SOTHERLY HOTELS LP (Form: S-11/A, Received: 08/09/2013 17:04:54)

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller reporting company

As filed with the Securities and Exchange Commission on August 9, 2013

Registration No. 333-189821

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

PRE-EFFECTIVE AMENDMENT NO. 1

FORM S-11

FOR REGISTRATION

UNDER

THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

SOTHERLY HOTELS LP

(Exact name of Registrant as specified in its governing instruments)

410 W. Francis Street

Williamsburg, Virginia 23185

(757) 229-5648

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Andrew M. Sims

Chief Executive Officer

Sotherly Hotels Inc.

410 W. Francis Street

Williamsburg, Virginia 23185

(757) 229-5648

(757) 564-8801 (Telecopy)

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies of all communications, including communications sent to agent for service, should be sent to:

Thomas J. Egan, Jr., Esq.

Pamela K. Dayanim, Esq.

Baker & McKenzie LLP

815 Connecticut Avenue, NW

Washington, DC 20006

(202) 452-7000

John A. Good, Esq.

Justin R. Salon, Esq.

Bass, Berry & Sims PLC

1201 Pennsylvania Avenue, Suite 300

Washington, DC 20004

(202) 827-2957

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934).

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed or supplemented without notice. We may not sell the securities described in this preliminary prospectus until the registration statement that we have filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale of these securities is not permitted.

SUBJECT TO COMPLETION, DATED AUGUST 9, 2013

PROSPECTUS

SOTHERLY HOTELS LP

LOGO

% Senior Unsecured Notes Due 2018

Sotherly Hotels LP, which we refer to in this prospectus as the Issuer or the Operating Partnership, is offering and selling % Senior Unsecured Notes due 2018, or the notes. The notes will be issued in denominations of $25 and integral multiples of $25 in excess thereof, will mature on , 2018 and will bear interest at a fixed rate of % per year. Interest on the notes will be payable quarterly in arrears, beginning , 2013.

The notes will be unsecured obligations of the Issuer and will rank equally with all of the Issuer’s existing and future unsecured indebtedness and senior in right of payment to any of the Issuer’s future obligations that are by their terms expressly subordinated or junior in right of payment to the notes.

We may, at our option, on or after , 2016 redeem some or all of the notes as described in “Description of Notes–Optional Redemption.” We have applied to list the notes on the NASDAQ ^® Global Market under the symbol “SHLP. ” We expect trading in the notes to begin within 30 days of 2013, the original issue date. We may from time to time purchase the notes in the open market or otherwise.

Investing in the notes involves certain risks. See “ Risk Factors ” beginning on page 12.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.


	Public Offering Price ⁽¹⁾	Underwriting Discounts and Commissions ⁽²⁾	Proceeds to Issuer ⁽³⁾
Per note		$	$
Total		$	$

(1)	Plus accrued interest, if any, from .

(2)	See “Underwriting” for additional disclosure regarding the underwriting discounts and expenses payable to the underwriters by us.

(3)	Before deducting expenses of the offering.

The underwriters may also purchase up to an additional $ aggregate principal amount of the notes from us at the public offering price per note, less the underwriting discounts and commissions, within 30 days from the date of this prospectus, solely to cover over-allotments, if any.

It is expected that delivery of the notes in book-entry form only will be made through the facilities of The Depository Trust Company on or about against payment therefor in immediately available funds.

We expect to deliver the notes on or about , 2013.

LOGO

The date of this prospectus is , 2013.

TABLE OF CONTENTS


	Page
PROSPECTUS SUMMARY		1

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		11

RISK FACTORS		12

USE OF PROCEEDS		30

MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY		31

CAPITALIZATION		32

RATIO OF EARNINGS TO FIXED CHARGES		33

SELECTED FINANCIAL AND OPERATING DATA		34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		37

OUR BUSINESS AND PROPERTIES		56

INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES		77

EXECUTIVE OFFICERS AND DIRECTORS		80

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS		84

OUR PRINCIPAL AGREEMENTS		87

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT		91

DESCRIPTION OF NOTES		94

PARTNERSHIP AGREEMENT		108

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS		112

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		126

UNDERWRITING		127

EXPERTS		129

LEGAL MATTERS		129

WHERE YOU CAN FIND MORE INFORMATION		129

INDEX TO FINANCIAL STATEMENTS		F-1

You should rely only on the information contained in this prospectus. Neither the underwriters nor we have authorized any other person to provide you with different or additional information. If anyone provides you with different, additional or inconsistent information, you should not rely on it. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs or that information contained herein is correct as of any time subsequent to the date hereof.

All brand and trade names, logos or trademarks contained or referred to in this prospectus are the property of their respective owners, and their appearance in this prospectus may not in any way be construed as participation by, or endorsement of, this offering by any of our franchisors. For more information, see “Our Principal Agreements– Franchise Agreements.”

We use market data and industry forecasts and projections throughout this prospectus, including data from publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers' experience in the industry and there can be no assurance that any of the forecasts or projections will be achieved. We believe that the surveys and market research others have performed are reliable, but we have not independently investigated or verified this information.

PROSPECTUS SUMMARY

This summary highlights the information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding whether to invest in the notes. You should carefully read this entire prospectus, including the information under the heading “Risk Factors” and all information included in this prospectus.

Explanatory Note

Unless the context otherwise requires or where otherwise indicated, in this prospectus, all references to “Operating Partnership” or the “Issuer” means only Sotherly Hotels LP, formerly MHI Hospitality, L.P., a Delaware limited partnership. All references in this prospectus to “Sotherly” means only Sotherly Hotels Inc., a Maryland corporation and the sole general partner of the Operating Partnership. All references in this prospectus to the “Company,” “we,” “us” and “our” refer to Sotherly Hotels Inc. and its subsidiaries and predecessors, including the Operating Partnership, unless the context otherwise requires or where otherwise indicated.

There are a few differences between Sotherly and the Operating Partnership, which are reflected in the disclosure in this prospectus. We believe it is important to understand the differences between Sotherly and the Operating Partnership in the context of how Sotherly Hotels Inc. and Sotherly Hotels LP operate as an interrelated consolidated company. Sotherly Hotels Inc. is a self-managed and self-administered real estate investment trust, or REIT, whose only material asset is its ownership of partnership interests of Sotherly Hotels LP. As a result, Sotherly Hotels Inc. does not conduct business itself, other than acting as the sole general partner of Sotherly Hotels LP, and issuing public equity from time to time. As general partner with control of Sotherly Hotels LP, Sotherly consolidates Sotherly Hotels LP for financial reporting purposes. Substantially all of the Company’s operations are conducted through Sotherly Hotels LP, and Sotherly Hotels LP holds, directly or indirectly, substantially all the assets of the Company and ownership interests in the Company’s joint venture. Sotherly Hotels LP conducts the operations of the Company’s business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from public equity issuances by Sotherly Hotels Inc., which are generally contributed by Sotherly to Sotherly Hotels LP in exchange for partnership units, Sotherly Hotels LP generates the capital required by the Company’s business through Sotherly Hotels LP’s operations or by Sotherly Hotels LP’s direct or indirect incurrence of indebtedness.

Company Overview

Sotherly was formed in August 2004 to own, acquire, renovate and reposition full-service, primarily upscale and upper-upscale hotel properties located in the Mid-Atlantic and Southern United States. On December 21, 2004, Sotherly successfully completed its initial public offering and elected to be treated as a self-advised REIT for federal income tax purposes. As of the date of this prospectus, Sotherly owns approximately 77.9% of the partnership units in the Operating Partnership. Limited partners (including certain of Sotherly’s officers and directors) own the remaining Operating Partnership units.

Our portfolio currently consists of ten full-service, primarily upscale and upper-upscale hotels located in seven states with an aggregate of 2,424 rooms and approximately 120,200 square feet of meeting space. Nine of these hotels are wholly-owned by subsidiaries of the Operating Partnership and operate under the Hilton, Crowne Plaza, Sheraton and Holiday Inn brands and are managed on a day -to -day basis by MHI Hotels Services, LLC, or MHI Hotels Services. We also own a 25.0% indirect noncontrolling interest in the 311-room Crowne Plaza Hollywood Beach Resort through a joint venture with The Carlyle Group, or Carlyle. Our portfolio is concentrated in markets that we believe possess multiple demand generators and have significant barriers to entry for new product delivery, which are important factors for us in identifying hotel properties that we expect will be capable of providing strong risk-adjusted returns.

In order for Sotherly to qualify as a REIT, it cannot directly manage or operate our hotels. Therefore, our wholly-owned hotel properties are leased to MHI Hospitality TRS, LLC, or our TRS Lessee, and managed by MHI Hotels Services, an eligible independent management company owned and controlled by certain individuals, including Andrew M. Sims, Sotherly’s chairman and chief executive officer, Kim E. Sims, a current director of

Sotherly, Christopher L. Sims, a former director of Sotherly, and William J. Zaiser, Sotherly’s former executive vice president and chief financial officer. Our TRS Lessee is wholly-owned by MHI Hospitality TRS Holding, Inc., or MHI Holding, a taxable REIT subsidiary that is wholly-owned by the Operating Partnership. Our TRS Lessee is disregarded as an entity separate from MHI Holding for U.S. federal income tax purposes. MHI Hotels Services and its predecessors have been in continuous operation since 1957. By using MHI Hotels Services as the management company, we intend to continue to capitalize on its extensive experience to seek above-average operating results. MHI Hotels Services and its predecessors have operated for many years in markets where we have a presence, and its operations are driven primarily by a focused sales, marketing and food and beverage strategy that is critical to the success of a full-service hotel.

The following chart generally depicts our corporate structure as of the date of this prospectus:

LOGO

Market Opportunity

As a result of the global economic recession, commencing in 2008 through early 2010, the U.S. lodging industry experienced substantial declines in operating performance driven by declining U.S. gross domestic product, or GDP, high unemployment levels, low consumer confidence and a reduction in the availability of credit. In addition to facing declining operating results, hotel owners were adversely impacted by a significant decline in the availability of debt financing for working capital, renovations and acquisitions. For the past three years, the lodging industry has experienced a recovery in revenue per available room, or RevPAR, and in financing activity. The breadth and sustainability of the recovery will be dependent on a variety of factors, including asset location, individual market performance, and property condition. New supply of hotel rooms has not yet emerged as a major factor impacting the recovery, and we believe the supply of new hotels is likely to remain low for the next several years due to the limited availability of debt financing dedicated to new construction projects. As a result, we believe well-located, properly positioned, and well managed hotels will continue to benefit from the ongoing lodging recovery and demand for hotel rooms.

In addition, we believe that a continued recovery in U.S. GDP growth, coupled with limited growth in new hotel room supply, will lead to increases in lodging industry RevPAR and operating profit. In March 2013, PKF Hospitality Research, a leading industry analytic expert, reported that lodging fundamentals are currently as sound as they have been in the past 30 years, and that hotel rates and RevPAR gains should be double the historic averages through 2015.

Competitive Strengths

We believe the following factors differentiate us from other owners, acquirers and investors in hotel properties:

•

Stable Portfolio of High Quality Properties . Our properties consist of well-located, geographically diverse, full-service hotels predominantly in the central business districts of cities in the Mid-Atlantic and Southeastern United States. Our hotels typically offer attractive amenities such as swimming pools, fitness centers, food and beverage facilities, parking and meeting space. Since Sotherly’s initial public offering, each of our hotels has undergone a substantial renovation program to enhance the quality and performance of the property.

•

Longtime Relationships with Leading Full-Service Hotel Brands . Our senior management team has developed strong relationships with many of the top full-service hotels brands in the upscale to upper-upscale categories, which is characterized by such brands as Hilton, Crowne Plaza, and Sheraton, and has received numerous awards from nationally recognized hotel franchisors, such as Intercontinental Hotels Group, Starwood Hotels and Hilton Hotels.

•

Existing Portfolio Repositioned, Relicensed and Renovated . From 2007 through 2009, we expended approximately $76.7 million in capital improvements resulting in the substantial renovation and licensing (or re-licensing) of five of our nine wholly-owned properties. For the six months ended June 30, 2013 and for the years ended December 31, 2012, 2011, and 2010, we have expended approximately $3.2 million, $2.9 million, $6.0 million and $2.9 million, respectively, for a total of approximately $14.9 million in capital improvements, which included substantial renovation of our property in Raleigh, North Carolina, which we re-branded as the DoubleTree by Hilton Raleigh Brownstone – University, and the first phase of renovation of the guest rooms at the Hilton Philadelphia Airport in Philadelphia, Pennsylvania and the Crowne Plaza Jacksonville Riverfront in Jacksonville, Florida. We believe this substantial level of capital investment and our upbranding efforts have positioned our properties to capture revenue opportunities in their respective markets and outperform our competitors as these locations mature.

•

Strategic Focus on Select Southern Markets . We are focusing our growth strategy on the major markets in the Southern United States, which we believe have and will continue to benefit from attractive demographic and economic growth characteristics. We believe this region also reflects an attractive business climate with respect to governmental and regulatory policies and taxation. In addition, our hotels are located near stable demand generators, such as large state universities, convention centers, corporate headquarters, sports venues and office parks and in markets that we believe have significant barriers to entry for new product delivery.

•

Prudent and Flexible Capital Structure . During the last three years, we have refinanced over 60% of the debt on our wholly-owned hotel properties, taking advantage of the current attractive interest rate environment. As of June 30, 2013, we had approximately $134.9 million of secured debt, of which approximately $85.8 million, or 63.6%, was fixed, at an average rate of 5.0% (exclusive of Sotherly’s 12.0% Series A Cumulative Redeemable Preferred Stock, or the Preferred Stock). Approximately $49.1 million, or 36.4%, of our secured debt is at a variable interest rate, which bore an average interest rate of 3.6% at June 30, 2013.

•

has spent his entire career with Sotherly and its predecessor, and has over 35 years of experience in the lodging industry as an operator, owner, developer, and financier. Mr. Folsom has nearly eight years of experience with Sotherly and 13 years of experience working in public real estate companies and in the real estate capital markets. Mr. Domalski has nearly 29 years of experience as an accountant and auditor and has worked at Sotherly since 2005.

Our Strategy

Our strategy is to grow through acquisitions of full-service, upscale and upper-upscale hotel properties located in the primary markets of the Southern United States. We intend to grow our portfolio through disciplined acquisitions of hotel properties and believe that we will be able to source significant external growth opportunities through our management team’s extensive network of industry, corporate and institutional relationships.

Our core strategy for our portfolio is intended to create value by acquiring performing hotel properties at significant discounts to replacement cost, as well as acquiring underperforming hotels and subsequently renovating, rehabilitating, repositioning, and up-branding these assets. Once these assets have benefited from this “turnaround” strategy, they become part of our core portfolio. We believe we can optimize performance within the portfolio by superior management practices and by timely and recurring capital expenditures to maintain and enhance the physical property.

Our Properties

As of the date of this prospectus, our portfolio consisted of the following 10 hotel properties:

Wholly-Owned Properties

Number
of
Rooms

Location

Date
of Acquisition

Years
Built / Renovated ⁽¹⁾

Chain
Designation

Hilton Philadelphia Airport

331

Philadelphia, PA

December 21, 2004

1972/2005/2013

Upper Upscale

Hilton Wilmington Riverside

272

Wilmington, NC

December 21, 2004

1970/2007

Upper Upscale

Hilton Savannah DeSoto

246

Savannah, GA

December 21, 2004

1968/2008

Upper Upscale

Sheraton Louisville Riverside

180

Jeffersonville, IN

September 20, 2006

1972/2008

Upper Upscale

Crowne Plaza Jacksonville Riverfront

292

Jacksonville, FL

July 22, 2005

1970/2006/2013

Upscale

Crowne Plaza Tampa Westshore

222

Tampa, FL

October 29, 2007

1973/2008

Upscale

Crowne Plaza Hampton Marina

173

Hampton, VA

April 24, 2008

1988/2008

Upscale

Holiday Inn Laurel West

207

Laurel, MD

December 21, 2004

1985/2005

Upper MidScale

DoubleTree by Hilton Brownstone - University

190

Raleigh, NC

December 21, 2004

1971/2002/2011

Upscale

Total Rooms in Our Wholly-Owned Portfolio

2,113

Joint Venture Property

Crowne Plaza Hollywood Beach Resort ⁽²⁾

311

Hollywood, FL

August 9, 2007

1972/2006

Upscale

Total Rooms in Our Portfolio

2,424

(1)	Year Renovated represents the year in which the replacement of a significant portion of the hotel’s furniture, fixtures or equipment was completed.

(2)	We own this hotel through a joint venture in which we have a 25% interest.

The following table illustrates certain key operating metrics for the twelve months ended June 30, 2013 for our portfolio.


Wholly-Owned Properties	Average Occupancy ⁽¹⁾			ADR ⁽²⁾		RevPAR ⁽ ³ ⁾
Hilton Philadelphia Airport		78.6	%	$	135.53	$	106.48
Hilton Wilmington Riverside		73.4	%	$	133.25	$	97.77
Hilton Savannah DeSoto		71.7	%	$	136.21	$	97.61
Sheraton Louisville Riverside		64.3	%	$	130.06	$	83.59
Crowne Plaza Jacksonville Riverfront		58.6	%	$	97.54	$	57.19
Crowne Plaza Tampa Westshore		67.8	%	$	102.13	$	69.24
Crowne Plaza Hampton Marina		53.3	%	$	92.93	$	49.55
Holiday Inn Laurel West		66.7	%	$	88.89	$	59.29
DoubleTree by Hilton Brownstone - University		71.1	%	$	109.14	$	77.57
Totals/ Weighted Averages in Our Wholly-Owned Portfolio		68.1	%	$	117.16	$	79.77

Joint Venture Property
Crowne Plaza Hollywood Beach Resort ⁽⁴⁾		80.7	%	$	156.21	$	126.10
Totals/ Weighted Averages in Our Portfolio		68.5	%	$	118.79	$	81.42

(1)	Average Occupancy represents the percentage of available rooms that were sold during a specified period of time and is calculated by dividing the number of rooms sold by the total number of rooms available, expressed as a percentage.

(2)	Average Daily Rate, or ADR, represents the average rate paid for rooms sold, calculated by dividing total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by total daily rooms sold.

(3)	RevPAR is the product of ADR and average daily occupancy. RevPAR does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services.

(4)	We own this hotel through a joint venture in which we have a 25% interest.

The selected operating data presented above should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

Our Partnership Information

The Issuer is a Delaware limited partnership formed in August 2004. The Issuer changed its name from MHI Hospitality, L.P. to Sotherly Hotels LP effective August 2, 2013. Our principal executive offices are located at 410 W. Francis Street, Williamsburg, VA 23185. Our telephone number is (757) 229-5648. Our website is http://www.sotherlyhotels.com. The information contained on, or that may be accessed through, our website is not part of, and is not incorporated into, this prospectus.

Employees

We currently employ eight full-time persons. All persons employed in the day-to-day operations of the hotels are employees of MHI Hotels Services, the management company engaged by our TRS Lessee to operate such hotels.

The Offering

The following summary contains basic information about the notes and the offering and is not intended to be complete. It does not contain all the information that is important to you. For a more complete understanding of the notes, you should read the section of this prospectus entitled “Description of Notes.”


Issuer		Sotherly Hotels LP

Securities Offered		$ million aggregate principal amount of the notes (or $ million if the underwriters’ overallotment option is exercised in full).

Maturity Date		, 2018.

Interest Rate		% per annum, computed on the basis of a 360-day year of twelve 30-day months, from .

Interest Payment Dates		, , , and of each year, commencing , 2013.

Price to Public		% of the principal amount, plus accrued interest, if any, from .

Ranking		The notes will be senior unsecured indebtedness of Sotherly Hotels LP, will rank equally with our other senior unsecured indebtedness and will be effectively subordinated to our secured indebtedness and structurally subordinated to all indebtedness of our subsidiaries. As of June 30, 2013, we had consolidated indebtedness of approximately $151.0 million, which is comprised of approximately $134.9 million of secured debt and approximately $16.1 million of unsecured debt. Of the approximately $151.0 million consolidated indebtedness outstanding at June 30, 2013, approximately $138.5 million was held by our subsidiaries and approximately $12.5 million relates to 12,458 shares of Preferred Stock, including 2,460 shares that were redeemed on August 2, 2013 for an aggregate redemption price of approximately $2.7 million and the remainder of which we intend to redeem with a portion of the net proceeds of this offering.

Use of Proceeds		We estimate that the net proceeds from the offering of the notes pursuant to this prospectus, after deducting the underwriting discount and estimated offering costs and expenses payable by us, will be approximately $ (or $ if the over-allotment option is exercised in full). We intend to use the net proceeds from this offering to redeem 100% of the outstanding shares of the Preferred Stock plus any accrued but unpaid dividends and any make-whole amounts or premium then due and payable on such Preferred Stock, which we estimate to be approximately $11,000,000. We intend to use the remaining net proceeds from the offering of the notes for general corporate purposes. See “Use of Proceeds” in this prospectus.

Optional Redemption		We may, at our option, redeem the notes in whole or in part at any time ,or from time to time, on or after , 2016 at a redemption price equal to % of the principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to the date of redemption as described in “Description of Notes—Optional Redemption” in this prospectus. The notes will not be entitled to the benefit of any sinking fund. The notes will not be subject to repayment at the option of the holder at any time prior to maturity, except in connection with a Change of Control Repurchase Event as defined under “Description of Notes—Certain Covenants—Offer to Repurchase Upon a Change of Control Repurchase Event” in this prospectus.



Change of Control Offer to Purchase		If a Change of Control Repurchase Event as defined under “Description of Notes—Certain Covenants—Offer to Repurchase Upon a Change of Control Repurchase Event” occurs, we must offer to repurchase the notes at a repurchase price equal to % of the aggregate principal amount plus any accrued and unpaid interest to, but not including, the repurchase date.


Default		The notes will contain events of default, the occurrence of which may result in the acceleration of our obligations under the notes in certain circumstances. See “Description of Notes—Events of Default; Modification and Waiver” in this prospectus.

Certain Covenants		We will issue the notes under an indenture, which is referred to as the Indenture, to be dated as of the issuance date between us and Wilmington Trust, National Association, as the trustee. The Indenture contains covenants that limit our ability to incur, or permit our subsidiaries to incur, third-party indebtedness if certain debt to asset value and/or interest coverage ratios would be exceeded. These covenants are subject to a number of important exceptions, qualifications, limitations and specialized definitions. See “Description of Notes—Certain Covenants” in this prospectus.

Form		The notes will be evidenced by global notes deposited with the trustee for the notes, as custodian for The Depository Trust Company, or DTC. Beneficial interests in the global notes will be shown on, and transfers of those beneficial interests can only be made through, records maintained by DTC and its participants. See “Description of Notes—Book-entry, Delivery and Form” in this prospectus.

Denominations		We will issue the notes only in denominations of $25 and integral multiples of $25 in excess thereof.

Payment of Principal and Interest		Principal and interest on the notes will be payable in U.S. dollars or other legal tender, coin or currency of the United States of America.

Future Issuances		We may, from time to time, without notice to or consent of the holders, increase the aggregate principal amount of the notes outstanding by issuing additional notes in the future with the same terms as the notes, except for the issue date and offering price, and such additional notes shall be consolidated with the notes issued in this offering and form a single series.

Listing		We have applied to list the notes on the NASDAQ ^® Global Market under the symbol “SHLP.” If the listing is approved, trading of the notes on the NASDAQ ^® Global Market is expected to commence within a 30-day period after the initial delivery of the notes. Currently, there is no public market for the notes.

Trustee, Registrar and Paying Agent		Wilmington Trust, National Association.

Governing Law		The Indenture and the notes will be governed by the laws of the State of New York. The Indenture will be subject to the provisions of the Trust Indenture Act of 1939, as amended.

Material Tax Considerations		You should consult your tax advisors concerning the U.S. federal income tax consequences of owning the notes in light of your own specific situation, as well as consequences arising under the laws of any other taxing jurisdiction. See “Material U.S. Federal Income Tax Considerations.”

Risk Factors		An investment in the notes involves certain risks. You should carefully consider the risks described under “Risk Factors” beginning on page 12 of this prospectus before making an investment decision.

Summary Financial Information

The following table sets forth, on an historical basis, certain summary consolidated financial and operating data for Sotherly Hotels LP and its subsidiaries. The financial results for the Crowne Plaza Hollywood Beach Resort, in which we have a 25.0% indirect interest, are not consolidated as we account for our investment under the equity method of accounting. You should read the following summary historical financial and operating data in conjunction with the consolidated historical financial statements and notes thereto of Sotherly Hotels LP and its subsidiaries and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this prospectus.


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
*Statement of Operations*
Total Revenues	$	87,343,220		$	81,172,504		$	77,382,344		$	71,518,726		$	70,762,732
Total Operating Expenses excluding Depreciation and Amortization		(68,376,569	)		(65,807,786	)		(62,451,362	)		(59,224,407	)		(58,810,002	)
Depreciation and Amortization		(8,661,769	)		(8,702,880	)		(8,506,802	)		(8,420,085	)		(6,346,222	)
Net Operating Income		10,304,882			6,661,838			6,424,180			3,874,234			5,606,509
Interest Income		16,158			14,808			22,305			41,999			72,547
Interest Expense		(12,382,146	)		(10,821,815	)		(10,030,517	)		(9,661,871	)		(6,811,460	)
Other Income (Expense) – Net		(1,965,376	)		(1,424,620	)		546,115			927,924			(1,263,304	)
Income Tax Benefit (Provision)		(1,301,229	)		(905,455	)		(214,344	)		1,807,126			1,475,695
Net Loss		(5,327,711	)		(6,475,243	)		(3,252,261	)		(3,010,587	)		(920,014	)
*Statement of Cash Flows*
Cash from Operations – net	$	9,011,957		$	7,550,142		$	4,728,270		$	3,182,605		$	7,214,566
Cash used in Investing – net		(3,156,121	)		(6,130,273	)		(3,469,608	)		(11,007,214	)		(51,931,701	)
Cash from (used in) Financing – net		(3,090,079	)		(2,798	)		(1,756,261	)		9,595,949			42,447,582
Net Increase (Decrease) in Cash and Cash Equivalents	$	2,765,757		$	1,417,071		$	(497,599	)	$	1,771,340		$	(2,269,553	)
*Balance Sheet* ⁽¹⁾
Investments in Hotel Properties – net	$	176,427,904		$	181,469,432		$	183,898,660		$	188,587,507		$	154,295,611
Properties Under Development		—			—			—			—			33,101,773
Total Assets		204,030,869			209,299,446			209,583,431			213,959,755			211,218,434
Line of Credit		—			25,537,290			75,197,858			75,522,858			73,187,858
Mortgage Loans		135,674,432			94,157,825			72,192,253			72,738,250			72,256,168
Series A Preferred Interest		14,227,650			25,353,698			—			—			—
Total Liabilities		166,698,739			165,416,203			158,775,128			160,118,529			157,442,238
Partners’ Capital		37,332,130			43,883,243			50,808,303			53,841,226			53,776,196
*Operating Data*
Average Number of Available Rooms		2,113			2,111			2,110			2,071			1,775
Total Number of Available Room Nights		773,358			770,334			770,150			755,942			649,499
Occupancy Percentage ⁽²⁾		68.9	%		66.2	%		66.0	%		60.4	%		62.0	%
Average Daily Rate (ADR) ⁽³⁾	$	114.22		$	110.24		$	104.42		$	107.21		$	119.50
RevPAR	$	78.65		$	72.94		$	68.93		$	64.74		$	74.04
*Additional Financial Data*
FFO ⁽⁵⁾	$	3,924,733		$	2,923,539		$	5,971,900		$	5,997,948		$	6,292,400
Adjusted FFO ⁽⁵⁾		9,470,684			5,577,805			5,315,321			2,848,314			4,881,390
Hotel EBITDA ⁽⁶⁾		22,439,770			18,708,019			17,639,548			14,771,907			14,224,058

(1)	As of the period end.

(2)	Occupancy Percentage is calculated by dividing the total daily number of rooms sold by the total daily number of rooms available, expressed as a percentage.

(3)	ADR is calculated by dividing the total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by the total daily number of rooms sold.

(4)	RevPAR is the product of ADR and occupancy, and does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services.

(5)

Industry analysts and investors use Funds from Operations, or FFO, as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. FFO, as defined by NAREIT, represents net income or loss determined in accordance with U.S. generally accepted accounting principles, or GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures.

Adjusted FFO accounts for certain additional items that are not in NAREIT’s definition of FFO, including any unrealized gain (loss) on hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, aborted offering costs, costs associated with the departure of executive officers and acquisition transaction costs.

The following is a reconciliation of net loss to FFO and Adjusted FFO for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
Net Loss	$	(5,327,711	)	$	(6,475,243	)	$	(3,252,261	)	$	(3,010,587	)	$	(920,014	)
Depreciation and amortization		8,661,769			8,702,880			8,506,802			8,420,085			6,346,222
Equity in depreciation and amortization of joint venture		590,675			567,803			546,055			545,580			545,659
(Gain)/loss on disposal of assets		—			128,099			171,304			42,870			320,533

FFO	$	3,924,733		$	2,923,539		$	5,971,900		$	5,997,948		$	6,292,400
Unrealized (gain)/loss on hedging activities ^(A)		13,752			77,152			(830,614	)		(1,220,161	)		691,268
Unrealized (gain)/loss on warrant derivative		2,026,677			1,309,075			—			—			—
(Increase)/decrease in deferred income taxes		1,412,467			685,189			174,035			(1,929,473	)		(1,652,278	)
Impairment of note receivable		110,871			—			—			—			300,000
Aborted offering costs		—			582,850			—			—			—
Equity in gain on extinguishment of debt of joint venture		—			—			—			—			(750,000	)
Loss on early extinguishment of debt ^(B)		1,982,184			—			—			—			—

Adjusted FFO	$	9,470,684		$	5,577,805		$	5,315,321		$	2,848,314		$	4,881,390

(A)	Includes equity in unrealized loss on hedging activities of joint venture.

(B)	Reflected in interest expense for the periods presented above.

(6)	Hotel EBITDA represents the portion of net operating income before depreciation and amortization and corporate general and administrative expenses that relate to our nine wholly-owned properties.

The following is a reconciliation of net loss to hotel EBITDA for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
Net Loss	$	(5,327,711	)	$	(6,475,243	)	$	(3,252,261	)	$	(3,010,587	)	$	(920,014	)
Interest expense		12,382,146			10,821,815			10,030,517			9,661,871			6,811,460
Interest income		(16,158	)		(14,808	)		(22,305	)		(41,999	)		(72,547	)
Income tax provision (benefit)		1,301,229			905,455			214,344			(1,807,126	)		(1,475,695	)
Depreciation and amortization		8,661,769			8,702,880			8,506,802			8,420,085			6,346,222
Equity in (earnings)/loss of joint venture		(172,172	)		60,094			(16,931	)		249,367			(48,496	)
(Gain)/loss on disposal of assets		—			128,099			171,304			42,870			320,533
Unrealized (gain)/loss on hedging activities		—			(72,649	)		(700,488	)		(1,220,161	)		691,268
Unrealized (gain)/loss on warrant derivative		2,026,677			1,309,075			—			—			—
Impairment of note receivable		110,871			—			—			—			300,000
Corporate general and administrative		4,078,826			4,025,794			3,389,764			3,170,627			2,940,979
Net lease rental income		(350,000	)		(447,000	)		(443,000	)		(445,000	)		(471,862	)
Other fee income		(255,707	)		(235,493	)		(238,198	)		(248,040	)		(197,790	)

Hotel EBITDA	$	22,439,770		$	18,708,019		$	17,639,548		$	14,771,907		$	14,224,058

The following table sets forth the operating data on a weighted average basis for the Operating Partnership, inclusive of its 25.0% indirect interest in the Crowne Plaza Hollywood Beach Resort:


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
*Operating Data*
Weighted Average Number of Available Rooms		2,197			2,188			2,188			2,149			1,857
Pro-rata Total of Available Room Nights		801,815			798,713			798,529			784,321			677,956
Occupancy Percentage ⁽¹⁾		69.2	%		66.6	%		66.5	%		60.8	%		61.8	%
Average Daily Rate (ADR) ⁽²⁾	$	115.56		$	111.22		$	105.12		$	107.79		$	120.78
RevPAR ⁽³⁾	$	80.00		$	74.11		$	69.92		$	65.49		$	74.69

(1)	Occupancy Percentage is calculated by dividing the total daily number of rooms sold by the total daily number of rooms available, expressed as a percentage.

(2)	ADR is calculated by dividing the total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by the total daily number of rooms sold.

(3)	RevPAR is the product of ADR and occupancy, and does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this prospectus. The forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

Forward-looking statements, which are based on certain assumptions and describe our current strategies, expectations and future plans, are generally identified by our use of words, such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or affirmative, but the absence of these words does not necessarily mean that a statement is not forward-looking. The factors listed under “Risk Factors” in this prospectus, as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Such risks and uncertainties include, among other things, risks and uncertainties related to:

•

national and local economic and business conditions that affect occupancy rates and revenues at our hotels and the demand for hotel products and services;

•

risks associated with the hotel industry, including competition, increases in wages and other labor costs, energy costs and other operating costs;

•

the magnitude and sustainability of the economic recovery in the hospitality industry and in the markets in which we operate;

•

the availability and terms of financing and capital and the general volatility of the securities markets;

•

risks associated with the level of our indebtedness and our ability to meet covenants in our debt agreements and, if necessary, to refinance or seek an extension of the maturity of such indebtedness or modify such debt agreements;

•

management and performance of our hotels;

•

risks associated with redevelopment and repositioning projects, including delays and cost overruns;

•

supply and demand for hotel rooms in our current and proposed market areas;

•

our ability to maintain adequate insurance coverage; and

•

other factors, including those discussed in “Risk Factors” in this prospectus.

These risks and uncertainties should be considered in evaluating any forward-looking statement contained in this prospectus. All forward-looking statements speak only as of the date of this prospectus. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this prospectus, except as required by law. In addition, our past results are not necessarily indicative of our future results.

RISK FACTORS

An investment in the notes involves various risks. The following are the material risks that apply to an investment in the notes. You should carefully consider the risks described below, together with the other information included in this prospectus before making a decision to invest in the notes. Any of the following risks could materially adversely affect our business, operations, industry or financial position or our future financial performance. In addition, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operations, industry and financial position and financial performance in the future.

Risks Related to the Offering

The notes are unsecured obligations of the Operating Partnership and not obligations of Sotherly or our subsidiaries and will be subordinated to any of the Operating Partnership’s future secured indebtedness to the extent of the value of the assets securing such indebtedness and effectively subordinated to any future obligations of the Operating Partnership’s subsidiaries. Structural subordination increases the risk that we will be unable to meet our obligations on the notes when they mature.

The notes will be unsecured unsubordinated obligations of the Operating Partnership and will rank equally in right of payment with all of the Operating Partnership’s other unsecured indebtedness and senior in right of payment to any of the Operating Partnership’s future obligations that are by their terms expressly subordinated or junior in right of payment to the notes. The notes will be effectively subordinated to any of the Operating Partnership’s existing or future secured indebtedness to the extent of the value of the assets securing such indebtedness. At June 30, 2013, we had consolidated debt of approximately $151.0 million, which is comprised of approximately $134.9 million of secured debt and approximately $16.1 million of unsecured debt.

The notes are obligations exclusively of the Operating Partnership and not of any of its subsidiaries. None of the Operating Partnership’s subsidiaries is a guarantor of the notes and the notes are not required to be guaranteed by any subsidiaries we, the Operating Partnership, may acquire or create in the future. The notes are also effectively subordinated to all of the liabilities of the Operating Partnership’s subsidiaries, to the extent of their assets, since they are separate and distinct legal entities with no obligation to pay any amounts due under the Issuer’s indebtedness, including the notes, or to make any funds available to make payments on the notes, whether by paying dividends or otherwise. The Operating Partnership’s right to receive any assets of any subsidiary in the event of a bankruptcy or liquidation of the subsidiary, and therefore the right of the Operating Partnership’s creditors to participate in those assets, will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors, in each case to the extent that the Operating Partnership is not recognized as a creditor of such subsidiary. In addition, even where the Operating Partnership is recognized as a creditor of a subsidiary, the Operating Partnership’s rights as a creditor with respect to certain amounts are subordinated to other indebtedness of that subsidiary, including secured indebtedness to the extent of the assets securing such indebtedness. As of June 30, 2013, 100% of our consolidated secured indebtedness, or $134.9 million, was in the form of mortgages secured by properties owned by subsidiaries of the Operating Partnership, and none of our properties were unencumbered as of June 30, 2013.

The notes restrict, but do not eliminate, the Operating Partnership’s ability to incur additional debt or take other action that could negatively impact holders of the notes.

Subject to specified limitations in the Indenture and as described under “Description of Notes—Certain Covenants,” the Indenture does not contain any provisions that would limit the Operating Partnership’s ability or the ability of its subsidiaries to incur indebtedness, including indebtedness that would be senior to the notes.

There are limited covenants in the Indenture.

The Indenture does not:

•

prevent our subsidiaries from incurring indebtedness which would effectively rank senior to the notes;

•

prevent us from incurring secured indebtedness that would rank senior to the notes to the extent of the value of the assets securing the indebtedness; or

•

prevent us from incurring unsecured indebtedness that is equal or subordinate in right of payment to the notes.

For these reasons, you should not consider the covenants in the Indenture as a significant factor in evaluating whether to invest in the notes.

An increase in the level of our outstanding indebtedness, or other events, could have an adverse impact on our business, properties, capital structure, financial condition, results of operations or prospects, which could adversely impact the trading prices for, or the liquidity of, the notes. Any such event could also adversely affect our cost of borrowing, limit our access to the capital markets or result in more restrictive covenants in future debt agreements.

Certain financial covenants in the Indenture rely on definitions that use non-GAAP measures and/or are subject to management’s good faith discretion, which could make it difficult for holders of our notes to determine independently whether we are in compliance with certain financial covenants relating to the notes.

The Indenture governing the notes contains financial covenants that restrict us or any of our subsidiaries from incurring indebtedness in amounts that would cause certain ratios specified in the Indenture, or Covenant Ratios, not to exceed certain fixed values (see “Description of Notes—Certain Covenants—Limitations on Incurrence of Debt”). The Covenant Ratios are calculated by reference to various specialized definitions specific to the Indenture, some of which utilize non-GAAP financial measures. If we had been subject to the covenants in the Indenture as of June 30, 2013, our Ratio of Debt to Adjusted Total Asset Value would have been 0.42 and our Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense would have been 3.32. For instance, certain definitions on which the Covenant Ratios rely reflect various adjustments to add or subtract certain items from GAAP consolidated net income and interest expense. In addition, management of Sotherly, our general partner, has discretion in calculating certain elements of the Covenant Ratios. For example, the definition of Consolidated Income Available for Debt Service allows management of Sotherly to determine in good faith whether, and the extent to which, certain non-recurring or other unusual items will be added back to our consolidated net income (calculated in accordance with GAAP) for purposes of calculating the Covenant Ratios. As a result of the foregoing, the financial statements that we include in future filings with the SEC, which are required to be prepared in accordance with GAAP, may employ different financial measures from those used in the Covenant Ratios, which may make it difficult for holders of our notes to determine independently whether we are in compliance with certain financial covenants.

Under certain circumstances, we may redeem the notes before maturity, and you may be unable to reinvest the proceeds at the same or a higher rate of return.

We may redeem all or a portion of the notes at any time after 2016, as described under “Description of Notes–Optional Redemption.” If a redemption does occur, you may be unable to reinvest the money you receive in the redemption at a rate that is equal to or higher than the rate of return on the notes.

General market conditions and other unpredictable factors could materially and adversely affect market prices for the notes.

There can be no assurance about the market prices for the notes. Several factors, many of which are beyond our control, will influence the market value of the notes. Factors that might influence the market value of the notes include, but are not limited to:

•

our creditworthiness, financial condition, performance and prospects;

•

the market for similar securities; and

•

economic, financial, geopolitical, regulatory or judicial events that affect us or the financial markets generally (including the occurrence of market disruption events).

If you purchase notes, whether in this offering or in the secondary market, the notes may subsequently trade at a discount to the price that you paid for them.

There is no established trading market for the notes, which could make it more difficult for you to sell your notes and could adversely affect their price.

The notes constitute a new issue of securities for which no established trading market exists. Consequently, it may be difficult for you to sell your notes. If the notes are traded after their initial issuance, they may trade at a discount, depending upon:

•

our financial condition;

•

prevailing interest rates;

•

the time remaining on the maturity of the notes;

•

their subordination to our existing and future liabilities;

•

the outstanding principal amount of the notes;

•

the market for similar securities; and

•

other factors beyond our control, including general economic conditions and conditions affecting lodging companies.

We have applied to list the notes on the NASDAQ ^® Global Market; however, we cannot assure you of the development or liquidity of any trading market for the notes following this offering.

Risks Related to Our Debt and Financing

We may not be able to generate sufficient cash to service our debt obligations, including our obligations under the notes. Increased leverage as a result of this offering may harm our financial condition and results of operations.

Our ability to make payments on and to refinance our indebtedness, including the notes, will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. As of June 30, 2013, we had consolidated debt of approximately $151.0 million, which is comprised of approximately $134.9 million secured and approximately $16.1 million unsecured debt. Of the approximately $16.1 million of unsecured debt as of June 30, 2013, approximately $12.5 million is related to the 12,458 shares of Preferred Stock issued and outstanding as of June 30, 2013 (of which 2,460 shares were redeemed on August 2, 2013 for an aggregate redemption price of approximately $2.7 million). We intend to redeem the remaining 9,998 shares of Preferred Stock with a portion of the net proceeds of this offering. The Preferred Stock is treated as debt under GAAP. See “Use of Proceeds.”

Our level of indebtedness could have important consequences to you, because:

•

it could affect adversely the Operating Partnership’s ability to satisfy its financial obligations, including those relating to the notes;

•

a portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;

•

it may impair our ability to obtain additional financing in the future and/or to refinance existing debt;

•

it could require us to agree to additional restrictions and limitations on our business operations and capital structure to obtain financing;

•

it may force us to dispose of one or more of our properties, possibly on unfavorable terms;

•

it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and

•

it may make us more vulnerable to downturns in our business, our industry or the economy in general.

We have debt obligations maturing in 2014, and if we are not successful in extending the term of this indebtedness or in refinancing this debt on acceptable economic terms or at all, our overall financial condition could be materially and adversely affected.

We will be required to seek additional capital in the near future to refinance or replace existing long-term mortgage debt that is maturing. Based on current market conditions, the availability of financing is, and may continue to be, limited. There can be no assurance that we will be able to obtain future financings on acceptable terms, if at all. On June 28, 2013, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2014. Under the terms of the extension, we made a principal payment of approximately $1.1 million to reduce the principal balance on the loan to $6.0 million. Subject to certain terms and conditions, we may extend the maturity date of the loan to June 30, 2015. In August 2014, our indebtedness to an affiliate of Carlyle related to our joint venture investment in the Crowne Plaza Hollywood Beach Resort matures. In August 2014, the mortgage on our Hilton Philadelphia Airport matures, but we may extend such mortgage until March 2017 pursuant to certain terms and conditions. The total aggregate amount of our debt obligations maturing in 2014 is approximately $40.6 million, which represents approximately 26.5% of our total debt obligations.

We will need to, and plan to, renew, replace or extend our long-term indebtedness prior to their respective maturity dates. If we are unable to extend these loans, we may be required to repay the outstanding principal amount at maturity or a portion of such indebtedness upon refinance. If we do not have sufficient funds to repay any portion of the indebtedness, it may be necessary to raise capital through additional debt financing, private or public offerings of debt securities or equity financings. We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest expense would lower our cash flow, and, consequently, cash available to meet our financial obligations. If we are unable to obtain alternative or additional financing arrangements in the future, or if we cannot obtain financing on acceptable terms, we may not be able to execute our business strategies or we may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses and potentially reducing cash flow from operating activities if the sale proceeds in excess of the amount required to satisfy the indebtedness could not be reinvested in equally profitable real property investments. Moreover, the terms of any additional financing may restrict our financial flexibility, including the debt we may incur in the future, or may restrict our ability to manage our business as we had intended. To the extent we cannot repay our outstanding debt, we risk losing some or all of our hotel properties to foreclosure and we could be required to invoke insolvency proceedings including, but not limited to, commencing a voluntary case under the U.S. Bankruptcy Code.

For tax purposes, a foreclosure of any of our hotels would be treated as a sale of the hotel for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the hotel, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds, which could hinder Sotherly’s ability to meet the REIT distribution requirements imposed by the Internal Revenue Code of 1986, as amended, or the Code. In addition, we may give full or partial guarantees to lenders of mortgage debt on behalf of the entities that own our hotels. When we give a guarantee on behalf of an entity that owns one of our hotels, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. See “Description of Notes – Events of Default” for a discussion of potential implications should any of our hotels be foreclosed on due to a default.

We must comply with financial covenants in our mortgage loan agreements.

Our mortgage loan agreements contain various financial covenants. Failure to comply with these financial covenants could result from, among other things, changes in the local competitive environment, general economic conditions and disruption caused by renovation activity or major weather disturbances.

If we violate the financial covenants contained in these agreements, we may attempt to negotiate waivers of the violations or amend the terms of the applicable mortgage loan agreement with the lender; however, we can make no assurance that we would be successful in any such negotiation or that, if successful in obtaining waivers or amendments, such waivers or amendments would be on attractive terms. Some mortgage loan agreements provide alternate cure provisions which may allow us to otherwise comply with the financial covenants by obtaining an appraisal of the hotel, prepaying a portion of the outstanding indebtedness or by providing cash collateral until such time as the financial covenants are met by the collateralized property without consideration of the cash collateral. Alternate cure provisions which include prepaying a portion of the outstanding indebtedness or providing cash collateral may have a material impact on our liquidity.

If we are unable to negotiate a waiver or amendment or satisfy alternate cure provisions, if any, or unable to meet any alternate cure requirements and a default were to occur, we would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financing. We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable.

Our organizational documents have no limitation on the amount of indebtedness we may incur. As a result, we may become highly leveraged in the future, which could materially and adversely affect us.

Our business strategy contemplates the use of both secured and unsecured debt to finance long-term growth. In addition, our organizational documents contain no limitations on the amount of debt that we may incur, and Sotherly’s board of directors may change our financing policy at any time. As a result, we may be able to incur substantial additional debt, including secured debt, in the future. Incurring debt could subject us to many risks, including the risks that:

•

our cash flows from operations may be insufficient to make required payments of principal and interest;

•

our debt may increase our vulnerability to adverse economic and industry conditions;

•

we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing cash available for funds available for operations and capital expenditures, future business opportunities or other purposes; and

•

the terms of any refinancing may not be in the same amount or on terms as favorable as the terms of the existing debt being refinanced.

Risks Related to Our Business and Properties

If the economy falls back into a recessionary period or fails to maintain positive growth, our operating performance, financial results and ability to meet our financial obligations may be harmed by declines in occupancy, average daily room rates and/or other operating revenues.

The performance of the lodging industry and the general economy historically have been closely linked. In an economic downturn, business and leisure travelers may seek to reduce costs by limiting travel and/or reducing costs on their trips. Our hotels, which are all full-service hotels, may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates. A decrease in demand for hotel stays and hotel services will negatively affect our operating revenues, which will lower our cash flow and may affect our ability to maintain compliance with our debt obligations, including the Operating Partnership’s obligations under the notes. We incurred a net loss of approximately $5.3 million for our 2012 fiscal year. A renewed economic downturn may produce continued losses. A weakening of the economy may adversely and materially affect our industry, business, results of operations and ability to meet our financial obligations and we cannot predict the likelihood, severity or duration of any such downturn. Moreover, reduced revenues as a result of a weakening economy may also reduce our working capital and impact our long-term business strategy.

Geographic concentration of our hotels makes our business vulnerable to economic downturns in the Mid-Atlantic and Southern United States.

Our hotels are located in the Mid-Atlantic and Southern United States. As a result, economic conditions in the Mid-Atlantic and Southern United States significantly affect our revenues and the value of our hotels to a greater extent than if we had a more geographically diversified portfolio. Business layoffs or downsizing, industry slowdowns, changing demographics and other similar factors that may adversely affect the economic climate in these areas could have a significant adverse impact on our business. Any resulting oversupply or reduced demand for hotels in the Mid-Atlantic and Southern United States and in our markets in particular would therefore have a disproportionate negative impact on our revenues and limit our ability to meet our financial obligations.

We own a limited number of hotels and significant adverse changes at one hotel may impact our ability to meet our financial obligations.

As of June 30, 2013, our portfolio consisted of nine wholly-owned properties and one joint venture property with a total of 2,424 rooms. Significant adverse changes in the operations of any one hotel could have a material adverse effect on our financial performance and, accordingly, on our ability to meet our financial obligations.

We are subject to risks of increased hotel operating expenses and decreased hotel revenues.

Our leases with our TRS Lessee provide for the payment of rent based in part on gross revenues from our hotels. Our TRS Lessee is subject to hotel operating risks including decreased hotel revenues and increased hotel operating expenses, including but not limited to the following:

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wage and benefit costs;

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repair and maintenance expenses;

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energy costs;

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property taxes;

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insurance costs; and

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other operating expenses.

Any increases in these operating expenses can have a significant adverse impact on our TRS Lessee’s ability to pay rent and other operating expenses and, consequently, our earnings, cash flow and ability to meet our financial obligations.

In keeping with our investment strategy, we may acquire, renovate and/or re-brand hotels in new or existing geographic markets as part of our repositioning strategy. Unanticipated expenses and insufficient demand for newly repositioned hotels could adversely affect our financial performance and our ability to meet our financial obligations.

We have in the past and may continue to develop or acquire hotels in geographic areas in which our management may have little or no operating experience. Additionally, those properties may also be renovated and re-branded as part of a repositioning strategy. Potential customers may not be familiar with our newly renovated hotel or be aware of the brand change. As a result, we may have to incur costs relating to the opening, operation and promotion of those new hotel properties that are substantially greater than those incurred in other geographic areas. These hotels may attract fewer customers than expected and we may choose to increase spending on advertising and marketing to promote the hotel and increase customer demand. Unanticipated expenses and insufficient demand at new hotel properties, therefore, could adversely affect our financial performance and our ability to meet our financial obligations.

We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel and as a result, our financial performance and ability to meet our financial obligations are dependent on the management of our hotels by MHI Hotels Services.

Since federal income tax laws restrict REITs and their subsidiaries from operating or managing hotels, we do not operate or manage our hotels. Instead, we lease all of our hotels to subsidiaries of our TRS Lessee, and our TRS Lessee retains third-party managers to operate our hotels pursuant to management agreements.

Under the terms of our management agreements with MHI Hotels Services and the REIT qualification rules, our ability to participate in operating decisions regarding the hotels is limited. We will depend on MHI Hotels Services to operate our hotels as provided in the management agreements. We do not have the authority to require any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel. Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, RevPAR and ADR, we may not be able to force MHI Hotels Services to change its method of operation of our hotels. Additionally, in the event that we need to replace MHI Hotels Services or any other management companies in the future, we may be required by the terms of the applicable management agreement to pay substantial termination fees and may experience significant disruptions at the affected hotels.

Our ability to meet our financial obligations is subject to fluctuations in our financial performance, operating results and capital improvements requirements.

We lease all of our hotels to our TRS Lessee. Our TRS Lessee is subject to hotel operating risks, including risks of sustaining operating losses after payment of hotel operating expenses, including management fees. Among the factors which could cause our TRS Lessee to fail to make required rent payments are reduced net operating profits or operating losses, increased debt service requirements and capital expenditures at our hotels, including capital expenditures required by the franchisors of our hotels. Among the factors that could reduce the net operating profits of our TRS Lessee are decreases in hotel revenues and increases in hotel operating expenses. Hotel revenue can decrease for a number of reasons, including increased competition from a new supply of hotel rooms and decreased demand for hotel rooms. These factors can reduce both occupancy and room rates at our hotels. We cannot assure you that we will continue to generate sufficient cash to meet our financial obligations.

Hedging against interest rate exposure may adversely affect us and our hedges may fail to protect us from the losses that the hedges were designed to offset.

Subject to maintaining Sotherly’s qualification as a REIT, we may continue to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as cap agreements and swap agreements. These agreements involve the risks that these arrangements may fail to protect or adversely affect us because, among other things:

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interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

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available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;

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the financial instruments we select may not have the effect of reducing our interest rate risk;

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the duration of the hedge may not match the duration of the related liability;

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the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

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the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.

As a result of any of the foregoing, our hedging transactions, which are intended to limit losses, may fail to protect us from the losses that the hedges were designed to offset and could have a material adverse effect on us.

Sotherly’s tax indemnification obligations, which were not the result of arm’s-length negotiations and which apply in the event that we sell certain properties, could subject us to liability, which we currently estimate to be approximately $9.2 million, and limit our operating flexibility and our ability to meet our financial obligations.

If we dispose of certain of our hotels, we would be obligated to indemnify the original contributors (including their permitted transferees and persons who are taxable on the income of a contributor or permitted transferee) against certain tax consequences of the sale pursuant to the tax indemnity agreements, the terms of which were not the result of arm’s-length negotiations. These original contributors include Andrew M. Sims, Sotherly’s chairman and chief executive officer, William J. Zaiser, Sotherly’s former executive vice president and chief financial officer, Kim E. Sims, a current Sotherly director, and Christopher L. Sims, a former Sotherly director. We have agreed to pay a certain amount of a contributor’s tax liability with respect to gains allocated to such contributor under Section 704(c) of the Code if we dispose of a property contributed by such contributor in a taxable transaction during a “protected period,” which continues until the earlier of:

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10 years after the contribution of such property; or

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the date on which the contributor no longer owns, in the aggregate, at least 25.0% of the units we issued to the contributor at the time of its contribution of property to the Operating Partnership.

This tax indemnity will be equal to a certain amount of the federal and state income tax liability a contributor incurs with respect to the gain allocated to such contributor upon such sale based on a sliding scale percentage. Specifically, we are responsible for indemnifying the contributors for 100.0% of their tax liability during the first five years after contribution and for 50.0% of their tax liability during the sixth year, and will indemnify them for: 40.0%, during the seventh year; 30.0%, during the eighth year; 20.0%, during the ninth year; and 10.0%, during the tenth year. The terms of the tax indemnity agreements also require us to gross up the tax indemnity payment for the amount of income taxes due as a result of the tax indemnity payment.

As over eight years have elapsed since the properties were contributed, if we were to sell, during 2013 in a taxable transaction, the five hotels that were contributed to us in Sotherly’s initial public offering in exchange for partnership units in the Operating Partnership (including our property in Jeffersonville, Indiana, which we substituted under the tax indemnity and related agreements for the property in Williamsburg, Virginia as part of an exchange pursuant to Section 1031 of the Code) our estimated total tax indemnification obligation to our indemnified contributors, including the gross-up payment, would be approximately $9.2 million, which amount will decrease until the end of 2014, at which time the indemnification agreement expires.

We may realize reduced revenue because our management company may experience conflicts of interest in connection with the management of its other properties.

MHI Hotels Services may experience conflicts of interest in connection with the management of other properties located nearby in the same geographic market as our hotel properties. Currently, MHI Hotels Services manages a small city-center property in the same geographic market as one of our hotel properties and also manages another property in the same geographic market as a second property in our portfolio. The fees that MHI Hotels Services earns for managing our properties are largely fixed under our management agreements and may be less than the fees it earns for other properties it manages or may manage in the future. Because MHI Hotels Services oversees the marketing and solicitation of individual and group business, it may have a greater financial incentive to direct prospective guests and customers to properties that we do not own, which would have a negative impact on our revenue and our ability to meet our financial conditions.

The Operating Partnership has substantial dealings with related parties and a number of its principal agreements were not negotiated at arm’s-length.

The Operating Partnership has substantial dealings with parties related to certain members of Sotherly’s management team and certain of Sotherly’s directors, including with MHI Hotels Services. While we believe the arrangements and transactions with related parties are fair and in the best interest of the Operating Partnership, they were not negotiated on an arm’s-length basis and may be less favorable to us than we could have obtained from third parties.

The Operating Partnership will have increased reporting and compliance obligations.

Following this offering, the Operating Partnership will be required to comply with rigorous reporting and compliance obligations. In particular, but without limitation, the Operating Partnership will be required to file periodic and other reports under the Exchange Act and to establish and maintain effective disclosure controls and internal control over financial reporting pursuant to the Sarbanes-Oxley Act. Preparing and filing annual and quarterly reports and other information with the Securities and Exchange Commission, or the SEC, and other compliance with these rules and regulations will involve a material increase in regulatory, legal and accounting expenses and the attention of management, and there can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all. We believe the Operating Partnership is well positioned to comply with these regulations, given the extensive experience of the management team in complying with similar regulations applicable to Sotherly.

Risks Related to the Lodging Industry

Our ability to meet our financial obligations and the value of our hotels in general may be adversely affected by factors in the lodging industry.

Operating Risks

Our hotel properties are subject to various operating risks common to the lodging industry, many of which are beyond our control, including the following:

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competition from other hotel properties in our markets;

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over-building of hotels in our markets, which adversely affects occupancy and revenues at our hotels;

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dependence on business and commercial travelers and tourism;

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increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;

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increases in operating costs due to inflation and other factors, including increases in labor costs, that may not be offset by increased room rates;

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changes in interest rates and in the availability, cost and terms of debt financing;

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changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

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adverse effects of international, national, regional and local economic and market conditions;

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adverse effects of a downturn in the lodging industry; and

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risks generally associated with the ownership of hotel properties and real estate, as we discuss in detail below.

These factors could reduce the net income of our TRS Lessee, which in turn could adversely affect the value of our hotels and our ability to meet our financial obligations.

Competition for Acquisitions

We may compete for investment opportunities with entities that may have substantially greater financial resources than we do. These entities generally may be able to accept more risk than we choose to prudently manage. This competition may generally limit the number of suitable investment opportunities offered to us. This competition may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms.

Seasonality of Hotel Business

The lodging industry is seasonal in nature, which can be expected to cause quarterly fluctuations in our revenues. Our quarterly earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues and to meet our financial obligations, including the payment of any amounts due under the notes.

Investment Concentration in Particular Segments of Single Industry

Our entire business is lodging-related. Therefore, a downturn in the lodging industry, in general, and the full-service upscale and upper-upscale segments in which we operate, in particular, will have a material adverse effect on the value of our hotels, our financial condition and the extent to which cash may be available meet our financial obligations, including the payment of any amounts due under the notes.

Capital Expenditures

Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. The franchisors of our hotels also require us to make periodic capital improvements as a condition of keeping the franchise licenses. In addition, several of our mortgage lenders require that we set aside amounts for capital improvements to the secured properties on a monthly basis. For the years ended December 31, 2012 and 2011, we spent approximately $2.9 million and approximately $6.0 million, respectively, on capital improvements to our hotels. Capital improvements and renovation projects may give rise to the following risks:

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possible environmental problems;

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construction cost overruns and delays;

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a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on affordable terms; and

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uncertainties as to market demand or a loss of market demand after capital improvements have begun.

The costs of all these capital improvements as well as future capital improvements could adversely affect our financial condition and amounts available to meet our financial obligations, including the payment of any amounts due under the notes.

Operating our hotels under franchise agreements could increase our operating costs and lower our net income.

Our hotels operate under franchise agreements which subject us to risks in the event of negative publicity related to one of our franchisors.

The maintenance of the franchise licenses for our hotels is subject to our franchisors’ operating standards and other terms and conditions. Our franchisors periodically inspect our hotels to ensure that our lessee, the management company and we follow their standards. Failure by us, our TRS Lessee or the management company to maintain these standards or other terms and conditions could result in a franchise license being canceled. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may also be liable to the franchisor for a termination payment, which varies by franchisor and by hotel. As a condition of continuing a franchise license, a franchisor could also possibly require us to make capital expenditures, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment. Nonetheless, we may risk losing a franchise license if we do not make franchisor-required capital expenditures.

If a franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise license or to operate the hotel without a franchise license. The loss of a franchise license could significantly decrease the revenues at the hotel and reduce the underlying value of the hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. A loss of a franchise license for one or more hotels could materially and adversely affect our revenues. This loss of revenues could, therefore, also adversely affect our financial condition and results of operations, and our ability to meet our financial obligations.

Restrictive covenants in certain of our franchise agreements contain provisions that may operate to limit our ability to sell or refinance our hotels, which could have a material adverse effect on us.

Franchise agreements typically contain covenants that may affect our ability to sell or refinance a hotel, including requirements to obtain the consent of the franchisor in the event of such a sale or refinancing transaction. In the event that a franchisor’s consent is not forthcoming, the terms of a sale or refinancing may be less favorable to us than would otherwise be the case. Some of our franchise agreements provide the franchisor with a right of first offer in the event of certain sales or transfers of a hotel and provide that the franchisor has the right to approve any change in the hotel management company engaged to manage the hotel. Generally, we may be limited in our ability to sell, lease or otherwise transfer hotels unless the transferee is not a competitor of the franchisor and the transferee agrees to assume the related franchise agreements. If the franchisor does not consent to the sale or financing of our hotels, we may be unable to consummate transactions that are in our best interests or the terms of those transactions may be less favorable to us, which could have a material adverse effect on our financial condition and the execution of our strategies.

Hotel re-development is subject to timing, budgeting and other risks that would increase our operating costs and limit our ability to meet our financial obligations.

We intend to acquire hotel properties from time to time as suitable opportunities arise, taking into consideration general economic conditions, and seek to re-develop or reposition these hotels. Redevelopment of hotel properties involves a number of risks, including risks associated with:

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construction delays or cost overruns that may increase project costs;

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receipt of zoning, occupancy and other required governmental permits and authorizations;

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development costs incurred for projects that are not pursued to completion;

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acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;

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financing; and

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governmental restrictions on the nature or size of a project.

We cannot assure you that any re-development project will be completed on time or within budget. Our inability to complete a project on time or within budget would increase our operating costs and reduce our net income and our ability to meet our financial obligations.

Uninsured and underinsured losses could adversely affect our operating results and our ability to meet our financial obligations.

We maintain comprehensive insurance on each of our hotel properties, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners. There are no assurances that current coverage will continue to be available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods, such as Hurricane Sandy in October 2012 and Hurricane Katrina in New Orleans in August 2005, losses from foreign terrorist activities such as those on September 11, 2001, or losses from domestic terrorist activities such as the Oklahoma City bombing on April 19, 1995, may not be insurable or may not be economically insurable. Currently, our insurers provide terrorism coverage in conjunction with the Terrorism Risk Insurance Program sponsored by the federal government through which insurers are able to receive compensation for insured losses resulting from acts of terrorism. The program is currently set to expire on December 31, 2014. If the program is not renewed, we do not intend to obtain terrorism insurance on our hotel properties as we anticipate it will be costly or unavailable. Lenders may require such insurance and our failure to obtain such insurance could constitute a default under loan agreements. Depending on our access to capital, liquidity and the value of the properties securing the affected loan in relation to the balance of the loan, a default could reduce our net income and limit our ability to meet our other financial obligations.

In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. 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 hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.

Noncompliance with governmental regulations could adversely affect our operating results.

Environmental Matters

Our hotels may be subject to environmental liabilities. An owner of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:

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our knowledge of the contamination;

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the timing of the contamination;

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the cause of the contamination; or

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the party responsible for the contamination of the property.

There may be unknown environmental problems associated with our properties. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest.

The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs. The discovery of environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability meet our financial obligations.

Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations

Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and ability to meet our financial obligations could be adversely affected.

Our hotels may be subject to unknown or contingent liabilities which could cause us to incur substantial costs.

The hotel properties that we acquire may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. Contingent or unknown liabilities with respect to entities or properties acquired might include:

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liabilities for environmental conditions;

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losses in excess of our insured coverage;

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accrued but unpaid liabilities incurred in the ordinary course of business;

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tax, legal and regulatory liabilities;

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claims of customers, vendors or other persons dealing with the Company’s predecessors prior to our formation or acquisition transactions that had not been asserted or were unknown prior to the Company’s formation or acquisition transactions; and

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claims for indemnification by the general partners, officers and directors and others indemnified by the former owners of our properties.

In general, the representations and warranties provided under the transaction agreements related to the sales of the hotel properties may not survive the closing of the transactions. While we will likely seek to require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification may be limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these hotels may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may adversely affect our financial condition, results of operations and our ability to meet our financial obligations.

Future terrorist activities may adversely affect, and create uncertainty in, our business.

Terrorism in the United States or elsewhere could have an adverse effect on our business, although the degree of impact will depend on a number of factors, including the U.S. and global economies and global financial markets. Previous terrorist attacks in the United States and subsequent terrorism alerts have adversely affected the travel and hospitality industries over the past several years. Such attacks, or the threat of such attacks, could have a material adverse effect on our business, our ability to finance our business and meet our financial obligations, our ability to insure our properties and/or our results of operations and financial condition, as a whole.

We face risks related to pandemic diseases, which could materially and adversely affect travel and result in reduced demand for our hotels.

Our business could be materially and adversely affected by the effect of a pandemic disease on the travel industry. For example, the outbreaks of SARS and avian flu in 2003 had a severe impact on the travel industry, and the outbreaks of H1N1 flu threatened to have a similar impact. A prolonged recurrence of SARS, avian flu, H1N1 flu or another pandemic disease also may result in health or other government authorities imposing restrictions on travel. Any of these events could result in a significant drop in demand for our hotels and adversely affect our financial conditions, results of operations and our ability to meet our financial obligations.

General Risks Related to the Real Estate Industry

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties in our portfolio in response to changing economic, financial and investment conditions is limited.

The real estate market is affected by many factors that are beyond our control, including:

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adverse changes in international, national, regional and local economic and market conditions;

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changes in interest rates and in the cost and terms of debt financing;

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absence of liquidity in credit markets which limits the availability and amount of debt financing;

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changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

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the ongoing need for capital improvements, particularly in older structures;

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changes in operating expenses; and

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civil unrest, acts of God, including earthquakes, floods and other natural disasters such as Hurricane Sandy in October 2012, Hurricane Katrina in New Orleans in August 2005, which may result in uninsured losses, and acts of war or terrorism, including the consequences of terrorist acts, such as those that occurred on September 11, 2001.

We may decide to sell our hotels in the future. We cannot predict whether we will be able to sell any hotel property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property.

We may be required to expend funds to correct defects or to make improvements before a hotel property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a hotel property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our operating results and financial condition, as well as our ability to meet our financial obligations.

Our hotels may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property, which would reduce our cash available to meet our financial obligations. In addition, the presence of significant mold could expose us to liability from our guests, employees or the management company and others if property damage or health concerns arise and could harm our reputation.

Increases in property taxes would increase our operating costs, reduce our income and adversely affect our ability to meet our financial obligations.

Each of our hotel properties is subject to real and personal property taxes. These taxes may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase, our financial condition, results of operations and our ability to meet our financial obligations could be adversely affected.

Federal Income Tax Risks

The federal income tax laws governing REITs are complex.

Sotherly intends to operate in a manner that will maintain its qualification as a REIT under the federal income tax laws. The REIT qualification requirements are extremely complex, however, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Sotherly has not requested or obtained a ruling from the Internal Revenue Service, or the IRS, that it qualifies as a REIT. Accordingly, we cannot be certain that Sotherly will be successful in operating in a manner that will permit it to qualify as a REIT. At any time, new laws, interpretations or court decisions may change the federal tax laws or the federal income tax consequences of Sotherly’s qualification as a REIT. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. Sotherly and its stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation. We are not aware, however, of any pending tax legislation that would adversely affect Sotherly’s ability to qualify as a REIT.

Failure to make distributions could subject Sotherly to tax.

In order to maintain its qualification as a REIT, each year Sotherly must pay out to its stockholders in distributions at least 90.0% of its REIT taxable income, computed without regard to the deductions for dividends paid and excluding net capital gain. To the extent that Sotherly satisfies this distribution requirement, but distributes less than 100.0% of its taxable income, Sotherly will be subject to federal corporate income tax on its undistributed taxable income. In addition, Sotherly will be subject to a 4.0% nondeductible excise tax if the actual amount that it pays out to its stockholders in a calendar year is less than the minimum amount specified under federal tax laws. Sotherly’s only source of funds to make these distributions comes from rent received from its TRS Lessee, which in turn receives revenues from hotel operations, and dividends from MHI Holding. Accordingly, Sotherly may be required to borrow money or sell assets to make distributions sufficient to enable it to pay out enough of its taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4.0% nondeductible excise tax in a particular year.

Failure to qualify as a REIT would subject Sotherly to federal income tax.

If Sotherly fails to qualify as a REIT in any taxable year, it will be required to pay federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. The resulting tax liability might cause Sotherly to borrow funds, liquidate some of its investments or take other steps that could negatively affect its operating results in order to pay any such tax. Unless it is entitled to relief under certain statutory provisions, Sotherly would be disqualified from treatment as a REIT for the four taxable years following the year in which it lost its qualification. If Sotherly lost its REIT status, its net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved. In addition, Sotherly would no longer be required to make distributions to its stockholders, and it would not be able to deduct any stockholder distributions in computing its taxable income. This would substantially reduce Sotherly’s earnings, cash available to pay distributions, and the value of common stock.

Failure to qualify as a REIT may cause Sotherly to reduce or eliminate distributions to its stockholders, and Sotherly may face increased difficulty in raising capital or obtaining financing.

If Sotherly fails to remain qualified as a REIT, it may have to reduce or eliminate any distributions to its stockholders in order to satisfy its income tax liabilities. Any distributions that Sotherly does make to its stockholders would be treated as taxable dividends to the extent of its current and accumulated earnings and profits. This may result in negative investor and market perception regarding the market value of Sotherly’s common stock, and the value of its common stock may be reduced. In addition, Sotherly and the Operating Partnership may face increased difficulty in raising capital or obtaining financing if Sotherly fails to qualify or remain qualified as a REIT because of the resulting tax liability and potential reduction of its market valuation.

MHI Holding increases our overall tax liability.

Our TRS Lessee is a single-member limited liability company that is wholly-owned by MHI Holding, a taxable REIT subsidiary that is wholly-owned by the Operating Partnership. Our TRS Lessee is disregarded as an entity separate from MHI Holding for U.S. federal income tax purposes, such that the assets, liabilities, income, gains, losses, credits and deductions of our TRS Lessee are treated as the assets, liabilities , income, gains, losses, credits and deductions of MHI Holding for U.S. federal income tax purposes. MHI Holding is subject to federal and state income tax on its taxable income, which will consist of the revenues from the hotels leased by Sotherly’s TRS Lessee, net of the operating expenses for such hotels and rent payments. Accordingly, although Sotherly’s ownership of MHI Holding and the TRS Lessee will allow Sotherly to participate in the operating income from its hotels in addition to receiving rent, that operating income will be fully subject to income tax. The after-tax net income of MHI Holding, if any, will be available for distribution to Sotherly.

Sotherly will incur a 100.0% excise tax on transactions with MHI Holding and the TRS Lessee that are not conducted on an arm’s-length basis. For example, to the extent that the rent paid by the TRS Lessee exceeds an arm’s-length rental amount, such amount potentially will be subject to this excise tax. Sotherly intends that all transactions among itself, MHI Holding and the TRS Lessee will be conducted on an arm’s-length basis and, therefore, that the rent paid by the TRS Lessee will not be subject to this excise tax.

Even if Sotherly remains qualified as a REIT, it may face other tax liabilities that reduce its cash flow.

Even if Sotherly remains qualified for taxation as a REIT, it may be subject to certain federal, state and local taxes on its income and assets. For example:

•

it will be required to pay tax on undistributed REIT taxable income;

•

it may be required to pay “alternative minimum tax” on its items of tax preference;

•

if it has net income from the disposition of foreclosure property held primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, it must pay tax on that income at the highest corporate rate;

•

if it sells a property in a “prohibited transaction,” its gain from the sale would be subject to a 100.0% penalty tax. A “prohibited transaction” would be a sale of property, other than a foreclosure property, held primarily for sale to customers in the ordinary course of business; and

•

MHI Holding is a fully taxable corporation and is required to pay federal and state taxes on its income, which will consist of the revenues from the hotels leased from the Operating Partnership, net of the operating expenses for such hotels and rent payments.

Complying with REIT requirements may cause Sotherly to forgo attractive opportunities that could otherwise generate strong risk-adjusted returns and instead pursue less attractive opportunities, or none at all.

To qualify as a REIT for federal income tax purposes, Sotherly must continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amounts it distributes to its stockholders and the ownership of its stock. Thus, compliance with the REIT requirements may hinder Sotherly’s ability to operate solely on the basis of generating strong risk-adjusted returns on invested capital for its stockholders.

Complying with REIT requirements may force Sotherly to liquidate otherwise attractive investments, which could result in an overall loss on its investments.

To maintain qualification as a REIT, Sotherly must ensure that at the end of each calendar quarter at least 75.0% of the value of its assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of Sotherly’s investment in securities (other than government securities, qualified real estate assets and securities of one or more taxable REIT subsidiaries) generally cannot include more than 10.0% of the outstanding voting securities of any one issuer or more than 10.0% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5.0% of the value of Sotherly’s assets (other than government securities, qualified real estate assets and securities of one or more taxable REIT subsidiaries) can consist of the securities of any one issuer, and no more than 25.0% of the value of Sotherly’s total assets can be represented by securities of one or more taxable REIT subsidiaries. If Sotherly fails to comply with these requirements at the end of any calendar quarter, it must correct such failure within 30 days after the end of the calendar quarter to avoid losing its REIT status and suffering adverse tax consequences. If Sotherly fails to comply with these requirements at the end of any calendar quarter, and the failure exceeds a de minimis threshold, Sotherly may be able to preserve its REIT status if the failure was due to reasonable cause and not to willful neglect. In this case, Sotherly will be required to dispose of the assets causing the failure within six months after the last day of the quarter in which the failure occurred, and it will be required to pay an additional tax of the greater of $50,000 or the product of the highest applicable tax rate multiplied by the net income generated on those assets. As a result, Sotherly may be required to liquidate otherwise attractive investments.

Taxation of dividend income could make Sotherly’s common stock less attractive to investors and reduce the market price of its common stock.

The federal income tax laws governing REITs, or the administrative interpretations of those laws, may be amended at any time. Any new laws or interpretations may take effect retroactively and could adversely affect Sotherly or could adversely affect its stockholders. Under recently-enacted legislation, “qualified dividends,” which include dividends from domestic C corporations that are paid to non-corporate stockholders, are subject to a reduced maximum rate of tax of 20.0%. Because REITs generally do not pay corporate-level taxes as a result of the dividends paid deduction to which they are entitled, dividends from REITs generally are not treated as qualified dividends and thus do not qualify for a reduced tax rate. Non-corporate investors could view an investment in non-REIT corporations as more attractive than an investment in REITs because the dividends they would receive from non-REIT corporations would be subject to lower tax rates.

If the Operating Partnership fails to qualify as a partnership for federal income tax purposes, Sotherly could cease to qualify as a REIT and suffer other adverse consequences.

We believe that the Operating Partnership will continue to qualify to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Operating Partnership is not subject to federal income tax on its income. Instead, each of its partners, including Sotherly, will be required to pay tax on its allocable share of the Operating Partnership’s income. We cannot assure you, however, that the IRS will not challenge the Operating Partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership as a corporation for federal income tax purposes, Sotherly could fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. Also, the failure of the Operating Partnership to qualify as a partnership would cause Sotherly to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including Sotherly.

Sotherly’s failure to qualify as a REIT would have serious adverse consequences to its stockholders.

Sotherly elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with its taxable year ended December 31, 2004. Sotherly believes it has operated so as to qualify as a REIT under the Code and believes that its current organization and method of operation comply with the rules and regulations promulgated under the Code to enable Sotherly to continue to qualify as a REIT. However, it is possible that Sotherly has been organized or has operated in a manner that would not allow it to qualify as a REIT, or that its future operations could cause it to fail to qualify. Qualification as a REIT requires Sotherly to satisfy numerous requirements (some on an annual and others on a quarterly basis) established under highly technical and complex sections of the Code for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within its control. For example, in order to qualify as a REIT, Sotherly must satisfy a 75.0% gross income test pursuant to Code Section 856(c)(3) and a 95.0% gross income test pursuant to Code Section 856(c)(2) each taxable year. In addition, Sotherly must pay dividends to its stockholders aggregating annually at least 90.0% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding capital gains) and must satisfy specified asset tests on a quarterly basis. While historically Sotherly has satisfied the distribution requirement discussed above by making cash distributions to its stockholders, Sotherly may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, its stock. The provisions of the Code and applicable Treasury regulations regarding qualification as a REIT are more complicated in Sotherly’s case because its holds its assets through the Operating Partnership.

If MHI Holding does not qualify as a taxable REIT subsidiary, or if Sotherly’s hotel manager does not qualify as an “eligible independent contractor,” Sotherly would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to its shareholders.

Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. Sotherly currently leases substantially all of its hotels to the TRS Lessee, which is a disregarded entity for U.S. federal income tax purposes and is wholly-owned by MHI Holding, a taxable REIT subsidiary, and expects to continue to do so. So long as MHI Holding qualifies as a taxable REIT subsidiary, it will not be treated as a “related party tenant” with respect to Sotherly’s properties that are managed by an independent hotel management company that qualifies as an “eligible independent contractor.” Sotherly believes that MHI Holding will continue to qualify to be treated as a taxable REIT subsidiary for federal income tax purposes, but there can be no assurance that the IRS will not challenge this status or that a court would not sustain such a challenge. If the IRS were successful in such challenge, it is possible that Sotherly would fail to meet the asset tests applicable to REITs and substantially all of its income would fail to be qualifying income for purposes of the two gross income tests. If Sotherly failed to meet any of the asset or gross income tests, it would likely lose its REIT qualification for federal income tax purposes.

Additionally, if Sotherly’s hotel manager does not qualify as an “eligible independent contractor,” Sotherly would fail to qualify as a REIT. Each hotel management company that enters into a management contract with the TRS Lessee must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid by the TRS Lessee to be qualifying income for purposes of the REIT gross income tests. Among other requirements, in order to qualify as an eligible independent contractor a manager must not own, directly or through its shareholders, more than 35.0% of Sotherly’s outstanding shares, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35.0% thresholds are complex. Although Sotherly intends to monitor ownership of its shares by its hotel manager and their owners, there can be no assurance that these ownership levels will not be exceeded.

Investors may be subject to a 3.8% Medicare tax in connection with an investment in the notes.

The U.S. tax laws impose a 3.8% “Medicare tax” on the “net investment income” (i.e., interest, dividends, capital gains, annuities, and rents that are not derived in the ordinary course of a trade or business) of individuals with income exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately), and of estates and trusts. Interest on the notes and gains from the disposition of the notes may be subject to the Medicare tax. Prospective investors should consult with their independent advisors as to the applicability of the Medicare tax to an investment in the notes in light of such investors’ particular circumstances.

Investors may be subject to U.S. withholding tax under the “Foreign Account Tax Compliance Act.”

On March 18, 2010, the Hiring Incentives to Restore Employment Act, or the HIRE Act, was enacted in the United States. The HIRE Act includes provisions known as the Foreign Account Tax Compliance Act, or FATCA, that generally impose a 30% U.S. withholding tax on “withholdable payments,” which consist of (i) U.S.-source dividends, interest, rents and other “fixed or determinable annual or periodical income” paid after June 30, 2014 and (ii) certain U.S.-source gross proceeds paid after December 31, 2016 to (a) “foreign financial institutions” unless they enter into an agreement with the IRS to collect and disclose to the IRS information regarding their direct and indirect U.S. owners and (b) “non-financial foreign entities” (i.e., foreign entities that are not foreign financial institutions) unless they certify certain information regarding their direct and indirect U.S. owners. Final regulations under FATCA were issued by the IRS on January 17, 2013. FATCA does not replace the existing U.S. withholding tax regime. However, the FATCA regulations contain coordination provisions to avoid double withholding on U.S.-source income.

Under a grandfathering rule, FATCA does not apply to any payments made under an obligation that is outstanding on July 1, 2014 (provided such obligation is not materially modified subsequent to such date) and any gross proceeds from the disposition of such obligation. The notes will be grandfathered obligations for FATCA purposes provided they are not materially modified after July 1, 2014. However, if the notes are materially modified after July 1, 2014, interest on the notes may be subject to FATCA withholding. Prospective investors should consult their own tax advisors regarding the potential implications of FATCA with respect to an investment in the notes in light of their particular circumstances.

USE OF PROCEEDS

We estimate that the net proceeds from the offering of the notes pursuant to this prospectus, after deducting the underwriting discount and estimated offering costs and expenses payable by us, will be approximately $ (or $ if the over-allotment option is exercised in full). We intend to use the net proceeds from this offering to redeem 100% of the outstanding shares of Sotherly’s Preferred Stock, plus any accrued but unpaid dividends and any make-whole amounts or premium then due and payable on such Preferred Stock, which we estimate to be approximately $11,000,000. We intend to use the remaining net proceeds from the offering of the notes for general corporate purposes.

Pending the permanent use of the net proceeds of this offering, we may invest the net proceeds in interest-bearing, short-term investment-grade securities, money-market accounts or other investments that are consistent with Sotherly’s intention to elect and qualify to be taxed as a REIT.

MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY

There is no established trading market for partnership units of the Operating Partnership. The Operating Partnership does not currently propose to offer partnership units to the public, and does not currently expect that a public market for those units will develop.

Partnership Unitholder Information

As of June 30, 2013, there were 13 holders of the Operating Partnership’s common partnership units.

Distributions

The Operating Partnership has paid the following distributions per common partnership unit for 2011, 2012 and for the first two quarters of 2013:


Quarter End	2011		2012		2013
March 31 ^st		—	$	0.020	$	0.035
June 30 ^th		—	$	0.020	$	0.035
September 30 ^th	$	0.020	$	0.030
December 31 ^st	$	0.020	$	0.030

Future distributions by the Operating Partnership will be at the discretion of Sotherly’s board of directors, acting on behalf of Sotherly as general partner of the Operating Partnership, and will depend on quarterly operating results, general economic conditions, requirements for capital improvements, the availability of debt and equity capital, the annual distribution requirements under the REIT provisions of the Code, the terms of Sotherly’s Preferred Stock instrument and such other factors as Sotherly’s board of directors deem relevant. The amount, timing and frequency of the distributions will be authorized and declared by Sotherly’s board of directors, in its sole discretion, based upon a variety of factors deemed relevant by the directors, and no assurance can be given that the distribution policy will not change in the future.

In December 2008, in the interest of capital preservation and based on the expectation that the U.S. economy, and in particular the lodging industry, would continue to face declining operating trends through 2010, Sotherly amended its dividend policy and reduced the level of its cash dividend payments. Reducing and suspending Sotherly’s dividend during 2009 and 2010 did not jeopardize its REIT status as its 2009 distributions exceeded the minimum annual distribution requirement and operating losses in 2010 eliminated any distribution requirement for 2010. In July 2011, in part due to improving operating trends, Sotherly reevaluated its quarterly dividend policy and reinstated its quarterly dividend distribution.

Sotherly’s ability to make common stock distributions is constrained by the terms of the Preferred Stock instrument. The Preferred Stock instrument permits Sotherly to pay a dividend on its common stock subject to certain requirements, including liquidity thresholds. At present, Sotherly meets and exceeds these requirements to pay a dividend on its common stock in an amount minimally necessary in order to maintain its status as a REIT. The Preferred Stock instrument requires a minimum liquidity position of $7.5 million as a condition to payment of a dividend on Sotherly’s common stock. We intend to use a portion of the net proceeds from this offering to redeem 100% of the outstanding shares of Sotherly’s Preferred Stock, plus any whole amounts or premium then due and payable. Once we have redeemed the outstanding shares of Sotherly’s Preferred Stock, all of these restrictions will no longer apply.

CAPITALIZATION

The following table sets forth the Operating Partnership’s capitalization as of June 30, 2013:

•

on an actual basis; and

•

on an as -adjusted basis to give effect to this offering, the Partnership’s distribution to Sotherly for redemption of 2,460 shares of Preferred Stock on August 2, 2013, and the application of the net proceeds of this offering as described under “Use of Proceeds”:


As of June 30, 2013
	Historical		Pro Forma ⁽¹⁾
Cash
Cash and cash equivalents	$	6,561,784	$	11,838,306
Restricted cash		4,257,037		4,257,037

• Total cash		10,818,821		16,095,343

Debt
Secured mortgage debt		134,893,689		134,893,689
Other loans		3,650,220		3,650,220
Unsecured Notes ⁽²⁾		—		20,000,000
Series A Cumulative Redeemable Preferred Stock, $0.01 par value		12,457,552		—

• Total debt		151,001,461		158,543,909
Equity
General partner account		594,463		582,504
Limited partner accounts		34,303,512		33,119,545

• Total equity		34,897,975		33,702,049

Total capitalization	$	185,899,436	$	192,245,958

(1)	Assumes no exercise of the underwriters’ over-allotment option.

(2)	Assumes a $20 million aggregate principal amount of notes issued in this offering.

RATIO OF EARNINGS TO FIXED CHARGES

Our historical ratios of earnings to fixed charges for the periods indicated are set forth in the table below. The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. For purposes of computing these ratios, earnings consist of income before income taxes plus interest expense and fixed charges consist of interest expense exclusive of capitalized interest.

In each period during which earnings were insufficient to cover fixed charges, the Operating Partnership met all financial obligations.


	Six Months Ended		Year Ended
	June 30, 2013		December 31, 2012		December 31, 2011		December 31, 2010		December 31, 2009		December 31, 2008
Ratio of Earnings to Fixed Charges:		0.99		0.71		0.54		0.73		0.55		0.54
Deficiency	$	48,060	$	3,620,855	$	4,994,395	$	2,738,663	$	4,448,544	$	3,872,432

For a description of our historical income available for debt service to interest expense ratios as they would have been calculated pursuant to the Indenture covenants, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Financial Covenants —Unsecured Notes.”

SELECTED FINANCIAL AND OPERATING DATA


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
*Statement of Operations*
Total Revenues	$	87,343,220		$	81,172,504		$	77,382,344		$	71,518,726		$	70,762,732
Total Operating Expenses excluding Depreciation and Amortization		(68,376,569	)		(65,807,786	)		(62,451,362	)		(59,224,407	)		(58,810,002	)
Depreciation and Amortization		(8,661,769	)		(8,702,880	)		(8,506,802	)		(8,420,085	)		(6,346,222	)
Net Operating Income		10,304,882			6,661,838			6,424,180			3,874,234			5,606,509
Interest Income		16,158			14,808			22,305			41,999			72,547
Interest Expense		(12,382,146	)		(10,821,815	)		(10,030,517	)		(9,661,871	)		(6,811,460	)
Other Income (Expense) – Net		(1,965,376	)		(1,424,620	)		546,115			927,924			(1,263,304	)
Income Tax Benefit (Provision)		(1,301,229	)		(905,455	)		(214,344	)		1,807,126			1,475,695
Net Loss		(5,327,711	)		(6,475,243	)		(3,252,261	)		(3,010,587	)		(920,014	)
*Statement of Cash Flows*
Cash from Operations – net	$	9,011,957		$	7,550,142		$	4,728,270		$	3,182,605		$	7,214,566
Cash used in Investing – net		(3,156,121	)		(6,130,273	)		(3,469,608	)		(11,007,214	)		(51,931,701	)
Cash from (used in) Financing – net		(3,090,079	)		(2,798	)		(1,756,261	)		9,595,949			42,447,582
Net Increase (Decrease) in Cash and Cash Equivalents	$	2,765,757		$	1,417,071		$	(497,599	)	$	1,771,340		$	(2,269,553	)
*Balance Sheet* ⁽¹⁾
Investments in Hotel Properties – net	$	176,427,904		$	181,469,432		$	183,898,660		$	188,587,507		$	154,295,611
Properties Under Development		—			—			—			—			33,101,773
Total Assets		204,030,869			209,299,446			209,583,431			213,959,755			211,218,434
Line of Credit		—			25,537,290			75,197,858			75,522,858			73,187,858
Mortgage Loans		135,674,432			94,157,825			72,192,253			72,738,250			72,256,168
Series A Preferred Interest		14,227,650			25,353,698			—			—			—
Total Liabilities		166,698,739			165,416,203			158,775,128			160,118,529			157,442,238
Partners’ Capital		37,332,130			43,883,243			50,808,303			53,841,226			53,776,196
*Operating Data*
Average Number of Available Rooms		2,113			2,111			2,110			2,071			1,775
Total Number of Available Room Nights		773,358			770,334			770,150			755,942			649,499
Occupancy Percentage ⁽²⁾		68.9	%		66.2	%		66.0	%		60.4	%		62.0	%
Average Daily Rate (ADR) ⁽³⁾	$	114.22		$	110.24		$	104.42		$	107.21		$	119.50
RevPAR	$	78.65		$	72.94		$	68.93		$	64.74		$	74.04
*Additional Financial Data*
FFO ⁽⁵⁾	$	3,924,733		$	2,923,539		$	5,971,900		$	5,997,948		$	6,292,400
Adjusted FFO ⁽⁵⁾		9,470,684			5,577,805			5,315,321			2,848,314			4,881,390
Hotel EBITDA ⁽⁶⁾		22,439,770			18,708,019			17,639,548			14,771,907			14,224,058

(1)	As of the period end.

(2)	Occupancy Percentage is calculated by dividing the total daily number of rooms sold by the total daily number of rooms available, expressed as a percentage.

(3)	ADR is calculated by dividing the total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by the total daily number of rooms sold.

(4)	RevPAR is the product of ADR and occupancy, and does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services.

(5)

Industry analysts and investors use FFO as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by NAREIT. FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures.

The following is a reconciliation of net loss to FFO and Adjusted FFO for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
Net Loss	$	(5,327,711	)	$	(6,475,243	)	$	(3,252,261	)	$	(3,010,587	)	$	(920,014	)
Depreciation and amortization		8,661,769			8,702,880			8,506,802			8,420,085			6,346,222
Equity in depreciation and amortization of joint venture		590,675			567,803			546,055			545,580			545,659
(Gain)/loss on disposal of assets		—			128,099			171,304			42,870			320,533

FFO	$	3,924,733		$	2,923,539		$	5,971,900		$	5,997,948		$	6,292,400
Unrealized (gain)/loss on hedging activities ^(A)		13,752			77,152			(830,614	)		(1,220,161	)		691,268
Unrealized (gain)/loss on warrant derivative		2,026,677			1,309,075			—			—			—
(Increase)/decrease in deferred income taxes		1,412,467			685,189			174,035			(1,929,473	)		(1,652,278	)
Impairment of note receivable		110,871			—			—			—			300,000
Aborted offering costs		—			582,850			—			—			—
Equity in gain on extinguishment of debt of joint venture		—			—			—			—			(750,000	)
Loss on early extinguishment of debt ^(B)		1,982,184			—			—			—			—

Adjusted FFO	$	9,470,684		$	5,577,805		$	5,315,321		$	2,848,314		$	4,881,390

(A)	Includes equity in unrealized loss on hedging activities of joint venture.

(B)	Reflected in interest expense for the periods presented above.

(6)	Hotel EBITDA represents the portion of net operating income before depreciation and amortization and corporate general and administrative expenses that relate to our nine wholly-owned properties.

The following is a reconciliation of net loss to hotel EBITDA for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
Net Loss	$	(5,327,711	)	$	(6,475,243	)	$	(3,252,261	)	$	(3,010,587	)	$	(920,014	)
Interest expense		12,382,146			10,821,815			10,030,517			9,661,871			6,811,460
Interest income		(16,158	)		(14,808	)		(22,305	)		(41,999	)		(72,547	)
Income tax provision (benefit)		1,301,229			905,455			214,344			(1,807,126	)		(1,475,695	)
Depreciation and amortization		8,661,769			8,702,880			8,506,802			8,420,085			6,346,222
Equity in (earnings)/loss of joint venture		(172,172	)		60,094			(16,931	)		249,367			(48,496	)
(Gain)/loss on disposal of assets		—			128,099			171,304			42,870			320,533
Unrealized (gain)/loss on hedging activities		—			(72,649	)		(700,488	)		(1,220,161	)		691,268
Unrealized (gain)/loss on warrant derivative		2,026,677			1,309,075			—			—			—
Impairment of note receivable		110,871			—			—			—			300,000
Corporate general and administrative		4,078,826			4,025,794			3,389,764			3,170,627			2,940,979
Net lease rental income		(350,000	)		(447,000	)		(443,000	)		(445,000	)		(471,862	)
Other fee income		(255,707	)		(235,493	)		(238,198	)		(248,040	)		(197,790	)

Hotel EBITDA	$	22,439,770		$	18,708,019		$	17,639,548		$	14,771,907		$	14,224,058

The following table sets forth the operating data on a weighted average basis for the Operating Partnership inclusive of its 25.0% indirect interest in the Crowne Plaza Hollywood Beach Resort:


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
*Operating Data*
Weighted Average Number of Available Rooms		2,197			2,188			2,188			2,149			1,857
Pro-rata Total of Available Room Nights		801,815			798,713			798,529			784,321			677,956
Occupancy Percentage ⁽¹⁾		69.2	%		66.6	%		66.5	%		60.8	%		61.8	%
Average Daily Rate (ADR) ⁽²⁾	$	115.56		$	111.22		$	105.12		$	107.79		$	120.78
RevPAR ⁽³⁾	$	80.00		$	74.11		$	69.92		$	65.49		$	74.69

(1)	Occupancy Percentage is calculated by dividing the total daily number of rooms sold by the total daily number of rooms available, expressed as a percentage.

(2)	ADR is calculated by dividing the total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by the total daily number of rooms sold.

(3)	RevPAR is the product of ADR and occupancy, and does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

As used in this section, the terms “we,” “us,” “our” or the “Company” refer to Sotherly Hotels Inc., a Maryland corporation, together with its consolidated subsidiaries, including Sotherly Hotels LP, a Delaware limited partnership, which may be referred to herein as the “Operating Partnership.” Sotherly Hotels Inc., the sole general partner of the Operating Partnership, which may be referred to herein as “Sotherly,” is a self-managed and self-administered lodging REIT incorporated in Maryland in August 2004 to pursue opportunities in the full-service, primarily upscale and upper-upscale segments of the hotel industry located in primary and secondary markets in the Mid-Atlantic and Southern United States. Sotherly commenced operations in December 2004 when it completed its initial public offering and thereafter consummated the acquisition of the initial properties. Sotherly owns all of its interest in its real estate investments through the Operating Partnership.

Our hotel portfolio currently consists of ten full-service, primarily upscale and upper-upscale hotels with 2,424 rooms, which operate under well-known brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn. Nine of these hotels, totaling 2,113 rooms, are 100% owned by subsidiaries of the Operating Partnership. We also own a 25.0% indirect non-controlling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle.

As of June 30, 2013, we owned the following hotel properties:


Property	Number of Rooms		Location	Date of Acquisition	Chain Designation
Wholly-owned
Crowne Plaza Hampton Marina		173	Hampton, VA	April 24, 2008	Upscale
Crowne Plaza Jacksonville Riverfront		292	Jacksonville, FL	July 22, 2005	Upscale
Crowne Plaza Tampa Westshore		222	Tampa, FL	October 29, 2007	Upscale
DoubleTree by Hilton Brownstone-University		190	Raleigh, NC	December 21, 2004	Upscale
Hilton Philadelphia Airport		331	Philadelphia, PA	December 21, 2004	Upper Upscale
Hilton Savannah DeSoto		246	Savannah, GA	December 21, 2004	Upper Upscale
Hilton Wilmington Riverside		272	Wilmington, NC	December 21, 2004	Upper Upscale
Holiday Inn Laurel West		207	Laurel, MD	December 21, 2004	Upper MidScale
Sheraton Louisville Riverside		180	Jeffersonville, IN	September 20, 2006	Upper Upscale

Joint Venture Property		2,113
Crowne Plaza Hollywood Beach Resort ⁽¹⁾		311	Hollywood, FL	August 9, 2007	Upscale

Total		2,424

(1)	We own this hotel through a joint venture in which we have a 25% interest.

We conduct substantially all our business through the Operating Partnership. Sotherly is the sole general partner of the Operating Partnership, and owns an approximate 77.9% interest in the Operating Partnership, with the remaining interest being held by limited partners who were contributors of our original hotel properties and related assets.

To qualify as a REIT, Sotherly cannot operate hotels. Therefore, our wholly-owned hotel properties are leased to our TRS Lessee, a wholly-owned subsidiary of our Operating Partnership, which then engages a hotel management company to operate the hotels under a management contract. Our TRS Lessee has engaged MHI Hotels Services to manage our wholly-owned hotels. Our TRS Lessee, and its parent, MHI Holding are consolidated into the Operating Partnership’s financial statements for accounting purposes. The earnings of MHI Holding are subject to taxation similar to other C corporations.

Key Operating Metrics

In the hotel industry, room revenue is considered the most important category of revenue and drives other revenue categories such as food, beverage, catering, parking, and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:

•

Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;

•

Average daily rate, or ADR, which is total room revenue divided by the number of rooms sold; and

•

Revenue per available room, or RevPAR, which is total room revenue divided by the total number of available rooms.

RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (such as housekeeping services, laundry, utilities and room supplies), but could also result in increased non-room revenue from the hotel’s restaurant, banquet or parking facilities. Changes in RevPAR that are primarily driven by changes in ADR typically have a greater impact on operating margins and profitability as they do not generate all of the additional variable operating costs associated with higher occupancy.

We also use FFO, Adjusted FFO and Hotel EBITDA as measures of our operating performance. See “—Non-GAAP Financial Measures.”

Results of Operations

The following table illustrates the key operating metrics for each of the six months ended June 30, 2013 and 2012 for our nine wholly-owned properties.


	Six months ended June 30, 2013			Six months ended June 30, 2012
Occupancy %		69.7	%		71.2	%
ADR	$	121.54		$	115.70
RevPAR	$	84.72		$	82.43

Comparison of the Six Months Ended June 30, 2013 to the Six Months Ended June 30, 2012

Revenue . Total revenue for the six months ended June 30, 2013 increased approximately $0.3 million, or 0.7%, to approximately $45.4 million compared to total revenue of approximately $45.1 million for the six months ended June 30, 2012. Each of our properties experienced increases in revenue except our Laurel, Maryland; Jacksonville, Florida; Tampa, Florida; and Hampton, Virginia properties.

Room revenue increased approximately $0.7 million, or 2.2%, to approximately $32.4 million for the six months ended June 30, 2013 compared to room revenue of approximately $31.7 million for the six months ended June 30, 2012. The increase in room revenue for the six months ended June 30, 2013 resulted from a 5.1% increase in ADR which was offset by a 2.2% decrease in occupancy as compared to the same period in 2012. Our property in Raleigh, North Carolina continues to experience a significant increase as a result of the rebranding to a DoubleTree by Hilton.

Food and beverage revenues decreased approximately $0.4 million, or 3.1%, to approximately $10.8 million for the six months ended June 30, 2013 compared to food and beverage revenues of approximately $11.2 million for the six months ended June 30, 2012. Decreases in food and beverage revenue at our properties in Savannah, Georgia and Tampa, Florida were offset by increases in banqueting revenue at our property in Raleigh, North Carolina.

Revenue from other operating departments decreased approximately $0.1 million, or 2.2%, to approximately $2.2 million for the six months ended June 30, 2013 compared to revenue from other operating departments of approximately $2.3 million for the six months ended June 30, 2012.

Hotel Operating Expenses . Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses and management fees, were approximately $32.3 million for the six months ended June 30, 2013, a decrease of approximately $0.4 million, or 1.1%, compared to total hotel operating expenses of approximately $32.7 million for the six months ended June 30, 2012.

Rooms expense for the six months ended June 30, 2013 increased approximately $0.2 million, or 1.9%, to approximately $8.6 million compared to rooms expense of approximately $8.4 million for the six months ended June 30, 2012.

Food and beverage expenses for the six months ended June 30, 2013 decreased approximately $0.5 million, or 6.0%, to approximately $6.9 million compared to food and beverage expenses of approximately $7.4 million for the six months ended June 30, 2012. Most of the decrease in food and beverage expense was directly related to the decrease in food and beverage revenues. Despite the decrease in food and beverage revenue, cost control measures enabled us to increase food and beverage margins from 34.2% to 36.1%.

Indirect expenses at our wholly-owned properties for the six months ended June 30, 2013 remained constant at approximately $16.6 million compared to indirect expenses for the six months ended June 30, 2012. While franchise fees increased directly in proportion to the increase in revenue, decreased energy and utility expenses due to lower energy prices, lower management fees due to a lower incentive management fee, and lower real estate taxes offset those and other increases in other indirect expenses. Repairs and maintenance, sales and marketing expenses, insurance, personal property taxes as well as general and administrative costs at the property level are also included in indirect expenses.

Depreciation and Amortization . Depreciation and amortization expense for the six months ended June 30, 2013 decreased approximately $0.3 million, or 6.7%, to $4.1 million compared to depreciation and amortization of approximately $4.4 million for the six months ended June 30, 2012.

Corporate General and Administrative . Corporate general and administrative expenses for the six months ended June 30, 2013 increased approximately $0.1 million, or 5.9%, to approximately $2.2 million compared to corporate and general administrative expenses of approximately $2.1 million the six months ended June 30, 2012.

Interest Expense . Interest expense for the six months ended June 30, 2013 decreased approximately $2.6 million, or 33.8%, to approximately $5.0 million compared to interest expense of approximately $7.6 million for the six months ended June 30, 2012. Most of the decrease related to the write-off of unamortized loan costs in conjunction with the extinguishment of the credit facility of approximately $0.5 million, the premium paid of approximately $0.8 million to redeem approximately 45% of the outstanding shares of Preferred Stock and the related write-off of unamortized issuance costs of approximately $0.7 million in the prior period which were offset by the premium paid to redeem 1,902 shares of Preferred Stock of approximately $0.2 million and the write-off of unamortized issuance costs related to the redeemed shares of approximately $0.1 million in the current period. The remaining decrease related to a lower effective interest rate on our outstanding debt.

Equity Income in Joint Venture . Equity income in joint venture for the six months ended June 30, 2013 represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. For the six months ended June 30, 2013, our 25.0% share of the net income of the hotel increased approximately $0.4 million, or 213.5%, to approximately $0.6 million compared to net income of approximately $0.2 million for the six months ended June 30, 2012. For the six months ended June 30, 2013, the hotel reported occupancy of 87.2%, ADR of $173.14 and RevPAR of $150.97. This compares with results reported by the hotel for the six months ended June 30, 2012 of occupancy of 84.0%, ADR of $156.94 and RevPAR of $131.85.

Unrealized Loss on Warrant Derivative . We recognized an unrealized loss of approximately $2.7 million on the value of the warrant derivative issued in April 2011 to the purchasers of Preferred Stock for the six months ended June 30, 2013 as well as an unrealized loss of approximately the same amount for the six months ended June 30, 2012. The unrealized losses are mostly attributable to the change in the market price of our common stock.

Income Taxes . The income tax provision for the six months ended June 30, 2013 increased approximately $0.3 million, or 29.4%, to approximately $1.4 million compared to an income tax provision of approximately $1.1 million for the six months ended June 30, 2012. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized greater operating income for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

Net Loss . The net loss for the six months ended June 30, 2013 decreased approximately $2.6 million, or 67.5%, to approximately $1.3 million as compared to a net loss of approximately $3.9 million for the six months ended June 30, 2012 as a result of the operating results discussed above.

Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011

The following table illustrates the key operating metrics for the years ended December 31, 2012 and 2011 for our nine wholly-owned operating properties.


	*Year ended* *December 31, 2012*			*Year ended* *December 31, 2011*
Occupancy %		68.9	%		66.2	%
ADR	$	114.22		$	110.24
RevPAR	$	78.65		$	72.94

Revenue . Total revenue for the year ended December 31, 2012 was approximately $87.3 million, an increase of approximately $6.1 million, or 7.6%, from total revenue for the year ended December 31, 2011 of approximately $81.2 million. Revenue increases were strongest at our DoubleTree by Hilton Brownstone - University and the Crowne Plaza Tampa Westshore properties.

Room revenues at our properties for the year ended December 31, 2012 increased approximately $4.6 million, or 8.3%, to approximately $60.8 million compared to room revenues for the year ended December 31, 2011 of approximately $56.2 million. The increase in room revenue was mostly attributable to increases in occupancy at our properties in Raleigh, North Carolina; Laurel, Maryland; Jacksonville, Florida and Tampa, Florida. Our recently renovated property in Raleigh, North Carolina as well as our property in Savannah, Georgia experienced significant increases in ADR as well. We expect occupancy and ADR to increase as demand continues to strengthen as the overall economy continues to improve.

Food and beverage revenues at our properties for the year ended December 31, 2012 increased approximately $1.5 million, or 7.2%, to approximately $22.0 million compared to food and beverage revenues for the year ended December 31, 2011 of approximately $20.5 million. Most of the increase in food and beverage revenue was attributable to increased revenues at the DoubleTree by Hilton Brownstone - University, the Holiday Inn Laurel West and the Crowne Plaza Tampa Westshore.

Other operating revenues for the year ended December 31, 2012 increased approximately $0.1 million, or 1.2%, to approximately $4.6 million compared to other operating revenues for the year ended December 31, 2011 of approximately $4.5 million. Higher guaranteed no-show fees and garage revenue offset a decrease in the payments received in respect of the expired Shell Island sublease.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, and management fees, increased approximately $2.5 million, or 4.1%, for the year ended December 31, 2012 to approximately $64.3 million compared to hotel operating expenses for the year ended December 31, 2011 of approximately $61.8 million. Increases in expenses that vary directly with increases in revenue, such as food and beverage expense, management fees and franchise fees, accounted for more than two-thirds of the increase in hotel operating expenses.

Rooms expense at our properties for the year ended December 31, 2012 increased approximately $0.8 million, or 4.9%, to approximately $16.6 million compared to rooms expense of approximately $15.8 million for the year ended December 31, 2011. The increase in rooms expense was directly related to the 8.3% increase in room revenue.

Food and beverage expenses at our properties for the year ended December 31, 2012 increased approximately $0.7 million, or 4.9%, to approximately $14.3 million compared to food and beverage expense of approximately $13.6 million for the year ended December 31, 2011. The increase in food and beverage expense was generally attributable to the 7.2% increase in food and beverage revenue.

Indirect expenses at our properties for the year ended December 31, 2012 increased approximately $1.1 million, or 3.6%, to approximately $32.9 million compared to indirect expenses of approximately $31.8 million for the year ended December 31, 2011. Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees and franchise fees. The overall increase in indirect expenses was offset by a decrease in energy costs, the non-recurrence of costs associated with Hurricane Irene at our property in Hampton, Virginia and the expiration of the sublease at Shell Island on December 31, 2011.

Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2012 remained constant at approximately $8.7 million compared to depreciation and amortization expense for the year ended December 31, 2011. We expect depreciation and amortization to remain at approximately this level for the current portfolio of hotels.

Corporate General and Administrative . Corporate general and administrative expenses for the year ended December 31, 2012 increased approximately $0.1 million, or 1.3%, to approximately $4.1 million compared to corporate general and administrative expenses of approximately $4.0 million for the year ended December 31, 2011. The absence in the current year of charges related to our aborted stock offering in 2011 was offset by higher salaries of our employees and legal fees.

Interest Expense . Interest expense for the year ended December 31, 2012 increased approximately $1.6 million, or 14.4%, to approximately $12.4 million compared to approximately $10.8 million of interest expense for the year ended December 31, 2011. If not for the write-off of unamortized loan costs in conjunction with the extinguishment of the credit facility in March 2012 of approximately $0.5 million, the premium paid to redeem approximately 11,514 shares of Preferred Stock in June 2012 of approximately $0.8 million and the write-off of unamortized issuance costs related to the redeemed shares of approximately $0.7 million, we would have experienced a reduction in interest expense of approximately $0.4 million.

Equity Income (Loss) in Joint Venture . Equity in the income of the joint venture was approximately $0.2 million for the year ended December 31, 2012 compared to equity in the loss of joint venture of approximately $0.1 million for the year ended December 31, 2011 and represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. The improvement was attributable to a 12.6% increase in net operating income as well as a curtailment of unrealized losses on hedging activities. For the year ended December 31, 2012, the Crowne Plaza Hollywood Beach Resort reported occupancy of 79.2%, ADR of $147.37 and RevPAR of $116.66. This compares with results reported by the hotel for the year ended December 31, 2011 of occupancy of 79.4%, ADR of $133.29 and RevPAR of $105.82.

Unrealized Loss on Warrant Derivative. The unrealized loss on the Warrant derivative for the year ended December 31, 2012 increased approximately $0.7 million, or 54.8%, to approximately $2.0 million compared to the unrealized loss of approximately $1.3 million for the year ended December 31, 2011. The current year loss was predominantly attributable to the increase in market price of the underlying common stock whereas the prior year loss was predominantly attributable to the modification to the Warrant agreement in December 2011 whereby the exercise price will be adjusted for any and all dividends declared and paid after December 31, 2011.

Income Tax Provision . The income tax provision for the year ended December 31, 2012 increased approximately $0.4 million, or 43.7%, to approximately $1.3 million compared to approximately $0.9 million for the year ended December 31, 2011. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized greater operating income for the year ended December 31, 2012 compared to the year ended December 31, 2011.

Net Loss . Net loss for the year ended December 31, 2012 decreased approximately $1.2 million to approximately $5.3 million compared to net loss of approximately $6.5 million for the year ended December 31, 2011 as a result of the operating results discussed above.

Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010

The following table illustrates the key operating metrics for the years ended December 31, 2011 and 2010 for our nine wholly-owned operating properties.


	*Year ended* *December 31, 2011*			*Year ended* *December 31, 2010*
Occupancy %		66.2	%		66.0	%
ADR	$	110.24		$	104.42
RevPAR	$	72.94		$	68.93

Revenue. Total revenue for the year ended December 31, 2011 was approximately $81.2 million, an increase of approximately $3.8 million, or 4.9%, from total revenue for the year ended December 31, 2010 of approximately $77.4 million. Increases in revenue at the Hilton Wilmington Riverside, the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore offset slight decreases in revenue at the Holiday Inn Laurel West and the DoubleTree by Hilton Brownstone - University.

Room revenues at our properties for the year ended December 31, 2011 increased approximately $3.1 million, or 5.8%, to approximately $56.2 million compared to room revenues for the year ended December 31, 2010 of approximately $53.1 million. The increase in room revenue was mostly attributable to increases in occupancy at our recently renovated properties in Jeffersonville, Indiana; Hampton, Virginia; and Tampa, Florida.

Food and beverage revenues at our properties for the year ended December 31, 2011 increased approximately $0.6 million, or 2.9%, to approximately $20.5 million compared to food and beverage revenues for the year ended December 31, 2010 of approximately $19.9 million. Most of the increase in food and beverage revenue was attributable to increased revenues at the Crowne Plaza Tampa Westshore and the Hilton Wilmington Riverside.

Other operating revenues for the year ended December 31, 2011 increased approximately $0.1 million, or 2.6%, to approximately $4.5 million compared to other operating revenues for the year ended December 31, 2010 of approximately $4.4 million. Higher guaranteed no-show fees offset decreases in pay-per-view movie revenue.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, indirect expenses, and management fees, increased approximately $2.7 million, or 4.6%, for the year ended December 31, 2011 to approximately $61.8 million compared to hotel operating expenses for the year ended December 31, 2010 of approximately $59.1 million. Increases in expenses that vary directly with increases in revenue, such as food and beverage expense, management fees and franchise fees, accounted for approximately half the increase in hotel operating expenses.

Rooms expense at our properties for the year ended December 31, 2011 increased approximately $0.7 million, or 5.0%, to approximately $15.8 million compared to rooms expense of approximately $15.1 million for the year ended December 31, 2010. The increase in rooms expense was directly related to the 5.8% increase in room revenue.

Food and beverage expenses at our properties for the year ended December 31, 2011 increased approximately $0.4 million, or 2.8%, to approximately $13.6 million compared to food and beverage expense of approximately $13.2 million for the year ended December 31, 2010. The increase in food and beverage expense was generally attributable to the 2.9% increase in food and beverage revenue.

Indirect expenses at our properties for the year ended December 31, 2011 increased approximately $1.8 million, or 5.9%, to approximately $31.8 million compared to indirect expenses of approximately $30.0 million for the year ended December 31, 2010. Sales and marketing costs, franchise fees, utilities, repairs and maintenance, insurance, management fees, real and personal property taxes as well as general and administrative costs at the property level are included in indirect expenses. Most of the increase in indirect expenses related to expenses that increase proportionally with increases in occupancy and/or revenue, including management fees, franchise fees and energy costs.

Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2011 increased approximately $0.2 million, or 2.3%, to approximately $8.7 million compared to depreciation and amortization expense of approximately $8.5 million for the year ended December 31, 2010.

Corporate General and Administrative. Corporate general and administrative expenses for the year ended December 31, 2011 increased approximately $0.6 million, or 18.8%, to approximately $4.0 million compared to corporate general and administrative expenses of approximately $3.4 million for the year ended December 31, 2010 due mostly to the charge in the third quarter for fees related to our aborted stock offering.

Interest Expense . Interest expense for the year ended December 31, 2011 increased approximately $0.8 million, or 7.9%, to approximately $10.8 million compared to approximately $10.0 million of interest expense for the year ended December 31, 2010. The increase was the combined result of a lower effective interest rate on our line of credit in the period prior to the June 2010 amendment to the then-existing credit agreement as well as higher interest costs in the current period associated with the April 2011 issuance of Preferred Stock.

Equity Income (Loss) in Joint Venture. Equity loss in the joint venture was approximately $60.1 thousand for the year ended December 31, 2011 compared to equity income in the joint venture of approximately $17.0 thousand for the year ended December 31, 2010 and represents our 25.0% share of the net income of the Crowne Plaza Hollywood Beach Resort. A 228.4% increase in net operating income was offset by higher interest expense and unrealized losses on hedging activities. For the year ended December 31, 2011, the Crowne Plaza Hollywood Beach Resort reported occupancy of 79.4%, ADR of $133.29 and RevPAR of $105.82. This compares with results reported by the hotel for the year ended December 31, 2010 of occupancy of 80.0%, ADR of $120.73 and RevPAR of $96.53.

Unrealized Loss on Warrant Derivative . The Company recognized an unrealized loss of approximately $1.3 million on the value of the Warrant derivative issued in April 2011 to the purchasers of Sotherly’s Preferred Stock. The loss predominantly was attributable to the modification to the Warrant agreement in December 2011 whereby the exercise price will be adjusted for any and all dividends declared and paid after December 31, 2011.

Income Tax Provision. The income tax provision for the year ended December 31, 2011 increased approximately $0.7 million, or 321.6%, to approximately $0.9 million compared to approximately $0.2 million for the year ended December 31, 2010. The income tax provision is primarily derived from the operations of our TRS Lessee. Our TRS Lessee realized greater operating income for the year ended December 31, 2011 compared to the year ended December 31, 2010.

Net Loss. Net loss for the year ended December 31, 2011 increased approximately $2.2 million to approximately $6.5 million compared to net loss of approximately $3.3 million for the year ended December 31, 2010 as a result of the operating results discussed above.

Sources and Uses of Cash

The following narrative discusses our sources and uses of cash for the six months ended June 30, 2013.

Operating Activities . Our principal source of cash to meet our operating requirements, including distributions to unitholders of the Operating Partnership and stockholders of Sotherly as well as debt service (excluding debt maturities), is the operations of our hotels. Cash flow provided by operating activities for the six months ended June 30, 2013 was approximately $7 million. We expect that the net cash provided by operations will be adequate to fund our continuing operations, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt), quarterly payments of dividends on the Preferred Stock, and the payment of dividends (distributions) to unitholders of the Operating Partnership and stockholders of Sotherly in accordance with federal income tax laws, which require us to make annual distributions to Sotherly’s stockholders of at least 90.0% of our REIT taxable income, excluding net capital gains.

Investing Activities . Approximately $3.2 million was spent during the six months ended June 30, 2013 on capital expenditures, of which, approximately $2.3 million related to the routine replacement of furniture, fixtures and equipment and $0.9 million related to renovation of our properties in Philadelphia, Pennsylvania and Jacksonville, Florida. We also contributed approximately $1.0 million during the six

months ended June 30, 2013 into reserves required by the lenders for the Hilton Wilmington Riverside, Hilton Savannah DeSoto, Hilton Philadelphia Airport, Sheraton Louisville Riverside and the Crowne Plaza Hampton Marina according to the provisions of the loan agreements. During the six months ended June 30, 2013, we received reimbursements from those reserves of approximately $0.8 million for capital expenditures related to those properties for periods ending on or before March 31, 2013.

Financing Activities . On March 26, 2013, the Company used the net proceeds of the mortgage on the DoubleTree by Hilton Brownstone-University to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million.

On June 17, 2013, we provided approximately $0.9 million in cash collateral to the lender for the Crowne Plaza Jacksonville Riverfront in order to comply with the terms of the loan agreement following the property’s failure to meet its debt service coverage test for the period ended March 31, 2013.

On June 28, 2013, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia. Pursuant to the agreement, the Company reduced the outstanding indebtedness by approximately $1.1 million.

The following narrative discusses our sources and uses of cash for the year ended December 31, 2012.

Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unitholders of the Operating Partnership and stockholders of Sotherly as well as repayments of indebtedness, is the operations of our hotels. Cash flow provided by operating activities for the year ended December 31, 2012 was approximately $9.0 million. We expect that cash on hand and the net cash provided by operations will be adequate to fund the Company’s operating requirements, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and the payment of dividends in accordance with federal income tax laws which require us to make annual distributions to Sotherly’s stockholders of at least 90.0% of our REIT taxable income, excluding net capital gains.

Investing Activities. Approximately $2.9 million was spent during the year ended December 31, 2012 on capital expenditures, of which, approximately $1.4 million related to the routine replacement of furniture, fixtures and equipment and $1.5 million related to the completion of our renovation of our property in Raleigh, North Carolina as well as renovation of our properties in Philadelphia, Pennsylvania and Jacksonville, Florida. We also contributed approximately $2.0 million during the year ended December 31, 2012 into reserves required by the lenders for the Hilton Wilmington Riverside, Hilton Savannah DeSoto, Hilton Philadelphia Airport, Sheraton Louisville Riverside, Crowne Plaza Jacksonville Riverfront and the Crowne Plaza Hampton Marina according to the provisions of the loan agreements as well as the administrator of the then-existing credit agreement. During the year ended December 31, 2012, we received reimbursements from those reserves of approximately $1.1 million for capital expenditures related to those properties for periods ending on or before September 30, 2012.

Financing Activities . On March 5, 2012, we obtained a mortgage on the Hilton Philadelphia Airport for $30.0 million and used the proceeds to extinguish the credit facility and repay a portion of the outstanding indebtedness on the $10.0 million loan agreement with Essex Equity High Income Joint Investment Vehicle, LLC, or the Note Agreement.

On June 18, 2012, we obtained a mortgage on the Crowne Plaza Tampa Westshore for $14.0 million and used the proceeds to repay the outstanding indebtedness on the Note Agreement and to redeem approximately 11,514 shares of Preferred Stock.

On July 10, 2012, we obtained a $14.3 million mortgage with Fifth Third Bank on the Crowne Plaza Jacksonville Riverfront in Jacksonville, Florida and used the proceeds to repay the outstanding indebtedness on the property and to pay transaction costs.

During the year ended December 31, 2012, we paid approximately $2.5 million of scheduled principal payments toward the mortgages on our properties.

During the year ended December 31, 2012, we also paid approximately $1.1 million in deferred financing costs in relation to the mortgages discussed above.

Capital Expenditures

We anticipate that our need for recurring capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment over the next 12 to 24 months will approximate historical norms for the industry. Historically, we have aimed to maintain overall capital expenditures at 4.0% of gross revenue, except for those capital expenditures required by our lenders as a condition to a financing arrangement or by our franchisors as a condition to a franchise license or license renewal.

We expect capital expenditures for the replacement or refurbishment of furniture, fixtures and equipment at our properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors. Reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels. We currently deposit an amount equal to 4.0% of gross revenue for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Crowne Plaza Hampton Marina and the Sheraton Louisville Riverside as well as 4.0% of room revenues for the Hilton Philadelphia Airport on a monthly basis.

Liquidity and Capital Resources

As of June 30, 2013, we had cash and cash equivalents of approximately $10.8 million, of which approximately $4.3 million was reserved for real estate taxes, capital improvement and certain other expenses, or otherwise restricted. We believe our overall liquidity and capital structure will improve as a result of this offering. We expect to use approximately $11,000,000 of the net proceeds of this offering to redeem 100% of the outstanding shares of Sotherly’s Preferred Stock. We anticipate having approximately $ (or $ if the over-allotment option is exercised in full) of additional cash available after this offering, which we expect will provide increased liquidity to fund ongoing operations and allow us to pursue acquisition opportunities. We expect that our cash on hand combined with our cash flow from the operations of our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and quarterly payment of dividends on the Preferred Stock.

In March 2013, we entered into a First Amendment to the Loan Agreement and other amendments to secure additional proceeds on the original $8.0 million mortgage on the DoubleTree by Hilton Brownstone-University with its existing lender. We used the net proceeds to redeem 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million. The redemption resulted in a prepayment fee of approximately $0.2 million.

In June 2013, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2014. Under the terms of the extension, we made a principal payment of approximately $1.1 million to reduce the principal balance on the loan to $6.0 million and are required to continue to make monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage will remain at a rate of LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00% per annum. Subject to certain terms and conditions, we may extend the maturity date of the loan to June 30, 2015.

On August 1, 2013, we obtained a $15.6 million mortgage with CIBC, Inc. on the DoubleTree by Hilton Raleigh Brownstone-University in Raleigh, North Carolina. The maturity date is August 1, 2018. Approximately $0.7 million of the loan proceeds were placed into a restricted reserve which can be disbursed to the Company upon satisfaction of certain financial performance criteria. The remaining proceeds of the mortgage were used to repay the existing mortgage indebtedness, to pay closing costs, to redeem 2,460 shares of Sotherly’s Preferred Stock for an aggregate redemption price of approximately $2.7 million plus the payment of related accrued and unpaid cash and stock dividends and for working capital. The redemption resulted in a prepayment fee of approximately $0.2 million.

We will need to, and plan to, renew, replace or extend our long-term indebtedness prior to their respective maturity dates. We are uncertain whether we will be able to refinance these obligations or if refinancing terms will be favorable. If we are unable to obtain alternative or additional financing arrangements in the future, or if we cannot obtain financing on acceptable terms, we may be forced to dispose of hotel properties on disadvantageous terms. To the extent we cannot repay our outstanding debt, we risk losing some or all of these properties to foreclosure and we could be required to invoke insolvency proceedings including, but not limited to, commencing a voluntary case under the U.S. Bankruptcy Code.

We believe there will be opportunities to acquire properties in the future that meet our strategic goals and provide attractive long term returns.

Mortgage Debt

As of June 30, 2013 and December 31, 2012, we had approximately $134.9 million and $135.7 million of outstanding mortgage debt, respectively. The following table sets forth our mortgage debt obligations on our hotels:

Balance Outstanding as of

Property

June 30,
2013

December 31,
2012

Prepayment
Penalties

Maturity
Date

Amortization
Provisions

Interest Rate

(unaudited)

Crowne Plaza Hampton Marina

5,999,500

7,559,625

None

06/2014

⁽¹⁾

$16,000

⁽ ² ⁾

LIBOR plus
4.55

% ⁽ ³ ⁾

Crowne Plaza Jacksonville Riverfront

13,948,116

14,135,234

None

07/2015

⁽ ⁴ ⁾

25 years

LIBOR plus
3.00

Crowne Plaza Tampa Westshore

13,738,236

13,872,077

None

06/2017

25 years

5.60

DoubleTree by Hilton Brownstone – University

9,958,327

7,816,867

None

10/2016

⁽ ⁵ ⁾

25 years

5.25

Hilton Philadelphia Airport

29,118,931

29,502,666

None

08/2014

⁽ ⁶ ⁾

25 years

LIBOR plus
3.00

% ⁽ ⁷ ⁾

Hilton Savannah DeSoto

21,822,392

22,051,314

Yes

⁽ ⁸ ⁾

07/2017

25 years

⁽ ⁹ ⁾

6.06

Hilton Wilmington Riverside

21,171,831

21,416,922

Yes

⁽ ⁸ ⁾

03/2017

25 years

⁽ ¹⁰ ⁾

6.21

Holiday Inn Laurel West

7,221,697

7,300,465

Yes

⁽ ¹¹ ⁾

08/2021

25 years

5.25

% ⁽ ¹² ⁾

Sheraton Louisville Riverside

11,914,659

12,019,262

⁽ ¹³ ⁾

01/2017

25 years

6.24

Total

134,893,689

135,674,432

(1)	The note provides that the mortgage can be extended until June 2015 if certain conditions have been satisfied.

(2)	We are required to make monthly principal payments of $16,000.

(3)	The note bears a minimum interest rate of 5.00%.

(4)	The note provides that the mortgage can be extended until July 2016 if certain conditions have been satisfied.

(5)	The note provides that after five years, the mortgage can be extended if certain conditions have been satisfied for an additional five-year period at a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest.

(6)	The note provides that the mortgage can be extended until March 2017 if certain conditions have been satisfied.

(7)	The note bears a minimum interest rate of 3.50%.

(8)	The notes may not be prepaid during the first six years of the terms. Prepayment can be made with penalty thereafter until 90 days before maturity.

(9)	The note provided for payments of interest only until August 2010 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in July 2017.

(10)	The note provided for payments of interest only until March 2009 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in March 2017.

(11)	Pre-payment can be made with penalty until 180 days before the fifth anniversary of the commencement date of the loan or from such date until 180 days before the maturity.

(12)	The note provides that after five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest, with a floor of 5.25%.

(13)	With limited exception, the note may not be prepaid until two months before maturity.

Contractual Obligations

The following table outlines our contractual obligations as of December 31, 2012, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands).


	Payments due by period (in thousands)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Mortgage loans, including interest	$	162,816	$	17,111	$	59,156	$	78,955	$	7,594
Other loans, including interest		4,249		147		4,102		—		—
Ground, building, office and equipment leases		1,344		502		651		191		—
Redeemable preferred stock		20,385		1,425		2,939		16,021		—

Totals	$	188,794	$	19,185	$	66,848	$	95,167	$	7,594

In connection with the acquisition of our six initial hotel properties, we entered into tax indemnity agreements that require us to indemnify the contributors of our initial properties against tax liabilities in the event we sell those properties in a taxable transaction during a 10-year period. As of June 30, 2013, such indemnification obligations could result in aggregate payments of approximately $9.2 million. Our obligations under the tax indemnity agreements may effectively preclude us from selling or disposing of certain of the initial hotels in taxable transactions or reducing our consolidated indebtedness below approximately $11.0 million.

Financial Covenants

Mortgage Loans

Under the terms of our non-recourse secured mortgage loan agreements, failure to comply with the financial covenants in the loan agreement triggers cash flows from the property to be directed to the lender, which may limit our overall liquidity as that cash flow would not be available to us.

As of June 30, 2013, we were in compliance with all debt covenants, current on all loan payments and not otherwise in default under any of our mortgage loans. We continue to be in compliance under the terms of the covenants in our mortgage loan agreement for the Crowne Plaza Jacksonville Riverfront by providing approximately $0.9 million cash collateral.

Unsecured Notes

The unsecured notes offered by this prospectus contain certain covenants and restrictions that require us to meet certain financial ratios and include certain financial measures that are not calculated in accordance with GAAP. See “Description of Notes— Certain Covenants.” These financial measures are presented below for the sole purpose of evaluating the Company’s compliance with the key financial covenants as if they had been applicable at June 30, 2013, December 31, 2012 and December 31, 2011.


	June 30, 2013			December 31, 2012			December 31, 2011
Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense
Net income (loss) ⁽¹⁾	$	(1,855,773	)	$	(5,327,711	)	$	(6,475,243	)
Interest expense ⁽¹⁾		9,822,975			12,382,146			10,821,815
Provision for taxes ⁽¹⁾		1,613,381			1,301,229			905,455
Equity in (income) loss of joint venture ⁽¹⁾		(551,574	)		(172,172	)		60,094
Unrealized loss on warrant derivative ⁽¹⁾		2,021,987			2,026,677			1,309,075
Unrealized gain on hedging activities ⁽¹⁾		—			—			(72,649	)
Impairment of note receivable ⁽¹⁾		110,871			110,871			—
Loss on disposal of assets ⁽¹⁾		—			—			128,099
Depreciation and amortization ⁽¹⁾		8,370,086			8,661,769			8,702,880
Corporate general and administrative expenses ⁽¹⁾		4,201,764			4,078,826			4,025,794
Income Available for Debt Service ⁽¹⁾	$	23,733,717		$	23,061,635		$	19,405,320
Interest expense ⁽¹⁾	$	9,822,975		$	12,382,146		$	10,821,815
Distributions on Preferred Interest ⁽¹⁾⁽²⁾		(1,883,169	)		(3,106,981	)		(2,122,205	)
Amortization of issuance costs ⁽¹⁾⁽²⁾		(787,962	)		(1,971,796	)		(1,106,279	)
Stabilized Consolidated Interest Expense	$	7,151,844		$	7,303,369		$	7,593,331
Ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense		3.32			3.16			2.56
Ratio of Debt to Adjusted Total Asset Value:
Line of credit	$	—		$	—		$	25,537,290
Mortgage loans		134,893,689			135,674,432			94,157,825
Loans payable		3,650,220			4,025,220			9,275,220
Total debt	$	138,543,909			139.699,652			128,970,335


	June 30, 2013			December 31, 2012			December 31, 2011
Income Available for Debt Service ⁽¹⁾	$	23,733,717		$	23,061,635		$	19,405,320
Capitalization Rate		7.5	%		7.5	%		7.5	%
		316,449,560			307,488,467			258,737,600
Cash and cash equivalents		10,818,821			10,255,610			7,100,350
		327,268,381			317,744,077			265,837,950
Ratio of Debt to Adjusted Total Asset Value		0.42			0.44			0.49

(1)	Represents the four preceding calendar quarters.

(2)	Includes prepayment fee and write-off of associated issuance costs associated with the portion of the Preferred Interest redeemed during the period.

Off-Balance Sheet Arrangements

Through a joint venture with a Carlyle subsidiary, we own a 25.0% indirect, noncontrolling interest in an entity, or the JV Owner, that acquired the 311-room Crowne Plaza Hollywood Beach Resort in Hollywood, Florida. We have the right to receive a pro rata share of operating surpluses and we have an obligation to fund our pro rata share of operating shortfalls. We also have the opportunity to earn an incentive participation in the net proceeds realized from the sale of the hotel based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds. The Crowne Plaza Hollywood Beach Resort is leased to another entity, or the Joint Venture Lessee, in which we also own a 25.0% indirect, noncontrolling interest.

The property is currently encumbered by a $32.6 million mortgage, which matures in August 2014, requires monthly payments of interest at a rate of LIBOR plus additional interest of 1.94% and requires annual principal payments of $0.5 million. In conjunction with the loan, the joint venture executed an interest-rate swap with a notional amount and maturity tied to the projected outstanding balance and maturity date of the loan. The Crowne Plaza Hollywood Beach Resort secures the mortgage.

Carlyle owns a 75.0% controlling interest in the JV Owner and the Joint Venture Lessee. Carlyle may elect to dispose of the Crowne Plaza Hollywood Beach Resort without our consent. We account for our noncontrolling 25.0% interest in all of these entities under the equity method of accounting.

Inflation

We generate revenues primarily from lease payments from our TRS Lessee and net income from the operations of our TRS Lessee. Therefore, we rely primarily on the performance of the individual properties and the ability of the management company to increase revenues and to keep pace with inflation. Operators of hotels, in general, possess the ability to adjust room rates daily to keep pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of the management company to raise room rates.

Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher than inflation.

Geographic Concentration and Seasonality

Our hotels are located in Florida, Georgia, Indiana, Maryland, North Carolina, Pennsylvania and Virginia. As a result, we are particularly susceptible to adverse market conditions in these geographic areas, including industry downturns, relocation of businesses and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could materially and adversely affect us.

The operations of our hotel properties have historically been seasonal, and the results of operations depend on the location and type of market in which an individual hotel resides. Our hotels are predominately in high demand markets in the Southeastern United States and often experience slow periods from mid-November through mid-February, with the exception of hotels located in markets, namely in Florida, that experience significant room demand during this period.

Critical Accounting Policies

The critical accounting policies are described below. We consider these policies critical because they involve difficult management judgments and assumptions, are subject to material change from external factors or are pervasive, and are significant to fully understand and evaluate our reported financial results.

Investment in Hotel Properties . Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 7-39 years for buildings and improvements and 3-10 years for furniture and equipment. In accordance with GAAP the controlling interests in hotels comprising our accounting predecessor, MHI Hotels Services Group, and noncontrolling interests held by the controlling holders of our accounting predecessor in hotels, which were acquired from third parties contributed to us in connection with Sotherly’s initial public offering, are recorded at historical cost basis. Noncontrolling interests in those entities that comprise our accounting predecessor and the interests in hotels, other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value at the time of acquisition.

We review our hotel properties for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform our review include, but are not limited to, adverse changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs a recoverability analysis to determine if the estimated undiscounted future cash flows from operating activities and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of a hotel property, an adjustment to reduce the carrying value to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.

There were no charges for impairment of hotel properties recorded in 2012, 2011 or 2010.

In performing the recoverability analysis, we project future operating cash flows based upon significant assumptions regarding growth rates, occupancy, room rates, economic trends, property-specific operating costs and future capital expenditures required to maintain the hotel in its current operating condition. We also project cash flows from the eventual disposition of the hotel based upon various factors including property-specific capitalization rates, ratio of selling price to gross hotel revenues and the selling price per room.

Revenue Recognition . Hotel revenues, including room, food, beverage and other hotel revenues, are recognized as the related services are delivered. We generally consider accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If we determine that amounts are uncollectible, which would generally be the result of a customer’s bankruptcy or other economic downturn, such amounts will be charged against operations when that determination is made.

Income Taxes . We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized. Because of expected future taxable income of our TRS Lessee, we have not recorded a valuation allowance to reduce our net deferred tax asset as of December 31, 2012. Should our estimate of future taxable income be less than expected, we would record an adjustment to the net deferred tax asset in the period such determination was made.

Recent Accounting Pronouncements

For a summary of recently adopted and newly issued accounting pronouncements, please refer to the Recent Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.

Non-GAAP Financial Measures

We consider FFO, Adjusted FFO and Hotel EBITDA, all of which are non-GAAP financial measures, to be key supplemental measures of our performance and could be considered along with, not alternatives to, net income (loss) as a measure of our performance. These measures do not represent cash generated from operating activities determined by GAAP or amounts available for our discretionary use and should not be considered alternative measures of net income, cash flows from operations or any other operating performance measure prescribed by GAAP.

FFO and Adjusted FFO . Industry analysts and investors use FFO as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any noncontrolling interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself.

We consider FFO to be a useful measure of adjusted net income (loss) for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.

We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, including any unrealized gain (loss) on its hedging instruments or warrant derivative, loan impairment losses, losses on early extinguishment of debt, aborted offering costs, costs associated with the departure of executive officers and acquisition transaction costs. We exclude these items as we believe it allows for meaningful comparisons between periods and among other REITs and is more indicative of the on-going performance of our business and assets. Our calculation of Adjusted FFO may be different from similar measures calculated by other REITs.

The following is a reconciliation of net loss to FFO and Adjusted FFO for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
Net Loss	$	(5,327,711	)	$	(6,475,243	)	$	(3,252,261	)	$	(3,010,587	)	$	(920,014	)
Depreciation and amortization		8,661,769			8,702,880			8,506,802			8,420,085			6,346,222
Equity in depreciation and amortization of joint venture		590,675			567,803			546,055			545,580			545,659
(Gain)/loss on disposal of assets		—			128,099			171,304			42,870			320,533

FFO	$	3,924,733		$	2,923,539		$	5,971,900		$	5,997,948		$	6,292,400
Unrealized (gain)/loss on hedging activities ⁽¹⁾		13,752			77,152			(830,614	)		(1,220,161	)		691,268
Unrealized (gain)/loss on warrant derivative		2,026,677			1,309,075			—			—			—
(Increase)/decrease in deferred income taxes		1,412,467			685,189			174,035			(1,929,473	)		(1,652,278	)
Impairment of note receivable		110,871			—			—			—			300,000
Aborted offering costs		—			582,850			—			—			—
Equity in gain on extinguishment of debt of joint venture		—			—			—			—			(750,000	)
Loss on early extinguishment of debt ⁽² ⁾		1,982,184			—			—			—			—

Adjusted FFO	$	9,470,684		$	5,577,805		$	5,315,321		$	2,848,314		$	4,881,390

(1)	Includes equity in unrealized loss on hedging activities of joint venture.

(2)	Reflected in interest expense for the periods presented above.

Hotel EBITDA . We define Hotel EBITDA as net income or loss excluding: (1) interest expense, (2) interest income, (3) equity in the income or loss of equity investees, (4) unrealized gains and losses on derivative instruments not included in other comprehensive income, (5) gains and losses on disposal of assets, (6) realized gains and losses on investments, (7) impairment of long-lived assets or investments, (8) corporate general and administrative expense; (9) depreciation and amortization; and (10) other operating revenue not related to our wholly-owned portfolio. We believe this provides a more complete understanding of the operating results over which our wholly-owned hotels and its operators have direct control. We believe Hotel EBITDA provides investors with supplemental information on the on-going operational performance of our hotels and the effectiveness of third-party management companies operating our business on a property-level basis.

The Company’s calculation of Hotel EBITDA may be different from similar measures calculated by other REITs.

The following is a reconciliation of net loss to Hotel EBITDA for the years ended December 31, 2012, 2011, 2010, 2009 and 2008:


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
Net Loss	$	(5,327,711	)	$	(6,475,243	)	$	(3,252,261	)	$	(3,010,587	)	$	(920,014	)
Interest expense		12,382,146			10,821,815			10,030,517			9,661,871			6,811,460
Interest income		(16,158	)		(14,808	)		(22,305	)		(41,999	)		(72,547	)
Income tax provision (benefit)		1,301,229			905,455			214,344			(1,807,126	)		(1,475,695	)
Depreciation and amortization		8,661,769			8,702,880			8,506,802			8,420,085			6,346,222
Equity in (earnings)/loss of joint venture		(172,172	)		60,094			(16,931	)		249,367			(48,496	)
(Gain)/loss on disposal of assets		—			128,099			171,304			42,870			320,533
Unrealized (gain)/loss on hedging activities		—			(72,649	)		(700,488	)		(1,220,161	)		691,268
Unrealized (gain)/loss on warrant derivative		2,026,677			1,309,075			—			—			—


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
Impairment of note receivable		110,871			—			—			—			300,000
Corporate general and administrative		4,078,826			4,025,794			3,389,764			3,170,627			2,940,979
Net lease rental income		(350,000	)		(447,000	)		(443,000	)		(445,000	)		(471,862	)
Other fee income		(255,707	)		(235,493	)		(238,198	)		(248,040	)		(197,790	)

Hotel EBITDA	$	22,439,770		$	18,708,019		$	17,639,548		$	14,771,907		$	14,224,058

OUR BUSINESS AND PROPERTIES

Overview

Sotherly is a self-managed and self-administered real estate investment trust, or REIT, that was formed in August 2004 to own, acquire, renovate and reposition full-service, primarily upscale and upper-upscale hotel properties located in the Mid-Atlantic and Southern United States. On December 21, 2004, Sotherly successfully completed its initial public offering and elected to be treated as a self-advised REIT for federal income tax purposes. Sotherly conducts its business through Sotherly Hotels LP, Sotherly’s operating partnership, of which Sotherly is the general partner. Sotherly owns approximately 77.9% of the partnership units in the Operating Partnership. Limited partners (including certain of Sotherly’s officers and directors) own the remaining Operating Partnership units.

Our portfolio currently consists of ten full-service, primarily upscale and upper-upscale hotels located in seven states with an aggregate of 2,424 rooms and approximately 120,200 square feet of meeting space. Nine of these hotels are wholly-owned by subsidiaries of the Operating Partnership and operate under the Hilton, Crowne Plaza, Sheraton and Holiday Inn brands and are managed on a day to day basis by MHI Hotels Services. We also own a 25.0% indirect noncontrolling interest in the 311-room Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle. Our portfolio is concentrated in markets that we believe possess multiple demand generators and have significant barriers to entry for new product delivery, which are important factors for us in identifying hotel properties that we expect will be capable of providing strong risk-adjusted returns.

Since Sotherly’s initial public offering in 2004, we have invested approximately $145 million in new hotel properties, in capital improvements to new and existing properties, and in joint ventures. From 2005 to 2008, our asset base approximately doubled, as we purchased five wholly-owned hotels and one additional hotel that was a joint venture project with Carlyle. By 2012, we had completed the renovation and repositioning of over 80% of our wholly-owned assets and successfully relicensed the majority of our hotels during this same period. Our repositioning efforts have garnered numerous awards from our franchisors for the quality of our renovations and the high level of guest satisfaction. Our renovations have also allowed us to align our hotels with more upscale brands from our franchisors. We believe this substantial level of capital investment and our upbranding efforts have positioned our properties to capture revenue opportunities in their respective markets and outperform our competitors as these locations mature.

In order for Sotherly to qualify as a REIT, it cannot directly manage or operate our hotels. Therefore, our wholly-owned hotel properties are leased to our TRS Lessee and managed by MHI Hotels Services, an eligible independent management company. Our TRS Lessee is a wholly-owned subsidiary of MHI Holding, which we refer to collectively with our TRS Lessee as MHI TRS. MHI TRS is a taxable REIT subsidiary for federal income tax purposes.

Market Opportunity

As a result of the global economic recession, commencing in 2008 through early 2010, the U.S. lodging industry experienced substantial declines in operating performance driven by declining U.S. gross domestic product, or GDP, high unemployment levels, low consumer confidence and a reduction in the availability of credit. In addition to facing declining operating results, hotel owners were adversely impacted by a significant decline in the availability of debt financing for working capital, renovations and acquisitions. For the past three years, the lodging industry has experienced a recovery in revenue per available room and in financing activity. The breadth and sustainability of the recovery will be dependent on a variety of factors, including asset location, individual market performance, and property condition. New supply of hotel rooms has not yet emerged as a major factor impacting the recovery, and we believe the supply of new hotels is likely to remain low for the next several years due to the limited availability of debt financing dedicated to new construction projects. As a result, we believe well-located, properly positioned, and well managed hotels will continue to benefit from the ongoing lodging recovery and demand for hotel rooms.

Operating performance in the lodging industry historically has correlated with U.S. GDP growth and we believe the national economy has stabilized and its nascent growth mirrors the recovery of revenue per available room in the U.S. lodging industry. As continued growth characterizes the domestic economy, industry experts are projecting that lodging fundamentals will remain strong over the near term.

Industry fundamentals have shown strong improvements since the recession of 2008 through early 2010. Smith Travel Research, a leading provider of supply and demand data for the lodging industry, reported that, the national hotel industry experienced its first positive month of year-over-year improvement in revenue per available room in early 2010. The industry has continued to trend in a positive direction since that time, as shown in the table below.

LOGO

Source: Smith Travel Research .

In addition to an improvement in operating fundamentals, commercial lenders report an expansion in the availability of credit. As shown in the table below, the commercial mortgage-backed security, or CMBS, market, which has historically provided a significant amount of debt financing to the real estate industry, has seen a significant increase in new issuances since the market lows of 2009.

LOGO

Source: Commercial Mortgage Alert, May, 2013 .

As credit has become more available, credit spreads continue to decline relative to benchmark treasury yields, thus providing hotel borrowers attractive overall borrowing rates for acquisition financing or refinancing of existing debt. As the table below demonstrates, credit spreads have declined significantly. This allows hotel owners to benefit from lower overall costs of financing.

LOGO

Source: Commercial Mortgage Alert, May 2013.

Although market conditions have improved, new room supply remains constrained, as we believe construction lending remains difficult to obtain and land and commodity costs remain high. The chart below provides an historic view of room supply in the upper upscale category of hotels, which represent the majority of the type of hotels owned by us. Rooms’ supply growth has lagged historic averages for over three years. Existing hotel owners benefit from constrained new supply, as pricing power is conveyed with additional demand.

LOGO

Source: Smith Travel Research .

We share the traditionally held belief that lodging demand is correlated to GDP growth. As shown below, U.S. GDP growth is projected to increase over the next several years.

LOGO

Source: IMF World Economic Outlook, May 2013 .

We believe that a continued recovery in U.S. GDP growth, coupled with limited growth in new hotel room supply, will lead to increases in lodging industry revenue per available room and operating profit. In March 2013, PKF Hospitality Research, a leading industry analytic expert, reported that lodging fundamentals are as currently sound as they have been in the past 30 years, and that hotel rates and revenue per available room gains should be double the historic averages through 2015.

Competitive Strengths

We believe the following factors differentiate us from other owners, acquirers and investors in hotel properties:

governmental and regulatory policies and taxation. In addition, our hotels are located near stable demand generators, such as large state universities, convention centers, corporate headquarters, sports venues and office parks and in markets that we believe have significant barriers to entry for new product delivery.

Prudent and Flexible Capital Structure . During the last three years, we have refinanced over 60% of the debt on our wholly-owned hotel properties, taking advantage of the current attractive interest rate environment. As of June 30, 2013, we had approximately $134.9 million of secured debt, of which approximately $85.8 million, or 63.6%, was fixed, at an average rate of 5.0% (exclusive of the Preferred Stock). Approximately $49.1 million, or 36.4%, of our secured debt is at a variable interest rate, which bore an average interest rate of 3.6% at June 30, 2013. The weighted average term of our debt at June 30, 2013 was approximately 3 years. However, should we exercise our options to extend the mortgages on our properties in Philadelphia and Jacksonville pursuant to the terms of those agreements, the weighted average term of our debt at June 30, 2013 would be approximately 4 years.

Experienced Management Team . We believe the Company’s and its predecessor’s longevity in the industry and its success through many market cycles, together with management’s experience in the lodging industry, is indicative of the Company’s conservative and disciplined approach toward hotel acquisition, ownership and operation. The members of our senior management team, led by Messrs. Sims, Folsom and Domalski, have significant experience in the lodging, capital markets, finance, and accounting industries, and have worked together at Sotherly since 2006. Mr. Sims, Sotherly’s chairman and chief executive officer, has spent his entire career with Sotherly and its predecessor, and has over 35 years of experience in the lodging industry as an operator, owner, developer, and financier. Mr. Folsom has nearly eight years of experience with Sotherly and 13 years of experience working in public real estate companies and in the real estate capital markets. Mr. Domalski has nearly 29 years of experience as an accountant and auditor and has worked at Sotherly since 2005.

Our Strategy and Investment Criteria

Our investment criteria are further detailed below:

•

Geographic Growth Markets : We are focusing our growth strategy on the major markets in the Southern region of the United States. Our management team remains confident in the long-term growth potential associated with this part of the United States. These markets have historically been characterized by population growth, economic expansion, growth in new businesses and growth in the resort, recreation and leisure segments. We will continue to focus on these markets, including coastal locations, and will investigate other markets for acquisitions only if we believe these new markets will provide similar long-term growth prospects.

•

Full-Service Hotels : We focus our acquisition strategy on the full-service hotel segment. Our full-service hotels fall primarily under the upscale to upper-upscale categories and include such brands as Hilton, DoubleTree by Hilton, Sheraton and Crowne Plaza. We do not own economy branded hotels. We believe that full-service hotels with upscale to upper-upscale brands will outperform the broader U.S. hotel industry and thus offer the highest returns on invested capital.

•

Significant Barriers to Entry : We intend to execute a strategy that entails the acquisition of hotels in prime locations with significant barriers to entry. We seek to acquire properties that will benefit from the licensing of brands that are not otherwise present in the market and provide us with geographic exclusivity which helps to protect the value of our investment.

•

Proximity to Demand Generators : We seek to acquire hotel properties located near multiple demand generators for both leisure and business travelers within the respective markets, including large state universities, airports, convention centers, corporate headquarters, sports venues and office parks.

We typically define underperforming hotels as those that are poorly managed, suffer from significant deferred maintenance and capital improvement and that are not properly positioned in their respective markets. In pursuing these opportunities, we hope to improve revenue and cash flow and increase the long-term value of the underperforming hotels we acquire. Our ultimate goal is to achieve a total investment that is substantially less than replacement cost of a hotel or the acquisition cost of a market performing hotel. In analyzing a potential investment in an underperforming hotel property, we typically characterize the investment opportunity as one of the following:

•

Up-branding Opportunity : The acquisition of properties that can be upgraded physically and enhanced operationally to qualify for what we view as higher quality franchise brands, including Hilton, DoubleTree by Hilton, Crowne Plaza and Sheraton.

•

Shallow-Turn Opportunity : The acquisition of an underperforming but structurally sound hotel that requires moderate renovation to re-establish the hotel in its market.

•

Deep-Turn Opportunity : The acquisition of a hotel that is closed or functionally obsolete and requires a restructuring of both the business components of the operations as well as the physical plant of the hotel, including extensive renovation of the building, furniture, fixtures and equipment.

Typically, in our experience, a deep turn opportunity takes a total of approximately four years from the initial acquisition of a property to achieving full post-renovation stabilization. Therefore, when evaluating future opportunities in underperforming hotels, we intend to focus on up-branding and shallow-turn opportunities, and to pursue deep-turn opportunities on a more limited basis and in joint venture partnerships if possible.

Investment Vehicles . In pursuit of our investment strategy, we may employ various traditional and non-traditional investment vehicles:

•

Direct Purchase Opportunity : Our traditional investment strategy is to acquire direct ownership interests via the Operating Partnership in properties that meet our investment criteria, including opportunities that involve full-service, upscale and upper-upscale properties in identified geographic growth markets that have significant barriers to entry for new product delivery. Such properties, or portfolio of properties, may or may not be acquired subject to a mortgage by the seller or third-party.

•

Distressed Debt Opportunities : In sourcing acquisitions for our core growth strategy, we may pursue investments in debt instruments that are collateralized by hotel properties. In certain circumstances, we believe that owning these debt instruments is a way to (i) ultimately acquire the underlying real estate asset and (ii) provide a non-dilutive current return to our stockholders in the form of interest payments derived from the ownership of the debt. Our principal goal in pursuing distressed debt opportunities is ultimately to acquire the underlying real estate. By owning the debt, we believe that we may be in a position to acquire deeds to properties that fit our investment criteria in lieu of foreclosures.

•

Joint Venture/Mezzanine Lending Opportunities : We may, from time to time, undertake a significant renovation and rehabilitation project that we characterize as a deep-turn opportunity. In such cases, we may acquire a functionally obsolete hotel whose renovation may be very lengthy and require significant capital. In these projects, we may choose to structure such acquisitions as a joint venture, or mezzanine lending program, in order to avoid severe short-term dilution and loss of current income commonly referred to as the “negative carry” associated with such extensive renovation programs. We will not pursue joint venture or mezzanine programs in which we would become a “de facto” lender to the real estate community.

Portfolio and Asset Management Strategy

We intend to ensure that the management of our hotel properties maximizes market share, as evidenced by RevPAR penetration indices, and that our market share yields the optimum level of revenues for our hotels in their respective markets. Our strategy is designed to actively manage our hotels’ operating expenses in an effort to maximize Hotel EBITDA.

Over our long history in the lodging industry we have refined many portfolio and asset management techniques that we believe provide for exceptional cash returns at our hotels. We undertake extensive budgeting due diligence wherein we examine market trends, one-time or exceptional revenue opportunities, and/or changes in the regulatory climate that may impact costs. We review daily revenue results and revenue management strategies at the hotels, and we focus on MHI Hotels Services’ ability to produce high quality revenues that translate to higher marginal profitability. We look for alternative forms of revenues, such as leasing roof-top space for cellular towers and other communication devices and also look to lease space to third parties in our hotels, which may include, but are not limited to, gift shops or restaurants. Our efforts further include periodic review of property insurance costs and coverage, and the cost of real and personal property taxes. We generally appeal tax increases in an effort to secure lower tax payments and routinely pursue strategies that allow for lower overall insurance costs, such as purchasing re-insurance and participating in state-sponsored insurance pools.

We also require detailed and refined reporting data from MHI Hotels Services, which includes detailed accounts of revenues, revenue segments, expenses and forecasts based on current and historic booking patterns. We also believe we optimize and successfully manage capital costs at our hotels while ensuring that adequate product standards are maintained to provide guest satisfaction and compliance with franchise brand standards.

None of our hotels is managed by a major national or global hotel franchise company. Through our long history in the lodging industry, we have found that management of our hotels by management companies other than franchisors is preferable to and more profitable than management derived from the major franchise companies, specifically with respect to optimization of operating expenses and the delivery of guest services.

Our portfolio management strategy includes our effort to optimize labor costs. The labor force in our hotels is predominately non-unionized, with only one property, the Jacksonville Crowne Plaza, having a total of approximately ten employees subject to collective bargaining. Further, the labor force at our hotels is eligible to receive health and other insurance coverage through MHI Hotels Services, which self-insures. Self-insuring has, in our opinion, provided significant cash savings over traditional insurance company sponsored plans.

Asset Disposition Strategy . When a property no longer fits with our investment objectives, we will pursue traditional and non-traditional means of disposal:

•

Direct Sale : Most commonly we will dispose of properties through a direct sale of the property for cash so that our investment capital can be redeployed according to the investment strategies outlined above.

•

Capital Recycling : Under this asset disposition strategy, we will seek to purchase a hotel in connection with the requirements of a tax-free exchange. Such a strategy may be deployed in order to mitigate the tax consequences to us that a direct sale might cause.

Our Properties

As of June 30, 2013, our portfolio consisted of the following properties:

Wholly-Owned Properties

Number
of
Rooms

Location

Date of
Acquisition

Acquisition
Cost ⁽¹⁾

Years
Built/Renovated ⁽²⁾

Chain
Designation

Hilton Philadelphia Airport

331

Philadelphia, PA

12/21/2004

$25,271,240

1972/2005/2013

Upper
Upscale

Hilton Wilmington Riverside

272

Wilmington, NC

12/21/2004

25,646,760

1970/2007

Upper Upscale

Hilton Savannah DeSoto

246

Savannah, GA

12/21/2004

27,279,940

1968/2008

Upper Upscale

Sheraton Louisville Riverside

180

Jeffersonville, IN

9/20/2006

7,600,200

1972/2008

Upper Upscale

Crowne Plaza Jacksonville Riverfront

292

Jacksonville, FL

7/22/2005

22,000,000

1970/2006/2013

Upscale

Crowne Plaza Tampa Westshore

222

Tampa, FL

10/29/2007

13,500,000

1973/2008

Upscale

Crowne Plaza Hampton Marina

173

Hampton, VA

4/24/2008

7,742,000

1988/2008

Upscale

Holiday Inn Laurel West

207

Laurel, MD

12/21/2004

12,200,200

1985/2005

Upper MidScale

DoubleTree by Hilton Brownstone-University

190

Raleigh, NC

12/21/2004

9,396,120

1971/2002/2011

Upscale

Total Rooms in Our Wholly-Owned Portfolio

2,113

Joint Venture Property

Crowne Plaza Hollywood Beach Resort ⁽³⁾

311

Hollywood, FL

8/9/2007

$74,000,000

1972/2006

Upscale

Total Rooms in Our Portfolio

2,424

(1)	Excludes transfer costs.

(2)	Year Renovated represents the year in which the replacement of a significant portion of the hotel’s furniture, fixtures or equipment was completed.

(3)	We own this hotel through a joint venture in which we own a 25% interest.

Insurance . Our current properties are covered by insurance of the type and amount we believe are customary for these types of properties, including limited terrorism insurance.

Competition . The hotel industry is highly competitive with various participants competing on the basis of price, level of service and geographic location. Each of our hotels is located in a developed area that includes other hotel properties. The number of competitive hotel properties in a particular geographic area could have a material adverse effect on occupancy, ADR and RevPAR of our hotels or at hotel properties we acquire in the future. We believe that brand recognition, location, the quality of the hotel, consistency of services provided, and price are the principal competitive factors affecting our hotels.

Our hotels currently compete primarily in the full-service upscale and upper-upscale segments of the market. Positive competitive factors affecting our position include geographic location, markets with growth potential and strong franchise partners, while certain disadvantages to our position include limited geographic diversity and smaller size in relation to larger competitors.

Operating Data . Room revenue is the most important category of revenue and drives other revenue categories such as food, beverage and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:

•

occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;

•

average daily rate, or ADR, which is total room revenue divided by the number of rooms sold; and

•

revenue per available room, or RevPAR, which is the product of ADR and occupancy.

The following table illustrates the actual key operating metrics for the twelve months ended June 30, 2013 for our portfolio.


Wholly-Owned Properties	Average Occupancy ⁽¹⁾			ADR ⁽²⁾		RevPAR ⁽³⁾
Hilton Philadelphia Airport		78.6	%	$	135.53	$	106.48
Hilton Wilmington Riverside		73.4	%	$	133.25	$	97.77
Hilton Savannah DeSoto		71.7	%	$	136.21	$	97.61
Sheraton Louisville Riverside		64.3	%	$	130.06	$	83.59
Crowne Plaza Jacksonville Riverfront		58.6	%	$	97.54	$	57.19
Crowne Plaza Tampa Westshore		67.8	%	$	102.13	$	69.24
Crowne Plaza Hampton Marina		53.3	%	$	92.93	$	49.55
Holiday Inn Laurel West		66.7	%	$	88.89	$	59.29
DoubleTree by Hilton Brownstone - University		71.1	%	$	109.14	$	77.57
Totals/ Weighted Averages in Our Wholly-Owned Portfolio		68.1	%	$	117.16	$	79.77

Joint Venture Property
Crowne Plaza Hollywood Beach Resort ⁽⁴⁾		80.7	%	$	156.21	$	126.10
Totals/ Weighted Averages in Our Portfolio		68.5	%	$	118.79	$	81.42

(1)	Average Occupancy represents the percentage of available rooms that were sold during a specified period of time and is calculated by dividing the number of rooms sold by the total number of rooms available, expressed as a percentage.

(2)	ADR represents the average rate paid for rooms sold, calculated by dividing total daily room revenue (i.e., excluding food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services) by total daily rooms sold.

(3)	RevPAR is the product of ADR and average daily occupancy. RevPAR does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services.

(4)	We own this hotel through a joint venture in which we have a 25% interest.

Wholly-owned properties .

Hilton Philadelphia Airport . The Hilton Philadelphia Airport is contiguous to the Philadelphia Airport and located approximately eight miles south of Philadelphia’s central business district at 4509 Island Avenue in Philadelphia, Pennsylvania. The property is located within three miles of the Lincoln Financial Field, Wells Fargo Center (formerly known as the Wachovia Spectrum Center) and the Citizens Bank Park which are homes to Philadelphia’s professional football, basketball, ice hockey, and baseball franchises. MHI Hotels Services and its

affiliates have managed the Hilton Philadelphia Airport since 1994. The Company is currently renovating this hotel and expects to invest approximately $1.5 million in upgrading the hotel’s rooms, baths, guest corridors, and other selected furniture, fixtures, and equipment throughout the hotel.

Key Highlights and Demand Generators . The Hilton Philadelphia Airport generates demand from transient travelers and corporate meetings. The top five accounts by revenue for 2012 were Airport Accommodations, Virgin America, Century Travel, American Diabetes Association and Air Canada. The hotel also benefits from large conventions at the Philadelphia Convention Center. The hotel’s locations near the Philadelphia professional sports complexes generates leisure demand for hotel rooms. We believe the Hilton Philadelphia Airport is a market leader in the upscale, full-service hotel sector in the Philadelphia airport market.

Guest Rooms . The Hilton Philadelphia Airport is comprised of 331 guest rooms, including three suites, in a nine-story L-shaped tower. All rooms provide modern conveniences including high-speed internet access.

Food and Beverage . The hotel has three dining options located on the premises. Landing Restaurant features continental and regional cuisine and an upscale buffet for breakfast and lunch. Players Sports Bar features a full-service bar with a sports theme. Café Express provides light fare and beverages in the hotel lobby.

Other Amenities . Other amenities include direct access to the general aviation facilities of the Philadelphia International Airport, business center, fitness center, indoor swimming pool, whirlpool spa, recreational facilities, and 10,000 square feet of meeting space in the hotel.

Operating and Occupancy Information . The following tables show certain historical data regarding the Hilton Philadelphia Airport.


	Year Ended December 31,
Metric	2012			2011			2010			2009			2008
Room Revenue	$	12,523,740		$	11,930,208		$	10,976,745		$	10,516,195		$	12,313,520
ADR	$	134.21		$	128.57		$	116.05		$	116.68		$	134.44
Occupancy %		77.0	%		76.8	%		78.3	%		74.6	%		75.6	%
RevPAR	$	103.38		$	98.75		$	90.86		$	87.04		$	101.64


	Six Months Ended June 30,
Metric	2013			2012			2011			2010			2009
Room Revenue	$	6,642,637		$	6,302,316		$	6,041,839		$	5,497,442		$	5,063,214
ADR	$	139.43		$	136.88		$	128.91		$	114.14		$	116.47
Occupancy %		79.5	%		76.4	%		78.2	%		80.4	%		72.6	%
RevPAR	$	110.88		$	104.62		$	100.85		$	91.76		$	84.51

Hilton Wilmington Riverside . The Hilton Wilmington Riverside is located five miles from the Wilmington International Airport at 301 North Water Street in Wilmington, North Carolina. The Hilton Wilmington Riverside was originally constructed in 1971 and expanded in 1999. The property is the only hotel located directly on the downtown Riverwalk and is situated across from the USS North Carolina Battleship Memorial. MHI Hotels Services and its affiliates have managed the Hilton Wilmington Riverside since 1989. The hotel was completely renovated in 2007.

Key Highlights and Demand Generators . The top five accounts by revenue for 2012 were CP Brunswick, PPD, North Carolina Bar Association, North Carolina Local Government Information Systems and North Carolina Advocates for Justice. Due to the hotel’s meeting space, group business accounts for over 50.0% of room revenues. State associations and educational related conferences contribute to the hotel’s business demand.

Guest Rooms . The Hilton Wilmington Riverside originally was constructed with 178 rooms and expanded in 1999 for a current total of 272 rooms in a nine-story structure. All rooms are equipped with high-speed internet service.

Food and Beverage . The hotel has three dining options located on the premises. Ruth’s Chris Steakhouse is a popular steakhouse located just off the hotel lobby. Innovation’s features American cuisine and daily chef’s specials. Currents Riverview Café offers coffee, cocktails and lite fare in the lobby and provides panoramic views of the Cape Fear River.

Other Amenities . Other amenities include an outdoor pool overlooking the Cape Fear River, fitness center, business center, gift shop and 20,000 square feet of meeting space in the hotel.

Operating and Occupancy Information . The following tables show certain historical data regarding the Hilton Wilmington Riverside.


	Year Ended December 31,
Metric	2012			2011			2010			2009			2008
Room Revenue	$	9,539,537		$	9,114,480		$	8,514,210		$	8,657,897		$	8,887,827
ADR	$	129.48		$	124.81		$	122.26		$	121.98		$	125.83
Occupancy %		74.0	%		73.6	%		70.1	%		71.5	%		71.0	%
RevPAR	$	95.82		$	91.81		$	85.76		$	87.21		$	89.28


	Six Months Ended June 30,
Metric	2013			2012			2011			2010			2009
Room Revenue	$	4,918,740		$	4,751,396		$	4,661,950		$	4,233,660		$	4,416,284
ADR	$	137.67		$	129.97		$	124.79		$	122.09		$	123.05
Occupancy %		72.6	%		73.9	%		75.90	%		70.4	%		72.9	%
RevPAR	$	99.91		$	95.98		$	94.69		$	85.99		$	89.70

Hilton Savannah DeSoto . The Hilton Savannah DeSoto hotel is located at 15 East Liberty Street in historic downtown Savannah, Georgia. The Hilton Savannah DeSoto overlooks Madison Square in the center of Savannah’s historic district. A hotel has occupied the site since 1890 and the current building was constructed in 1968. The hotel offers views of the Savannah skyline and the Savannah River. The Hilton Savannah DeSoto is connected via an enclosed atrium to a luxury condominium building. MHI Hotels Services and its affiliates have managed the Hilton Savannah DeSoto since 1994. The hotel was completely renovated in 2008.

Key Highlights and Demand Generators . The Hilton Savannah DeSoto has historically generated its corporate demand from upscale business travelers and corporate meetings conducted by regional organizations. The top five accounts by revenue for 2012 were Armstrong Atlantic State University (Road Scholar), National Association of Credit Unions, NetJets, Rotary and Tauck. The historic sites of Savannah create demand from the leisure segment. Group business, primarily the association and corporate meeting segments, account for more than 50.0% of the Hilton Savannah DeSoto’s business.

Guest Rooms . The Hilton Savannah DeSoto is a 14-story structure with 246 traditionally-styled guest rooms including five suites and an executive level. All rooms are equipped with high-speed internet access.

Food and Beverage . The hotel has three dining options located on the premises. The DeSoto Grille serves authentic Savannah cuisine and a buffet at both breakfast and lunch. Beulah’s, located in the lobby area, serves coffees, juices, baked fresh daily breakfast breads, sandwiches and salads. The Lion’s Den is the hotel’s lounge.

Other Amenities . Other amenities include a business center, a fitness center, second-floor rooftop with an outdoor pool, complimentary access to the Downtown Athletic Club, gift shop and 20,000 square feet of meeting space in the hotel.

Operating and Occupancy Information . The following tables show certain historical information regarding the Hilton Savannah DeSoto.


	Year Ended December 31,
Metric	2012			2011			2010			2009			2008
Room Revenue	$	8,851,984		$	8,405,396		$	7,977,247		$	6,989,162		$	7,499,444
ADR	$	132.59		$	123.85		$	117.52		$	125.01		$	137.23
Occupancy %		74.2	%		75.6	%		75.6	%		62.3	%		60.7	%
RevPAR	$	98.32		$	93.61		$	88.84		$	77.84		$	83.29


	Six Months Ended June 30,
Metric	2013			2012			2011			2010			2009
Room Revenue	$	4,659,532		$	4,746,939		$	4,343,541		$	4,159,611		$	3,615,682
ADR	$	144.29		$	136.77		$	127.63		$	122.05		$	131.95
Occupancy %		72.5	%		77.5	%		76.4	%		76.5	%		61.5	%
RevPAR	$	104.65		$	106.02		$	97.55		$	93.42		$	81.20

Sheraton Louisville Riverside . The Sheraton Louisville Riverside is located near Interstate 65 and directly on the Ohio River at 700 West Riverside Drive in historic Jeffersonville, Indiana. The hotel is five miles from Louisville International Airport and one mile from the Louisville central business district. The hotel was completely renovated in 2008.

Key Highlights and Demand Generators . The top five accounts by revenue for this hotel in 2012 were Humana, Deloitte, Heartland, Consolidated Grain & Barge and Kroger. The property is located on the Ohio River at the base of the Second Street bridge that accesses the Louisville central business district one mile to the south. The hotel caters primarily to the city’s corporate community, including Humana and Yum Products, as well as special sporting events such as the Kentucky Derby and University of Louisville athletics.

Guest Rooms . The Sheraton Louisville Riverside is composed of 180 guest rooms.

Food and Beverage . The hotel offers two dining options on the premises. The Bristol Bar and Grille offers fine dining in a casual atmosphere. The Lobby Bar offers full-service bar with light fare menu. Five additional restaurants are contiguous to the hotel.

Other Amenities . Other amenities include an indoor pool, club lounge, fitness center, business center and 7,600 square feet of meeting space in the hotel.

Operating and Occupancy Information . The following tables show certain historical information, from the date of re-opening the Sheraton Louisville Riverside after extensive renovations.


	Year Ended December 31,
Metric	2012			2011			2010			2009			2008
Room Revenue	$	5,148,511		$	4,895,268		$	4,523,283		$	3,726,328		$	1,915,775
ADR	$	123.73		$	118.37		$	108.56		$	109.39		$	120.95
Occupancy %		63.1	%		62.9	%		63.4	%		51.6	%		35.7	%
RevPAR	$	78.04		$	74.51		$	68.85		$	56.40		$	43.20

*	Represents eight months of operations.


	Six Months Ended June 30,
Metric	2013			2012			2011			2010			2009
Room Revenue	$	3,284,659		$	2,933,415		$	2,555,587		$	2,239,935		$	1,856,087
ADR	$	150.79		$	138.98		$	127.87		$	117.24		$	116.85
Occupancy %		66.9	%		64.4	%		61.3	%		58.6	%		48.5	%
RevPAR	$	100.82		$	89.54		$	78.44		$	68.75		$	56.66

Crowne Plaza Jacksonville Riverfront . The Crown Plaza Jacksonville Riverfront is located at 1201 Riverplace Boulevard in downtown Jacksonville, Florida. The hotel is approximately fifteen minutes from the airport and close to the Prime Osborn Center, Alltel Stadium, the Jacksonville Landing and historic San Marco neighborhood shops and restaurants. The hotel was renovated in 2006 when it changed brands from Hilton to Crowne Plaza and currently is undergoing additional renovations, where the Company expects to invest approximately $4.0 million in upgrades and improvements to the hotel.

Key Highlights and Demand Generators . The top five accounts by revenue for this hotel in 2012 were Accreditation Council for Graduate Medical Education, Winn Dixie, Legal Services Corporate, Shands Jacksonville Medical Center & University of Florida Health and Army Strong Bonds. The property is located on the preferred south bank of the St. John’s River in the city’s central business district and directly on the Riverwalk. The hotel caters primarily to local corporate clients as well as hosting regional corporate and association conferences. The waterfront Riverwalk location appeals to leisure guests.

Guest Rooms . The Crowne Plaza Jacksonville Riverfront features 292 luxury guestrooms, including 30 Junior Suites. All rooms are equipped with high-speed internet access.

Food and Beverage . The hotel has four dining options located on the premises. Ruth’s Chris Steakhouse is a popular steakhouse, located on the waterfront with a view of the city’s skyline. The American Grille is a full-service three-meal restaurant with regional fare. Crowne Bar is a lobby bar featuring a variety of drinks and light fare. Riverfront Lounge, an outdoor venue, features light fare and a variety of drink specialties.

Other Amenities . The hotel offers 12,000 square feet of flexible meeting space, a fitness center, gift shop, business center, outdoor riverside pool, covered parking and a water taxi service to downtown venues.

Operating and Occupancy Information . The following tables show certain historical data regarding the Crowne Plaza Jacksonville Riverfront.


	Year Ended December 31,
Metric	2012			2011			2010			2009			2008
Room Revenue	$	6,332,016		$	5,738,863		$	5,846,195		$	6,152,815		$	7,585,013
ADR	$	95.72		$	101.29		$	100.63		$	102.35		$	116.90
Occupancy %		61.9	%		53.2	%		54.5	%		56.4	%		60.7	%
RevPAR	$	59.25		$	53.85		$	54.82		$	57.73		$	70.97


	Six Months Ended June 30,
Metric	2013			2012			2011			2010			2009
Room Revenue	$	3,197,805		$	3,434,380		$	2,984,441		$	3,069,678		$	3,394,127
ADR	$	96.73		$	93.53		$	99.72		$	97.53		$	103.55
Occupancy %		62.6	%		69.1	%		56.6	%		59.6	%		62.0	%
RevPAR	$	60.50		$	64.62		$	56.47		$	58.08		$	64.22

Crowne Plaza Tampa Westshore . The Crowne Plaza Tampa Westshore is located at 5303 West Kennedy Boulevard in Tampa, Florida. The hotel is situated on 3.82 acres in Tampa’s Westshore Corridor, the city’s corporate, entertainment, restaurant and shopping district, and is within two miles of Tampa International Airport. The property is located contiguous to the I-275 Memorial Highway Interchange, the city’s most traveled highway. The Westshore Mall is located one-tenth of a mile to the east of the hotel. The hotel was completely renovated in 2008 and reopened for business in March 2009.

Key Highlights and Demand Generators . The top five accounts by revenue for this hotel in 2012 were MacDill Air Force Base, Joint War Fighting, Shriners Hospital, Avantair and Humana The hotel is located in close proximity to the Westshore office market, airport and various sports venues, including a professional football stadium and the New York Yankees spring training facility. The hotel is situated near military and defense contract installations and caters primarily to local, corporate and military clients as well as hosting regional corporate and association conferences.

Guest Rooms . The hotel features 222 rooms, including 44 suites. All rooms are equipped with high-speed internet access.

Food and Beverage . Mezzo Restaurant and Lounge is located off the lobby and provides three-meal service in a casual atmosphere. Tampa’s Mojito Restaurant and Lounge is located on the premises.

Other Amenities . Other amenities include an outdoor pool, fitness center, business center and 10,000 square feet of meeting space in the hotel.

Operating and Occupancy Information . The following tables show certain historical data, from the date of opening post-renovation, regarding the Crowne Plaza Tampa Westshore.


	Year Ended December 31,
Metric	2012			2011			2010			2009*
Room Revenue	$	5,795,816		$	5,071,150		$	4,374,288		$	2,232,175
ADR	$	100.77		$	96.82		$	88.89		$	82.00
Occupancy %		70.8	%		64.6	%		60.7	%		40.7	%
RevPAR	$	71.33		$	62.58		$	53.98		$	33.40

*	Represents ten months of operations.


	Six Months Ended June 30,
Metric	2013			2012			2011			2010			2009 ^*
Room Revenue	$	3,029,627		$	3,214,848		$	2,789,444		$	2,380,913		$	705,481
ADR	$	102.34		$	99.89		$	101.67		$	90.89		$	84.21
Occupancy %		73.7	%		79.7	%		68.3	%		65.2	%		32.3	%
RevPAR	$	75.40		$	79.57		$	69.42		$	59.25		$	27.16

*	Represents one month of operations.

Crowne Plaza Hampton Marina . Less than a half mile off interstate 64, the hotel is centrally located between Williamsburg and Virginia Beach at 700 Settlers Landing Road in Hampton, Virginia. The Crowne Plaza Hampton Marina Hotel is the only waterfront hotel in Hampton, Virginia and is near Hampton University and contiguous to the Virginia Air & Space Museum. This property features 173 guestrooms and suites, an outdoor pool, meeting facilities, and multiple dining options all located in a marina setting. The hotel was completely renovated in 2008 to 2009.

Key Highlights and Demand Generators . The top five accounts by revenue for this hotel in 2012 were Hampton University, Delta Airlines, M2 Pictures, Virginia Port Authority and Veterans Medical Center. The property is located on the Hampton River in downtown Hampton, Virginia, a short walk from Hampton University, Hampton Coliseum and the Air and Space Museum. The downtown waterfront setting is attractive to leisure guests. Additionally, the hotel is situated in close proximity to major defense and defense contractor installations and caters primarily to local government and military complexes such as NASA Langley, Langley Airforce Base, Fort Monroe, Newport News Shipbuilding and the Norfolk Naval Base.

Guest Rooms . The hotel features 173 guestrooms and suites. All rooms are equipped with high-speed internet access.

Food and Beverage . The hotel has four dining options located on the premises. The Regatta Grille features waterfront dining with a southern cuisine. Oyster Alley is an outdoor dockside restaurant that offers drinks and a light fare menu. Latitude 37 serves light fare and cordials in a waterfront lounge setting with a sophisticated nautical theme. Java Junkie is a sandwich shop on the hotel premises.

Other Amenities . Other Amenities at the Crowne Plaza Hampton Marina include an outdoor pool, fitness center, business center and 7,600 square feet of meeting space in the hotel.

Operating and Occupancy Information . The following tables show certain historical data, from the date of purchase, regarding the Crowne Plaza Hampton Marina.


	Year Ended December 31,
Metric	2012			2011			2010			2009			2008
Room Revenue	$	3,217,702		$	3,449,851		$	3,245,826		$	2,955,592		$	1,266,096
ADR	$	90.50		$	88.48		$	89.39		$	97.20		$	101.00
Occupancy %		56.2	%		61.7	%		57.5	%		48.4	%		28.9	%
RevPAR	$	50.89		$	54.63		$	51.40		$	47.08		$	29.21

*	Represents eight months of operations.


	Six Months Ended June 30,
Metric	2013			2012			2011			2010			2009
Room Revenue	$	1,474,070		$	1,567,235		$	1,725,584		$	1,495,326		$	1,453,232
ADR	$	95.53		$	90.26		$	90.55		$	90.77		$	98.99
Occupancy %		49.3	%		55.1	%		60.9	%		52.9	%		47.2	%
RevPAR	$	47.08		$	49.78		$	55.11		$	48.03		$	46.68

Holiday Inn Laurel West . The Holiday Inn Laurel West is located at 15101 Sweitzer Lane in Laurel, Maryland, near I-95 and Route 198 between Washington, D.C. and Baltimore, Maryland. The Holiday Inn Laurel West opened in 1985 with 125 guest rooms and in 1989 completed an addition of 80 rooms for a current total of 207 guest rooms. The hotel was renovated in 2005.

Key Highlights and Demand Generators . The hotel is conveniently located at the entrance to a corporate office park with major employers such as United Parcel Service, SunTrust, and the Washington Suburban Sanitary Commission. The top five accounts by revenue for 2012 were Worldstrides, EF Smithsonian, National Labor College, Corporate Lodging and Bright Spark. Much of the leisure demand is generated from its easy access off I-95 and proximity to the Washington, DC, Baltimore and Annapolis areas. Major government installations are located in close proximity to the hotel including the National Agriculture Research Center, National Security Administration, NASA, Fort Mead and Secret Service Training.

Guest Rooms . The hotel contains 207 guestrooms in a six story mid-rise structure. All rooms are equipped with high-speed internet access.

Food and Beverage . The hotel has two dining options located on the premises. Outback Steakhouse serves dinner, featuring steak and seafood, and provides bar service. Atrium Café serves three meals in the atrium of the hotel.

Other Amenities . Other amenities include a business center, executive level accommodations with keyed access and upgraded amenities, a 8,000 square foot atrium area with indoor pool, sauna, whirlpool, exercise room, game room, putting green, billiards, shuffleboard and gift shop and over 8,000 square feet of meeting and banquet space in the hotel.

Operating and Occupancy Information . The following tables show certain historical information regarding Holiday Inn Laurel West.


	Year Ended December 31,
Metric	2012			2011			2010			2009			2008
Room Revenue	$	4,495,818		$	4,090,326		$	4,116,447		$	4,181,469		$	4,310,740
ADR	$	88.66		$	89.01		$	88.77		$	92.70		$	96.42
Occupancy %		66.9	%		60.8	%		61.4	%		59.7	%		59.0	%
RevPAR	$	59.34		$	54.14		$	54.48		$	55.34		$	56.90


	Six Months Ended June 30,
Metric	2013			2012			2011			2010			2009
Room Revenue	$	2,398,388		$	2,414,440		$	2,163,150		$	2,244,767		$	2,365,793
ADR	$	92.40		$	91.93		$	91.13		$	90.61		$	97.06
Occupancy %		69.3	%		69.7	%		63.4	%		66.1	%		65.1	%
RevPAR	$	64.01		$	64.09		$	57.73		$	59.91		$	63.14

DoubleTree by Hilton Brownstone - University . The DoubleTree by Hilton Brownstone – University is located near the central Raleigh business district and adjacent to North Carolina State University, at 1707 Hillsborough Street in Raleigh, North Carolina. The DoubleTree by Hilton Brownstone – University was built in 1971 as an independent property and operated as a Hilton for 20 years. MHI Hotels Services and its affiliates have managed the DoubleTree by Hilton Brownstone – University since 1999. In November 2011, the hotel was rebranded from Holiday Inn Brownstone to the DoubleTree by Hilton Brownstone - University, after completion of an approximate capital improvement program of approximately $4.5 million and the execution of a license agreement with Hilton Worldwide.

The hotel leases land adjacent to the hotel for use as a parking lot. The lease provides for annual rent of $76,104 and expires in August 2016 with options to renew for up to three additional 10-year periods with an option to purchase the leased property at fair market value at the end of the original lease term in August 2016, subject to payment of an annual fee of $9,000 and other conditions.

Key Highlights and Demand Generators . The DoubleTree by Hilton Brownstone - University generates transient business demand from corporate and government related entities. The top five accounts by revenue for 2012 were North Carolina State University, Amtrak, Allscripts, Neighborworks America and Partners in Team Travel. Group business demand is generated through these entities and additionally through conventions, North Carolina State University special events (sports and educational), youth sporting events, state association meetings and government training. Weddings, special events, and religious celebrations generate leisure demand for this property. We believe the hotel’s strong ties to North Carolina State University and the expansion of the downtown convention center provide for opportunities in RevPAR growth.

Guest Rooms . The hotel is comprised of 187 guest rooms in an eight-story building. The property site is also improved with 18 additional and separate apartment suites. All rooms are equipped with high-speed internet access.

Food and Beverage . The Harvest Grille Restaurant and Harvest Grille Bistro located on the premises are both open for breakfast, dinner and lunch.

Other Amenities . Other amenities include an outdoor swimming pool, complimentary on-site fitness facility, access to the YMCA, and 15,000 square feet of meeting space in the hotel.

Operating and Occupancy Information . The following tables show certain historical information regarding the DoubleTree by Hilton Brownstone - University.


	Year Ended December 31,
Metric	2012			2011			2010			2009			2008
Room Revenue	$	4,918,893		$	3,491,691		$	3,518,842		$	3,527,654		$	4,310,289
ADR	$	104.12		$	85.87		$	78.71		$	82.91		$	90.59
Occupancy %		67.9	%		59.4	%		65.5	%		62.3	%		69.5	%
RevPAR	$	70.73		$	51.02		$	51.55		$	51.68		$	62.98


	Six Months Ended June 30,
Metric	2013			2012			2011			2010			2009
Room Revenue	$	2,796,521		$	2,335,603		$	1,803,420		$	1,726,758		$	1,752,881
ADR	$	111.44		$	101.35		$	84.30		$	76.16		$	85.69
Occupancy %		73.0	%		66.6	%		63.2	%		67.0	%		60.4	%
RevPAR	$	81.32		$	67.54		$	53.28		$	51.02		$	51.79

Joint venture properties.

Crowne Plaza Hollywood Beach Resort . The Crowne Plaza Hollywood Beach Resort Hotel opened in September 2007 is owned through a joint venture with Carlyle. A winner of the InterContinental Hotels Group 2008 Renovation Award, the resort is centrally located to enjoy both the Intracoastal Waterway and Atlantic Ocean access.

Key Highlights and Demand Generators . The Crowne Plaza Hollywood Beach Resort is located in a high growth area in close proximity to both Fort Lauderdale and Miami. The hotel is situated near the Hollywood Conference Center, Gulfstream Park, Hard Rock Casino, Sun Life Stadium home to Miami’s NFL and MLB teams, as well as South Florida’s famous beaches and nightlife. The top five accounts by revenue for 2012 were American College of Neuropsychopharmacology, SAP International, Inc., ESPN Productions, Inc., Commonfund and ShopNBC.

Guest Rooms . The Crowne Plaza Hollywood Beach Resort features 311 luxury guestrooms and suites with upscale resort-style amenities.

Food and Beverage . The resort offers two dining options and a coffee bar on the premises. With seating both inside and outside the resort, Elements Bistro serves an Asian/Caribbean fused menu for breakfast, lunch and dinner. The poolside Lava Tiki Bar & Grille offers hearty bar food and signature cocktails. Located in the resort lobby, the Cool Beans Coffee Bar has a full selection of Starbucks coffees.

Other Amenities . The resort also has a health and fitness center, gift shop, business center, outdoor open-air infinity-edge pool overlooking the Intracoastal Waterway, and 10,000 square feet of full-service banquet and meeting space.

Operating and Occupancy Information . The following tables show certain historical information, from the date of purchase, regarding the Crowne Plaza Hollywood Beach Resort.


	Year Ended December 31,
Metric	2012			2011			2010			2009			2008
Room Revenue	$	13,279,070		$	12,012,048		$	10,957,552		$	9,719,185		$	10,185,886
ADR	$	147.37		$	133.29		$	120.73		$	121.06		$	151.64
Occupancy %		79.2	%		79.4	%		80.0	%		70.7	%		59.0	%
RevPAR	$	116.66		$	105.82		$	96.52		$	85.62		$	89.49


	Six Months Ended June 30,
Metric	2013			2012			2011			2010			2009
Room Revenue	$	8,498,298		$	7,463,159		$	6,678,598		$	6,367,126		$	5,253,389
ADR	$	173.14		$	156.94		$	139.28		$	134.98		$	137.27
Occupancy %		87.2	%		84.0	%		85.2	%		83.8	%		68.0	%
RevPAR	$	150.97		$	131.85		$	118.64		$	113.11		$	93.33

Federal Tax and Realty Tax Data . The following table presents the federal tax basis for the real property, exclusive of furniture and equipment, for each of our hotels as of December 31, 2012, as well as the method of depreciation, depreciable life and the 2012 annual real estate tax for each property:

Property

Taxable
Basis

Method

Life

2012 Realty Tax

Hilton Philadelphia Airport

29,464,156

VAR ⁽¹⁾

10-40 years

591,635

Hilton Wilmington Riverside

27,325,726

VAR ⁽¹⁾

7-40 years

189,122

Hilton Savannah DeSoto

24,727,102

VAR ⁽¹⁾

7-40 years

318,322

Sheraton Louisville Riverside

21,649,490

SL ⁽²⁾

20-40 years

280,234

⁽³⁾

Crowne Plaza Jacksonville Riverfront

24,125,659

VAR ⁽¹⁾

20-40 years

429,129

Crowne Plaza Tampa Westshore

34,853,100

SL ⁽²⁾

20-40 years

203,050

Crowne Plaza Hampton Marina

10,889,905

SL ⁽²⁾

10-40 years

82,208

Holiday Inn Laurel West

12,704,641

VAR ⁽¹⁾

20-40 years

159,925

DoubleTree by Hilton Brownstone – University

13,291,787

VAR ⁽¹⁾

7-40 years

57,119

⁽⁴⁾

(1)	MACRS (Modified Accelerated Cost Recovery System) for additions and improvements prior to 2005 and straight line for improvements thereafter.

(2)	Straight line.

(3)	Includes annual contribution to the Jeffersonville Urban Enterprise Association.

(4)	Includes reimbursed real estate taxes on adjoining ground lease.

Tax Status

While the Operating Partnership is generally not subject to federal and state income taxes, the unitholders of the Operating Partnership, including Sotherly, are subject to tax on their respective shares of the Operating Partnership’s taxable income.

Sotherly has one taxable REIT subsidiary, MHI Holding, in which it owns an interest through the Operating Partnership. MHI Holding is subject to federal, state and local income taxes. MHI Holding has operated at a cumulative taxable loss through December 31, 2012 of $6.3 million and has paid no income taxes since its formation. In addition to a deferred tax asset of approximately $1.5 million for these cumulative tax loss carryforwards, MHI Holding had a deferred tax asset of approximately $0.4 million attributable to start-up expenses related to the opening of several of its hotels which was not deductible when incurred and is being amortized over 15 years and deferred tax assets of approximately $0.2 million attributable to year-to-year timing differences for accrued, but not deductible, vacation and sick pay amounts.

Sotherly elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ended December 31, 2004. In order to maintain its qualification as a REIT, Sotherly must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90.0% of its taxable income (determined without regard to the deduction for dividends paid and excluding net capital gains) to its stockholders. Sotherly has adhered to these requirements each taxable year since its formation in 2004 and intends to continue to adhere to these requirements and maintain its qualification for taxation as a REIT. As a REIT, Sotherly generally will not be subject to federal corporate income tax on that portion of its net income that is distributed to its stockholders. If Sotherly fails to qualify for taxation as a REIT in any taxable year, and no relief provision applies, it will be subject to federal income taxes at regular corporate rates (as well as any applicable alternative minimum tax) and it would be disqualified from re-electing treatment as a REIT until the fifth taxable year after the year in which it failed to qualify as a REIT. Even if Sotherly qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.

Legal Proceedings

We are not involved in any material litigation, nor to our knowledge, is any material litigation threatened against us. We are involved in routine litigation arising out of the ordinary course of business, all of which is expected to be covered by insurance, and none of which is expected to have a material impact on our financial condition or results of operations.

Environmental Matters

In connection with the ownership and operation of the hotels, we are subject to various federal, state and local laws, ordinances and regulations relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under, or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination

from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the owner’s ability to borrow using such property as collateral. Furthermore, a person who arranges for the disposal or treatment of a hazardous or toxic substance at a property owned by another, or who transports such substance to or from such property, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. The costs of remediation or removal of such substances may be substantial, and the presence of such substances may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of the hotels, we may be potentially liable for such costs.

We believe that our hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which would have a material adverse effect on us. We have not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our present hotel properties.

Employees

We currently employ eight full-time persons, seven of whom work at our corporate office in Williamsburg, Virginia and one who works in our office in Rockville, Maryland. All persons employed in the day-to-day operations of the hotels are employees of MHI Hotels Services, the management company engaged by our TRS Lessee to operate such hotels.

INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The following is a discussion of Sotherly’s investment policies and policies with respect to certain other activities, including financing matters and conflicts of interest. The Operating Partnership does not have separate investment policies or policies with respect to the other activities described in this section.

The policies described in this section may be amended or revised from time to time at the discretion of Sotherly’s board of directors, without a vote of Sotherly’s stockholders. Any change to any of these policies by Sotherly’s board of directors, however, would be made only after a thorough review and analysis of that change, in light of then-existing business and other circumstances, and then only if, in the exercise of its business judgment, Sotherly’s board of directors believes that it is advisable to do so in our and Sotherly’s stockholders’ best interests. We cannot assure you that our investment objectives will be attained.

Investments in Real Estate or Interests in Real Estate

We have invested principally in full-service, upscale and upper-upscale hotels located in the primary markets of the Mid-Atlantic and Southern United States. We are focusing our investments in the major markets of the Southern United States. We conduct substantially all of our investment activities through the Operating Partnership and its subsidiaries. Sotherly’s primary investment objective is to enhance stockholder value over time by improving the operating results of our initial properties and by identifying, acquiring and repositioning additional hotel properties that we expect to generate enhanced revenue, improved cash flow performance and long-term appreciation.

There are no limitations on the amount or percentage of our total assets that may be invested in any one property. Additionally, no limits have been set on the concentration of investments in any one location or facility type. Our policy is to acquire assets primarily for income and long-term appreciation.

Additional criteria with respect to our hotel investments are described in the section entitled “Our Business and Properties - Our Strategy and Investment Criteria” in this prospectus.

Investments in Mortgages, Structured Financings and Other Lending Policies

In sourcing acquisitions for our core turnaround growth strategy, we may pursue investments in debt instruments that are collateralized by underperforming hotel properties. In certain circumstances, we believe that owning these debt instruments is a way to (i) ultimately acquire the underlying real estate asset and (ii) provide a non-dilutive current return to Sotherly’s stockholders in the form of interest payments derived from the ownership of the debt. Our principal goal in pursuing distressed debt opportunities is ultimately to acquire the underlying real estate. By owning the debt, we believe that we may be in a position to acquire deeds to properties that fit our investment criteria in lieu of foreclosures. We do not have a policy limiting our ability to invest in loans secured by properties or to make loans to other persons. We may consider offering purchase money financing in connection with the sale of properties where the provision of that financing will increase the value to be received by us for the property sold. We may make loans to joint ventures in which we may participate in the future. However, neither Sotherly nor the Operating Partnership intend to engage in significant lending activities.

Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers

We may, from time to time, undertake a significant renovation and rehabilitation project and chose to structure such acquisitions as a joint venture, or mezzanine lending program, in order to avoid severe short-term dilution and loss of current income. For information concerning our joint venture or mezzanine lending opportunities, please see the section entitled “Our Business and Properties - Our Strategy and Investment Criteria” in this prospectus.

We may also invest in securities of other issuers in connection with acquisitions of indirect interests in properties, which we expect will typically be general or limited partnership interests in special purpose partnerships that own properties. We may in the future acquire some, all or substantially all of the securities or assets of other REITs or similar entities where that investment would be consistent with our investment policies and the REIT qualification requirements. There are no limitations on the amount or percentage of our total assets that may be invested in any one issuer, other than those imposed by the gross income and asset tests that we must satisfy to qualify

as a REIT. However, we do not anticipate investing in other issuers of securities for the purpose of exercising control or acquiring any investments primarily for sale in the ordinary course of business or holding any investments with a view to making short-term profits from their sale. In any event, we do not intend that our investments in securities will require us to register as an “investment company” under the Investment Company Act of 1940, as amended, and we intend to divest securities before any registration would be required.

We do not intend to engage in trading, underwriting, agency distribution or sales of securities of other issuers.

Disposition Policy

Although we have no current plans to dispose of properties within our portfolio, we will consider doing so, subject to REIT qualification and prohibited transaction rules, if our management determines that a sale of a property would be in our best interests based on the price being offered for the property, the operating performance of the property, the tax consequences of the sale and other factors and circumstances surrounding the proposed sale. When a property no longer fits with our investment objectives, we will pursue traditional and non-traditional means of disposal. For further information concerning our asset disposition strategy, please see the section entitled “Our Business and Properties - Our Strategy and Investment Criteria” in this prospectus. For a discussion of the implications of disposing of certain of our properties, see the section entitled “Risk Factors” in this prospectus.

Financing Policies

At June 30, 2013, we had total consolidated indebtedness of approximately $151.0 million, which we estimate was between 49% and 54% of the value of our assets, which is in line with our targeted debt levels of 45% to 55% of the value of our assets.

Equity Capital Policies

Subject to applicable law and the requirements for listed companies on NASDAQ, Sotherly’s board of directors has the authority, without further stockholder approval, to issue additional authorized common stock and preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. Existing stockholders of Sotherly will have no preemptive right to additional stock issued in any offering, and any offering might cause a dilution of investment. Sotherly may in the future issue common stock in connection with acquisitions. The Operating Partnership also may issue units in connection with acquisitions of property.

Sotherly may, under certain circumstances, purchase common stock in the open market or in private transactions with its stockholders, if those purchases are approved by Sotherly’s board of directors. Sotherly’s board of directors has no present intention of causing Sotherly to repurchase any of Sotherly’s stock, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualifying as a REIT.

Sotherly’s stockholders have had the opportunity since June 2006 to participate in a dividend reinvestment plan, or DRIP, sponsored and administered by American Stock Transfer & Trust Company, or AST, which allows them to acquire additional shares of Sotherly’s common stock by automatically reinvesting their cash dividends. The additional shares are purchased on the open market by the DRIP administrator. The share price of stock acquired pursuant to the DRIP is the average price of all shares purchased with the reinvested distributions by the DRIP administrator on behalf of all DRIP participants relating to a particular distribution by us. The DRIP administrator charges participants under the DRIP commissions and other fees according to the fee schedule provided by AST in connection with any acquisition of shares. We do not subsidize or otherwise provide any discount to DRIP participants in connection with the acquisition of common stock under the DRIP. Stockholders who do not participate in the DRIP continue to receive cash distributions as declared.

Conflicts of Interest Policy

Sotherly’s current board of directors consists of Andrew M. Sims, General Anthony C. Zinni, J. Paul Carey, Edward S. Stein, David J. Beatty, James P. O’Hanlon, Kim E. Sims, David R. Folsom and Ryan P. Taylor.

MHI Hotels Services is owned and controlled by, among others, members of the Sims family, including Andrew Sims, Sotherly’s chairman and chief executive officer, and Kim Sims, a member of Sotherly’s board of directors. MHI Hotels Services manages our hotel properties pursuant to a management agreement with our TRS Lessee. In addition, unless a majority of Sotherly’s independent directors concludes otherwise, MHI Hotels Services has a right of first offer to manage hotels we acquire in the future, subject to certain exceptions, and receives substantial management fees based on the revenues and operating profit of our hotels. Our management agreements with MHI Hotels Services, including the financial terms thereof, were not negotiated on an arm’s-length basis and may be less favorable to us than we could have obtained from third parties. See the “Certain Relationships and Related Party Transactions” section of this prospectus.

Sotherly’s bylaws require that certain transactions between us and any of Sotherly’s directors, officers or employees must be approved by a majority of Sotherly’s disinterested directors, and we have adopted polices designed to reduce potential conflicts of interest in accordance with Sotherly’s bylaws. Additionally, Sotherly’s Nominating, Corporate Governance and Compensation Committee, which is composed entirely of independent directors, oversees risks associated with conflicts of interest. However, we cannot assure you that these policies will be successful in eliminating the influence of these conflicts. Neither Sotherly’s charter or bylaws, nor any of our policies, restrict any of Sotherly’s directors, officers, stockholders or affiliates from conducting, for their own account, or on behalf of others, business activities of the type we conduct. Pursuant to employment agreements entered into with Sotherly’s chief executive officer, chief financial officer and chief operating officer, such individuals have agreed not to solicit certain of our employees or engage in certain competitive activities with us.

The Maryland General Corporation Law provides that a contract or other transaction between a corporation and any of that corporation’s directors or any other entity in which that director is also a director or has a material financial interest is not void or voidable solely on the grounds of (i) the common directorship or interest, (ii) the fact that the director was present at the meeting at which the contract or transaction is approved or (iii) the fact that the director’s vote was counted in favor of the contract or transaction, if:

•

the fact of the common directorship or interest is disclosed to the board or a committee of the board, and the board or that committee authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even if the disinterested directors constitute less than a quorum;

•

the fact of the common directorship or interest is disclosed to stockholders entitled to vote on the contract or transaction, and the contract or transaction is approved by a majority of the votes cast by the stockholders entitled to vote on the matter, other than votes of stock owned of record or beneficially by the interested director, corporation, firm or other entity; or

•

the contract or transaction is fair and reasonable to the corporation.

Reporting Policies

After the offering, the Operating Partnership will become subject to the information reporting requirements of the Exchange Act. Pursuant to these requirements, the Operating Partnership will file periodic reports and other information, including audited financial information, with the SEC.

Pursuant to the requirements of the Exchange Act, Sotherly files periodic reports, proxy statements and other information, including audited financial statements, with the SEC. Sotherly makes available to its stockholders audited annual financial statements and annual reports through its website located at www.sotherlyhotels.com. The information contained in or accessed through our website is not part of and is not incorporated into this prospectus.

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth information on the directors and executive officers of Sotherly. The Operating Partnership is managed by Sotherly, its sole general partner and parent company. Consequently, the Operating Partnership does not have its own separate directors or executive officers. All of Sotherly’s directors are elected annually at the annual meeting of Sotherly’s stockholders, except for one director who is elected annually by the holders of the Preferred Stock. Following the redemption of the Preferred Stock with a portion of the net proceeds of this offering, all of Sotherly’s directors will be elected annually by Sotherly’s common stockholders.


			Director/ Officer
Name	Age	Position with the Company	Since
Andrew M. Sims	56	Chairman of the Board of Directors and Chief Executive Officer	2004
David R. Folsom	48	Director, President and Chief Operating Officer	2011 /2011 /2006
Anthony E. Domalski	51	Vice President and Chief Financial Officer	2013
David J. Beatty	69	Director	2011
J. Paul Carey	54	Director	2004
James P. O’Hanlon	69	Director	2007
Kim E. Sims	58	Director	2004
Edward S. Stein	66	Director	2004
Anthony C. Zinni	69	Director	2004
Ryan P. Taylor	37	Director	2011

Executive Officers

Set forth below is biographical information for Sotherly’s executive officers.

Andrew M. Sims is Sotherly’s chief executive officer and chairman of the board and has served in such capacities since its inception in August 2004. In addition, Mr. Sims served as Sotherly’s president from our inception through December 31, 2010. He served as President of MHI Hotels Services from 1995 until August 2004 after serving for seven years as Vice President of Finance and Development. As President of MHI Hotels Services, Mr. Sims oversaw company operations as well as the areas of accounting and finance, marketing, development and franchise relations. Andrew M. Sims is the brother of Kim E. Sims. Mr. Sims serves as a director of MHI Hotels Services. Mr. Sims has a bachelor of science degree in commerce from Washington & Lee University.

The board of directors of Sotherly concluded that Mr. Sims has the relevant professional experience and skills to serve as director of Sotherly because he has spent over thirty years in the hospitality industry and has experience operating, developing and owning hotel properties. Mr. Sims has held several positions in hotel management, including president of the hotel management company, MHI Hotels Services. Most recently, as chief executive officer, Mr. Sims has developed and expanded our hotel portfolio and managed franchise, banking and third party service-provider relations. Mr. Sims’ employment agreement with Sotherly provides that Sotherly must nominate him to serve as a director.

David R. Folsom is Sotherly’s president and chief operating officer. He was appointed to the position of president in January 2011 and to the position of chief operating officer in January 2006. Mr. Folsom was appointed as a director in 2011. Mr. Folsom assists the chief executive officer in the execution of Sotherly’s strategic business plan and coordinates Sotherly’s capital raising and borrowing efforts, as well as sourcing and conducting due diligence on potential acquisitions to facilitate the company’s growth. Prior to joining Sotherly, Mr. Folsom was Vice President of Paragon Real Estate, a Cleveland-based early stage real estate venture focusing on distressed multi-family assets in 2005. From 2001 to 2005, he was an investment banker with BB&T Capital Markets, where he served in the Real Estate Securities Group and Debt Capital Markets Groups. While at BB&T, Mr. Folsom participated in over 70

equity, debt and preferred stock underwritings, as well as financial advisory transactions across many industries. He was a member of the lead underwriting team that took Sotherly public in 2004. Mr. Folsom served as a commissioned officer in the U.S. Marine Corps, is a graduate of the U.S. Naval Academy and received a master of business administration degree from Georgetown University. In 2012, Mr. Folsom also acted as an adjunct professor at the College of William and Mary.

The board of directors of Sotherly concluded that Mr. Folsom has the relevant professional experience and skills to serve as director of the Sotherly because of his current positions as president and chief operating officer of Sotherly as well as his past investment banking and real estate financing experience.

Anthony E. Domalski is Sotherly’s vice president and chief financial officer, a position to which he was appointed as of January 1, 2013. Prior to this role, Mr. Domalski was Sotherly’s chief accounting officer since May 2005. He joined Sotherly in May 2005 and was appointed an officer by the board of directors in July 2006. A certified public accountant, he is responsible for financial analysis, cash management, investment, risk management and financial and tax reporting. From 2001 to 2005, Mr. Domalski served as Chief Financial Officer for SwissFone, Inc., a Washington, DC based telecommunications company, where he assisted in a management-led buyout of the U.S. international wholesale division from Swisscom, AG. Prior to his tenure at SwissFone, Inc., Mr. Domalski held several other senior financial positions in the telecommunications and hospitality industry and spent nine years at a local public accounting firm. Mr. Domalski is a member of the American Institute of Certified Public Accountants. Mr. Domalski received a bachelor of science degree in accounting and finance from the University of Maryland.

Directors

Set forth below is biographical information for Sotherly’s directors who are not executive officers.

David J. Beatty previously served as a director of Sotherly from the completion of Sotherly’s initial public offering in December 2004 until 2007 and resumed service as a director of Sotherly in 2011. He also serves as chairman of Sotherly’s audit committee. He began his 40 plus year career in finance and real estate development as head of marketing operations for George Kaufman real estate development group in 1972. He was a founder of Essex Commercial Mortgage in 1987 and founder and President of CENIT Commercial Mortgage Corp. in 1990. In 2001, Mr. Beatty founded TowneBank Commercial Mortgage, LLC, where he currently serves as President. TowneBank Commercial Mortgage, LLC specializes in placing debt and equity for the lodging industry. He has been President of Guest Quarters, Inc. (1979-1982), Treasurer and Chief Financial Officer of Guest Quarters Development Group (1982-1986) and President of mortgage financing for Lawson-Essex, Inc. (1987-1990). Mr. Beatty received a bachelor of arts degree from Georgetown University and a master of business administration degree from the Darden School of Business at the University of Virginia.

The board of directors of Sotherly concluded that Mr. Beatty has the relevant professional experience and skills to serve as director of Sotherly, as evidenced by Mr. Beatty’s current and former service as director of Sotherly, because of his corporate and financial leadership as president and chief financial officer of a hotel company as well as his current position of president at TowneBank Commercial Mortgage, LLC.

J. Paul Carey became a director of Sotherly prior to completion of Sotherly’s initial public offering in December 2004. Mr. Carey currently is a private investor. From October 2003 to March 2013, Mr. Carey served as the Managing Partner for JPT Partners, a privately held investment partnership created to acquire and manage transaction-processing companies in the education and financial services industry, a position he held since October 2003. Prior to his position with JPT Partners, Mr. Carey served as the Chief Executive Officer of Enumerate Solutions, Inc., a venture backed software company, from November 2001 until October 2003. Mr. Carey also served as the Executive Vice President for Sallie Mae and was responsible for financial reporting from August 1997 to April 2001, and as a partner with LCL Ltd., a financial advisory management and investment firm, from March 1993 to August 1997. He serves on the board of Opportunity Scholarships, Inc., an early stage company in the educational financial services market. Mr. Carey received a master of business administration degree from the University of Maryland and a bachelor of arts degree from The Catholic University of America.

The board of directors of Sotherly concluded that Mr. Carey has the relevant professional experience and skills to serve as director of Sotherly because of his significant financial expertise. Mr. Carey has twenty-seven years of experience in finance and financial services, holding principal executive officer positions in financial reporting, financial planning and analysis, budgeting, asset-liability management and other areas of financial management. During his time at Sallie Mae, in addition to financial reporting, Mr. Carey was responsible for all investor and regulatory relations and management.

James P. O’Hanlon became a director of Sotherly in March 2007 and serves on Sotherly’s Nominating, Corporate Governance and Compensation Committee, or the NCGC Committee, as well as the audit committee. Mr. O’Hanlon retired from Dominion Energy in January 2003 after serving as President and Chief Operating Officer for three years. He previously served as Chief Operating Officer of Dominion Generation, a generating unit of Dominion Resources, upon its formation in May 1999. Prior to his employment with Dominion Generation, Mr. O’Hanlon was with a subsidiary of Virginia Power since 1989 and served as Vice President-Nuclear Services, Vice President-Nuclear Operations and subsequently, Senior Vice President-Nuclear. He is a Captain (retired) in the U.S. Naval Reserves. Since 2003, Mr. O’Hanlon has provided consulting services in the areas of management appraisals, budget reviews and safety assessments. Mr. O’Hanlon received a bachelor of science degree in Marine Engineering from the United States Naval Academy and completed studies in nuclear engineering at the U.S. Naval Nuclear Power School. He has also pursued postgraduate studies at Penn State University and the University of Virginia, Darden School of Business.

The board of directors of Sotherly concluded that Mr. O’Hanlon has the relevant professional experience and skills to serve as director of Sotherly because of his corporate leadership as president and chief operating officer at one of the nation’s largest energy generation companies. Mr. O’Hanlon’s former positions provide a practical background of business and technical experience while serving in executive, management and supervisory positions.

Ryan P. Taylor became a director of Sotherly in 2011. He is the Managing Partner of Richmond Hill Investment Co., LP, or Richmond Hill, an investment firm launched in December 2010 that is dedicated to the preservation and growth of capital through disciplined, long-term value investing. In addition, Mr. Taylor is a Managing Director of Essex Equity Capital Management, LLC, or Essex Equity, where he joined in June 2008 and is primarily responsible for the firm’s investment activities, including sourcing, researching, monitoring and portfolio management. The entities have combined assets under management of approximately $500 million. Prior to joining Essex Equity, Mr. Taylor spent 10 years at Greenhill & Co., Inc. most recently as a Principal. Mr. Taylor joined Greenhill & Co., Inc. in 1998. Mr. Taylor earned a B.B.A. in Finance with Honors from the University of Texas at Austin in 1998.

The board of directors of Sotherly concluded that Mr. Taylor has the relevant professional experience and skills to serve as director of Sotherly because of his investment banking and real estate financing experience. As set forth in the Articles Supplementary, the holder(s) of Preferred Stock have the exclusive right, voting separately as a single class, to elect one member of Sotherly’s board of directors. The holders of the Preferred Stock have designated Ryan P. Taylor to serve as a director on Sotherly’s board of directors.

Kim E. Sims became a director of Sotherly upon completion of Sotherly’s initial public offering in December 2004 and is the President and a director of MHI Hotels Services, a position he has held since December 2004. Mr. Sims served as Executive Vice President of Operations of MHI Hotels Services from 1995 until 2004 and has provided thirty years of service at MHI Hotels Services. He has a bachelor of science degree in commerce from Washington & Lee University. Kim E. Sims is the brother of Andrew M. Sims.

The board of directors of Sotherly concluded that Mr. Sims has the relevant professional experience and skills to serve as director of Sotherly because of his more than thirty year experience in hotel management and operations. As president of MHI Hotels Services, Mr. Sims has an expertise in the hospitality industry that enhances the dialogue of the board of directors. Under the terms of our strategic alliance agreement which expires in 2014, MHI Hotels Services has the right to nominate, during the term of the agreement, one person for election to Sotherly’s board of directors at each annual meeting of stockholders for so long as Andrew M. Sims, Kim E. Sims, Christopher L. Sims, a former director, and their affiliates and families own, in the aggregate, not less than 1.5 million units in the Operating Partnership or shares of Sotherly’s common stock. MHI Hotels Services’ nominee for director is Kim E. Sims.

Edward S. Stein became a director of Sotherly upon completion of the Company’s initial public offering in December 2004 and is chairman of Sotherly’s NCGC Committee and is a member of the Sotherly’s audit committee. He is a founding partner of the Norfolk, Virginia law firm of Weinberg and Stein. Mr. Stein has practiced law in the areas of real estate, estate planning, probate, corporate law and business law since 1974. He is admitted to the Virginia Bar and is a member of the Norfolk and Portsmouth and Virginia Bar Associations. Mr. Stein received a bachelor of arts degree from Harvard University and a juris doctor degree from the University of Virginia School of Law.

The board of directors of Sotherly concluded that Mr. Stein has the relevant professional experience and skills to serve as director of Sotherly because he has spent more than thirty-five years practicing business, tax and corporate law and had served effectively as counsel for fourteen years to MHI Hotels Services. Mr. Stein also has developed and rehabilitated real estate and has experience in venture capital transactions.

General Anthony C. Zinni became a director of Sotherly in December 2004 upon completion of its initial public offering and is a member of Sotherly’s NCGC Committee. General Zinni has been a director at BAE Systems, since 2001 and served as Chief Executive Officer on an interim basis during 2009. General Zinni also served as a director of DynCorp International from 2006-2008 and served as the Executive Vice President of DynCorp International, from July 2008-December 2008. He retired from the U.S. Marine Corps after 39 years of service in October 2000. During his military career, General Zinni served as the Commanding General, First Marine Expeditionary Force from 1994 to 1996, and as Commander-in-Chief, U.S. Central Command from 1997 to 2000. General Zinni has participated in numerous humanitarian operations and Presidential diplomatic missions. In November 2001, General Zinni was appointed senior adviser and U.S. envoy to the Middle East by Secretary of State Colin Powell. Since November 2000, General Zinni has consulted in the areas of defense, military, national security, foreign policy and regional issues. Since 2008, he has served as a professor at Cornell University. In 2008, he also served as a professor at Duke University. General Zinni received a bachelor of arts degree in economics from Villanova University. He also earned a master of arts degree in international relations from Salve Regina College, a master of science degree in management and supervision from Central Michigan University, and honorary doctorate degrees from both the College of William and Mary and the Marine Maritime Academy.

The board of directors of Sotherly concluded that General Zinni has the relevant professional experience and skills to serve as director of Sotherly because he is a skilled and experienced leader who has a strong background in corporate governance. General Zinni’s leadership experience includes almost forty years in the U.S. Marine Corps and, most recently, as a director and executive officer of BAE Systems and DynCorp International, two large global security and defense public companies. General Zinni has served on four private company boards in addition to his public company board involvement.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In accordance with Sotherly’s audit committee charter and procedures established by Sotherly’s audit committee, Sotherly’s audit committee or another independent body of Sotherly’s board is responsible for reviewing and approving the terms and conditions of all related party transactions. Any transaction, in which the amount involved exceeds $120,000, and in which a director or executive officer of Sotherly or a member of the immediate family of a director or officer of Sotherly has a direct or indirect material interest, would need to be approved by Sotherly’s audit committee or another independent body of Sotherly’s board prior to its entering into such transaction. The Operating Partnership is managed by Sotherly, its sole general partner and parent company. Consequently, the Operating Partnership does not have its own separate directors or executive officers. The procedures for review and approval of certain relationships and related transactions are contained in Sotherly’s audit committee charter which is available on our website at www.sotherlyhotels.com.

All new related party transactions that were not previously approved were reviewed and approved by Sotherly’s audit committee or another independent body of Sotherly’s board in 2012, unless otherwise indicated.

Transactions with MHI Hotels Services

MHI Hotels Services is currently the management company for each of our hotels.

MHI Hotels Services, the management company, is owned and controlled by certain individuals, including Andrew M. Sims, Sotherly’s chairman and chief executive officer, Kim E. Sims, a current director of Sotherly, Christopher L. Sims, a former director of Sotherly, and William J. Zaiser, Sotherly’s former executive vice president and chief financial officer. Each of Andrew M. Sims and Kim E. Sims, both of whom are current directors of Sotherly, beneficially own, directly or indirectly, approximately 21.61% of the total outstanding ownership interests of MHI Hotels Services. One of Sotherly’s current directors and a former director, Kim E. Sims and Christopher L. Sims, respectively, are currently officers and employees of MHI Hotels Services. Andrew M. Sims, Kim E. Sims, Christopher L. Sims and William J. Zaiser are also directors of MHI Hotels Services.

Strategic Alliance Agreement

On December 21, 2004, we entered into a ten-year strategic alliance agreement with MHI Hotels Services pursuant to which (i) MHI Hotels Services agrees to refer to us (on an exclusive basis) hotel acquisition opportunities in the United States presented to MHI Hotels Services and (ii) unless a majority of Sotherly’s independent directors in good faith concludes for valid business reasons that another management company should manage a hotel owned by us, we agree to offer MHI Hotels Services or its subsidiaries the right to manage hotel properties that we acquire in the United States. Pursuant to the strategic alliance agreement, the Crowne Plaza Jacksonville Riverfront, acquired in July 2005, the Sheraton Louisville Riverside, opened in May 2008, the Crowne Plaza Hampton Marina, acquired in April 2008, and the Crowne Plaza Tampa Westshore, opened in March 2009, are managed by MHI Hotels Services.

In addition, during the term of the agreement, which expires in December 2014, MHI Hotels Services has the right to nominate one person for election to Sotherly’s board of directors at the annual meeting of Sotherly’s stockholders, subject to the approval of such nominee by Sotherly’s NCGC Committee for so long as Andrew M. Sims, Kim E. Sims, Christopher L. Sims, a former director of Sotherly, and their families and affiliates, hold, in the aggregate, not less than 1.5 million units of the Operating Partnership or shares of Sotherly’s common stock. MHI Hotels Services’ nominee for director is Kim E. Sims.

Management Agreements

Pursuant to the terms of a master management agreement, we have engaged MHI Hotels Services as the property manager for eight of our wholly-owned hotels. Certain of Sotherly’s executive officers and certain of our directors are also directors of MHI Hotels Services.

The master management agreement has a term of ten years for our six initial hotels and a term of ten years for each hotel we acquire in the future that becomes subject to such agreement, including the Crowne Plaza Jacksonville Riverfront and the Crowne Plaza Hampton Marina. During the third quarter of 2006, we sold the Holiday Inn

Downtown Williamsburg and purchased the former Louisville Ramada Riverfront Inn, now the Sheraton Louisville Riverside, substituting the Louisville property for the Williamsburg property pursuant to the terms of the master management agreement. MHI Hotels Services benefits from the payment of management fees by us pursuant to our master management agreement. MHI Hotels Services receives a base management fee equal to a percentage of each hotel’s revenues (2.0% for the first year, 2.5% for the second year and 3.0% thereafter). Pursuant to the master management agreement, MHI Hotels Services receives an incentive fee equal to 10% of the amount by which gross operating profit of the hotels on an aggregate basis for a given year exceeds gross operating profits for the same hotels, on an aggregate basis, for a prior year, subject to a maximum amount of 0.25% of the aggregate gross revenue of the hotels.

In January 2008, the master management agreement was amended to revise certain provisions relating to payment by our TRS Lessee to MHI Hotels Services of a project management fee equal to five percent (5%) of the total project costs associated with the management, coordination, planning and execution of a major repositioning or product improvement plan for a Company hotel, subject to certain conditions.

In January 2009, we entered into a new management agreement with MHI Hotels Services solely for the management of the Crowne Plaza Tampa Westshore. The audit committee reviewed and approved this new management agreement in January 2009. The agreement changes certain provisions from those contained in the master management agreement for our other eight wholly-owned properties. Specifically, if we terminate the management agreement for convenience, we will pay MHI Hotels Services base and incentive management fees through the end of the initial year of the agreement or ninety days, whichever is greater, as opposed to terms of the master management agreement which provides that MHI Hotels Services must be paid the base and incentive fees for the remainder of the initial or renewal term. The provisions of the new agreement related to base management and incentive management fees are the same as those contained in the master management agreement, except that the incentive fee is calculated on a stand-alone basis for the Crowne Plaza Tampa Westshore, and not on an aggregate basis with the other eight properties. In addition, provisions relating to the submission and approval of the operating budgets were amended.

Any amendment, supplement or modification of the master management agreement and the Tampa management agreement must be in writing signed by all parties and approved by a majority of Sotherly’s independent directors. If the master management agreement terminates as to all of the hotels covered in connection with a default under the master management agreement, the strategic alliance agreement will also terminate. The master management agreement expires for the majority of our hotels in December 2014. The few remaining hotels will be subject to the master management agreement until no later than April 2018. The Tampa management agreement expires in March 2019.

For the years ended December 31, 2012 and 2011, we paid management fees of approximately $2.8 million and $2.5 million, respectively, inclusive of incentive management fees of approximately $0.2 million and $0.1 million, respectively, to MHI Hotels Services.

Shell Island Resort

In connection with the Shell Island Resort, in 2004 we entered into sublease arrangements with MHI Hotels LLC and MHI Hotels Two, Inc., affiliates of the management company, MHI Hotels Services. Under the sublease arrangements, MHI Hotels LLC and MHI Hotels Two, Inc. paid us a fixed annual rent of $640,000. Consequent to the cancellation of the management company’s contract to manage the condominium rental program for the resort and expiration of the underlying leases in December 2011 and pursuant to the terms of the sublease, in 2012 the Operating Partnership received $350,000 from MHI Hotels Services and will continue to receive a reduced set of minimum payments through December 2014.

Employee Medical Benefits

We purchase employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of MHI Hotels Services, to pay for the employer portion of the plan covering our employees and those of MHI Hotels Services that work exclusively for our properties. For the years ended December 31, 2012 and 2011, we paid $126,919 and $115,381, respectively, for the employer portion of the plan covering our employees and $1,662,936 and $1,749,787, respectively, for the employer portion of the plan covering those employees that work exclusively for our properties under our management agreements with MHI Hotels Services.

Transactions with Richmond Hill Investment Co., LP, Essex Equity Capital Management, LLC and Their Affiliates

On April 18, 2011, Sotherly entered into a Securities Purchase Agreement, or the Purchase Agreement, with Essex Illiquid, LLC and Richmond Hill, which we refer to collectively as the Investors, under which Sotherly issued and sold to the Investors in a private placement 25,000 shares of Sotherly’s Preferred Stock and the Warrant to purchase 1,900,000 shares of the Sotherly’s common stock, par value $0.01 per share, for an aggregate purchase price of $25.0 million. On December 21, 2011, and on July 10, 2012, Sotherly amended the terms of the Warrant. Pursuant to the Warrant amendments, (i) the exercise price per share of common stock covered by the Warrant will be adjusted from time to time in the event of cash dividends upon common stock by deducting from such exercise price the per-share amount of such cash dividends and (ii) Sotherly established a modified excepted holder limit (as defined in the Sotherly’s Articles of Amendment and Restatement) for the Investors.

Ryan P. Taylor is a director and Managing Partner of Richmond Hill and a Managing Director of Essex Equity, an affiliate of Essex Illiquid, LLC and Essex Equity High Income Joint Investment Vehicle, LLC. As set forth in the Articles Supplementary, the holder(s) of Sotherly’s Preferred Stock have the exclusive right, voting separately as a single class, to elect one member of Sotherly’s board of directors. The holders of the Preferred Stock have designated Ryan P. Taylor to serve as a director on Sotherly’s board of directors. Upon the redemption of all of the shares of the Preferred Stock with a portion of the net proceeds from this offering, the holder(s) of Sotherly’s Preferred Stock will no longer have the right to elect one member of Sotherly’s board of directors and Mr. Taylor will no longer be entitled to serve as a member of Sotherly’s board of directors.

On April 18, 2011, Sotherly entered into the Note Agreement with Essex Equity High Income Joint Investment Vehicle, LLC. Pursuant to the terms of the Note Agreement, Sotherly had the right to borrow up to $10.0 million on or before December 31, 2011. The principal amount borrowed under the Note Agreement bears interest at the rate of 9.25% per annum, payable quarterly in arrears. On December 21, 2011, and June 15, 2012, Sotherly entered into amendments to the Note Agreement to (i) extend the lender’s loan commitment by 17 months through May 31, 2013 and (ii) increase the undrawn term loan commitments under the Note Agreement to $7.0 million. All amounts due under the Note Agreement were repaid and the Note Agreement expired on March 31, 2013.

Transactions with Employees and Consultant

Effective as of January 1, 2013, Sotherly’s board of directors, as recommended by Sotherly’s NCGC Committee, unanimously approved a consulting agreement, or the Consulting Agreement, between Sotherly and WJZ Consulting LLC, or the Consultant, the managing member of which is Mr. Zaiser, Sotherly’s former chief financial officer.

The Consulting Agreement terminates on December 31, 2015 and provides for targeted, annual consulting fees payable during the consulting period. In addition, pursuant to the Consulting Agreement, Sotherly and the Consultant expect that the consulting services to be performed shall require a targeted amount of hours per month dedicated by the Consultant to Sotherly. The Consultant is entitled to receive $207,000 in 2013, $165,000 in 2014 and $123,000 in 2015 for services performed under the Consulting Agreement during those periods.

Effective as of June 24, 2013, and following the approval by a committee consisting of Sotherly’s independent directors, we hired Robert E. Kirkland, IV to serve as our Compliance Officer at an annual salary of $70,000 and Ashley S. Kirkland to serve as our Legal Analyst at an annual salary of $60,000. Ashley S. Kirkland is Andrew Sims’ daughter. Robert E. Kirkland, IV and Ashley S. Kirkland are married. Neither Robert E. Kirkland, IV nor Ashley S. Kirkland are executive officers of Sotherly or the Operating Partnership.

OUR PRINCIPAL AGREEMENTS

Strategic Alliance Agreement

MHI Hotels Services is currently the management company for each of our hotels.

In addition, during the term of the agreement, which expires in December 2014, MHI Hotels Services has the right to nominate one person for election to Sotherly’s board of directors at the annual meeting of Sotherly’s stockholders, subject to the approval of such nominee by Sotherly’s NCGC Committee for so long as certain of Sotherly’s officers and directors, Andrew Sims, Kim Sims, and Christopher Sims, and their families and affiliates, hold, in the aggregate, not less than 1.5 million units of the Operating Partnership or shares of Sotherly’s common stock.

Lease Agreements

In order for us to maintain qualification as a REIT, neither Sotherly nor the Operating Partnership or its subsidiaries can operate our hotels directly. Our wholly-owned hotels are leased to our TRS Lessee, which has engaged MHI Hotels Services to manage the hotels. Each lease for the wholly-owned hotels has a non-cancelable term of three to ten years, subject to earlier termination upon the occurrence of certain contingencies described in the lease.

During the term of each lease, our TRS Lessee is obligated to pay a fixed annual base rent plus a percentage rent and certain other additional charges. Base rent accrues and is paid monthly. Percentage rent is calculated by multiplying fixed percentages by gross room revenues, in excess of certain threshold amounts and is paid monthly or quarterly, according to the terms of the agreement.

Management Agreements

Pursuant to the terms of two management agreements, we, through our TRS Lessee, have engaged MHI Hotels Services as the property manager for our existing hotel portfolio. One of the management agreements, which we refer to as the master management agreement, covers all our wholly-owned hotels in our portfolio, excluding the Crowne Plaza Tampa Westshore. The second agreement relates to the Crowne Plaza Tampa Westshore. Except as described below, we intend to offer MHI Hotels Services the opportunity to manage any hotels we acquire in the future that we lease to our TRS Lessee. In addition, the joint venture entity which leases the Crowne Plaza Hollywood Beach Resort has also entered into a management agreement with MHI Hotels Services on terms that vary from those described below. The following terms apply only to our wholly-owned hotels.

Term . The management agreements with MHI Hotels Services have initial terms of ten years from the date of commencement of management activities at each property. The master management agreement covering our wholly-owned hotels, excluding the Crowne Plaza Tampa Westshore, expires between December 2014 and April 2018. The separate management agreement covering the Crowne Plaza Tampa Westshore expires in March 2019. The term of the management agreements with respect to each hotel may be renewed by MHI Hotels Services for two successive periods of five years each upon the mutual agreement of MHI Hotels Services and our TRS Lessee, subject to the satisfaction of certain performance tests, provided that at the time the option to renew is exercised, MHI Hotels Services is not then in default under the management agreements. If at the time of the exercise of any renewal period MHI Hotels Services is in default, then the exercise of the renewal option will be conditional on timely cure of such default, and if such default is not timely cured, then our TRS Lessee may terminate the management agreements. If MHI Hotels Services desires to exercise any option to renew, it must give our TRS Lessee written notice of its election to renew the management agreements no less than 90 days before the expiration of the then current term of the management agreements.

Any amendment, supplement or modification of the management agreements must be in writing signed by all parties and approved by a majority of Sotherly’s independent directors.

Amounts Payable under the Management Agreements . MHI Hotels Services receives a base management fee, and, if the hotels exceed certain financial thresholds, an additional incentive management fee for the management of our hotels.

The base management fee for each of our initial hotels and for any subsequent hotels we directly acquire will be a percentage of the gross revenues of the hotel and will be due monthly. The applicable percentage of gross revenue for the base management fee for each of our wholly-owned hotels is as follows:


	2015			2014			2013			2012			2011			2010			2009
Crowne Plaza Hampton Marina ⁽¹⁾		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		2.0	%		2.0	%
Crowne Plaza Tampa Westshore ⁽²⁾		3.0	%		3.0	%		3.0	%		3.0	%		2.5	%		2.0	%		2.0	%
Crowne Plaza Jacksonville Riverfront		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%
DoubleTree by Hilton Brownstone - University		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%
Hilton Philadelphia Airport		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%
Hilton Savannah DeSoto		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%
Hilton Wilmington Riverside		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%
Holiday Inn Laurel West		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%
Sheraton Louisville Riverside ⁽³⁾		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%		3.0	%

(1)	In 2010, the management company abated the increase in management fee for the Crowne Plaza Hampton for 2010.

(2)

In January 2009, we entered a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore. The provisions of the new agreement related to base management fee are the same as those contained in the master management agreement. The provisions of the new agreement related to the incentive management fee are the same as those contained in the master management agreement except that it is calculated separately and not aggregated with the other properties covered by the master management agreement.

(3)

Pursuant to the master management agreement, the term for each of the initial properties, which included the Holiday Inn Downtown Williamsburg, was 10 years. The management company agreed to substitute the Sheraton Louisville Riverside for the Holiday Inn Downtown Williamsburg for remainder of the term of the agreement.

The base management fee for a hotel acquired in the future which is first leased by our TRS Lessee, other than on the first day of a fiscal year, will be 2.0% for the partial year such hotel is first leased and for the first full fiscal year such hotel is managed. There is no fee cap on the base management fee.

Subsequently Acquired Hotel Properties


First full calendar year and any partial calendar year	2.0	%
Second calendar year	2.5	%
Third calendar year and thereafter	3.0	%

The incentive management fee under the master management agreement, if any, will be due annually in arrears within 90 days of the end of the fiscal year and will be equal to 10.0% of the amount by which the gross operating profit of all our hotels, with the exception of the Tampa property, on an aggregate basis for a given year exceeds the gross operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive fee may not exceed 0.25% of the aggregate gross revenue of all of the hotels included in the incentive fee calculation for the year in which the incentive fee is earned. The calculation of the incentive fee will not include results of hotels for the fiscal year in which they are initially leased, or for the fiscal year in which they are sold, and newly acquired or leased hotels will be included in the calculation beginning in the second full calendar year such hotel is managed. The management agreement for the management of the Tampa property includes a similar provision for payment of an incentive management fee on a stand-alone basis.

Early Termination . The master management agreement may be terminated with respect to one or more of the hotels earlier than the stated term, if certain events occur, including:

•

a sale of a hotel or the substitution of a newly acquired hotel for an existing hotel;

•

the failure of MHI Hotels Services to satisfy certain performance standards with respect to any of the future hotels or with respect to the six initial hotels after the expiration of the initial 10-year term;

•

in the event of a casualty to, condemnation of, or force majeure involving a hotel; or

•

upon a default by MHI Hotels Services or us that is not cured prior to the expiration of any applicable cure periods.

The management agreement for the Crowne Plaza Tampa Westshore may also be terminated for convenience with 90 days’ notice to MHI Hotels Services.

Termination Fees . In certain cases of early termination of the master management agreement with respect to one or more of the hotels and the management agreement for our Tampa property, we must pay MHI Hotels Services a termination fee, plus any amounts otherwise due to MHI Hotels Services pursuant to the terms of that management agreement. We will be obligated to pay termination fees in such circumstances provided that MHI Hotels Services is not then in default, subject to certain cure and grace periods.

New Acquisitions; Strategic Alliance Agreement . Pursuant to the strategic alliance agreement with MHI Hotels Services, we have agreed to engage MHI Hotels Services for the management of any hotels acquired in the future unless a majority of Sotherly’s independent directors in good faith concludes, for valid business reasons, that another management company should manage any newly acquired hotels. If the management agreement terminates as to all of the hotels covered in connection with a default under the management agreement, the strategic alliance agreement will also terminate.

Franchise Agreements

Our hotels operate under franchise licenses from national hotel companies.

We anticipate that most of the additional hotels we acquire will be operated under franchise licenses. We believe that the public’s perception of quality associated with a franchisor is an important feature in the operation of a hotel. Franchisors provide a variety of benefits for franchisees, which include national advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems.

Our TRS Lessee holds the franchise licenses for our wholly-owned hotels. MHI Hotels Services must operate each of our hotels it manages in accordance with and pursuant to the terms of the franchise agreement for the hotel.

The franchise licenses generally specify certain management, operational, record keeping, accounting, reporting and marketing standards and procedures with which the franchisee must comply. Under the franchise licenses, the franchisee must comply with the franchisors’ standards and requirements with respect to:

•

training of operational personnel;

•

safety;

•

maintaining specified insurance;

•

the types of services and products ancillary to guest room services that may be provided;

•

display of signage;

•

marketing techniques including print media, billboards, and promotions standards; and

•

the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas.

Additionally, as the franchisee, our TRS Lessee is required to pay the franchise fees described below.

The following table sets forth certain information for the franchise licenses of our wholly-owned hotel properties:


	Franchise Fee ⁽¹⁾			Marketing/Reservation Fee ⁽¹⁾			Expiration Date
Crowne Plaza Hampton Marina		5.0	%		3.5	%		10/07/2018
Crowne Plaza Jacksonville Riverfront		5.0	%		3.5	%		04/01/2016
Crowne Plaza Tampa Westshore		5.0	%		3.5	%		03/06/2019
DoubleTree by Hilton Brownstone – University		5.0	%		4.0	%		11/30/2021
Hilton Philadelphia Airport		5.0	%		3.5	%		10/31/2014
Hilton Savannah DeSoto		5.0	%		4.0	%		07/31/2017
Hilton Wilmington Riverside		5.0	%		4.0	%		03/31/2018
Holiday Inn Laurel West		5.0	%		2.5	%		10/05/2015
Sheraton Louisville Riverside		5.0	%		3.5	%		04/25/2023

(1)	Represents the percentage of room revenues payable to the franchisor.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of units of the Operating Partnership and outstanding shares of Sotherly’s common stock as of the date of this prospectus for each person or group known to us to be holding more than 5.0% of the Operating Partnership’s partnership units, or Sotherly’s common stock, each director and named executive officer of Sotherly and for the current directors and executive officers of Sotherly as a group. The table shows the number of partnership interests or units in the Operating Partnership and shares of Sotherly’s common stock the person “beneficially owns,” as determined by the rules of the SEC. The Operating Partnership is obligated to redeem each unit at the request of the holder thereof for the cash value of one share of Sotherly’s common stock or, at Sotherly’s option, one share of Sotherly’s common stock, which is traded on the NASDAQ ^® Global Market. As of the date of this prospectus, there are 13,038,125 partnership units of the Operating Partnership outstanding held by 13 partners.


Name of Beneficial Owner ⁽¹⁾	Number of Shares of Sotherly Beneficially Owned			Number of Units of the Operating Partnership Beneficially Owned			Percent of Partnership Units			Total			Percent of Common Stock ⁽²⁾
*General Partner of Operating Partnership*
Sotherly Hotels Inc.		—			12,056,927	⁽³⁾		80.7	⁽ ⁴ ⁾		12,056,927	⁽³⁾		—
*Directors, Executive Officers and 5% Holders of Sotherly Hotels Inc. Common Stock or Operating Partnership Units*
Ryan P. Taylor/Essex Illiquid, LLC/Richmond Hill Capital Partners, LP		1,900,000	⁽ ⁵ ⁾		—						1,900,000			15.8
Andrew M. Sims ⁽ ⁶ ⁾		747,055	⁽ ⁷ ⁾		549,997	⁽ ⁸ ⁾		4.2			1,297,052			12.1
Edmunds White Partners, LLC		997,414	⁽ ⁹ ⁾		—			—			997,414			9.8
Palogic Value Management, L.P		811,152	⁽ ¹⁰ ⁾		—			—			811,152			8.0
Cheong Family		368,168	⁽ ¹¹ ⁾		364,086	⁽ ¹¹ ⁾		2.8			732,254			7.0
Kim E. Sims ⁽ ⁶ ⁾		75,250	⁽ ⁸ ⁾		434,997	⁽ ⁸ ⁾		3.3			510,247			4.8
Edward S. Stein		22,500	⁽ ¹² ⁾		333,099	⁽ ¹³ ⁾		2.6			355,599			3.4
William J. Zaiser		48,625	⁽ ¹⁴ ⁾		214,981	⁽ ¹⁵ ⁾		1.7			263,606			2.5
David R. Folsom		234,506	⁽ ¹⁶ ⁾		—			—			234,506			2.3
James P. O’Hanlon		53,250	⁽ ¹⁷ ⁾		—			—			53,250			*
Anthony E. Domalski		46,000	⁽ ¹⁸ ⁾					—			46,000			*
General Anthony C. Zinni		31,428	⁽ ¹² ⁾		—			—			31,428			*
J. Paul Carey		28,500	⁽ ¹² ⁾		—			—			28,500			*
David J. Beatty		10,222	⁽ ¹⁹ ⁾		—			—			10,222			*
All executive officers and directors of the Company as a group (10 persons)		3,148,711			1,282,112			9.8			4,430,823			33.2

*	Represents less than 1% of the number of shares of common stock of Sotherly.

(1)	Unless otherwise indicated, the named stockholders have sole voting power with respect to all shares shown as being beneficially owned by them. Includes all restricted stock grants, including those that will vest on December 31, 2013.

(2)

Assumes that all units of the Operating Partnership held by such person or group of persons are redeemed for common stock of Sotherly (regardless of when such units are redeemable) on a one-for-one basis. Assumes that all warrants to purchase shares of Sotherly’s common stock held by such person or group of persons are exercised (only if exercisable within 60 days). The total number of shares of Sotherly’s common stock outstanding used in calculating the ownership interest of the named holders of units in the Operating Partnership and the named holders of warrants to purchase shares of Sotherly’s common stock is based on the deemed conversion or exercise of only the units or warrants, as applicable, owned by such holder into shares of Sotherly’s common stock.

(3)	Includes units representing both general and limited partnership interests in the Operating Partnership as well as a warrant to purchase 1,900,000 additional partnership units.

(4)

Sotherly currently owns a 1% interest in the Operating Partnership as general partner and an approximately 76.9% interest in the Operating Partnership as a limited partner and owns a warrant to purchase 1,900,000 additional partnership units. Assumes that all warrants to purchase additional partnership units are exercised (only if exercisable within 60 days). The total number of units in the Operating Partnership used in calculating the ownership interest of Sotherly is based on the deemed exercise of the warrants.

(5)

Based on information set forth in a Schedule 13D/A filed with the SEC on July 17, 2012, Essex Illiquid, LLC, Richmond Hill Investments, LLC, Basil Maher, and M. Brian Maher have shared voting and dispositive power over 1,748,000,000 shares, through their ownership of warrants to purchase shares of Sotherly’s common stock. Based on information set forth in a Schedule 13D/A filed with the SEC on July 17, 2012, Richmond Hill Capital Partners, LP, Richmond Hill Advisors, LLC, Richmond Hill Investment Co., LP, Richmond Hill Capital Management, LLC, collectively, the Richmond Hill Entities, and Ryan P. Taylor have shared voting and dispositive power over 152,000 shares, through their ownership of warrants to purchase shares of Sotherly’s common stock. Ryan P. Taylor, Sotherly’s director, is affiliated with both Essex Illiquid, LLC and the Richmond Hill Entities. Mr. Taylor disclaims beneficial ownership over the shares of Sotherly’s common stock and the related warrants. Each of Essex Illiquid, LLC and Richmond Hill Investments, LLC, on the one hand, and each Richmond Hill Entity, on the other hand, disclaim beneficial ownership of any securities held by the other. The address of each of Essex Illiquid, LLC, Richmond Hill Investments, LLC, Richmond Hill Capital Partners, LP, Richmond Hill Advisors, LLC, Richmond Hill Investment Co., LP, Richmond Hill Capital Management, LLC, and Ryan P. Taylor is 375 Hudson Street, 12th Floor, New York, New York 10014. The address of both Basil Maher and M. Brian Maher is c/o Essex Equity Management, LLC, 70 South Orange Avenue, Suite 105, Livingston, New Jersey 07039.

(6)	Andrew M. Sims and Kim E. Sims are siblings.

(7)

Includes 68,500 shares of the common stock of Sotherly granted under Sotherly’s 2004 Long Term Incentive Plan, or the 2004 Plan including 15,000 shares of Sotherly’s common stock granted pursuant to Mr. Sims’ employment agreement with Sotherly that were fully vested on January 1, 2011. Includes 156,250 shares held by Susan L. Sims, Andrew M. Sims’ spouse. Includes 271,250 shares held by the family limited partnership of Andrew M. Sims.

(8)

Andrew M. Sims and Kim E. Sims each received 605,166 units in connection with Sotherly’s initial public offering. On July 22, 2005, the family limited partnerships of Andrew M. Sims and Kim E. Sims each received 23,850 units in connection with our acquisition of the Hilton Jacksonville Riverfront Hotel. Includes 35,981 units held by the Edgar Sims Irrevocable Trust for which Andrew M. Sims, Kim E. Sims and Christopher L. Sims, a former director, serve as co-trustees. Andrew M. Sims redeemed 115,000 units for common stock on June 7, 2011. Kim E. Sims redeemed 80,000 units for common stock on March 1, 2007, 50,000 units for common stock on August 28, 2007, 50,000 units for common stock on October 3, 2011 and 50,000 units for common stock on March 1, 2013.

(9)	Based on information set forth in a Schedule 13G/A filed with the SEC on February 13, 2013, Edmunds White Partners, LLC has voting and dispositive power over 997,414 shares. The address of Edmunds White Partners, LLC is 10831 Ridgefield Parkway, Richmond, Virginia 23233.

(10)

Based on information set forth in a Schedule 13G/A filed with the SEC on January 23, 2013, Palogic Value Management, L.P., Palogic Value Fund, L.P., Palogic Capital Management, LLC and Ryan L. Vardeman, collectively, the Palogic Entities, have shared voting and dispositive power over 811,152 shares of Sotherly’s common stock. Palogic Value Fund is the record and direct beneficial owner of the 811,152 shares. Palogic Value Management is the investment manager and general partner of, and may be deemed to have indirect beneficial ownership of securities owned by, Palogic Value Fund. Palogic Capital Management is the general partner of, and may be deemed to have indirect beneficial ownership of securities owned by, Palogic Value Management. Ryan Vardeman is the sole member of, and may be deemed to have indirect beneficial ownership of securities owned by, Palogic Capital Management. The address of each of the Palogic Entities is c/o Taylor H. Wilson, Esq., Haynes and Boone, LLP, 2323 Victory Avenue, Suite 700, Dallas, Texas 75219.

(11)

Represents 308,234 units held by Khersonese Investment (USA) Inc., 6,832 units held by IPAX and 49,020 units held by Phileo Land Company. Supreme Corp. redeemed 368,168 units for Sotherly’s common stock on March 22, 2010. These entities are indirectly controlled by members of the Cheong Family, including Kee Cheok Cheong, Kee Fong Cheong, Kee Seong Cheong, Kee Lai Cheong and Kee Soon Cheong. The address of these four entities is 13th Floor, Bangunan Pak Peng Box #1 No.75, Jalan Petaling, 50000 Kuala Lumpur, Malaysia.

(12)	Includes 15,500 shares of restricted stock of Sotherly granted under the 2004 Plan all of which were fully vested on December 31, 2012. Also includes 3,000 shares of restricted stock of Sotherly granted under the 2004 Plan, which will vest on December 31, 2013.

(13)	Represents 333,099 units held by the Celia K. Krichman Charitable Trust, of which Edward S. Stein is a Trustee. Mr. Stein disclaims beneficial ownership of these units.

(14)	Includes 29,075 shares of Sotherly’s common stock granted under the 2004 Plan.

(15)	The family limited partnership of William J. Zaiser received 206,830 units in connection with Sotherly’s initial public offering and an additional 8,151 units in connection with the acquisition of the Hilton Jacksonville Riverfront Hotel on July 22, 2005.

(16)	Includes 84,363 shares of Sotherly’s common stock granted under the 2004 Plan, including 60,000 shares of Sotherly’s common stock granted pursuant to Mr. Folsom’s employment agreement with Sotherly that were fully vested on January 1, 2011.

(17)

Includes 13,500 shares of restricted stock of Sotherly granted under the 2004 Plan, all of which were fully vested on December 31, 2012. Also includes 3,000 shares of restricted stock of Sotherly granted under the 2004 Plan, which will vest on December 31, 2013. Includes 8,000 shares held by Claudia O’Hanlon, Mr. O’Hanlon’s spouse.

(18)

Includes 39,750 shares of Sotherly’s common stock granted under the 2004 Plan, including 30,000 shares of restricted common stock granted pursuant to Mr. Domalski’s employment agreement with Sotherly that will vest in equal amounts of 6,000 shares on each December 31 in the five-year period of 2013 through 2017.

(19)	Includes 4,500 shares of restricted stock of Sotherly granted under the 2004 Plan all of which are fully vested. Also includes 3,000 shares of restricted stock of Sotherly granted under the 2004 Plan, which will vest on December 31, 2013.

DESCRIPTION OF NOTES

This description sets forth certain terms of the notes that we are offering pursuant to this prospectus. In this section, we use capitalized words to signify terms that are specifically defined in the indenture, or the Indenture, to be dated as of the closing date, by and between us and Wilmington Trust, National Association, as trustee and collateral agent, or the trustee. This section contains definitions of certain capitalized terms that are used herein. We refer you to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used in this prospectus for which no definition is provided. As used in this section, all references to “we,” “our” and “us” mean Sotherly Hotels LP, a Delaware limited partnership.

Because this section is a summary, it does not describe every aspect of the notes or the Indenture. We urge you to read the Indenture because that document and not this summary defines your rights as a holder of notes. Please review a copy of the Indenture. You may obtain a copy of the Indenture from us without charge. See “Where You Can Find More Information.” You may also review the Indenture at the trustee’s corporate trust office at Wilmington Trust, National Association, Rodney Square North, 1100 N. Market Street, Wilmington, DE 19890, Attn: Corporate Capital Markets.

General

The terms of the notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended, or the Trust Indenture Act.

The notes will be a single series under the Indenture, initially in the aggregate principal amount of $ million ($ if the underwriters’ overallotment option is exercised in full). This series may be reopened and we may, from time to time, issue additional notes of the same series without the consent of any of the holders of the notes. The notes will mature (unless previously redeemed) on , 2018. The notes will be redeemable in whole or in part at any time or from time to time on and after , 2016, at a redemption price equal to % of the principal amount redeemed plus accrued and unpaid interest to, but not including, the redemption date as described under “— Optional Redemption of the Notes” below. The notes will be issued only in fully registered form without coupons, in denominations of $25.00 and integral multiples of $25.00 in excess thereof. The notes will be evidenced by a global note in book-entry form, except under the limited circumstances described under “— Certificated Notes.” Currently there is no public market for the notes.

The notes are not convertible into or exchangeable for our partnership interests or shares of common stock of Sotherly.

Ranking

The notes will be our direct, senior unsecured obligations and will:

•

rank equally with each other and with all of our existing and future unsecured and unsubordinated indebtedness outstanding from time to time;

•

rank senior to all of our future indebtedness that by its terms is expressly subordinate to the notes;

•

effectively rank junior to any of our future secured indebtedness to the extent of the value of the assets securing such indebtedness; and

•

effectively be structurally subordinated to all existing and future indebtedness and other obligations of each of our subsidiaries, including the claims of mortgage lenders holding secured indebtedness, as to the specific property receiving each lender’s mortgage and other secured indebtedness.

The notes are our obligations exclusively, and are not the obligations of any of our subsidiaries and will not be guaranteed by any of our subsidiaries or by Sotherly. Accordingly, the indebtedness incurred by any of our subsidiaries will have to be satisfied in full before you will be able to realize any value from our encumbered or indirectly held properties. As of June 30, 2013, we had consolidated indebtedness of approximately $151.0 million, which is comprised of approximately $134.9 million of secured debt and approximately

$16.1 million unsecured debt. Of the approximately $151.0 million consolidated indebtedness outstanding at June 30, 2013, approximately $138.5 million was held by our subsidiaries and approximately $12.5 million relates to 12,458 shares of Preferred Stock (of which, 2,460 shares were redeemed on August 2, 2013 for an aggregate redemption price of approximately $2.7 million). We intend to redeem the remaining 9,998 shares of Preferred Stock with a portion of the net proceeds of this offering. Sotherly, our subsidiaries or we may also incur additional indebtedness in the future, including secured indebtedness, subject to the provisions described under “—Certain Covenants — Limitations on Incurrence of Debt.”

Interest and Maturity

The notes will bear interest at the rate per annum set forth on the cover page of this prospectus from, and including, , 2013, and the subsequent interest periods will be the periods from, and including, an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be. Interest is payable quarterly in arrears on , , and of each year, commencing , 2013, to the persons in whose names the notes are registered at the close of business on , , or , as the case may be, immediately before the relevant interest payment date.

Interest payments will be made only on a Business Day. If any interest payment is due on a non-Business Day, we will make the payment on the next day that is a Business Day. Payments made on the next Business Day in this situation will be treated under the Indenture as if they were made on the original due date. Such payment will not result in a Default under the notes or the Indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a Business Day.

Accrued and unpaid interest is also payable on the date of maturity or earlier redemption of the notes. Interest on the notes will be computed on the basis of a 360-day year of twelve 30-day months.

The notes will mature (unless previously redeemed) on , 2018. Unless we redeem the notes prior to their maturity date, we will redeem the notes at their principal amount on the maturity date.

“Business Day” means a day other than a Saturday, Sunday or any other day on which banking institutions in New York City or the location of the corporate trust office of the trustee are authorized or required by law, regulation or executive order to close.

“ Default ” means any event that is, or after notice or passage of time or both would be, an Event of Default (as defined below).

Optional Redemption of the Notes

We may redeem the notes in whole or in part, at any time and from time to time on or after , 2016 at a redemption price equal to % of the principal amount of the notes being redeemed plus accrued and unpaid interest, if any, to, but not including, the redemption date.

We are required to give notice of such redemption not less than 30 days nor more than 60 days prior to the redemption date to each Holder’s address appearing in the securities register maintained by the trustee. In the event we elect to redeem less than all of the notes, the particular notes to be redeemed will be selected by the trustee by such method as the trustee shall deem fair and appropriate.

“ Holder” means any registered holder on the books of the Registrar, from time to time, of the notes.

Merger, Consolidation or Sale

We may consolidate or merge with or into any other corporation, and we may sell, lease or convey all or substantially all of our assets to any corporation, provided that the successor entity, if other than us, is organized and existing under the laws of the United States of America or any United States, or U.S., state or the District of Columbia and assumes all of our obligations to:

•

pay or deliver the principal and any premium, if any, and any interest on, the notes; and

•

perform and observe all of our other obligations under the Indenture;

and provided further that no Event of Default (as defined below) shall have occurred and be continuing.

Except as described below under “—Certain Covenants —Offer to Repurchase Upon a Change of Control Repurchase Event,” the Indenture does not provide for any right of acceleration in the event of a consolidation, merger, sale of all or substantially all of the assets, recapitalization or change in our stock ownership. In addition, the Indenture does not contain any provision which would protect the Holders of notes against a sudden and dramatic decline in credit quality resulting from takeovers, recapitalizations or similar restructurings.

Certain Covenants

Offer to Repurchase Upon a Change of Control Repurchase Event

“Change of Control Repurchase Event ” means (A) the acquisition by any person, including any syndicate or group deemed to be a “person” under Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions of the Capital Stock entitling that person to exercise more than 50% of the total voting power of all the Capital Stock entitled to vote generally in the election of the REIT’s directors (except that such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition); and (B) following the closing of any transaction referred to in subsection (A), neither we, the REIT nor the acquiring or surviving entity has a class of common securities (or American Depositary Receipts representing such securities) listed on the New York Stock Exchange, or the NYSE, the NYSE Amex Equities, or the NYSE Amex, or the Nasdaq Stock Market, or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE Amex or the Nasdaq Stock Market.

If a Change of Control Repurchase Event occurs, unless we have exercised our option to redeem the notes as described under “— Optional Redemption of the Notes,” we will make an offer to each Holder to repurchase all or any part (in a principal amount of $25 and integral multiples of $25 in excess thereof) of that Holder’s notes at a repurchase price in cash equal to % of the aggregate principal amount of notes repurchased plus any accrued and unpaid interest on the notes repurchased to, but not including, the date of repurchase. Within 30 days following any Change of Control Repurchase Event or, at our option, prior to any Change of Control Repurchase Event, but after the public announcement of the Change of Control Repurchase Event, we will give notice to each Holder with copies to the trustee and the paying agent (if other than the trustee) describing the transaction or transactions that constitute or may constitute the Change of Control Repurchase Event and offering to repurchase notes on the payment date specified in the notice, which will be no earlier than 30 days and no later than 60 days from the date such notice is given. The notice shall, if given prior to the date of consummation of the Change of Control Repurchase Event, state that the offer to purchase is conditioned on the Change of Control Repurchase Event occurring on or prior to the payment date specified in the notice.

We will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control Repurchase Event. To the extent that the provisions of any securities laws or regulations conflict with the Change of Control Repurchase Event provisions of the notes, we will comply with the applicable securities laws and regulations and will not be deemed to have breached our obligations under the Change of Control Repurchase Event provisions of the Indenture by virtue of such conflict.

On the Change of Control Repurchase Event payment date, we will, to the extent lawful:

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Accept for payment all notes or portions of notes properly tendered pursuant to our offer;

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Deposit with the trustee an amount equal to the aggregate purchase price in respect of all notes or portions of notes properly tendered; and

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Deliver or cause to be delivered to the trustee the notes properly accepted, together with an officers’ certificate stating the aggregate principal amount of notes being purchased by us.

The trustee will promptly mail to each Holder of notes properly tendered the purchase price for the notes, and the trustee will promptly authenticate and mail (or cause to be transferred by book-entry) to each Holder a new note equal in principal amount to any unpurchased portion of any notes surrendered; provided that each new note will be in a principal amount of $25 and integral multiples of $25 in excess thereof.

We will not be required to make an offer to repurchase the notes upon a Change of Control Repurchase Event if (i) we or our successor delivered a notice to redeem in the manner, at the times and otherwise in compliance with the optional redemption and repayment provision described above prior to the occurrence of the Change of Control Repurchase Event (and all of the notes are redeemed pursuant to such redemption on the related redemption date); or (ii) a third party makes an offer in respect of the notes in the manner, at the times and otherwise in compliance with the requirements for an offer made by us and such third party purchases all notes properly tendered and not withdrawn under its offer.

There can be no assurance that sufficient funds will be available at the time of any Change of Control Repurchase Event to make required repurchases of notes tendered. Our failure, or the failure of our successor or any third party, as applicable, to repurchase the notes upon a Change of Control Repurchase Event would result in an Event of Default under the Indenture. It is possible that we will not have sufficient funds at the time of the Change of Control Repurchase Event to make the required repurchase of the notes.

“ Capital Stock ” means, with respect to any entity, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting), including partnership or limited liability company interests, whether general or limited, in the equity of such entity (including without limitation all warrants, options, derivative instruments, or rights of subscription or conversion relating to or affecting Capital Stock), whether outstanding on the issue date of the notes or issued thereafter, including without limitation, in the case of Sotherly, all common stock and preferred stock of Sotherly outstanding from time to time.

Limitations on Incurrence of Debt

We will not, and will not permit any subsidiary to, incur any Debt, other than Intercompany Debt, including that which is subordinate in right of payment to the notes, if, immediately after giving effect to the incurrence of such Debt and the application of the proceeds thereof, the ratio of the aggregate principal amount of all outstanding Debt to Adjusted Total Asset Value would be greater than 0.65 to 1.0.

In addition to the foregoing limitation on the incurrence of Debt, we will not, and will not permit any subsidiary to, incur any Debt if the ratio of Stabilized Consolidated Income Available for Debt Service to Stabilized Consolidated Interest Expense on the date on which such additional Debt is to be incurred, on a pro forma basis, after giving effect to the incurrence of such Debt and to the application of the proceeds thereof, would be less than 1.5 to 1.0.

“ Adjusted Total Asset Value ” as of any date means the sum of (i) Stabilized Asset Value, (ii) Non-Stabilized Asset Value and (iii) total cash and cash equivalents of us and our subsidiaries on a consolidated basis determined in accordance with GAAP.

“Asset Under Renovation” as of any date means any hotel asset owned by us, any subsidiary or any Unconsolidated Entity that is designated by us in our discretion as the recipient or beneficiary of capital expenditures that are in an amount greater than 4% of a hotel asset’s total revenues for the preceding 12 months.

“ Capitalization Rate ” means 7.5%.

“Consolidated Income Available for Debt Service” means, in each case calculated for the four complete calendar quarters preceding the date of determination, Consolidated Net Income of us and our consolidated subsidiaries plus amounts that have been deducted for but minus amounts that have been added for (a) Consolidated Interest Expense plus dividends on mandatorily redeemable or mandatorily convertible preferred stock and prepayment penalties included in GAAP interest expense, (b) provision for taxes of us and our consolidated subsidiaries based on income, (c) depreciation and amortization and all other non-cash items deducted for purposes of calculating Consolidated Net Income, (d) provision for gains and losses on sales or other dispositions of properties and other investments, (e) extraordinary items, (f) non-recurring or other unusual items, as determined by us in good faith, and (g) corporate, general and administrative expenses.

“Consolidated Interest Expense” means, for the four complete calendar quarters preceding the date of determination, the aggregate amount of interest expense for us and our consolidated subsidiaries for such period determined in accordance with GAAP, excluding any interest that is (i) payable in respect of Capital Stock, (ii) capitalized or (iii) payable in a form other than cash.

“ Consolidated Net Income ” means, for the four complete calendar quarters preceding the date of determination, the amount of net income (or loss) of the Issuer and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP.

“Debt ” means, as of any date, without duplication, any indebtedness of us or any subsidiary, whether or not contingent, solely in respect of (i) borrowed money evidenced by bonds, notes, debentures or similar instruments, (ii) indebtedness secured by a mortgage, pledge, lien, charge, encumbrance or any security interest existing on property owned by us or any subsidiary, or (iii) reimbursement obligations in connection with any letters of credit actually issued or amounts representing the balance deferred and unpaid of the purchase price of any property except any such balance that constitutes an accrued expense or trade payable, but in the case of items of indebtedness incurred under (i) through (iii) above only to the extent that any such items (other than letters of credit) would appear as a liability on our consolidated balance sheet in accordance with GAAP. The term “Debt” also includes, to the extent not otherwise included, any obligation of us or any subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise (other than for purposes of collection in the ordinary course of business), indebtedness of another person (other than us or any subsidiary), but excludes Capital Stock (as defined above) of Sotherly, us, or our subsidiaries.

“ Intercompany Debt ” means Debt to which the only parties are Sotherly, any of its subsidiaries, us or any of our subsidiaries, or Debt owed to Sotherly arising from routine cash management practices, but only so long as such Debt is held solely by any of Sotherly, any of its subsidiaries, us and any of our subsidiaries.

“ Non-Stabilized Asset ” as of any date means any hotel asset owned by us, any subsidiary or any Unconsolidated Entity that (i) is, or within the preceding 24 months has been, an Asset Under Renovation, or (ii) has, within the preceding 24 months, (a) completed a brand change, (b) been subject to an event, or a series of events, giving rise to a material casualty or (c) is in, or has completed, condemnation proceedings in respect of all or any part of such hotel asset.

“ Non-Stabilized Asset Value ” as of any date means the total “as-stabilized” value of all Non-Stabilized Assets as determined by an appraisal of each such Non-Stabilized Asset commissioned by us from a certified MAI appraiser in December of each year during which any notes remain outstanding.

“ Stabilized Asset ” means any hotel asset owned by us, any subsidiary or any Unconsolidated Entity that does not constitute a Non-Stabilized Asset.

“ Stabilized Asset Value ” as of any date means the total value of all Stabilized Assets determined by dividing (i) Stabilized Consolidated Income Available for Debt Service by (ii) the Capitalization Rate.

“Stabilized Consolidated Income Available for Debt Service” means, for the four complete calendar quarters preceding the date of determination, our Consolidated Income Available for Debt Service, excluding any portion of Consolidated Income Available for Debt Service attributable to a Non-Stabilized Asset.

“Stabilized Consolidated Interest Expense” means, for the four complete calendar quarters preceding the date of determination, our Consolidated Interest Expense, excluding any portion of Consolidated Interest Expense relating to Debt that is secured by a Non-Stabilized Asset.

“ Unconsolidated Entity ” means an entity, other than one of our consolidated subsidiaries, in which we own a direct or indirect interest that is accounted for under the equity method of accounting or the cost method of accounting.

Information Rights

During any period in which any notes are outstanding, the Indenture will provide that, whether or not we are subject to Sections 13 or 15(d) of the Exchange Act, we will, to the extent permitted under the Exchange Act, file with the SEC the annual reports, quarterly reports and other documents that we would have been required to file with the SEC pursuant to Sections 13 or 15(d) of the Exchange Act (collectively, the “Financial Information”) if we were subject to such requirements; notwithstanding the foregoing, during any period in which we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act, Sotherly, as our sole general partner, may elect to satisfy our obligations under this section by filing with the SEC the Financial Information required to be filed by Sotherly under Sections 13 or 15(d) of the Exchange Act.

Unless the Financial Information is available through the SEC’s Electronic Data Gathering, Analysis and Retrieval System (or a successor system), we will, in any event, within 15 days after the respective dates on which a periodic report on Form 10-K or Form 10-Q, as the case may be, was required to be filed with the SEC or would have been required to be filed with the SEC if we were subject to Section 13 or 15(d) of the Exchange Act as a non-accelerated filer (as such term is defined in Rule 12b-2 under the Exchange Act):

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transmit by mail (or other permissible means under the Exchange Act) to all Holders of notes, without cost to such Holders, copies of the Financial Information; and

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file with the trustee copies of the Financial Information.

If the filing of the Financial Information by us or Sotherly, as applicable, with the SEC is not permitted under the Exchange Act, we will promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of the Financial Information to any prospective Holder.

Delivery of any reports, information and documents to the trustee is for informational purposes only and its receipt of such reports, information or other documents shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including our or any other Person’s compliance with any of its covenants thereunder. Neither the trustee nor any paying agent shall have any obligation to monitor or confirm, on a continuing basis or otherwise, our or any other Person’s compliance with the covenants described herein or with respect to any reports or other documents filed pursuant to the Indenture.

Maintenance of Properties

We will cause all of our material properties used or useful in the conduct of our business or the business of any subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements of these properties, all as in our judgment may be necessary so that the business carried on in connection with these properties may be properly and advantageously conducted at all times; provided, however, that we and our subsidiaries shall not be prevented from selling or otherwise disposing of for value their respective properties in the ordinary course of business.

Insurance

We will, and will cause each of our subsidiaries to, keep all of its insurable properties insured against loss or damage at least equal to their then full insurable value with insurers of recognized responsibility and having an A.M. Best policy holder’s rating of not less than A-V.

Payment of Taxes and Other Claims

We will pay or discharge or cause to be paid or discharged, before the same shall become delinquent: (i) all taxes, assessments and governmental charges levied or imposed upon us or any subsidiary or upon the income, profits or property of us or any subsidiary; and (ii) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of us or any subsidiary; provided, however, that we shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings or for which we have set apart and maintain an adequate reserve.

Events of Default

The following are Events of Default under the Indenture with respect to the notes:

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default in the payment of any interest on the notes when due and payable, which continues for 30 days;

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default in the payment of any principal of or premium on the notes when due;

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default in tendering payment for the notes upon a Change of Control Repurchase Event, when such payment remains unpaid 60 days after issuance of the requisite notice;

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default in the performance of any other obligation contained in the Indenture for the benefit of the notes, which continues for 90 days after written notice;

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specified events in bankruptcy, insolvency or reorganization of us or any Significant Subsidiary;

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an event of default, as defined in any bond, note, debenture or other evidence of Debt of us or any Significant Subsidiary in excess of $17,500,000 singly or in aggregate principal amount which becomes accelerated so as to be due and payable prior to the date on which the same would otherwise become due and payable and such acceleration(s) shall not have been annulled or rescinded within 30 days of notice of such acceleration(s) to us or the Significant Subsidiary; provided, however, that if such event of default, acceleration(s) or payment default(s) are contested by us, a final and non-appealable judgment or order confirming the existence of the default(s) and/or the lawfulness of the acceleration(s), as the case may be, shall have been entered; and

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any final and non-appealable judgment or order for the payment of money in excess of $17,500,000 singly, or in the aggregate for all such final judgments or orders against all such Persons: (i) shall be rendered against us or any Significant Subsidiary and shall not be paid or discharged and (ii) there shall be any period of 60 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $17,500,000 during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect.

Book-entry and other indirect Holders of the notes should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or rescind an acceleration of maturity.

Annually, within 120 days following each December 31 while the notes are outstanding, we will furnish to the trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the Indenture, or else specifying any Default and the nature and status thereof. We will also deliver to the trustee a written notification of any uncured Default within 30 days after we become aware of such uncured Default.

“ Person ” means any individual, corporation, partnership, limited liability company, joint venture, association, joint- stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.

“Significant Subsidiary ” means each of our significant subsidiaries, if any, as defined in Rule 1-02(w) of Regulation S-X under the Securities Act.

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Remedies if an Event of Default Occurs

If an Event of Default with respect to the outstanding notes occurs and is continuing, the trustee or the Holders of not less than 25% in aggregate principal amount of the notes may declare the principal thereof, premium, if any, and all unpaid interest thereon to be due and payable immediately.

At any time after the trustee or the Holders of the notes have accelerated the repayment of the principal, premium, if any, and all unpaid interest on the notes, but before the trustee has obtained a judgment or decree for payment of money due, the Holders of a majority in aggregate principal amount of outstanding notes may rescind and annul that acceleration and its consequences, provided that all payments and/or deliveries due, other than those due as a result of acceleration, have been made and all Events of Default have been remedied or waived.

The Holders of a majority in principal amount of the outstanding notes may waive any default with respect to that series, except a default:

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in the payment of any amounts due and payable or deliverable under the notes; or

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in an obligation contained in, or a provision of, the Indenture which cannot be modified under the terms of the Indenture without the consent of each Holder of the notes.

The Holders of a majority in principal amount of the outstanding notes may direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee with respect to the notes, provided that (i) such direction is not in conflict with any rule of law or the Indenture, (ii) the trustee may take any other action deemed proper by the trustee that is not inconsistent with such direction and (iii) the trustee need not take any action that might involve it in personal liability or be unduly prejudicial to the Holders not joining therein. Subject to the provisions of the Indenture relating to the duties of the trustee, before proceeding to exercise any right or power under the Indenture at the direction of the Holders, the trustee is entitled to receive from those Holders security or indemnity satisfactory to the trustee against the costs, expenses and liabilities which it might incur in complying with any direction.

A Holder of the notes will have the right to institute a proceeding with respect to the Indenture or for any remedy under the Indenture, if:

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that Holder previously gives to the trustee written notice of a continuing Event of Default with respect to the notes;

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the Holders of not less than 25% in principal amount of the outstanding notes have made written request;

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such Holder or Holders have offered to indemnify the trustee against the costs, expenses and liabilities incurred in connection with such request;

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the trustee has not received from the Holders of a majority in principal amount of the outstanding notes a direction inconsistent with the request (it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of the Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any rights under the Indenture, except in the manner herein provided and for equal and ratable benefit of all Holders); and

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the trustee fails to institute the proceeding within 60 days.

However, the Holder of a note has the right, which is absolute and unconditional, to receive payment of the principal of and interest on such note on the respective due dates (or, in the case of redemption, on the redemption date) and to institute suit for the enforcement of any such payment and such rights shall not be impaired without the consent of such Holder.

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Modification and Waiver

Some types of changes require the consent of each Holder of the notes, other types require the consent of the Holders of a majority of the principal amount of outstanding notes, and other types do not require the consent of any Holders of the notes.

Without the consent of the Holder of each note affected, an amendment or waiver may not:

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change the stated maturity of the principal of, or any installment of interest on, any note;

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reduce the principal amount of, or premium, if any, or interest on, any note;

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change the place or currency of payment of principal of, or premium, if any, or interest on, any note; or

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impair the right to institute suit for the enforcement of any payment on or after the stated maturity (or, in the case of a redemption, on or after the redemption date) of any note.

The Holders of a majority in principal amount of the notes may waive compliance with any provision of (or waive any Event of Default under) the Indenture or the notes without notice to any Holder. The Holders of a majority in principal amount of the notes may waive compliance by us with any provision or the Indenture or the notes without notice to any Holder.

We and the trustee may also amend and modify the Indenture without the consent of any Holder for any of the following purposes:

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to evidence the succession of another person to us and the assumption by any such successor of the covenants of us contained in the Indenture and the notes;

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to add to our covenants for the benefit of the Holders or to surrender any right or power conferred in the Indenture upon us;

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to add Events of Default for the benefit of the Holders;

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to add or change any provisions of the Indenture to facilitate the issuance of bearer securities;

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to evidence and provide for the acceptance of appointment by a successor trustee with respect to the notes and to add to or change any of the provisions of the Indenture as shall be necessary to provide for or facilitate the administration of the trustees thereunder by more than one trustee;

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to cure any ambiguity, to correct or supplement any provision in the Indenture which may be defective or inconsistent with any other provision therein, or to make any other provisions with respect to other matters or questions arising under the Indenture that shall not be inconsistent with the provisions of the Indenture or to make any other changes, provided that in each case, such provisions shall not adversely affect the interests of the Holders of notes in any material respect as we determine in good faith;

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to secure the notes;

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to qualify or maintain qualifications of the Indenture under the Trust Indenture Act; or

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to supplement any of the provisions of the Indenture as is necessary to permit or facilitate the defeasance or discharge of the notes under specified provisions of the Indenture, provided that any such action shall not adversely affect the interests of the Holders in any material respect as we determine in good faith.

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The Registrar and Paying Agent

We have initially designated the trustee as the registrar and paying agent for the notes. Payments of interest and principal will be made, and the notes will be transferable, at the office of the paying agent, or at such other place or places as may be designated pursuant to the Indenture. For notes which we issue in book-entry form evidenced by a global security, payments will be made to a nominee of the depository.

Satisfaction and Discharge

The Indenture will be discharged and will cease to be of further effect as to all notes, when:

(1)

either:

all notes that have been authenticated, except lost, stolen or destroyed notes that have been replaced or paid and notes for which payment has been deposited in trust and thereafter repaid to us, have been delivered to the trustee for cancellation; or

all notes that have not been delivered to the trustee for cancellation have become due and payable by reason of the mailing of a notice of redemption or otherwise or shall become due and payable within one year and we have irrevocably deposited with the trustee or the paying agent, in trust, for the benefit of the Holders, cash in U.S. dollars and/or non-callable government securities in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay and discharge the entire indebtedness on the notes not delivered to the trustee for cancellation for principal, premium, if any, and accrued interest, to the date of maturity or redemption;

(2)

we have paid all sums payable by us under the Indenture with respect to the notes;

(3)

we have delivered irrevocable instructions to the trustee to apply the deposited money toward the payment of the notes at maturity or on the redemption date, as the case may be; and

(4)

we have delivered to the trustee an officers’ certificate and an opinion of counsel stating that the conditions precedent to the satisfaction and discharge of the notes have been satisfied.

Legal Defeasance and Covenant Defeasance

Legal Defeasance.

We will be deemed to have paid and will be discharged from any and all obligations in respect of the notes on the 91st day after we have made the deposit referred to below, and the provisions of the Indenture will cease to be applicable with respect to the notes (except for, among other matters, certain obligations to register the transfer of or exchange of the notes, to replace stolen, lost or mutilated notes, to maintain paying agencies and to hold funds for payment in trust) if:

(1)

we have irrevocably deposited with the trustee, in trust, cash in U.S. dollars and/or non-callable government securities that will provide funds in amount sufficient, in the opinion of a nationally recognized public accounting firm, to pay the principal of, premium, if any, and accrued interest on the notes at the time such payments are due or on the applicable redemption date in accordance with the terms of the Indenture;

(2)

we have delivered to the trustee:

an opinion of counsel to the effect that Holders of the notes will not recognize income, gain or loss for federal income tax purposes as a result of the defeasance and will be subject to federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such defeasance had not occurred, which opinion of counsel must be based upon a ruling of the Internal Revenue Service to the same effect or a change in applicable federal income tax law or related treasury regulations after the date of the Indenture; and

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an opinion of counsel to the effect that the defeasance trust does not constitute an “investment company” within the meaning of the Investment Company Act of 1940 and, after the passage of 91 days following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally;

(3)

no Event of Default will have occurred and be continuing on the date of such deposit, or insofar as Events of Default due to certain events of bankruptcy, insolvency or reorganization in respect of us are concerned, during the period ending on the 91st day after the date of such deposit, and such deposit shall not result in a breach or violation of, or constitute a default under, any other material agreement or instrument to which we are a party or by which we are bound;

(4)

we shall have delivered to the trustee an officers’ certificate and an opinion of counsel, each stating that, subject to certain assumptions and exclusions, all conditions precedent provided for or relating to the defeasance have been complied with; and

(5)

the trustee shall have received such other documents, assurances and opinions of counsel as the trustee shall have reasonably required.

Covenant Defeasance.

We will not need to comply with certain restrictive covenants, and the provisions of the Indenture will cease to be applicable with respect to an Event of Default under the notes other than an Event of Default due to our failure to pay the principal of or interest on the notes when due, upon:

(1)

the satisfaction of the conditions described in clauses 1, 2(b), 3, 4 and 5 under “—Legal Defeasance” above; and

(2)

our delivery to the trustee of an opinion of counsel to the effect that the Holders of the notes will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such defeasance had not occurred.

If we exercise our option to omit compliance with certain provisions of the Indenture as described in the immediately preceding paragraph and the notes are declared due and payable because of the occurrence of an Event of Default that remains applicable, the amount of money and/or non-callable government securities on deposit with the trustee may not be sufficient to pay amounts due on the notes at the time of acceleration resulting from such Event of Default. In such event, we will remain liable for such payments.

No Personal Liability

The Indenture provides that no recourse for the payment of the principal of, premium, if any, or interest on any of the notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the us in the Indenture, or in any of the notes or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Issuer or of any successor Person (as defined above) thereof. Each Holder, by accepting the notes, waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes.

Governing Law

The Indenture and the notes will be governed by the laws of the State of New York.

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Sinking Fund

The notes are not entitled to any sinking fund payments.

Listing

We have applied to list the notes on the Nasdaq Global Market under the symbol “SHLP.” If approved, we expect trading in the notes to begin within 30 days after the original issue date of the notes.

Trading Characteristics

We expect the notes to trade “flat,” meaning that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the notes that is not included in the trading price. Any portion of the trading price of a Note that is attributable to accrued and unpaid interest will be treated as ordinary interest income for U.S. federal income tax purposes and will not be treated as part of the amount realized for purposes of determining gain or loss on the disposition of the note.

Book-entry, Delivery and Form

We have obtained the information in this section concerning The Depository Trust Company, or DTC, and its book-entry systems and procedures from sources that we believe to be reliable. We take no responsibility for an accurate portrayal of this information. In addition, the description of the clearing system in this section reflects our understanding of the rules and procedures of DTC as they are currently in effect. DTC could change its rules and procedures at any time.

The notes will initially be represented by one or more fully registered global notes. Each such global note will be deposited with, or on behalf of, DTC or any successor thereto and registered in the name of Cede & Co. (DTC’s nominee).

So long as DTC or its nominee is the registered owner of the global securities representing the notes, DTC or such nominee will be considered the sole owner and Holder of the notes for all purposes of the notes and the Indenture. Except as provided below, owners of beneficial interests in the notes will not be entitled to have the notes registered in their names, will not receive or be entitled to receive physical delivery of the notes in definitive form and will not be considered the owners or Holders under the Indenture, including for purposes of receiving any reports delivered by us or the trustee pursuant to the Indenture. Accordingly, each person owning a beneficial interest in a note must rely on the procedures of DTC or its nominee and, if such person is not a participant, on the procedures of the participant through which such person owns its interest, in order to exercise any rights of a Holder.

Unless and until we issue the notes in fully certificated, registered form under the limited circumstances described under the heading “Certificated Notes:”

•

you will not be entitled to receive a certificate representing your interest in the notes;

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all references in this prospectus to actions by Holders will refer to actions taken by DTC upon instructions from its direct participants; and

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all references in this prospectus to payments and notices to Holders will refer to payments and notices to DTC or Cede & Co., as the registered Holder of the notes, for distribution to you in accordance with DTC procedures.

The Depository Trust Company

DTC will act as securities depositary for the notes. The notes will be issued as fully registered notes registered in the name of Cede & Co. DTC is:

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a limited-purpose trust company organized under the New York Banking Law;

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a “banking organization” under the New York Banking Law;

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a member of the Federal Reserve System;

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a “clearing corporation” under the New York Uniform Commercial Code; and

•

a “clearing agency” registered under the provisions of Section 17A of the Exchange Act.

DTC holds securities that its direct participants deposit with DTC. DTC facilitates the settlement among direct participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in direct participants’ accounts, thereby eliminating the need for physical movement of securities certificates.

Direct participants of DTC include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is owned by a number of its direct participants. Indirect participants of DTC, such as securities brokers and dealers, banks and trust companies, can also access the DTC system if they maintain a custodial relationship with a direct participant.

Purchases of notes under DTC’s system must be made by or through direct participants, which will receive a credit for the notes on DTC’s records. The ownership interest of each beneficial owner is in turn to be recorded on the records of direct participants and indirect participants. Beneficial owners will not receive written confirmation from DTC of their purchase, but beneficial owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the direct participants or indirect participants through which such beneficial owners entered into the transaction. Transfers of ownership interests in the notes are to be accomplished by entries made on the books of participants acting on behalf of beneficial owners. Beneficial owners will not receive certificates representing their ownership interests in the notes, except as provided under “Certificated Notes.”

To facilitate subsequent transfers, all notes deposited with DTC are registered in the name of DTC’s nominee, Cede & Co. The deposit of notes with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual beneficial owners of the notes. DTC’s records reflect only the identity of the direct participants to whose accounts such notes are credited, which may or may not be the beneficial owners. The participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to direct participants, by direct participants to indirect participants and by direct participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Book-entry format

Under the book-entry format, the paying agent will pay interest or principal payments to Cede & Co., as nominee of DTC. DTC will forward the payment to the direct participants, who will then forward the payment to the indirect participants or to you as the beneficial owner. You may experience some delay in receiving your payments under this system. Neither we, the trustee, nor any paying agent has any direct responsibility or liability for the payment of principal or interest on the notes to owners of beneficial interests in the notes.

DTC is required to make book-entry transfers on behalf of its direct participants and is required to receive and transmit payments of principal, premium, if any, and interest on the notes. Any direct participant or indirect participant with which you have an account is similarly required to make book-entry transfers and to receive and transmit payments with respect to the notes on your behalf. We and the trustee under the Indenture have no responsibility for any aspect of the actions of DTC or any of its direct or indirect participants. In addition, we and the trustee under the Indenture have no responsibility or liability for any aspect of the records kept by DTC or any of its direct or indirect participants relating to or payments made on account of beneficial ownership interests in the notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. We also do not supervise these systems in any way.

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The trustee will not recognize you as a Holder under the Indenture, and you can only exercise the rights of a Holder indirectly through DTC and its direct participants. DTC has advised us that it will only take action regarding a note if one or more of the direct participants to whom the note is credited directs DTC to take such action and only in respect of the portion of the aggregate principal amount of the notes as to which that participant or participants has or have given that direction. DTC can only act on behalf of its direct participants. Your ability to pledge notes to non-direct participants, and to take other actions, may be limited because you will not possess a physical certificate that represents your notes.

Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the notes unless authorized by a direct participant in accordance with DTC’s procedures. Under its usual procedures, DTC will mail an omnibus proxy to us as soon as possible after the record date. The omnibus proxy assigns Cede & Co.’s consenting or voting rights to those direct participants to whose accounts the notes are credited on the record date (identified in a listing attached to the omnibus proxy).

Certificated Notes

Unless and until they are exchanged, in whole or in part, for notes in definitive form in accordance with the terms of the notes, the notes may not be transferred except (1) as a whole by DTC to a nominee of DTC or (2) by a nominee of DTC to DTC or another nominee of DTC or (3) by DTC or any such nominee to a successor of DTC or a nominee of such successor.

We will issue the notes to you or your nominees, in fully certificated registered form, rather than to DTC or its nominees, only if:

•

we advise the trustee in writing that DTC is no longer willing or able to discharge its responsibilities properly or that DTC is no longer a registered clearing agency under the Exchange Act, and the trustee or we are unable to locate a qualified successor within 90 days;

•

an Event of Default has occurred and is continuing under the Indenture and a request for such exchange has been made; or

•

we, at our option, elect to terminate the book-entry system through DTC.

If any of the three above events occurs, DTC is required to notify all direct participants that notes in fully certificated registered form are available through DTC. DTC will then surrender the global note representing the notes along with instructions for re-registration. The trustee will re-issue the notes in fully certificated registered form and will recognize the registered Holders of the certificated notes as Holders under the Indenture.

Unless and until we issue the notes in fully certificated, registered form, (1) you will not be entitled to receive a certificate representing your interest in the notes; (2) all references in this prospectus to actions by Holders will refer to actions taken by the depositary upon instructions from their direct participants; and (3) all references in this prospectus to payments and notices to Holders will refer to payments and notices to the depositary, as the registered Holder of the notes, for distribution to you in accordance with its policies and procedures.

Additional Notes and Additional Series of Notes

We may from time to time, without notice to or the consent of the Holders of the notes, create and issue additional notes ranking equally and ratably with the notes, except for potential differences, including, but not limited to, the issue prices, issue dates and interest accrued prior to the issue dates. The notes offered hereby and any additional notes that we may issue would be governed by the Indenture. No additional notes may be issued if an Event of Default has occurred and is continuing with respect to the notes.

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PARTNERSHIP AGREEMENT

The following description of certain terms of the agreement of limited partnership of the Operating Partnership is only a summary. For a complete description, we refer you to the Agreement of Limited Partnership of Sotherly Hotels LP, as amended, a copy of which is an exhibit to this registration statement.

Management

The Operating Partnership was formed on August 19, 2004 as a limited partnership under the Delaware Revised Uniform Limited Partnership Act. Pursuant to the partnership agreement, Sotherly Hotels Inc., as general partner of the Operating Partnership, has, subject to certain protective rights of limited partners described below, full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership, including the ability to cause the Operating Partnership to enter into certain major transactions including acquisitions, dispositions, refinancings and selection of lessees and to cause changes in the Operating Partnership’s line of business and distribution policies.

The partnership agreement does not require the partners of the Operating Partnership to hold an annual meeting and the Operating Partnership does not intend to hold annual meetings of the partners, given the general partner’s management responsibility and discretion.

Transferability of Interests

Sotherly may not voluntarily withdraw from the Operating Partnership or transfer or assign its interest in the Operating Partnership or engage in any transaction which would result in a change of control of Sotherly unless:

•

We receive the consent of limited partners holding more than 50.0% of the partnership interests of the limited partners (other than those held by the general partner or any subsidiary);

•

The consent of limited partners (including the general partner or any subsidiary) holding more than 66.7% of the percentage interests of the limited partnership interests (including those held by the general partner or any subsidiary) is obtained and as a result of such transaction all limited partners will receive for each partnership unit an amount of cash, securities or other property equal in value to the product of the conversion factor and the greatest amount of cash, securities or other property paid in the transaction to a holder of one share of Sotherly’s common stock, provided that if, in connection with the transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than 50.0% of the outstanding shares of Sotherly’s common stock, each holder of units shall be given the option to exchange its units for the greatest amount of cash, securities or other property that a limited partner would have received had it (A) exercised its redemption right (described below) and (B) sold, tendered or exchanged pursuant to the offer shares of Sotherly’s common stock received upon exercise of the redemption right immediately prior to the expiration of the offer; or

•

In addition, in the event of a change of control of Sotherly, the limited partners will have the right, for a period of 30 days following the change of control event, to cause the Operating Partnership to redeem all of the units held by the limited partners for a cash amount equal to the cash redemption amount otherwise payable upon redemption pursuant to the partnership agreement.

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Sotherly also may (i) transfer all or any portion of its general partnership interest to an affiliate of the general partner, and following such transfer, may withdraw as the general partner and (ii) engage in a transaction required by law or by the rules of any national securities exchange on which Sotherly’s common stock is listed.

Limited partners may not transfer their units without Sotherly’s written consent as general partner.

Capital Contribution

Sotherly currently own a 1.0% interest as general partner and an approximately 76.9% interest as limited partner in the Issuer. The partnership agreement provides that if the Operating Partnership requires additional funds at any time in excess of funds available to the Operating Partnership from borrowing or capital contributions, Sotherly may borrow such funds from a financial institution or other lender and lend such funds to the Operating Partnership. Under the partnership agreement, Sotherly is obligated to contribute the proceeds of any offering of shares of stock as additional capital to the Operating Partnership. Sotherly is authorized to cause the Operating Partnership to issue partnership interests for less than fair market value if Sotherly has concluded in good faith that such issuance is in both the Operating Partnership’s and Sotherly’s best interests. If Sotherly contributes additional capital to the Operating Partnership, it will receive additional units and Sotherly’s percentage interest will be increased on a proportionate basis based upon the amount of such additional capital contributions and the value of the Operating Partnership at the time of such contributions. Conversely, the percentage interests of the limited partners will be decreased on a proportionate basis in the event of additional capital contributions by Sotherly. In addition, if Sotherly contributes additional capital to the Operating Partnership, we will revalue the property of the Operating Partnership to its fair market value (as determined by Sotherly) and the capital accounts of the partners will be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property (that has not been reflected in the capital accounts previously) would be allocated among the partners under the terms of the partnership agreement if there were a taxable disposition of such property for its fair market value (as determined by us) on the date of the revaluation. The Series A Preferred Interests held by the General Partner in connection with the issuance of Sotherly’s Series A Preferred Stock include a right to receive special distributions and preferred distributions. The Operating Partnership may issue additional preferred partnership interests, in connection with acquisitions of property or otherwise, which could have priority over common partnership interests with respect to distributions from the Operating Partnership, including the partnership interests Sotherly owns as the general partner.

Redemption Rights

Pursuant to the partnership agreement, the limited partners received redemption rights which enable them to cause the Issuer to redeem their units in exchange for cash or, at Sotherly’s option, shares of common stock of Sotherly. The cash redemption amount per unit is based on the average of the market price of Sotherly’s common stock for the 10 trading days immediately preceding the notice of redemption. The number of shares of Sotherly’s common stock issuable upon redemption of units held by limited partners may be adjusted upon the occurrence of certain events such as stock dividends, stock subdivisions or combinations. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption rights if the delivery of Sotherly’s common stock to the redeeming limited partner would:

•

result in any person owning, directly or indirectly, common stock in excess of the stock ownership limit in Sotherly’s charter;

•

result in shares of Sotherly’s common stock being owned by fewer than 100 persons (determined without reference to any rules of attribution);

•

result in Sotherly being “closely held” within the meaning of Section 856(h) of the Code;

•

cause Sotherly to own, actually or constructively, 10.0% or more of the ownership interests in a tenant of Sotherly’s, the Operating Partnership’s or a subsidiary partnership’s real property, within the meaning of Section 856(d)(2)(B) of the Code other than a taxable REIT subsidiary if the requirements of Section 856(d)(8)(B) of the Code are satisfied;

•

cause any of our hotel management companies to fail to qualify as an “eligible independent contractor” within the meaning of Section 856(d)(9) of the Code; or

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•

cause the acquisition of Sotherly’s common stock by such redeeming limited partner to be “integrated” with any other distribution of common stock for purposes of complying with the registration provisions of the Securities Act.

Sotherly may, in its sole and absolute discretion, waive any of these restrictions.

With respect to the units issued in connection with the acquisition of our initial properties, the redemption rights may be exercised by the limited partners at any time after the first anniversary of our acquisition of these properties; provided, however, unless Sotherly otherwise agrees:

•

a limited partner may not exercise the redemption right for fewer than 1,000 units or, if such limited partner holds fewer than 1,000 units, the limited partner must redeem all of the units held by such limited partner;

•

a limited partner may not exercise the redemption right for more than the number of units that would, upon redemption, result in such limited partner or any other person owning, directly or indirectly, common stock of Sotherly in excess of the ownership limitation in Sotherly’s charter; and

•

a limited partner may not exercise the redemption right more than two times annually.

The aggregate number of shares of the Sotherly’s common stock issuable upon exercise of the redemption rights is 2,881,198. The number of shares of the Sotherly’s common stock issuable upon exercise of the redemption rights will be adjusted to account for stock splits, mergers, consolidations or similar pro rata stock transactions.

The partnership agreement requires that the Operating Partnership be operated in a manner that enables Sotherly to satisfy the requirements for being classified as a REIT, to avoid any federal income or excise tax liability imposed by the Code (other than any federal income tax liability associated with Sotherly’s retained capital gains) and to ensure that the partnership will not be classified as a “publicly traded partnership” taxable as a corporation under Section 7704 of the Code.

In addition to the administrative and operating costs and expenses incurred by the Operating Partnership, the Operating Partnership generally will pay all of our administrative costs and expenses, including:

•

all expenses relating to Sotherly’s continuity of existence and our subsidiaries’ operations;

•

all expenses relating to offerings and registration of securities;

•

all expenses associated with the preparation and filing of any of Sotherly’s and the Operating Partnership’s periodic or other reports and communications under federal, state or local laws or regulations;

•

all expenses associated with Sotherly’s compliance with laws, rules and regulations promulgated by any regulatory body; and

•

all of Sotherly’s other operating or administrative costs incurred in the ordinary course of business on behalf of the Operating Partnership.

These expenses, however, do not include any of Sotherly’s administrative and operating costs and expenses incurred that are attributable to hotel properties that are owned by Sotherly directly rather than by the Operating Partnership or its subsidiaries.

Distributions

The partnership agreement provides that the Operating Partnership will distribute cash at such time and in such amounts as determined by Sotherly in its sole discretion, to Sotherly and the limited partners in accordance with their respective percentage interests in the Operating Partnership. Furthermore, the partnership agreement provides that the Operating Partnership shall distribute amounts sufficient to enable Sotherly to pay stockholder dividends that will allow Sotherly to meet the distribution requirements to qualify as a REIT and avoid any federal income or excise tax liability.

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Upon liquidation of the Operating Partnership, after payment of, or adequate provision for, debts and obligations of the partnership, including any partner loans, any remaining assets of the partnership will be distributed to Sotherly and the limited partners with positive capital accounts in accordance with their respective positive capital account balances.

Allocations

Profits and losses of the partnership (including depreciation and amortization deductions) for each fiscal year generally are allocated to Sotherly and the limited partners in accordance with the respective percentage interests in the partnership. All of the foregoing allocations are subject to compliance with the provisions of Sections 704(b), 704(c) and 706 of the Code and Treasury regulations promulgated thereunder. The Operating Partnership expects to use the “traditional method” under Section 704(c) of the Code for allocating items with respect to contributed property acquired in connection with the offering for which the fair market value differs from the adjusted tax basis at the time of contribution.

Term

The Operating Partnership has perpetual duration unless dissolved upon:

•

Sotherly’s bankruptcy, dissolution, removal or withdrawal (unless the limited partners elect to continue the partnership);

•

the passage of 90 days after the sale or other disposition of all or substantially all the assets of the partnership;

•

the redemption of all units (other than those held by Sotherly, if any); or

•

an election by Sotherly in its capacity as the general partner.

Tax Matters

Pursuant to the partnership agreement, Sotherly is the tax matters partner of the Operating Partnership and, as such, Sotherly has authority to handle tax audits and to make tax elections under the Code on behalf of the Operating Partnership.

Indemnification

Subject to any terms, conditions or restrictions set forth in the Operating Partnership’s partnership agreement, Section 17-108 of the Delaware Revised Uniform Limited Partnership Act empowers a Delaware limited partnership to indemnify and hold harmless any partner or other person from and against all claims and demands whatsoever. The amended and restated partnership agreement of the Operating Partnership generally requires the Operating Partnership to indemnify Sotherly and the directors, officers and employees of Sotherly, and any affiliates of either Sotherly or the Operating Partnership and certain other specific persons to the fullest extent permitted by the law against all losses, claims, damages, liabilities, including reasonable legal fees and expenses, or similar events except for those which arise from bad faith, improper receipt of a personal benefit or where there was reasonable knowledge that the act or omission leading to the activity was unlawful.

Sotherly provides insurance from a commercial carrier against certain liabilities that could be incurred by Sotherly’s directors and officers.

Insofar as the foregoing provisions permit indemnification of Sotherly’s directors, officers or persons controlling us for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following discussion is a summary of the material U.S. federal income tax consequences that a holder of the notes may consider relevant to the purchase, ownership and disposition of the notes, but does not purport to be a complete analysis of all potential tax consequences. Baker & McKenzie LLP has acted as our tax counsel, has reviewed this discussion, and is of the opinion that this discussion is accurate in all material respects. The following discussion is based upon the Code, current, temporary and proposed U.S. Treasury regulations issued under the Code, or collectively the Treasury Regulations, the legislative history of the Code, IRS rulings, pronouncements, interpretations and practices, and judicial decisions now in effect, all of which are subject to change at any time. Any such change may be applied retroactively in a manner that could adversely affect a holder of the notes. This discussion does not address all of the U.S. federal income tax consequences that may be relevant to a holder in light of such holder’s particular circumstances or to holders subject to special rules, including, without limitation:

•

a broker-dealer or a dealer in securities or currencies;

•

an S corporation;

•

a bank, thrift or other financial institution;

•

a regulated investment company or a real estate investment trust;

•

an insurance company

•

a tax-exempt organization;

•

a person subject to the alternative minimum tax provisions of the Code;

•

a person holding the notes as part of a hedge, straddle, conversion, integrated or other risk reduction or constructive sale transaction;

•

a partnership or other pass-through entity;

•

a person deemed to sell the notes under the constructive sale provisions of the Code;

•

a U.S. person whose “functional currency” is not the U.S. dollar; or

•

a U.S. expatriate or former long-term resident.

In addition, this discussion is limited to persons that purchase the notes in this offering for cash at their “issue price” (as defined below in “U.S. Holders – Original Issue Discount”) and that hold the notes as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address the effect of any applicable state, local, non-U.S. or other tax laws, including gift and estate tax laws.

As used herein, “U.S. Holder” means a beneficial owner of the notes that is, for U.S. federal income tax purposes:

•

an individual who is a citizen or resident of the United States;

•

a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

•

an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

•

a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons that have the authority to control all substantial decisions of the trust, or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

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If an entity treated as a partnership for U.S. federal income tax purposes holds the notes, the tax treatment of an owner of the entity generally will depend upon the status of the particular owner and the activities of the entity. If you are an owner of an entity treated as a partnership for U.S. federal income tax purposes, you should consult your tax advisor regarding the tax consequences of the purchase, ownership and disposition of the notes.

We have not sought and will not seek any rulings from the IRS with respect to the matters discussed below. There can be no assurance that the IRS will not take a different position concerning the tax consequences of the purchase, ownership or disposition of the notes or that any such position would not be sustained.

THIS SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE TAX ADVICE. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR SITUATIONS, POTENTIAL CHANGES IN APPLICABLE TAX LAWS AND THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, INCLUDING GIFT AND ESTATE TAX LAWS, AND ANY TAX TREATIES.

U.S. Holders

Interest

A U.S. Holder generally will be required to recognize and include in gross income any stated interest as ordinary income at the time it is paid or accrued on the notes in accordance with such holder’s method of accounting for U.S. federal income tax purposes.

Original Issue Discount

If the issue price of a note is less than its stated redemption price at maturity, then the note will be treated as being issued with original issue discount, or OID, for U.S. federal income tax purposes unless the difference between the note’s issue price and its stated redemption price at maturity is less than a statutory de minimis amount, as defined below. Generally, the “issue price” of a note is the first price at which a substantial amount of the issue is sold to purchasers other than bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers. The “stated redemption price at maturity” of a note is the total of all payments to be made under the note other than qualified stated interest (generally, stated interest that is unconditionally payable in cash or property at least annually at a single fixed rate or at certain floating rates that properly take into account the length of the interval between stated interest payments). The stated interest on the notes will qualify as qualified stated interest, and the stated redemption price at maturity will equal the principal amount of the notes.

If the notes are issued with OID, a U.S. Holder generally will be required to include such OID in income as it accrues on a constant yield basis in advance of the receipt of cash payments to which such income is attributable. Under the constant yield method, a U.S. Holder must include in income in each taxable year the sum of the daily portions of OID for each date on which the U.S. Holder held the note during the taxable year, regardless of the U.S. Holder’s method of accounting for U.S. federal income tax purposes. The constant yield method generally requires U.S. Holders to include in income increasingly greater amounts of OID in successive accrual periods. A U.S. Holder’s tax basis in a note is increased by each accrual of OID and decreased by each payment other than a payment of qualified stated interest.

The amount of OID on the notes is de minimis if it is less than 0.0025 multiplied by the product of the stated redemption price at maturity and the number of complete years to maturity. Rather than being characterized as interest, any payment attributable to such de minimis OID is characterized as if it were gain from the sale of the notes, and a pro rata amount of such de minimis OID must be included in income as principal payments are received on the notes.

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Additional Amounts

Upon the occurrence of certain events, we may be required to make certain payments in excess of stated interest and the principal amount of the notes. These contingencies may implicate the provisions of Treasury regulations relating to “contingent payment debt instruments.” We intend to take the position that the notes should not be treated as contingent payment debt instruments because of these additional payments. This position is based in part on assumptions regarding the likelihood, as of the date of issuance of the notes, that such additional amounts will have to be paid. Assuming such position is respected, any amounts paid to a U.S. Holder pursuant to any such redemption would be taxable as described below in “U.S. Holders-Sale or Other Taxable Disposition of the Notes.” This position is binding on a holder unless such holder discloses its contrary position in the manner required by applicable Treasury regulations. The IRS, however, may take a position contrary to our position, which could affect the timing and character of a holder’s income and the timing of our deductions with respect to the notes. Holders are urged to consult their tax advisors regarding the potential application to the notes of the contingent payment debt instrument rules and the consequences thereof. The remainder of this discussion assumes that the notes are not treated as contingent payment debt instruments.

Sale or Other Taxable Disposition of the Notes

A U.S. Holder will recognize gain or loss on the sale, exchange, redemption (including a partial redemption), retirement or other taxable disposition of a note equal to the difference between the sum of the cash and the fair market value of any property received in exchange therefor (less a portion allocable to any accrued and unpaid stated interest, which generally will be taxable as ordinary income if not previously included in such holder’s income) and the U.S. Holder’s adjusted tax basis in the note. A U.S. Holder’s adjusted tax basis in a note (or a portion thereof) generally will be the U.S. Holder’s cost therefor decreased by any payment on the note other than a payment of qualified stated interest. This gain or loss will generally constitute capital gain or loss. In the case of a non-corporate U.S. Holder, including an individual, if the note has been held for more than one year, such capital gain may be subject to reduced federal income tax rates. The deductibility of capital losses is subject to certain limitations.

Medicare Tax

Certain individuals, trusts and estates are subject to a Medicare tax of 3.8% on the lesser of (i) “net investment income,” or (ii) the excess of modified adjusted gross income over a threshold amount. Net investment income generally includes interest income and net gains from the disposition of notes, unless such interest payments or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). U.S. Holders are encouraged to consult with their tax advisors regarding the possible implications of the Medicare tax on their ownership and disposition of notes in light of their individual circumstances.

Information Reporting and Backup Withholding

A U.S. Holder may be subject to information reporting and backup withholding when such holder receives interest and principal payments on the notes or proceeds upon the sale or other disposition of such notes (including a redemption or retirement of the notes). Certain holders (including, among others, corporations and certain tax-exempt organizations) generally are not subject to information reporting or backup withholding. A U.S. Holder will be subject to backup withholding if such holder is not otherwise exempt and:

•

such holder fails to furnish its taxpayer identification number, or “TIN,” which, for an individual is ordinarily his or her social security number;

•

the IRS notifies the payor that such holder furnished an incorrect TIN;

•

in the case of interest payments such holder is notified by the IRS of a failure to properly report payments of interest or dividends;

•

in the case of interest payments, such holder fails to certify, under penalties of perjury, that such holder has furnished a correct TIN and that the IRS has not notified such holder that it is subject to backup withholding; or

•

such holder does not otherwise establish an exemption from backup withholding.

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A U.S. Holder should consult its tax advisor regarding its qualification for an exemption from backup withholding and the procedures for obtaining such an exemption, if applicable. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability or may be refunded, provided the required information is furnished in a timely manner to the IRS.

Non-U.S. Holders

For purposes of this discussion, “Non-U.S. Holder” means a beneficial owner of the notes that is not a “U.S. Holder.” Special rules may apply to holders that are partnerships or entities treated as partnerships for U.S. federal income tax purposes and to Non-U.S. Holders that are subject to special treatment under the Code, including controlled foreign corporations, passive foreign investment companies, certain U.S. expatriates, and foreign persons eligible for benefits under an applicable income tax treaty with the United States. Such Non-U.S. Holders should consult their tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them, including any reporting requirements.

Interest

Interest paid to a Non-U.S. Holder on the notes will not be subject to U.S. federal withholding tax provided that:

•

such holder does not directly or indirectly, actually or constructively own a 10% or greater interest in our capital or profits;

•

such holder is not a controlled foreign corporation with respect to which we are a “related person” within the meaning of Section 864(d)(4) of the Code;

•

such holder is not a bank that received such interest on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business; and

(i)

the Non-U.S. Holder certifies in a statement provided to us or our paying agent, under penalties of perjury, that it is not a U.S. person within the meaning of the Code and provides its name and address,

(ii)

a securities clearing organization, bank or other financial institution that holds customers’ securities in the ordinary course of its trade or business and holds the notes on behalf of the Non-U.S. Holder certifies to us or our paying agent under penalties of perjury that it, or the financial institution between it and the Non-U.S. Holder, has received from the Non-U.S. Holder a statement, under penalties of perjury, that such holder is not a U.S. person and provides us or our paying agent with a copy of such statement or

(iii)

the Non-U.S. Holder holds its notes directly through a “qualified intermediary” and certain conditions are satisfied.

A Non-U.S. Holder generally will also be exempt from withholding tax on interest if such amount is effectively connected with such holder’s conduct of a U.S. trade or business (and, if an income tax treaty applies, is attributable to a U.S. “permanent establishment”) (as discussed below under “Non-U.S. Holders - U.S. Trade or Business”) and the holder provides us with a properly executed IRS Form W-8ECI (or applicable successor form).

If a Non-U.S. Holder does not satisfy the requirements above, interest paid to such Non-U.S. Holder generally will be subject to a 30% U.S. federal withholding tax. Such rate may be reduced or eliminated under a tax treaty between the United States and the Non-U.S. Holder’s country of residence. To claim a reduction or exemption under a tax treaty, a Non-U.S. Holder must generally complete an applicable IRS Form W-8 (i.e., IRS Form W-8BEN) (or applicable successor form) and claim the reduction or exemption on the form.

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Additional Amounts

Upon the occurrence of certain events, we may be required to make certain payments in excess of stated interest and the principal amount of the notes. Such payments may be treated as interest or as other income subject to U.S. federal withholding tax. A Non-U.S. Holder that is subject to U.S. federal withholding tax should consult its tax advisors as to whether it can obtain a refund for all or a portion of any amounts withheld.

Sale or Other Taxable Disposition of the Notes

A Non-U.S. Holder generally will not be subject to U.S. federal income tax or withholding tax on gain recognized on the sale, exchange, redemption, retirement or other disposition of a note so long as (1) the gain is not effectively connected with the conduct by the Non-U.S. Holder of a trade or business within the United States (or, if a tax treaty applies, the gain is not attributable to a U.S. permanent establishment maintained by such Non-U.S. Holder) and (2) in the case of a Non-U.S. Holder who is an individual, such Non-U.S. Holder is not present in the United States for 183 days or more in the taxable year of disposition or certain other requirements are not met. A Non-U.S. Holder who is an individual and does not meet this exemption should consult his or her tax advisor regarding the potential liability for U.S. federal income tax on such holder’s gain realized on the sale, exchange, redemption, retirement or other disposition of a note.

U.S. Trade or Business

If interest paid on a note or gain from a disposition of a note is effectively connected with a Non-U.S. Holder’s conduct of a U.S. trade or business (and, if an income tax treaty applies, the Non-U.S. Holder maintains a U.S. permanent establishment to which such amounts are generally attributable), the Non-U.S. Holder generally will be subject to U.S. federal income tax on the interest or gain on a net basis in the same manner as if it were a U.S. Holder. A Non-U.S. Holder that is a non-U.S. corporation may be subject to an additional “branch profits tax” equal to 30% of its “effectively connected earnings and profits” for the taxable year, subject to certain adjustments, unless it qualifies for a lower rate under an applicable income tax treaty. For this purpose, interest on a note or gain from a disposition of a note will be included in effectively connected earnings and profits if the interest or gain is effectively connected with the conduct by the foreign corporation of a trade or business in the United States.

Backup Withholding and Information Reporting

Backup withholding generally will not apply to payments of principal or interest made by us or our paying agents, in their capacities as such, to a Non-U.S. Holder of a note if the holder certifies as to its non-U.S. status in the manner described above under “- Non-U.S. Holders – Interest.” However, information reporting generally will still apply with respect to payments of interest.

Payments of the proceeds from a disposition by a Non-U.S. Holder of a note made to or through a foreign office of a broker will not be subject to information reporting or backup withholding, except that information reporting (but generally not backup withholding) may apply to those payments, if the broker has certain enumerated connections with the U.S., provided, however, that such information reporting will not apply if the broker has documentary evidence in its records that the Non-U.S. Holder is a non-U.S. person and certain other conditions are met, or the Non-U.S. Holder otherwise establishes an exemption from information reporting.

Payment of the proceeds from a disposition by a Non-U.S. Holder of a note made to or through the U.S. office of a broker generally is subject to information reporting and backup withholding unless the holder or beneficial owner certifies as to its non-U.S. status in the manner described above under “Non-U.S. Holders - Interest” or otherwise establishes an exemption from information reporting and backup withholding.

A Non-U.S. Holder should consult its tax advisor regarding the application of withholding and backup withholding in its particular circumstance and the availability of and procedure for obtaining an exemption from withholding and backup withholding under current Treasury Regulations. In this regard, the current Treasury Regulations provide that a certification may not be relied on if we or our agent (or other party) knows or has reason to know that the certification may be false. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability or may be refunded, provided the required information is furnished in a timely manner to the IRS.

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FATCA

The Foreign Account Tax Compliance Act, or FATCA, generally imposes a 30% U.S. withholding tax on “withholdable payments,” which consist of (i) U.S.-source dividends, interest, rents and other “fixed or determinable annual or periodical income” paid after June 30, 2014 and (ii) certain U.S.-source gross proceeds paid after December 31, 2016 to (a) “foreign financial institutions” unless they enter into an agreement with the IRS to collect and disclose to the IRS information regarding their direct and indirect U.S. owners and (b) “non-financial foreign entities” (i.e., foreign entities that are not foreign financial institutions) unless they certify certain information regarding their direct and indirect U.S. owners. FATCA does not replace the existing U.S. withholding tax regime. However, the FATCA regulations contain coordination provisions to avoid double withholding on U.S.-source income.

Under a grandfathering rule, FATCA does not apply to any payments made under an obligation that is outstanding on July 1, 2014 (provided such obligation is not materially modified subsequent to such date) and any gross proceeds from the disposition of such obligation. Accordingly, the notes should be grandfathered obligations for FATCA purposes (provided they are not materially modified after July 1, 2014), such that payments on these notes should not be subject to FATCA. Prospective investors are encouraged to consult with their tax advisors regarding the possible implications of FATCA on an investment in notes in light of such holders’ individual circumstances.

General Tax Considerations Relating to Our Structure

The Operating Partnership is organized as a Delaware limited partnership. The Operating Partnership is treated as a partnership for U.S. federal income tax purposes and not as an association taxable as a corporation. As a partnership, the Operating Partnership is not subject to tax at the entity level. Instead, each of the Operating Partnership’s partners includes such partner’s allocable share of the Operating Partnership’s items of taxable income, gains, losses, deductions and credits in determining such partner’s taxable income, whether or not the Operating Partnership makes distributions to such partner.

Section 7704 of the Code provides that a “publicly traded partnership” shall be treated as a corporation for U.S. federal income tax purposes unless such partnership has met and continues to meet certain requirements regarding the types of gross income received by such partnership. Section 7704 of the Code defines “publicly traded partnership” as any partnership if interests in such partnership are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof. We have conducted our affairs and activities, and intend to continue to conduct our affairs and activities, in a manner to ensure that the Operating Partnership will not be treated as a publicly traded partnership. If the Operating Partnership were treated as a publicly traded partnership and thus is taxable as a corporation, the Operating Partnership would pay U.S. federal income tax at corporate rates on its net income, and distributions to its partners in general would be dividends to the extent of the Operating Partnership’s earnings and profits, with distributions in excess thereof being treated first as a return of capital and thereafter as capital gain.

In the opinion of Baker & McKenzie LLP, the Operating Partnership has been properly treated as a partnership for U.S. federal income tax purposes, and not as a “publicly traded partnership” within the meaning of Section 7704 of the Code, commencing with its taxable year ended December 31, 2004. However, we have not sought, and will not seek, a ruling from the IRS that the Operating Partnership is treated as a partnership for U.S. federal income tax purposes.

Under Section 704(b) of the Code, a partnership’s tax allocations generally will be respected for U.S. federal income tax purposes if they have “substantial economic effect” or they are in accordance with the partners’ interests in the partnership. If a partnership’s allocations do not comply with Section 704(b) of the Code, the IRS may reallocate partnership tax items in accordance with the interests of the partners in the partnership. We believe that the Operating Partnership’s allocations should be respected for U.S. federal income tax purposes.

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General Considerations Regarding Sotherly’s REIT Status

The Operating Partnership’s sole general partner is Sotherly. Sotherly was incorporated as a Maryland corporation in August 2004, and elected to be taxable as a REIT commencing with its taxable year ending December 31, 2004. Sotherly conducts all of its activities and holds all of its assets through the Operating Partnership. As a REIT, Sotherly receives a dividends paid deduction for amounts that it distributes to its stockholders. Accordingly, Sotherly generally is not subject to U.S. federal income tax on that portion of its net income that it distributes to stockholders. This treatment substantially eliminates the “double taxation” (at the corporate and stockholder levels) that generally results from investment in a non-REIT “C” corporation.

The Code provisions governing the federal income tax treatment of REITs and their stockholders are highly technical and complex, and this summary is qualified in its entirety by the express language of applicable Code provisions, the Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof. If a partnership, including any entity that is treated as a partnership for federal income tax purposes, holds Sotherly’s common stock, the federal income tax treatment of the partner in the partnership will generally depend on the status of the partner and the activities of the partnership.

REIT Qualification

Sotherly elected to be taxable as a REIT commencing with its taxable year ending December 31, 2004. This section of the prospectus discusses the laws governing the tax treatment of a REIT and its stockholders, which are highly technical and complex. Sotherly has conducted its business operations each taxable year since its formation in 2004 in conformity with the requirements for REIT qualification, and Sotherly intends to operate its business operations in conformity with these requirements so as to maintain its status as a REIT. In the opinion of Baker & McKenzie LLP, Sotherly has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT for its taxable years ended December 31, 2004 through December 31, 2012, and Sotherly’s organization and proposed method of operation will enable it to continue to meet the requirements for qualification and taxation as a REIT for its taxable year ending December 31, 2013 and thereafter. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in Sotherly’s circumstances, however, no assurance can be given that Sotherly will be able to maintain its REIT status for any particular year.

Maintenance of REIT status depends on Sotherly’s ability to meet various qualification requirements imposed upon REITs by the Code, on a continuing basis, through actual operating results, distribution levels, and diversity of stock ownership,. Sotherly’s ability to maintain REIT status also depends on its satisfaction of certain asset tests, some of which depend upon the fair market values of assets directly or indirectly owned by Sotherly. Precise values for such assets may not be readily determinable or available. While Sotherly intends to continue to operate in conformity with the REIT requirements and in a manner that will allow it to maintain its REIT status, no assurance can be given that the actual results of Sotherly’s operations for any taxable year will allow it to satisfy such requirements or that Sotherly will be able to maintain its status as a REIT.

Taxation of Sotherly

As a REIT, Sotherly generally is not subject to U.S. federal income tax on that portion of its net income that it distributes to stockholders. This treatment substantially eliminates the “double taxation” (at the corporate and stockholder levels) that generally results from investment in a non-REIT “C” corporation. However, Sotherly is subject to U.S. federal tax as follows:

1. Sotherly is subject to tax at regular corporate rates on any undistributed adjusted REIT taxable income, including undistributed net capital gain (adjusted REIT taxable income is the taxable income of a REIT subject to specified adjustments, including a deduction for dividends paid).

2. Under certain circumstances, Sotherly may be subject to the “alternative minimum tax” on its items of tax preference.

3. If Sotherly has (a) net income from the sale or other disposition of “foreclosure property” (including foreign currency gain that is attributable to otherwise permitted income from foreclosure property) which is held primarily for sale to customers in the ordinary course of business or (b) other nonqualifying income from foreclosure property, Sotherly is subject to tax at the highest corporate rate on such income. Foreclosure property generally is property acquired on foreclosure or otherwise on default on a loan secured by such real property or a lease of such property.

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4. If Sotherly has net income from “prohibited transactions,” which are, in general, sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, generally other than foreclosure property and property involuntarily converted, such income is subject to a 100.0% penalty tax.

5. If Sotherly fails to satisfy the 75.0% gross income test or the 95.0% gross income test (as discussed below), but nonetheless maintains its qualification as a REIT because certain other requirements have been met, Sotherly is subject to a 100.0% tax on an amount equal to (a) the gross income attributable to the greater of the amount by which it fails the 75.0% gross income test or the 95.0% gross income test multiplied by (b) a fraction intended to reflect Sotherly’s profitability.

6. If Sotherly fails to satisfy the asset test (as discussed below) but nonetheless maintains its qualification as a REIT because certain other requirements have been met, Sotherly may be subject to a tax that would be the greater of (a) $50,000; or (b) an amount determined by multiplying the highest rate of tax for corporations by the net income generated by the assets for the period beginning on the first date of the failure and ending on the day Sotherly disposes of the assets (or otherwise satisfies the requirements for maintaining REIT qualification).

7. If Sotherly fails to satisfy one or more requirements for REIT qualification, other than the 95.0% and 75.0% gross income tests and other than the asset test, but nonetheless maintains its qualification as a REIT because certain other requirements have been met, Sotherly may be subject to a $50,000 penalty for each failure.

8. If Sotherly fails to distribute during each calendar year at least the sum of (1) 85.0% of its ordinary income for such year, (2) 95.0% of its capital gain net income for such year, and (3) any undistributed taxable income from prior periods, Sotherly is subject to a nondeductible 4.0% excise tax on the excess of such required distribution over the amounts distributed.

9. If Sotherly acquires any appreciated assets from a C corporation ( i.e. , a corporation generally subject to full corporate level tax) in a transaction in which the basis of the assets in its hands is determined by reference to the basis of the assets (or any other property) in the hands of the C corporation, Sotherly may be subject to tax on such appreciation at the highest corporate income tax rate then applicable if it recognizes gain on a disposition of such assets during the 10-year period following their acquisition from the non-REIT C corporation. This tax is referred to as the “Built-in Gains Tax.” The Built-in Gains Tax would not apply if the asset acquired in such manner was exchanged for a replacement property in a qualifying exchange under Code Section 1031. However, a sale of the replacement property within that same 10-year period would be subject to the Built-in Gains Tax.

10. Sotherly may be subject to a 100.0% excise tax if its dealings with its taxable REIT subsidiaries, defined below, are not at arm’s length.

11. Any earnings of a taxable REIT subsidiary will effectively be subject to a corporate-level tax.

12. Sotherly may elect to retain and pay federal income tax on its net long-term capital gain, in which case a stockholder would include its proportionate share of Sotherly’s undistributed long-term capital gain in its income, would be allowed a credit for its proportionate share of the tax deemed to have paid, and an adjustment would be made to increase the stockholder’s tax basin in its Sotherly common stock.

Requirements for REIT Qualification

Organizaitonal Requirements

An entity must satisfy the following requirements in order to qualify as a REIT under the Code: (1) it must be a corporation, trust or association that would be taxable as a domestic corporation but for the REIT provisions of the Code, (2) it must elect to be taxed as a REIT and satisfy relevant filing and other administrative requirements, (3) it must be managed by one or more trustees or directors, (4) its beneficial ownership must be evidenced by transferable shares or by transferable certificates of beneficial interest, (5) it must not be a financial institution or an insurance company subject to special provisions of the federal income tax laws, (6) it must use a calendar year for U.S. federal

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income tax purposes, (7) it must have at least 100 beneficial owners for at least 335 days of each taxable year of 12 months or during a proportionate part of a taxable year of less than 12 months and (8) it must not be closely held (i.e., at any time during the last half of any taxable year, more than 50.0% in value of its outstanding capital stock must not be owned, directly or indirectly through the application of certain attribution rules, by five or fewer “individuals,” as such term is defined in the Code to include certain entities).

To monitor compliance with the stock ownership requirements, a REIT is generally required to maintain records regarding the actual ownership of its common stock. A REIT must demand written statements each year from the record holders of 5.0% or more of its common stock (or such lesser percentage as is required by applicable Treasury Regulations) pursuant to which the record holders must disclose the actual owners of the stock (i.e., the persons required to include in gross income the dividends paid by the REIT). A REIT must maintain a list of those persons failing or refusing to comply with this demand as part of its records. A REIT could be subject to monetary penalties if it fails to comply with these record-keeping requirements. A stockholder that fails or refuses to comply with the demand is required by the Treasury Regulations to submit a statement with its tax return disclosing such stockholder’s actual ownership of the REIT’s common stock and other information. If in any taxable year a REIT did not know, and with the exercise of reasonable diligence could not have known, that it failed to meet the requirement that it cannot be closely held, the REIT will be treated as having met such requirement for such taxable year.

Sotherly has complied with the organizational and record-keeping requirements described above for each taxable year since its formation, and it intends to continue to comply with these requirements in order to maintain its status as a REIT.

Asset Tests

At the close of each quarter of its taxable year, Sotherly generally must satisfy three tests relating to the nature of its assets. First, at least 75.0% of the value of Sotherly’s total assets must be represented by interests in real property, interests in mortgages on real property, shares in other REITs, cash, cash items and government securities (as well as certain temporary investments in stock or debt instruments purchased with the proceeds of new capital raised by us). Second, although the remaining 25.0% of its assets generally may be invested without restriction, securities in this class generally may not exceed (1) 5.0% of the value of its total assets as to any one nongovernment issuer, (2) 10.0% of the outstanding voting securities of any one issuer, or (3) 10.0% of the value of the outstanding securities of any one issuer. Third, not more than 25.0% of the total value of its assets can be represented by securities of one or more taxable REIT subsidiaries. Securities for purposes of the above 5.0% and 10.0% asset tests may include debt securities, including debt issued by a partnership.

Debt of an issuer will not count as a security for purposes of the 10.0% value test if the security qualifies for any of a number of applicable exceptions, for example, as “straight debt,” as specially defined for this purpose to include certain debt issued by partnerships, and to include certain other debt that is not considered to be abusive and that presents minimal opportunity to share in the business profits of the issuer. Solely for purposes of the 10.0% value test, a REIT’s interest in the assets of a partnership will be based upon the REIT’s proportionate interest in any securities issued by the partnership (including, for this purpose, the REIT’s interest as a partner in the partnership and any debt securities issued by the partnership, but excluding any securities qualifying for the “straight debt” or other exceptions described above), valuing any debt instrument at its adjusted issue price.

After initially meeting the asset tests at the close of any quarter, Sotherly will not lose its qualification as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If Sotherly fails to satisfy the asset tests because it acquires securities during a quarter, Sotherly can cure this failure by disposing of the non-qualifying assets within 30 days after the close of that quarter. If Sotherly fails the 5.0% asset test or the 10.0% asset test at the end of any quarter, and such failure is not cured within 30 days thereafter, it may dispose of sufficient assets or otherwise satisfy the requirements of such asset tests within six months after the last day of the quarter in which its identification of the failure to satisfy those asset tests occurred to cure the violation, provided that the non-permitted assets do not exceed the lesser of 1.0% of the total value of its assets at the end of the relevant quarter or $10,000,000. If Sotherly fails any of the other asset tests, or its failure of the 5.0% and 10.0% asset tests is in excess of this amount, as long as the failure was due to reasonable cause and not willful neglect and, following its identification of the failure, filed a schedule in accordance with the Treasury Regulations describing each asset that caused the failure, Sotherly is permitted to avoid disqualification as a REIT, after the 30-day cure period, by taking steps to satisfy the requirements of the applicable asset test within six months after the last day of the quarter in which its identification of the failure to satisfy the REIT asset test occurred, including the disposition of sufficient assets to meet the asset tests and paying a tax equal to the greater of (1) $50,000 or (2) the product of the net income generated by the assets that caused the failure multiplied by the highest applicable corporate tax rate (currently 35.0%).

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Sotherly has complied with the foregoing REIT asset tests each tax year since its election to be taxable as a REIT, and it intends to monitor compliance with such tests on an ongoing basis. We can provide no assurance, however, that the IRS will agree with Sotherly’s determinations in this regard. To the extent that Sotherly fails one or more of the asset tests and does not fall within any of the safe harbors described above, Sotherly may fail to maintain its REIT status.

Gross Income Tests

To maintain its qualification as a REIT, Sotherly must satisfy two gross income tests each year. First, at least 75.0% of its gross income for each taxable year, excluding gross income from prohibited transactions, must be derived from investments relating to real property or mortgages on real property, including “rents from real property,” dividends received from other REITs, interest income derived from mortgage loans secured by real property (including certain types of mortgage-backed securities), and gains from the sale of real estate assets, as well as “qualified temporary investment income,” (i.e., income that is attributable to temporary investments in stock and debt securities of new capital proceeds from stock issuances and public debt offerings and that is received in the one-year period beginning on the date new capital is received). Second, at least 95.0% of Sotherly’s gross income in each taxable year, excluding gross income from prohibited transactions, must be derived from sources of income that qualify under the 75.0% gross income test and other dividends, interest, gain from the sale or disposition of stock or securities, and certain other categories of income.

Rents will qualify as “rents from real property” in satisfying the gross income tests only if several conditions are met, including the following:

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The rent must not be based in whole or in part on the income or profits of any person. An amount will not be disqualified, however, solely by being based on a fixed percentage or percentages of receipts or sales or, if it is based on the net income or profits of a lessee which derives substantially all of its income with respect to such property from subleasing of substantially all of such property, to the extent that the rents paid by the sublessees would qualify as rents from real property, if earned directly by Sotherly.

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If rent is partly attributable to personal property leased in connection with a lease of real property, the portion of the total rent that is attributable to the personal property will not qualify as rents from real property if it exceeds 15.0% of the total rent received under the lease.

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For rents received to qualify as rents from real property, Sotherly generally must not operate or manage the property or furnish or render certain services to the lessees of such property, other than through an “independent contractor,” as defined in the Code, who is adequately compensated and from which Sotherly derives or receives no income or through a taxable REIT subsidiary. Sotherly is permitted, however, to perform services that are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not otherwise considered rendered to the occupant of the property. Additionally, Sotherly may directly or indirectly provide non-customary services to lessees of its properties without disqualifying all of the rents from the property if the gross income from such services does not exceed 1.0% of the total gross income from the property. In such a case, only the amounts for non-customary services are not treated as rents from real property, and the provision of the services does not disqualify all of the rents from treatment as rents from real property. For purposes of this test, gross income received from such non-customary services is deemed to be at least 150.0% of the direct cost of providing the services. Sotherly is permitted to provide services to lessees through a taxable REIT subsidiary without disqualifying the rental income received from lessees as rents from real property.

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Rental income will not qualify as rents from real property if Sotherly directly or indirectly (through application of certain constructive ownership rules) owns (i) in the case of any lessee which is a corporation, stock possessing 10.0% or more of the total combined voting power of all classes of

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stock entitled to vote, or 10.0% or more of the total value of shares of all classes of stock, of such lessee or (ii) in the case of any lessee which is not a corporation, an interest of 10.0% or more in the assets or net profits of such lessee. Rental payments from a taxable REIT subsidiary, however, will qualify as rents from real property even if Sotherly owns more than 10.0% of the total value or combined voting power of the taxable REIT subsidiary if (i) at least 90.0% of the property is leased to unrelated lessees and the rent paid by the taxable REIT subsidiary is substantially comparable to the rent paid by the unrelated lessees for comparable space or (ii) the property is a “qualified lodging facility” or a “qualified health care facility” and certain additional requirements are satisfied.

Sotherly has complied with the foregoing REIT gross income tests each taxable year since its election to be taxable as a REIT, and the bulk of its income has primarily consisted of rents from real property. None of the rents under its leases has been based on the income or profits of any person, and none of the rents that Sotherly has received and which are attributable to personal property has exceeded 15.0% of the total rents received under any lease. Furthermore, all or most of the services performed with respect to Sotherly’s properties have been services that are usually or customarily rendered in connection with the rental of real property and not rendered to the occupant(s) of such property. Sotherly intends to monitor compliance with the REIT gross income tests on an ongoing basis but we can provide no assurances that the actual future sources of Sotherly’s income will allow it to continue to satisfy these tests.

Even if Sotherly were to fail to satisfy one or both of the 75.0% gross income test and the 95.0% gross income test for any taxable year, it may still qualify as a REIT for that year if it is eligible for relief under specific provisions of the Code. These relief provisions generally will be available if (1) Sotherly’s failure to meet these tests was due to reasonable cause and not due to willful neglect; (2) Sotherly attaches a schedule of its income sources to its federal income tax return; and (3) any incorrect information on the schedule is not due to fraud with intent to evade tax. It is not possible, however, to state whether, in all circumstances, Sotherly would be entitled to the benefit of these relief provisions. If these relief provisions are inapplicable, Sotherly will not qualify as a REIT. Even where these relief provisions apply, a tax would be imposed upon the profit attributable to the amount by which Sotherly fails to satisfy the particular gross income test.

Annual Distribution Requirements

To qualify as a REIT, Sotherly is required to distribute to its stockholders each year in an amount equal to at least (1) the sum of (a) 90.0% of its REIT taxable income (computed without regard to the dividends paid deduction and its net capital gain) and (b) 90.0% of the net income (after tax), if any, from foreclosure property, minus (2) the sum of certain items of non-cash income over 5.0% of its REIT taxable income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before Sotherly timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration, provided that such payment is made during the 12-month period following the close of such taxable year. These distributions are taxable to stockholders in the year in which paid, even though the distributions relate to Sotherly’s prior taxable year for purposes of the 90.0% distribution requirement.

To the extent that Sotherly does not distribute all of its REIT taxable income, Sotherly will be subject to tax on the undistributed amount at regular corporate tax rates, as the case may be. However, Sotherly can elect to “pass through” any of the taxes paid on its undistributed net capital gain income to its stockholders on a pro rata basis. Furthermore, if Sotherly should fail to distribute during each calendar year at least the sum of (1) 85.0% of its ordinary income for such year, (2) 95.0% of its capital gain net income for such year, and (3) any undistributed taxable income from prior periods, Sotherly would be subject to a non-deductible 4.0% excise tax on the excess of such required distribution over the sum of the amounts distributed (including any deemed distribution of net capital gain). For these and other purposes, dividends that Sotherly declares in October, November or December of one taxable year and payable to a stockholder of record on a specific date in any such month shall be treated as both paid by and received by the stockholder during such taxable year, provided that the dividend is actually paid by Sotherly by January 31 of the following taxable year.

If Sotherly fails to meet the distribution requirements as a result of an adjustment to its tax return by the IRS or it determines that it understated income on a filed return, Sotherly may be able to retroactively cure the failure by paying a “deficiency dividend” (plus applicable penalties and interest) within a specified period.

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Commencing with its taxable year ended December 31, 2004, Sotherly has satisfied the annual distribution requirements described above. It is possible, however, that in the future Sotherly may not have sufficient cash or other liquid assets to meet the distribution requirements, due to timing differences between the actual receipt of income and actual payment of expenses on the one hand, and the inclusion of such income and deduction of such expenses in computing its REIT taxable income on the other hand. Further, as described below, it is possible that, from time to time, Sotherly may be allocated a share of net capital gain attributable to the sale of depreciated property that exceeds its allocable share of cash attributable to that sale. To avoid any problem with the distribution requirements, Sotherly will closely monitor the relationship between its REIT taxable income and cash flow and, if necessary and feasible, will borrow funds or issue stock to satisfy the distribution requirement.

Qualified REIT Subsidiaries

For purposes of the requirements described herein, any corporation Sotherly owns that is a qualified REIT subsidiary will not be treated as a corporation separate from Sotherly and all of its assets, liabilities and items of income, deduction and credit will be treated as Sotherly’s assets, liabilities and items of income, deduction and credit. A qualified REIT subsidiary is a corporation, other than a taxable REIT subsidiary, all of the capital stock of which is owned by a REIT.

Ownership of Partnership Interests

A REIT that is a partner in an entity treated as a partnership for federal tax purposes is treated as owning its proportionate share of the assets of the partnership and as earning its allocable share of the gross income of the partnership for purposes of the requirements described herein. In addition, the character of the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of the REIT requirements, including the asset and income tests described below. Accordingly, Sotherly’s proportionate share of the assets, liabilities and items of income of the Operating Partnership and of any other partnership, joint venture, limited liability company or other entity treated as a partnership for federal tax purposes in which it directly or indirectly owns an interest, will be treated as its assets, liabilities and items of income.

Taxable REIT Subsidiaries

A REIT is permitted to own up to 100.0% of the stock of one or more “taxable REIT subsidiaries.” The subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. In addition, if a taxable REIT subsidiary owns, directly or indirectly, securities representing 35.0% or more of the vote or value of a subsidiary corporation, that subsidiary will automatically be treated as a taxable REIT subsidiary of the parent REIT. A taxable REIT subsidiary is subject to federal, state and local income tax (where applicable), as a regular “C” corporation.

Generally, a taxable REIT subsidiary may earn income that would not be qualifying income under the REIT income tests if earned directly by the parent REIT. Several provisions in the Code regarding the arrangements between a REIT and a taxable REIT subsidiary ensure, however, that the taxable REIT subsidiary will be subject to an appropriate level of federal income tax. For example, the Code limits the ability of a taxable REIT subsidiary to deduct interest payments made to its parent REIT in excess of a certain amount. In addition, the Code imposes a 100.0% tax on transactions between a taxable REIT subsidiary and its parent REIT or the REIT’s tenants that are not conducted on an arm’s-length basis. Moreover, the value of any securities held by a REIT in all of its taxable REIT subsidiaries cannot be worth more than 25.0% of the REIT’s total asset value.

We cannot provide any assurance that any taxable REIT subsidiaries that Sotherly currently owns or will form in the future will not be limited in their ability to deduct interest payments (if any) made to Sotherly, or that the IRS would not seek to impose a 100.0% tax on Sotherly to the extent any taxable REIT subsidiary is undercompensated for any services it may perform for its tenants or the tenants of partnerships in which Sotherly owns an interest, or on a portion of the payments received by it from, or expenses deducted by, its taxable REIT subsidiaries.

Prohibited Transaction Rules

Any gain that a REIT recognizes from the sale of property held as inventory or otherwise held primarily for sale to customers in the ordinary course of business (excluding sales of foreclosure property and sales conducted by taxable REIT subsidiaries) will be treated as income from a prohibited transaction that is subject to a 100.0% penalty

123

tax. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of business is a question of fact that depends on all of the facts and circumstances of the particular transaction. Under a statutory safe harbor, however, Sotherly will not be subject to the 100.0% tax with respect to a sale of property if (1) the property has been held for at least two years for the production of rental income prior to the sale, (2) capitalized expenditures on the property in the two years preceding the sale are less than 30.0% of the net selling price of the property and (3) (a) Sotherly either has seven or fewer sales of property (excluding certain property obtained through foreclosure and certain involuntary conversions) in the year of sale or (b) the aggregate tax basis of property sold during the year of sale is 10.0% or less of the aggregate tax basis of all of its assets as of the beginning of the taxable year, or (c) the aggregate fair market value of property sold during the year of sale is 10.0% or less of the aggregate fair market value of all of its assets as of the beginning of the taxable year, in each case excluding sales of foreclosure property and involuntary conversions. In addition, in order for the 10.0% safe harbor to apply, substantially all of the marketing and development expenditures with respect to the property sold must be made through an independent contractor from whom Sotherly derives no income. Although Sotherly will attempt to ensure that none of its sales of property will constitute a prohibited transaction, it cannot provide assurances that none of such sales will be so treated. In the event that the IRS were to successfully contend that such sales are prohibited transactions Sotherly would be required to pay the 100.0% penalty tax on any gains resulting from any such sales.

Failure to Qualify

If Sotherly fails to satisfy one or more requirements for REIT qualification, other than the gross income tests and asset tests, it may retain its REIT qualification if the failures are due to reasonable cause and not willful neglect, and if Sotherly pays a penalty of $50,000 for each such failure.

If Sotherly fails to qualify for taxation as a REIT in any taxable year and the relief provisions do not apply, it will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to its stockholders in any year in which Sotherly fails to qualify will not be deductible, nor will they be required to be made. Unless entitled to relief under specific statutory provisions, Sotherly will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether Sotherly would be entitled to such statutory relief.

Foreclosure Property

Foreclosure property is real property (including interests in real property) and any personal property incident to such real property (1) that is acquired by a REIT as a result of the REIT having bid in the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of the property or a mortgage loan held by the REIT and secured by the property, (2) for which the related loan or lease was made, entered into or acquired by the REIT at a time when default was not imminent or anticipated and (3) for which such REIT makes an election to treat the property as foreclosure property. Treatment of property as foreclosure property generally continues until the end of the third taxable year following the year during which the REIT acquires or takes possession of the property, but this period ends prematurely if, before the end of the third year, (1) the REIT makes a lease of the property under which it will receive rents not qualified for purposes of the 75.0% gross income test, (2) the REIT begins construction on the property (other than by continuing a project at least 10.0 % completed when default became imminent), or (3) the REIT uses the property in a trade or business on a day more than 90 days after it acquired the property. The IRS may, however, extend the period if the REIT establishes to the IRS’s satisfaction that an extension is necessary for the orderly liquidation of the REIT’s interests in such property, but no such extension may prolong the period beyond the sixth taxable year following the year during which the REIT acquires or takes possession of the property.

REITs generally are subject to tax at the maximum corporate rate (currently 35.0%) on any net income from foreclosure property. Net income from foreclosure property is the excess of (1) gain on sales and exchanges of foreclosure property that the REIT holds for sale to customers in the ordinary course of a trade or business and (2) gross income from foreclosure property other than rents from real property, interest on real property mortgages, refunds of real property taxes and gains on dispositions of real property not held for sale to customers in the ordinary course of business, over deductions directly connected with the production of the above income. Net income from foreclosure property qualifies under both the 75.0% and the 95.0% gross income tests described above.

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Any gain from the sale of property for which a foreclosure property election has been made will not be subject to the 100.0% tax on gains from prohibited transactions, even if the property is held primarily for sale to customers in the ordinary course of a trade or business.

If there were a default on any leases of the properties held by its operating partnership such that Sotherly acquires possession of the subject property, and Sotherly elects to treat such property as foreclosure property, Sotherly’s net income from any foreclosure property should qualify under both the 75.0% and the 95.0% gross income tests. Sotherly will be subject to federal income tax on such net income, however.

Distressed Debt Acquisitions

The REIT rules provide that in order to determine whether interest income on a mortgage loan is treated as qualifying income for purposes of the 75.0% gross income test when the loan is secured by both real property and other property, the “loan value of the real property” and the “amount of the loan” must be calculated. The “loan value of the real property” is the fair market value of the real property, determined as of the date on which the commitment by a REIT to purchase the loan becomes binding on the REIT. The “amount of the loan” is the highest principal amount of the loan outstanding during the taxable year. Accordingly, if the loan value of the real property is equal to or exceeds the amount of the loan, 100.0% of the interest income on the loan will be attributed to the real property, even though a significant portion of any security for the loan may be property other than real property. If the amount of the loan exceeds the loan value of the real property, the interest income apportioned to the real property is the amount equal to the interest income multiplied by a fraction, the numerator of which is the loan value of the real property and the denominator of which is the amount of the loan. The interest income apportioned to the other property securing the loan is the amount equal to the excess of the total interest income over the interest income apportioned to the real property.

If a REIT acquires distressed mortgage debt at a discount, the use of the highest principal amount of the debt as the “amount of the loan” can cause the REIT to recognize nonqualifying income and hold a nonqualifying asset, even though the price paid by the REIT for the debt may be less than the fair market value of the real property securing the debt. The IRS has been asked to issue guidance on this matter and to clarify that the “amount of the loan” with respect to the acquisition by a REIT of distressed mortgage debt should be the REIT’s highest adjusted tax basis in the debt during the year instead of the highest principal amount of the debt. As of the date of this offering, any clarifying guidance has yet to be issued.

Sotherly may acquire distressed debt instruments that are collateralized by under-performing hotel properties. If such debt is also secured by other property, Sotherly will be required to apportion the interest income on such debt as described above. It is possible that as a result of such apportionment, part of the interest income may be treated as non-qualifying income for purposes of the 75.0% gross income test, and a portion of the hotel properties securing the debt may be treated as a non-qualifying asset. This in turn may make it difficult for Sotherly to continue to comply with the REIT qualification requirements.

Hedging Transactions

Sotherly may enter into hedging transactions with respect to one or more of its assets or liabilities. Hedging transactions could take a variety of forms, including interest rate swaps or cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. Any income from a hedging transaction to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred by Sotherly to acquire or own real estate assets, which is clearly identified as such before the close of the day on which it was acquired, originated or entered into, including gain from the disposition of such a transaction, will be disregarded for purposes of the 75.0% and 95.0% gross income tests. There are also rules for disregarding income for purposes of the 75.0% and 95.0% gross income tests with respect to hedges of certain foreign currency risks. To the extent Sotherly enters into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both the 75.0% and 95.0% gross income tests. Sotherly intends to structure any hedging transactions in a manner that does not jeopardize its ability to qualify as a REIT.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The effects of potential changes in interest rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that could occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.

To meet in part our long-term liquidity requirements, we will borrow funds at a combination of fixed and variable rates. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. From time to time we may enter into interest rate hedge contracts such as collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue derivative contracts for trading or speculative purposes.

As of June 30, 2013, we had approximately $98.3 million of fixed-rate debt and approximately $52.7 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.66%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the change in 30-day LIBOR. However, to the extent that 30-day LIBOR does not exceed the 30-day LIBOR floors on the mortgages on the Crowne Plaza Hampton Marina and the Hilton Philadelphia Airport of 0.45% and 0.50%, respectively, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the amount outstanding on our mortgage on the Crowne Plaza Hampton Marina, the mortgage on the Hilton Philadelphia Airport, the mortgage on the Crowne Plaza Jacksonville Riverfront and the loan from the Carlyle entity that is the other member of the Crowne Plaza Hollywood Beach Resort joint venture, the Carlyle Affiliate Lender, remain at approximately $52.7 million, the balance at June 30, 2013, the impact on our annual interest incurred and cash flows of a one percent increase in 30 day LIBOR would be approximately $448,000.

As of December 31, 2012, we had approximately $98.7 million of fixed-rate debt and approximately $55.2 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.78%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Our variable-rate debt is exposed to changes in interest rates, specifically the change in 30-day LIBOR. However, to the extent that 30-day LIBOR does not exceed the 30-day LIBOR floors on the mortgages on the Crowne Plaza Hampton Marina and the Hilton Philadelphia Airport of 0.45% and 0.50%, respectively, a portion of our variable-rate debt would not be exposed to changes in interest rates. Assuming that the amount outstanding on our mortgage on the Crowne Plaza Hampton Marina, the mortgage on the Hilton Philadelphia Airport, the mortgage on the Crowne Plaza Jacksonville Riverfront and the loan from the Carlyle Affiliate Lender remain at approximately $55.2 million, the balance at December 31, 2012, the impact on our annual interest incurred and cash flows of a one percent increase in 30-day LIBOR would be approximately $467,000.

126

UNDERWRITING

Sandler O’Neill & Partners, L.P. is acting as representative of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated , 2013, each underwriter named below has severally agreed to purchase from us, and we have agreed to sell to that underwriter, the principal amount of notes set forth opposite that underwriter’s name at the public offering price less the underwriting discount set forth on the cover page of this prospectus:


Underwriters		Principal Amount of Notes
Sandler O’Neill & Partners, L.P.		$
Total		$

The underwriting agreement provides that the obligations of the underwriters to purchase the notes included in this offering are subject to approval of certain legal matters by counsel and to certain other conditions. The underwriters are obligated to purchase all of the notes if they purchase any of the notes. The underwriters’ obligations to purchase the notes from us are several and not joint.

The underwriters propose to offer the notes directly to the public initially at the public offering price set forth on the cover page of this prospectus, plus accrued interest, if any, from , 2013 to the date of delivery of the notes, and to certain dealers at the public offering price minus a concession not to exceed % of the principal amount of the notes. The underwriters may allow, and dealers may reallow, a concession not to exceed % of the principal amount of the notes on sales to other dealers. After the initial offering of the notes to the public, the public offering price and other selling terms may be changed by the underwriters.

The notes consist of a new issue of securities with no established trading market. We have applied to list the notes on the NASDAQ ^® Global Market. If the listing is approved, we expect trading of the notes to begin within the 30-day period after the initial delivery of the notes. Even if the notes are listed, there may be little or no secondary market for the notes. The representative of the underwriters has advised us that, following completion of the offering of the notes, one or more underwriters intend to make a market in the notes after the initial offering, although they are under no obligation to do so. The underwriters may discontinue any market making activities at any time without notice. We can give no assurance as to development, maintenance or liquidity of any trading market for the notes.

The following table shows the total underwriting discounts that we will pay to the underwriters in connection with this offering. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option:


Underwriters	Per Note		Without Option Exercise		With Full Option Exercise
Public Offering Price	$	25.0000	$		$
Underwriting Discount		%		%		%
Proceeds to Us	$		$		$

Certain expenses associated with the offer and the sale of the notes, exclusive of the underwriting discount, are estimated to be approximately $ and will be paid by us. We will pay all of our expenses and costs in connection with this offering, including the discount and commissions payable to the underwriters. In addition to the underwriting discounts and commissions, we will reimburse the underwriters for their reasonable out-of-pocket expenses incurred in connection with their engagement as underwriters, including, without limitation, all marketing, syndication and travel expenses and legal fees and expenses up to a maximum aggregate amount of $100,000 if the offering is consummated and up to a maximum aggregate amount of $70,000 if the offering is not consummated.

In connection with the offering, the representative of the underwriters may purchase and sell notes in the open market. These transactions may include over-allotment, syndicate covering transactions and stabilizing transactions. Over-allotment involves sales of notes in excess of the principal amount of notes to be purchased by the underwriters

127

in the offering, which creates a short position. Covering transactions involve purchases of the notes in the open market after the distribution has been completed in order to cover short positions. Stabilizing transactions consist of certain bids or purchases of notes made for the purpose of preventing or retarding a decline in the market price of the notes while the offering is in progress.

The underwriters may also impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the underwriters, in covering short positions or making stabilizing purchases, repurchase notes originally sold by the syndicate member.

Any of these activities may cause the price of the notes to be higher than the price that otherwise would exist in the absence of such activities. These activities, if commenced, may be discontinued at any time.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act or to contribute to payments the underwriters may be required to make in respect of any of those liabilities.

Conflicts of Interest

The underwriters have not historically, but may in the future, provide investment banking and advisory services to us and our affiliates in the ordinary course of business, for which they have received, or may receive, compensation for such services.

128

EXPERTS

The financial statements of the Operating Partnership and its subsidiaries as of December 31, 2012 included in this prospectus and the related notes to those financial statements, have been audited by PBMares, LLP (formerly Witt Mares, PLC), an independent registered public accounting firm, as stated in their report appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

LEGAL MATTERS

Certain legal matters in connection with this offering, including the validity of the notes, will be passed upon for us by Baker & McKenzie LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by Bass Berry & Sims PLC.

WHERE YOU CAN FIND MORE INFORMATION

We maintain a website, www.sotherlyhotels.com, which contains additional information concerning Sotherly and the Operating Partnership. Sotherly files, and the Operating Partnership will file, annual, quarterly and special reports, proxy statements and other information, as applicable, with the SEC. You may read and copy any document Sotherly or the Operating Partnership files with the SEC at the SEC’s public reference room at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC (http://www.sec.gov).

The Operating Partnership has filed a Registration Statement of which this prospectus is a part and related exhibits with the SEC under the Securities Act. The Registration Statement contains additional information about us. You may inspect the Registration Statement and exhibits without charge at the office of the SEC at Room 1580, 100 F Street, N.E., Washington, D.C. 20549, and you may obtain copies from the SEC at prescribed rates.

Sotherly makes available free of charge through its website all of its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, definitive proxy statements and other reports filed with the SEC as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. Sotherly has also posted on this website its Code of Business Conduct and the charters of its Audit and Nominating, Corporate Governance and Compensation Committees of its board of directors. The information contained in or accessed through our on our website is neither part of nor incorporated into this prospectus.

This prospectus does not contain all of the information included in the registration statement. We have omitted certain parts of the registration statement in accordance with the rules and regulations of the SEC. For further information, we refer you to the registration statement, including its exhibits and schedules, which may be found at the SEC’s website at http://www.sec.gov . Statements contained in this prospectus and any accompanying prospectus supplement about the provisions or contents of any contract, agreement or any other document referred to are not necessarily complete. Please refer to the actual exhibit for a more complete description of the matters involved.

129

INDEX TO FINANCIAL STATEMENTS


Sotherly Hotels LP
Report of Independent Registered Public Accounting Firm			F-2

Consolidated Balance Sheets for Sotherly Hotels LP as of June 30, 2013 and December 31, 2012 and 2011			F-3

Consolidated Statements of Operations for Sotherly Hotels LP for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010			F-4

Consolidated Statements of Changes in Partners’ Capital for Sotherly Hotels LP for the six months ended June 30, 2013 and for the years ended December 31, 2012, 2011 and 2010			F-5

Consolidated Statements of Cash Flows for Sotherly Hotels LP for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010			F-6

Notes to Consolidated Financial Statements			F-7

Schedule III—Real Estate and Accumulated Depreciation as of December 31, 2012			F-28

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of the General Partner of

Sotherly Hotels LP (formerly MHI Hospitality, L.P.)

Williamsburg, Virginia

We have audited the accompanying consolidated balance sheets of Sotherly Hotels LP (formerly MHI Hospitality, L.P.) and subsidiaries (the “Partnership”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in partners’ capital, and cash flows for each of the three years in the period ended December 31, 2012. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule of real estate and accumulated depreciation as of December 31, 2012. These consolidated financial statements are the responsibility of the Partnership ’ s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sotherly Hotels LP (formerly MHI Hospitality, L.P.) and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ PBMares, LLP

Norfolk, Virginia

August 9, 2013

F-2

SOTHERLY HOTELS LP

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2013 (UNAUDITED) AND

DECEMBER 31, 2012 AND 2011

December 31,

June 30,

2011

2012

2013

(unaudited)

ASSETS

Investment in hotel properties, net

181,469,432

176,427,904

174,718,233

Investment in joint venture

8,966,795

8,638,967

8,446,083

Cash and cash equivalents

4,409,959

7,175,716

6,561,784

Restricted cash

2,690,391

3,079,894

4,257,037

Accounts receivable, net

1,702,616

1,478,923

2,158,065

Accounts receivable-affiliate

24,880

8,657

10,665

Prepaid expenses, inventory and other assets

1,877,456

1,684,951

2,294,047

Note receivable, net

100,000

—

Shell Island sublease, net

720,588

480,392

360,294

Deferred income taxes

4,061,749

2,649,282

1,331,530

Deferred financing costs, net

3,275,580

2,406,183

2,152,654

TOTAL ASSETS

209,299,446

204,030,869

202,290,392

LIABILITIES

Line of credit

25,537,290

—

Mortgage loans

94,157,825

135,674,432

134,893,689

Loans payable

9,275,220

4,025,220

3,650,220

Series A Preferred Interest

25,353,698

14,227,650

12,457,552

Accounts payable and accrued liabilities

7,437,246

6,786,684

7,403,468

Advance deposits

453,077

625,822

881,192

Partner distributions payable

258,772

389,179

456,334

Warrant derivative liability

2,943,075

4,969,752

7,649,962

TOTAL LIABILITIES

165,416,203

166,698,739

167,392,417

Commitments and contingencies (see Note 7)

PARTNERS’ CAPITAL

General Partner: 129,387, 129,727 and 130,382 units issued and outstanding as of December 31, 2011 and 2012 and June 30, 2013, respectively

683,691

617,909

594,463

Limited Partners: 12,809,238, 12,842,898 and 12,907,743 units issued and outstanding as of December 31, 2011 and 2012 and June 30, 2013, respectively

43,199,552

36,714,221

34,303,512

TOTAL PARTNERS’ CAPITAL

43,883,243

37,332,130

34,897,975

TOTAL LIABILITIES AND PARTNERS’ CAPITAL

209,299,446

204,030,869

202,290,392

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

F-3

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED) AND

YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

December 31,

June 30,

2010

2011

2012

2013

(unaudited)

REVENUE

Rooms department

53,090,084

56,187,231

60,824,016

31,700,572

32,401,979

Food and beverage department

19,905,509

20,482,457

21,961,328

11,176,007

10,826,366

Other operating departments

4,386,751

4,502,816

4,557,876

2,261,088

2,212,109

Total revenue

77,382,344

81,172,504

87,343,220

45,137,667

45,440,454

EXPENSES

Hotel operating expenses

Rooms department

15,090,190

15,841,985

16,613,769

8,420,645

8,577,196

Food and beverage department

13,248,212

13,617,847

14,284,057

7,355,536

6,915,391

Other operating departments

697,037

537,969

480,307

240,938

226,025

Indirect

30,026,159

31,784,191

32,919,610

16,642,698

16,571,618

Total hotel operating expenses

59,061,598

61,781,992

64,297,743

32,659,817

32,290,230

Depreciation and amortization

8,506,802

8,702,880

8,661,769

4,375,554

4,083,871

Corporate general and administrative

3,389,764

4,025,794

4,078,826

2,094,534

2,217,471

Total operating expenses

70,958,164

74,510,666

77,038,338

39,129,905

38,591,572

NET OPERATING INCOME

6,424,180

6,661,838

10,304,882

6,007,762

6,848,882

Other income (expense)

Interest expense

(10,030,517

)

(10,821,815

)

(12,382,146

)

(7,572,362

)

(5,013,191

)

Interest income

22,305

14,808

16,158

7,852

7,559

Equity income (loss) in joint venture

16,931

(60,094

)

172,172

177,714

557,116

Unrealized loss on warrant derivative

—

(1,309,075

)

(2,026,677

)

(2,684,900

)

(2,680,210

)

Unrealized gain on hedging activities

700,488

72,649

—

Impairment of note receivable

—

(110,871

)

—

Loss on disposal of assets

(171,304

)

(128,099

)

—

Net loss before income taxes

(3,037,917

)

(5,569,788

)

(4,026,482

)

(4,063,934

)

(279,844

)

Income tax (provision) benefit

(214,344

)

(905,455

)

(1,301,229

)

(1,062,721

)

(1,374,873

)

Net loss

(3,252,261

)

(6,475,243

)

(5,327,711

)

(5,126,655

)

(1,654,717

)

Net loss per unit

Basic

(0.25

)

(0.50

)

(0.41

)

(0.40

)

(0.13

)

Diluted

(0.25

)

(0.50

)

(0.39

)

(0.38

)

(0.12

)

Weighted average number of units outstanding

Basic

12,893,444

12,934,325

12,973,953

12,974,306

13,037,064

Diluted

12,909,444

13,117,767

13,625,561

13,425,660

13,948,646

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

F-4

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED) AND

YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

General Partner

Limited Partners

Total

Units

Amount

Units

Amount

Balances at December 31, 2009

128,346

783,908

12,706,204

53,057,318

53,841,226

Issuance of partnership units

761

1,405

75,414

139,222

140,627

Amortization of deferred grants of partnership units

—

1,140

—

112,860

114,000

Redemption of limited partnership units

(150

)

(914

)

(14,850

)

(34,375

)

(35,289

)

Net loss

—

(32,522

)

—

(3,219,739

)

(3,252,261

)

Balances at December 31, 2010

128,957

753,017

12,766,768

50,055,286

50,808,303

Issuance of partnership units

455

749

45,045

74,181

74,930

Distributions declared

—

(5,176

)

—

(512,421

)

(517,597

)

Redemption of limited partnership units

(25

)

(146

)

(2,575

)

(7,004

)

(7,150

)

Net loss

—

(64,753

)

—

(6,410,490

)

(6,475,243

)

Balances at December 31, 2011

129,387

683,691

12,809,238

43,199,552

43,883,243

Issuance of partnership units

460

1,104

45,540

109,296

110,400

Distributions declared

—

(12,976

)

—

(1,284,646

)

(1,297,622

)

Redemption of limited partnership units

(120

)

(633

)

(11,880

)

(35,547

)

(36,180

)

Net loss

—

(53,277

)

—

(5,274,434

)

(5,327,711

)

Balances at December 31, 2012

129,727

617,909

12,842,898

36,714,221

37,332,130

Issuance of partnership units

755

2,561

74,745

163,919

166,480

Redemption of limited partnership units

(100

)

(329

)

(9,900

)

(32,571

)

(32,900

)

Distributions declared

—

(9,130

)

—

(903,888

)

(913,018

)

Net loss

—

(16,548

)

—

(1,638,169

)

(1,654,717

)

Balances at June 30, 2013

130,382

594,463

12,907,743

34,303,512

34,897,975

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

F-5

SOTHERLY HOTELS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED) AND

YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

December 31,

June 30,

2010

2011

2012

2013

(unaudited)

Cash flows from operating activities:

Net loss

(3,252,261

)

(6,475,243

)

(5,327,711

)

(5,126,655

)

(1,654,717

)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

8,506,802

8,702,880

8,661,769

4,375,554

4,083,871

Equity in (income) loss of joint venture

(16,931

)

60,094

(172,172

)

(177,714

)

(557,116

)

Loss on disposal of assets

171,304

128,099

—

Impairment of note receivable

—

110,871

—

Unrealized gain on hedging activities

(700,488

)

(72,649

)

—

Unrealized loss on warrant derivative

—

1,309,075

2,026,677

2,684,900

2,680,210

Amortization of deferred financing costs

1,308,255

1,106,279

1,971,796

1,628,344

430,396

Paid-in-kind interest

—

353,698

387,554

245,573

131,449

Charges related to equity-based compensation

254,626

74,930

110,400

166,480

Changes in assets and liabilities:

Restricted cash

(682,321

)

129,976

377,908

444,269

(126,397

)

Accounts receivable

(243,220

)

165,764

212,822

(1,682,614

)

(679,141

)

Inventory, prepaid expenses and other assets

(371,523

)

380,260

122,645

(323,045

)

(642,708

)

Deferred income taxes

174,035

685,189

1,412,467

1,103,579

1,317,752

Accounts payable and accrued liabilities

(443,326

)

1,074,323

(1,072,036

)

1,258,711

1,564,135

Advance deposits

8,249

(102,825

)

172,745

446,549

255,370

Due from affiliates

15,069

30,292

16,222

8,257

(2,008

)

Net cash provided by operating activities

4,728,270

7,550,142

9,011,957

4,996,108

6,967,576

Cash flows from investing activities:

Improvements and additions to hotel properties

(2,886,325

)

(5,979,832

)

(2,908,114

)

(2,163,680

)

(3,167,840

)

Distributions from joint venture

238,386

437,500

500,000

250,000

750,000

Funding of restricted cash reserves

(1,956,410

)

(2,347,877

)

(1,983,383

)

(993,239

)

(972,570

)

Proceeds from restricted cash reserves

1,134,741

1,733,231

1,215,972

903,457

814,713

Proceeds from sale of assets

—

26,705

19,404

—

Net cash used in investing activities

(3,469,608

)

(6,130,273

)

(3,156,121

)

(2,003,462

)

(2,575,697

)

Cash flows from financing activities:

Proceeds of Series A Preferred Interest

—

25,000,000

—

Redemption of Series A Preferred Interest

—

(11,513,602

)

(11,513,602

)

(1,901,547

)

Distributions paid

—

(258,825

)

(1,167,216

)

(518,465

)

(845,863

)

Pledge of cash collateral

—

(892,890

)

Proceeds of loans

—

5,000,000

—

Payments on line of credit

(325,000

)

(49,660,569

)

(25,537,290

)

(25,537,290

)

—

Proceeds of mortgage refinancing

—

27,700,000

44,000,000

2,225,613

Payments on mortgage debt and loans

(730,783

)

(5,953,178

)

(7,773,393

)

(6,028,749

)

(3,381,357

)

Redemption of units in operating partnership

(35,289

)

(7,150

)

(36,180

)

(14,640

)

(32,900

)

Payment of deferred financing costs

(665,189

)

(1,823,076

)

(1,102,398

)

(824,319

)

(176,867

)

Net cash used in financing activities

(1,756,261

)

(2,798

)

(3,090,079

)

(437,065

)

(5,005,811

)

Net increase (decrease) in cash and cash equivalents

(497,599

)

1,417,071

2,765,757

2,555,581

(613,932

)

Cash and cash equivalents at the beginning of the period

3,490,487

2,992,888

4,409,959

7,175,716

Cash and cash equivalents at the end of the period

2,992,888

4,409,959

7,175,716

6,965,540

6,561,784

Supplemental disclosures:

Cash paid during the year for interest

8,870,424

8,705,123

10,412,434

6,062,706

4,528,329

Cash paid during the year for income taxes

21,694

48,351

117,447

104,595

108,147

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

F-6

SOTHERLY HOTELS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

Sotherly Hotels LP (formerly MHI Hospitality, L.P.) (the “Partnership”), a Delaware limited partnership, commenced operations on December 21, 2004 when its general partner and majority unitholder, Sotherly Hotels Inc. (formerly, MHI Hospitality Corporation) (the “Company”), completed its initial public offering (“IPO”), contributed the proceeds to the Partnership and consummated the acquisition of six hotel properties (“initial properties”).

The Company is a self-managed and self-administered real estate investment trust (“REIT”) and was formed to own full-service, primarily upper-upscale and upscale hotels located in primary and secondary markets in the Mid-Atlantic and Southern United States. The hotels operate under well-known national hotel brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn. The Partnership also owns a 25.0% noncontrolling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with CRP/MHI Holdings, LLC, an affiliate of both Carlyle Realty Partners V, L.P. and The Carlyle Group (“Carlyle”).

Pursuant to the terms of the Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), the Company, as general partner, is not entitled to compensation for its services to the Partnership. The Company, as general partner, conducts substantially all of its operations through the Partnership and the Company’s administrative expenses are the obligations of the Partnership. Additionally, the Company is entitled to reimbursement for any expenditure incurred by it on the Partnership’s behalf.

For the Company to qualify as a REIT, neither the Company nor the Partnership can operate hotels. Therefore, our wholly-owned hotels are leased to a subsidiary of MHI Hospitality TRS Holding, Inc., MHI Hospitality TRS, LLC, (collectively, “MHI TRS”), a wholly-owned subsidiary of the Partnership. MHI TRS then engages a hotel management company, MHI Hotels Services, LLC (“MHI Hotels Services”), to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

All references in these notes to consolidated financial statements to the “Partnership,” “we,” “us” and “our” refer to Sotherly Hotels LP and its subsidiaries and predecessors, unless the context otherwise requires or where otherwise indicated.

Significant transactions occurring during the period ended June 30, 2013 and three prior fiscal years include the following:

On June 4, 2010, the Partnership entered into a fifth amendment to its then-existing credit agreement with Branch Banking & Trust Company (“BB&T”), as administrative agent and lender, to address the sufficiency of the borrowing base. The amendment revised the methodology used to value the Partnership’s existing hotel properties in the borrowing base and modified certain other aspects of the then-existing credit agreement, as amended, including fixing the interest rate spread for the variable LIBOR-based interest rate at 4.00% and a minimum LIBOR of 0.75%. The amendment converted the facility to non-revolving, eliminated the Partnership’s ability to re-borrow principal paid in the future and established minimum repayments equal to 50% of excess cash flow, as defined in the agreement, payable quarterly. Pursuant to the amendment, the Partnership was required to fund reserves for insurance and real estate taxes as well as a reserve for the replacement of furniture, fixtures and equipment equal to 3.0% of gross room revenues. The amendment also modified the fixed charge covenant, eliminated the leverage covenant, placed limits on capital expenditures and required prepayments from a portion of the proceeds of future equity offerings of up to $21.7 million. In the event that the Partnership made prepayments totaling $21.7 million, the excess cash flow prepayment requirement would terminate. The amendment allowed the Partnership to pay additional dividends in any fiscal quarter, subject to the existing cap of 90% of the prior year’s funds from operations (“FFO”) provided certain liquidity thresholds and other conditions were met. The amendment provided for a contingent extension of the maturity date for one year to May 2012, provided that certain valuation and other criteria were met, including payment of an extension fee and an extension or refinancing of the Jacksonville mortgage.

F-7

On April 18, 2011, the Partnership entered into a sixth amendment to the then-existing credit agreement. Among other things, the amendment: (i) extended the final maturity date of the credit facility to May 8, 2014; (ii) provided that no additional advances may be made and no currently outstanding advances subsequently repaid or prepaid may be re-borrowed; (iii) adjusted the release amounts with respect to secured hotel properties; (iv) reduced the additional interest from 4.00% to 3.50% and removed the LIBOR floor of 0.75%; and (v) adjusted certain financial covenants including restrictions relating to payment of dividends. In connection with the amendment, the Partnership reduced the outstanding balance on its existing credit facility by approximately $22.7 million.

On April 18, 2011, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Essex Illiquid, LLC and Richmond Hill Capital Partners, LP (collectively, the “Investors”), under which the Company issued and sold to the Investors in a private placement 25,000 shares of the Company’s Series A Cumulative Redeemable Preferred Stock (the “Preferred Stock”), and a warrant (the “Essex Warrant”) to purchase 1,900,000 shares of the Company’s common stock, par value $0.01 per share, for a purchase price of $25.0 million.

Coincident with the issuance of the Preferred Stock, the Partnership issued a Series A Preferred Interest (the “Preferred Interest”) in the Partnership to the Company in an amount equivalent to the proceeds of the Preferred Stock received by the general partner pursuant to the terms of the Partnership Agreement. The Partnership Agreement also authorizes the general partner to cause the Partnership to make special distributions to the Company related to its Preferred Interest for the sole purpose of fulfilling the Company’s obligations with respect to the Preferred Stock. In addition, the Partnership issued the Company a warrant (the “Warrant”) to purchase 1,900,000 partnership units at an amount equal to the consideration received by the Company upon exercise of the Essex Warrant, as amended.

The Partnership used the net proceeds from the issuance of the Preferred Interest and Warrant to partially prepay the amounts owed by the Partnership under its then-existing credit agreement.

On April 18, 2011, the Company entered into an agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which the Company had the right to borrow up to $10.0 million on behalf of the Partnership on or before December 31, 2011 (the “Bridge Financing”). The principal amount borrowed bears interest at the rate of 9.25% per annum, payable quarterly in arrears and matures on the earlier of April 18, 2015 or the redemption in full of the Preferred Stock.

On June 30, 2011, the Partnership entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina until June 30, 2012. Under the terms of the extension, the Partnership makes monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage was increased to LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00%. The Partnership also pledged $750,000 in cash collateral held by the lender in an interest-bearing account.

On August 1, 2011, the Partnership entered into agreements with PNC Bank, National Association, in its capacity as trustee of the AFL-CIO Building Investment Trust, to extend the maturity of the mortgage on the Crowne Plaza Jacksonville Riverfront until January 22, 2013. During the extension, and pursuant to the loan documents, the interest rate applicable to the mortgage loan is fixed at 8.0% and the lender has waived certain covenants requiring the borrower to further pay down principal under certain circumstances. In order to effect the extension, and pursuant to the loan documents, the Partnership tendered to the lender the sum of $4.0 million as principal curtailment of the mortgage loan, thus reducing the mortgage loan’s current outstanding principal amount to $14.0 million, and the lender waived certain covenants requiring the Partnership to further pay down principal under certain circumstances.

On August 5, 2011, the Partnership obtained a 10-year, $7.5 million mortgage with Bank of Georgetown on the Holiday Inn Laurel West hotel property. The mortgage bears interest at a rate of 5.25% per annum for the first five years. After five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest, with a floor of 5.25%. The mortgage provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. Proceeds of the mortgage were used to pay down a portion of the Partnership’s indebtedness under its credit facility.

On October 17, 2011, the Partnership obtained a 5-year, $8.0 million mortgage with Premier Bank, Inc. on its property in Raleigh, North Carolina. The mortgage bears interest at a rate of 5.25% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage may be extended for an additional 5-year period, at the Partnership’s option if certain conditions have been satisfied, at a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest. Proceeds of the mortgage were used to pay down a portion of the Partnership’s indebtedness under its credit facility.

F-8

On December 15, 2011, the Partnership obtained a 5-year, $12.2 million mortgage with Goldman Sachs Commercial Mortgage Capital, L.P. on the Sheraton Louisville Riverside in Jeffersonville, Indiana. The mortgage bears interest at a rate of 6.2415% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. Proceeds of the mortgage were used to pay down a portion of the Partnership’s indebtedness under its credit facility.

On December 21, 2011, the Company entered into an amendment to its $10.0 million bridge loan agreement with Essex Equity High Income Joint Investment Vehicle, LLC to extend the lender’s loan commitment by 17 months through May 31, 2013.

On December 21, 2011, the Company also amended the terms of the outstanding Essex Warrant issued by the Company in favor of the Investors. Pursuant to the Essex Warrant amendment, the exercise price per share of common stock covered by the warrant will be adjusted from time to time in the event of cash dividends upon common stock by deducting from such exercise price the per-share amount of such cash dividends. Such adjustment did not take in to account quarterly dividends declared prior to January 1, 2012.

On March 5, 2012, the Partnership obtained a $30.0 million mortgage with TD Bank, N.A. on the Hilton Philadelphia Airport. The mortgage bears interest at a rate of 30-day LIBOR plus additional interest of 3.0% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage’s maturity date is August 30, 2014, with an extension option until March 1, 2017, contingent upon the extension or acceptable replacement of the Hilton Worldwide license agreement. Proceeds of the mortgage were used to extinguish the Partnership’s indebtedness under the then-existing credit facility, prepay a portion of the Company’s indebtedness under the Bridge Financing and for working capital. With this transaction, the Partnership’s syndicated credit facility was extinguished and the Crowne Plaza Tampa Westshore hotel property was released from such mortgage encumbrance.

On June 15, 2012, the Company entered into an amendment of its Bridge Financing that provided, subject to a $1.5 million prepayment which the Company made on June 18, 2012, that the amount of undrawn term loan commitments increased to $7.0 million, of which $2.0 million was reserved to repay principal amounts outstanding on the Crowne Plaza Jacksonville Riverfront hotel property.

On June 15, 2012, the Company simultaneously entered into an agreement with the holders of the Company’s Preferred Stock to redeem 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash and stock dividends.

On June 18, 2012, the Partnership obtained a $14.0 million mortgage with C1 Bank on the Crowne Plaza Tampa Westshore in Tampa, Florida. The mortgage bears interest at a rate of 5.60% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage’s maturity date is June 18, 2017. Proceeds of the mortgage were used to pay the outstanding indebtedness under the then-existing Bridge Financing and to make a special distribution to the Company for the purpose of redeeming the 11,514 shares of Preferred Stock referenced above.

On June 22, 2012, the Partnership entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2013. Under the terms of the extension, the Partnership was required to make monthly principal payments of $16,000 and additional quarterly principal payments to the lender of $200,000 each on July 1, 2012, October 1, 2012, January 1, 2013 and April 1, 2013. Interest payable monthly pursuant to the mortgage remained at a rate of LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00% per annum.

On July 10, 2012, the Partnership obtained a $14.3 million mortgage with Fifth Third Bank on the Crowne Plaza Jacksonville Riverfront in Jacksonville, Florida. The mortgage bears interest at a rate of LIBOR plus additional interest of 3.0% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The maturity date is July 10, 2015, but may be extended for an additional year pursuant to certain terms and conditions. The mortgage also contains an “earn-out” feature which allows for an additional draw of up to $3.0 million during the term of the loan contingent upon satisfaction of certain debt service coverage and loan-to-value covenants. Proceeds of the mortgage were used to repay the existing mortgage indebtedness and to pay closing costs.

F-9

On March 22, 2013, the Partnership entered into a First Amendment to the Loan Agreement and other amendments to secure additional proceeds on the original $8.0 million mortgage on the DoubleTree by Hilton Brownstone-University hotel property with its existing lender, Premier Bank, Inc. Pursuant to the amended loan documents, the mortgage loan’s principal amount was increased to $10.0 million, the prepayment penalty was removed and the interest rate was fixed at 5.25%; if the mortgage loan is extended, it will adjust to a rate of 3.00% plus the current 5-year U.S. Treasury bill rate of interest, with an interest rate floor of 5.25%. The remaining original terms of the agreement remained the same.

On March 26, 2013, the Company redeemed 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of accrued and unpaid cash and stock dividends. The Partnership made a special distribution to the Company with respect to its Preferred Interest in order to fund the redemption, redeeming an equivalent portion of the Preferred Interest.

On June 28, 2013, the Partnership entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina in Hampton, Virginia, until June 30, 2014. Under the terms of the extension, the Partnership made a principal payment of approximately $1.1 million to reduce the principal balance on the loan to approximately $6.0 million and is required to continue to make monthly principal payments of $16,000. Interest, payable monthly pursuant to the mortgage, will remain at a rate of LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00% per annum. Pursuant to certain terms and conditions, the Partnership may extend the maturity date of the loan to June 30, 2015.

2. Summary of Significant Accounting Policies

Basis of Presentation — The consolidated financial statements of the Partnership presented herein include all of the accounts of Sotherly Hotels LP, MHI TRS and subsidiaries. All significant inter-company balances and transactions have been eliminated. Additionally, all administrative expenses of the Company and those expenditures made by the Company on behalf of the Partnership are reflected as the administrative expenses, expenditures and obligations thereto of the Partnership, pursuant to the terms of the Partnership Agreement.

Investment in Hotel Properties — Investments in hotel properties include investments in operating properties which are recorded at acquisition cost and allocated to land, property and equipment and identifiable intangible assets. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from the Partnership’s accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project, which constitute additions or improvements that extend the life of the property, are capitalized.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 7 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.

The Partnership reviews its investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are found to be less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value would be recorded and an impairment loss recognized.

F-10

Investment in Joint Venture — Investment in joint venture represents the Partnership’s noncontrolling indirect 25.0% equity interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that had an option to purchase a three-acre development site with parking garage adjacent to the hotel and which leased the parking garage for use by the hotel; and (iv) the entity that owned the $22.0 million junior participation in the existing mortgage. Carlyle owns a 75.0% controlling indirect interest in all these entities. The Partnership accounts for its investment in the joint venture under the equity method of accounting and is entitled to receive its pro rata share of annual cash flow. The Partnership also has the opportunity to earn an incentive participation in the net sale proceeds based upon the achievement of certain overall investment returns, in addition to its pro rata share of net sale proceeds.

Cash and Cash Equivalents — The Partnership considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Concentration of Credit Risk — The Partnership holds cash accounts at several institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) protection limits of $250,000. The Partnership’s exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize the Partnership’s potential risk.

Restricted Cash — Restricted cash includes real estate tax escrows, insurance escrows , reserves for replacements of furniture, fixtures and equipment as well as cash collateral pursuant to certain requirements in the then-existing credit agreement and the Partnership’s various mortgage agreements .

Accounts Receivable — Accounts receivable consists primarily of hotel guest and banqueting receivables. Ongoing evaluations of collectability are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.

Inventories — Inventories, consisting primarily of food and beverages, are stated at the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis.

Franchise License Fees — Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of June 30, 2013 and as of December 31, 2012 and 2011 were $218,739, $240,489 and $284,090, respectively. Amortization expense for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $21,750, $21,750, $43,500, $46,912 and $48,350, respectively.

Deferred Financing Costs — Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations.

Derivative Instruments — The Partnership’s derivative instruments are reflected as assets or liabilities on the balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in partners’ capital to the extent the hedge is effective. For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings.

The Partnership uses derivative instruments to add stability to interest expense and to manage its exposure to interest-rate movements. To accomplish this objective, the Partnership primarily used an interest-rate swap, which was required under its then-existing credit agreement and acted as a cash flow hedge involving the receipts of variable-rate amounts from a counterparty in exchange for the Partnership making fixed-rate payments without exchange of the underlying principal amount. The Partnership valued its interest-rate swap at fair value, which it

F-11

defines 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 (exit price) and included it in accounts payable and accrued liabilities. The Partnership also uses derivative instruments in the Company’s stock to obtain more favorable terms on its financing. The Partnership does not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.

The Partnership accounts for the Warrant based upon the guidance enumerated in Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging: Contracts in Entity’s Own Stock . The Essex Warrant contains a provision that could require an adjustment to the exercise price if the Company issued securities deemed to be dilutive to the Essex Warrant. Under the terms of the Warrant, the Partnership is obligated to issue additional partnership units in exchange for the consideration received by the Company upon exercise of the Essex Warrant, and therefore is classified as a derivative liability. The Warrant is carried at fair value with changes in fair value reported in earnings as long as the Warrant remains classified as a derivative liability.

The Partnership’s warrant derivative liability was valued at June 30, 2013 as well as at December 31, 2012 and 2011 using the Monte Carlo simulation method which is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of our and our peer group’s future expected stock prices and minimizes standard error. The Monte Carlo simulation method takes into account, as of the valuation date, factors including the exercise price, the remaining term of the Warrant, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the Warrant.

The Partnership classifies the inputs used to measure fair value into the following hierarchy:

Level 1

Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2

Unadjusted quoted prices in active markets for similar assets or liabilities, or

Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or

Inputs other than quoted prices that are observable for the asset or liability.

Level 3

Unobservable inputs for the asset or liability.

The Partnership endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table represents our derivative instruments measured at fair value and the basis for that measurement:

Level 1

Level 2

Level 3

June 30, 2013

Warrant

—

(7,649,962

)

—

December 31, 2012

Warrant

—

(4,969,752

)

—

December 31, 2011

Warrant

—

(2,943,075

)

—

F-12

Preferred Interest — The Partnership accounts for its Series A Preferred Interest based upon the guidance enumerated in ASC 480, Distinguishing Liabilities from Equity. The Preferred Stock is mandatorily redeemable on April 18, 2016, or upon the earlier occurrence of certain triggering events and therefore is classified as a liability instrument on the date of issuance. The Company’s sole source of funds to meet its obligations under the Articles Supplementary are the special distributions from the Partnership which the Company, as general partner, may declare at its sole discretion.

Revenue Recognition — Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as telephone, parking, gift shop sales and rentals from restaurant tenants, rooftop leases and gift shop operators. Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities.

Income Taxes — The Partnership is generally not subject to federal and state income taxes as the unitholders of the Partnership are subject to tax on their respective shares of the Partnership’s taxable income.

The Partnership’s taxable REIT subsidiary, whose operations are reflected in its consolidated financial statements, is subject to federal, state and local income taxes. The Partnership accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. As of June 30, 2013, the Partnership had no uncertain tax positions. The Partnership’s policy is to recognize obligations for interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which the Partnership is subject generally include 2009 through 2012. In addition, as of June 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions to which MHI TRS is subject generally also include 2004 through 2008.

Stock-based Compensation — The Company’s 2004 Long-Term Incentive Plan (the “2004 Plan”) and its 2013 Long-Term Incentive Plan (the “2013 Plan”) permit the grant of stock options, restricted (non-vested) stock and performance stock compensation awards to employees of the Partnership for up to 350,000 and 750,000 shares of common stock, respectively. The Company and the Partnership believe that such awards better align the interests of their employees with those of their stockholders and unitholders. Under the terms of the Partnership Agreement, the Company, as general partner, is authorized to issue additional partnership units to itself in connection with the issuance of shares of common stock in the Company in exchange for the net proceeds received by the Company in connection with any such issuance.

Under the 2004 Plan, the Company has made restricted stock and deferred stock awards totaling 337,438 shares including 255,938 shares issued to certain executives and employees, and 81,500 restricted shares issued to its independent directors. Of the 255,938 shares issued to certain of the Company’s executives and employees, all have vested except 30,000 issued to the Chief Financial Officer upon execution of his employment contract which will vest pro-rata on each of the next five anniversaries of the effective date of his employment agreement. Regarding the restricted shares awarded to the Company’s independent directors, all of the shares have vested except 15,000 shares which vest at the end of 2013. As of June 30, 2013, no awards have been granted under the 2013 Plan.

The value of the awards is charged to compensation expense on a straight-line basis over the vesting or service period based on the Company’s stock price on the date of grant or issuance. Under either the 2004 Plan or the 2013 Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. As of June 30, 2013, no performance-based stock awards have been granted under either the 2004 Plan or the 2013 Plan. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method. Total compensation cost recognized under the 2004 Plan for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $43,026, $26,155, $157,230, $121,190 and $223,204, respectively.

F-13

Comprehensive Income (Loss) — Comprehensive income (loss), as defined, includes all changes in partners’ capital (net assets) during a period from non-owner sources. The Partnership does not have any items of comprehensive income (loss) other than net income (loss).

Segment Information — The Partnership has determined that its business is conducted in one reportable segment: hotel ownership.

Use of Estimates — The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements — There are no recent accounting pronouncements which the Partnership believes will have a material impact on its consolidated financial statements.

3. Acquisition of Hotel Properties

There were no new acquisitions during the six months ended June 30, 2013 or 2012, or for the years ended December 31, 2012, 2011 or 2010.

4. Investment in Hotel Properties

Investment in hotel properties as of June 30, 2013 and as of December 31, 2012 and 2011 consisted of the following:

December 31,
2011

December 31,
2012

June 30,
2013

(unaudited)

Land and land improvements

19,373,908

19,429,571

19,555,434

Buildings and improvements

179,585,304

181,209,101

182,213,649

Furniture, fixtures and equipment

32,419,505

33,716,700

30,986,922

231,378,717

234,355,372

232,756,005

Less: accumulated depreciation

(49,909,285

)

(57,927,468

)

(58,037,772

)

181,469,432

176,427,904

174,718,233

5. Debt

Credit Facility. During 2010, 2011 and a portion of the year ended December 31, 2012, the Partnership had a secured credit facility with a syndicated bank group comprised of BB&T, Key Bank National Association and Manufacturers and Traders Trust Company.

On June 4, 2010, the Partnership entered into a fifth amendment to its then-existing credit agreement modifying certain provisions of the agreement including an increase in the rate of interest to LIBOR plus additional interest of 4.00%; a LIBOR floor of 0.75%; a conversion to a non-revolving facility; a provision for mandatory quarterly pre-payments based on excess cash flow, as defined in the amendment, as well as a mandatory prepayment if the Company, as co-borrower, raises equity within certain parameters; and provides an option to extend the maturity for one year if certain conditions are met.

F-14

On April 18, 2011, the Partnership entered into a sixth amendment to the then-existing credit agreement which, among other things, (i) extended the final maturity date of advances under the credit agreement to May 8, 2014; (ii) provided that no additional advances may be made and no currently outstanding advances subsequently repaid or prepaid may be re-borrowed; (iii) adjusted the release amounts with respect to secured hotel properties; (iv) reduced the additional interest from 4.00% to 3.50% and removed the LIBOR floor of 0.75%; and (v) adjusted certain financial covenants including restrictions relating to payment of dividends. In connection with the amendment, the Partnership reduced the outstanding balance on its then-existing credit facility by approximately $22.7 million. In March 2012, the Partnership’s syndicated credit facility was extinguished.

The Partnership had borrowings under the credit facility of $0, $0 and $25,537,290 at June 30, 2013 and at December 31, 2012 and 2011, respectively.

Mortgage Debt. As of June 30, 2013 and as of December 31, 2012 and 2011, the Partnership had $134,893,689, $135,674,432 and $94,157,825 of outstanding mortgage debt, respectively. The following table sets forth the Partnership’s mortgage debt obligations on our hotels.

Property

Balance Outstanding as of

Prepayment
Penalties

Maturity
Date

Amortization
Provisions

Interest
Rate

December 31,
2011

December 31,
2012

June 30,
2013

(unaudited)

Crowne Plaza Hampton Marina

8,151,625

7,559,625

5,999,500

None

06/201

(1)

16,000

⁽ ² ⁾

LIBOR plus
4.55

% ⁽ ³ ⁾

Crowne Plaza Jacksonville Riverfront

14,000,000

14,135,234

13,948,116

None

07/201

⁽ ⁴ ⁾

25 years

LIBOR plus
3.00

Crowne Plaza Tampa Westshore

—

13,872,077

13,738,236

None

06/2017

25 years

5.60

DoubleTree by Hilton Brownstone – University

7,980,385

7,816,867

9,958,327

None

10/2016

⁽ ⁵ ⁾

25 years

5.25

Hilton Philadelphia Airport

—

29,502,666

29,118,931

None

08/2014

⁽ ⁶ ⁾

25 years

LIBOR plus
3.00

% ⁽ ⁷ ⁾

Hilton Savannah DeSoto

22,488,916

22,051,314

21,822,392

Yes ⁽⁸⁾

07/2017

25 years

⁽ ⁹ ⁾

6.06

Hilton Wilmington Riverside

21,884,909

21,416,922

21,171,831

Yes ⁽⁸⁾

03/2017

25 years

⁽ ¹⁰ ⁾

6.21

Holiday Inn Laurel West

7,451,990

7,300,465

7,221,697

Yes ⁽¹¹⁾

08/2021

25 years

5.25

% ⁽ ¹² ⁾

Sheraton Louisville Riverside

12,200,000

12,019,262

11,914,659

⁽¹³⁾

01/2017

25 years

6.24

Total

94,157,825

135,674,432

134,893,689

(1)	The note provides that the mortgage can be extended until June 2015 if certain conditions have been satisfied.

(2)	The Partnership is required to make monthly principal payments of $16,000.

(3)	The note bears a minimum interest rate of 5.00%.

(4)	The note provides that the mortgage can be extended until July 2016 if certain conditions have been satisfied.

(5)	The note provides that after five years, the mortgage can be extended if certain conditions have been satisfied for additional five year period at a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest.

(6)	The note provides that the mortgage can be extended until March 2017 if certain conditions have been satisfied.

(7)	The note bears a minimum interest rate of 3.50%.

F-15

(8)	The notes may not be prepaid during the first six years of the terms. Prepayment can be made with penalty thereafter until 90 days before maturity.

(9)	The note provided for payments of interest only until August 2010 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in July 2017.

(10)	The note provided for payments of interest only until March 2009 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in March 2017.

(11)	Pre-payment can be made with penalty until 180 days before the fifth anniversary of the commencement date of the loan or from such date until 180 days before the maturity.

(12)	The note provides that after five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current five-year U.S. Treasury rate of interest, with a floor of 5.25%.

(13)	With limited exception, the note may not be prepaid until two months before maturity.

Total mortgage debt maturities as of June 30, 2013 without respect to any additional loan extensions for the following twelve-month periods were as follows:


June 30, 2014	$	9,031,123
June 30, 2015		30,706,188
June 30, 2016		15,262,169
June 30, 2017		53,659,368
June 30, 2018		19,920,622
Thereafter		6,314,219

Total future maturities	$	134,893,689

Loan from Carlyle Affiliate Lender. On February 9, 2009, the indirect subsidiary of the Partnership which is a member of the joint venture entity that owns the Crowne Plaza Hollywood Beach Resort, borrowed $4.75 million from the Carlyle entity that is the other member of such joint venture (the “Carlyle Affiliate Lender”), for the purpose of improving the Partnership’s liquidity. In June 2008, the joint venture that owns the property purchased a junior participation in a portion of the mortgage loan from the lender. The amount of the loan from the Carlyle Affiliate Lender approximated the amount the Partnership contributed to the joint venture to enable the joint venture to purchase its interest in the mortgage loan. The interest rate and maturity date of the loan are tied to a note that is secured by a mortgage on the property. The loan, which currently bears a rate of LIBOR plus additional interest of 3.00%, requires monthly payments of interest and principal equal to 50.0% of any distributions it receives from the joint venture. The mortgage to which the loan is tied matures in August 2014. The outstanding balance on the loan at June 30, 2013 and at December 31, 2012 and 2011 was $3,650,220, $4,025,220 and $4,275,220, respectively.

Available Bridge Financing. On April 18, 2011, the Company entered into an agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which the Company had the right to borrow up to $10.0 million before the earlier of December 31, 2011 or the redemption in full of the Preferred Stock. On December 21, 2011, the Company entered into an amendment to the agreement extending the right to borrow the remainder of the available financing to May 31, 2013. The principal amount borrowed bore interest at the rate of 9.25% per annum, payable quarterly in arrears. At June 30, 2013 and at December 31, 2012 and 2011, the Company had borrowings under the Bridge Financing of $0.0 million, $0.0 million and $5.0 million, respectively.

F-16

6. Preferred Interest and Warrants

Preferred Interest. On April 18, 2011, the Company completed a private placement to the Investors pursuant to the Securities Purchase Agreement for gross proceeds of $25.0 million. The Company issued 25,000 shares of Preferred Stock and the Essex Warrant to purchase 1,900,000 shares of the Company’s common stock, par value $0.01 per share.

The Company has designated a class of preferred stock, the Preferred Stock, consisting of 27,650 shares with $0.01 par value per share, having a liquidation preference of $1,000.00 per share pursuant to Articles Supplementary, which sets forth the preferences, rights and restrictions for the Preferred Stock. The Preferred Stock is non-voting and non-convertible. The holders of the Preferred Stock have a right to payment of a cumulative dividend payable quarterly (i) in cash at an annual rate of 10.0% of the liquidation preference per share and (ii) in additional shares of Preferred Stock at an annual rate of 2.0% of the liquidation preference per share. As set forth in the Articles Supplementary, the holder(s) of the Company’s Preferred Stock will have the exclusive right, voting separately as a single class, to elect one (1) member of the Company’s board of directors. In addition, under certain circumstances as set forth in the Articles Supplementary, the holder(s) of the Company’s Preferred Stock will be entitled to appoint a majority of the members of the board of directors. The holder(s) of the Company’s Preferred Stock will be entitled to require that the Company redeem the Preferred Stock under certain circumstances, but no later than April 18, 2016, and on such terms and at such price as is set forth in the Articles Supplementary.

Concurrently with the issuance of the Preferred Stock, the Partnership issued the Preferred Interest to the Company in an amount equivalent to the proceeds of the Preferred Stock received by the general partner pursuant to the terms of the Partnership Agreement. The Partnership Agreement also authorizes the general partner to make special distributions to the Company related to its Preferred Interest for the sole purpose of fulfilling the Company’s obligations with respect to the Preferred Stock. In addition, the Partnership issued the Warrant to purchase 1,900,000 partnership units at an amount equal to the consideration received by the Company upon exercise of the Essex Warrant, as amended.

On June 15, 2012, the Company entered into an agreement with the holders of the Company’s Preferred Stock to redeem 11,514 shares of Preferred Stock for an aggregate redemption price of approximately $12.3 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.8 million. In addition, approximately $0.7 million in unamortized issuance costs related to the redeemed shares were written off.

On June 18, 2012, the Partnership used a portion of the proceeds of the mortgage on the Crowne Plaza Tampa Westshore to make a special distribution to the Company for the purpose of redeeming the 11,514 shares of Preferred Stock.

On March 26, 2013, the Partnership used the net proceeds of the mortgage on the DoubleTree by Hilton Brownstone-University to make a special distribution to the Company for the purpose of redeeming 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee of approximately $0.2 million. In addition, $0.1 million in unamortized issuance costs related to the redeemed shares were written off.

As of June 30, 2013 and as of December 31, 2012 and 2011, there were 12,458, 14,228 and 25,354 shares of the Preferred Stock issued and outstanding, respectively.

As of June 30, 2013 and as of December 31, 2012 and 2011, the redemption value of the Preferred Interest was $12,457,552, $14,227,650 and $25,353,698, respectively.

F-17

Warrants . The Essex Warrant, as modified, entitles the holder(s) to purchase up to 1,900,000 shares of the Company’s common stock at an exercise price of $2.25 per share. Pursuant to the Essex Warrant amendment, the exercise price per share of common stock covered by the Essex Warrant will be adjusted from time to time in the event of cash dividends upon common stock by deducting from such exercise price the per-share amount of such cash dividends. Such adjustment does not take into account quarterly dividends declared prior to January 1, 2012. At June 30, 2013, the adjusted exercise price was $2.08 per share. The Essex Warrant expires on October 18, 2016. The holders of the Essex Warrant have no voting rights. The exercise price and number of shares of common stock issuable upon exercise of the Essex Warrant are both subject to additional adjustments under certain circumstances. The Essex Warrant also contains a cashless exercise right.

Concurrently with the issuance of the Essex Warrant, the Partnership issued the Warrant to the Company. Under the terms of the Warrant, the Company is obligated to exercise the Warrant immediately and concurrently if at any time the Essex Warrant is exercised by its holders. In that event, the Partnership shall issue an equivalent number of partnership units and shall be entitled to receive the proceeds received by the Company upon exercise of the Essex Warrant.

On the date of issuance, the Company and the Partnership determined the fair market value of the Warrant and the Essex Warrant were each approximately $1.6 million using the Black-Scholes option pricing model assuming an exercise price of $2.25 per share of common stock, a risk-free interest rate of 2.26%, a dividend yield of 5.00%, expected volatility of 60.0%, and an expected term of 5.5 years. On the date of issuance, the fair value of the warrant is included in deferred financing costs. The deferred cost is amortized to interest expense in the accompanying consolidated statements of operations over the period from issuance to the mandatory redemption date of the Preferred Stock.

7. Commitments and Contingencies

Ground, Building and Submerged Land Leases —The Partnership leases 2,086 square feet of commercial space next to the Savannah hotel property for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. In December 2007, the Partnership signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the second of three optional five-year renewal periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for this operating lease for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $32,623, $32,062, $65,812, $66,198 and $60,049, respectively.

The Partnership leases, as landlord, the entire fourteenth floor of the Savannah hotel property to The Chatham Club, Inc. under a ninety-nine year lease expiring July 31, 2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the property. No rental income is recognized under the terms of this lease as the original lump sum rent payment of $990 was received by the previous owner and not prorated over the life of the lease.

The Partnership leases a parking lot adjacent to the DoubleTree by Hilton Brownstone-University in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expires August 31, 2016. There is a renewal option for up to three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. The Partnership holds an exclusive and irrevocable option to purchase the leased land at fair market value at the end of the original lease term, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for each of the six-month periods ended June 30, 2013 and 2012 was $47,741 and for each of the years ended December 31, 2012, 2011 and 2010 was $95,482.

In conjunction with the sublease arrangement for the property at Shell Island which expired in December 2011, the Partnership incurred an annual lease expense for a leasehold interest other than the purchased leasehold interest. Lease expense for each of the years ended December 31, 2011 and 2010 was $195,000.

The Partnership leases land adjacent to the Crowne Plaza Tampa Westshore for use as parking under a five-year agreement with the Florida Department of Transportation that commenced in July 2009 and expires in July 2014. The agreement requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $1,226, $1,226, $2,515, $2,806 and $2,641, respectively.

F-18

The Partnership leases certain submerged land in the Saint Johns River in front of the Crowne Plaza Jacksonville Riverfront from the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land was leased under a five-year operating lease requiring annual payments of $4,961 which expired September 18, 2012. A new operating lease was executed requiring annual payments of $6,020 and expires September 18, 2017. Rent expense for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $3,010, $2,480, $5,920, $4,961 and $4,961, respectively.

The Company, as general partner, leases 3,542 square feet of commercial office space in Williamsburg, Virginia under an agreement which expires August 31, 2015. Rent expense for each of the six-month periods ended June 30, 2013 and 2012 was $27,500 and for each of the years ended December 31, 2012, 2011 and 2010 was $55,000.

The Company, as general partner, leases 1,632 square feet of commercial office space in Rockville, Maryland under an agreement that expires February 28, 2017. The agreement requires monthly payments at an annual rate of $22,848 for the first year of the lease term and monthly payments at an annual rate of $45,696 for the second year of the lease term, increasing 2.75% per year for the remainder of the lease term. Rent expense for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 was $22,074, $22,272, $44,927, $44,320 and $44,041, respectively.

The Partnership also leases certain furniture and equipment under financing arrangements expiring between August 2013 and September 2017.

A schedule of minimum future lease payments for the following twelve-month periods is as follows:


June 30, 2014	$	464,960
June 30, 2015		376,491
June 30, 2016		266,758
June 30, 2017		90,385

Total future minimum lease payments	$	1,198,594

Management Agreements —Each of the operating hotels that the Partnership wholly-owned at June 30 , 2013, except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. The Partnership entered into a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019 (see Note 9).

Franchise Agreements —As of June 30, 2013, the Partnership’s hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, the Partnership is required to pay a franchise fee of 5.0% of room revenues, plus additional fees for marketing, central reservation systems, and other franchisor programs and services that amount to between 2.5% and 6.0% of room revenues from the hotels. The franchise agreements currently expire between October 2014 and April 2023.

Restricted Cash Reserves —Each month, the Partnership is required to escrow with its lender on the Hilton Wilmington Riverside and the Hilton Savannah DeSoto an amount equal to ¹ / ₁₂ of the annual real estate taxes due for the properties. The Partnership is also required by several of its lenders to establish individual property improvement funds to cover the cost of replacing capital assets at its properties. Each month, contributions equal 4.0% of gross revenues for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside, the Sheraton Louisville Riverside and the Crowne Plaza Hampton Marina and equal 4.0% of room revenues for the Hilton Philadelphia Airport.

Pursuant to the terms of the fifth amendment to the then-existing credit agreement and until its termination in March 2012, the Partnership was required to escrow with its lender an amount sufficient to pay the real estate taxes as well as property and liability insurance for the encumbered properties when due. In addition, the Partnership was required to make monthly contributions equal to 3.0% of room revenues into a property improvement fund.

F-19

Litigation —The Partnership is not involved in any material litigation, nor, to its knowledge, is any material litigation threatened against the Partnership. The Partnership is involved in routine litigation arising out of the ordinary course of business, all of which the Partnership expects to be covered by insurance and none of which it expects will have a material impact on its financial condition or results of operations.

8. Equity

Preferred Stock – The Company has authorized 1,000,000 shares of preferred stock, of which 27,650 shares have been designated Series A Cumulative Redeemable Preferred Stock, as described above. None of the remaining authorized shares have been issued. Under the terms of the Partnership Agreement, the Company, as general partner, may cause the Partnership to issue additional preferred partnership interests in exchange for the proceeds of the issuance of any additional shares of preferred stock.

Common Stock— The Company is authorized to issue up to 49,000,000 shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock and holders of the Partnership’s units other than the Company are entitled to receive distributions when authorized by the Company’s board of directors out of assets of the Partnership available for the payment of distributions.

On January 25, 2013, the Company was issued 45,500 partnership units and awarded an aggregate of 30,500 shares of unrestricted stock to certain executives and employees as well as 15,000 shares of restricted stock to certain of its independent directors.

On January 1, 2013, the Company was issued 30,000 partnership units and granted 30,000 restricted shares to its Chief Financial Officer in accordance with the terms of his employment contract.

On February 2, 2012, the Company was issued 46,000 partnership units and awarded an aggregate of 29,500 shares of unrestricted stock to certain executives and employees as well as 1,500 shares of unrestricted stock and 15,000 shares of restricted stock to certain of its independent directors.

On March 22, 2011, the Company was issued 29,500 partnership units and issued 17,500 shares of non-restricted stock to certain executives and employees as well as 12,000 shares of restricted stock to its then serving independent directors.

On January 1, 2011, the Company was issued 16,000 partnership units and granted 16,000 non-restricted shares to its Chief Operating Officer and President in accordance with the terms of his employment contract, as amended.

On June 7, 2010, the Company was issued 21,000 partnership units and granted 21,000 shares of restricted stock to its Vice President and General Counsel in accordance with the terms of his employment contract.

During February 2010, the Company was issued 30,175 partnership units and awarded 18,175 shares of non-restricted stock to certain executives and 12,000 shares of restricted stock to its independent directors.

In addition, on February 1, 2010, the Company was issued 15,000 partnership units and awarded 15,000 shares of non-restricted stock to its Chief Executive Officer in accordance with the terms of his renewed employment contract.

On January 1, 2010, the Company was issued 10,000 partnership units and issued 10,000 non-restricted shares to its Chief Operating Officer in accordance with the terms of his employment contract, as amended.

Warrants for Shares of Common Stock — The Company has granted no warrants representing the right to purchase shares of common stock other than the Essex Warrant described in Note 6.

Partnership Units —Holders of partnership units, other than the general partner, have certain redemption rights, which enable them to cause the Partnership to redeem their units in exchange for shares of the Company’s common stock on a one-for-one basis or, at the option of the Company, cash per unit equal to the average of the market price of the Company’s common stock for the 10 trading days immediately preceding the notice date of such

F-20

redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company.

During the six months ended June 30, 2013 and the years ended December 31, 2012, 2011 and 2010, the Company redeemed a total of 39,600 units in the Operating Partnership held by a trust controlled by two members of the Board of Directors for a total of $111,519 pursuant to the terms of the Partnership Agreement.

As of June 30, 2013 and as of December 31, 2012 and 2011, the total number of Partnership units outstanding was 13,038,125, 12,972,625 and 12,938,625, respectively.

Distributions — The following table presents the quarterly distributions declared and payable per unit for the years ended December 31, 2010, 2011, 2012 and for the first two quarters of 2013:

Quarter Ended

2010

2011

2012

2013

March 31,

0.000

0.020

0.035

June 30,

0.000

0.020

0.035

September 30,

0.000

0.020

0.030

December 31,

0.000

0.020

0.030

9. Related Party Transactions

MHI Hotels Services. As of June 30, 2013, the members of MHI Hotels Services (a company that is majority-owned and controlled by the Company’s chief executive officer, its former chief financial officer, a member of its Board of Directors and a former member of its Board of Directors) owned 1,089,641 shares, or approximately 10.7%, of the Company’s outstanding common stock as well as 1,877,972 partnership units. The following is a summary of the transactions between the Partnership and MHI Hotels Services:

Accounts Receivable— At June 30, 2013 and at December 31, 2012 and 2011, the Partnership was due $10,665, $8,657 and $24,880, respectively, from MHI Hotels Services.

Shell Island Sublease —The Partnership has a sublease arrangement with MHI Hotels Services on its expired leasehold interests in the property at Shell Island. For the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010, the Company earned $175,000, $175,000, $350,000, $640,000 and $640,000, respectively, in leasehold revenue. The underlying leases at Shell Island expired on December 31, 2011.

Strategic Alliance Agreement— On December 21, 2004, the Partnership entered into a ten-year strategic alliance agreement with MHI Hotels Services that provides in part for the referral of acquisition opportunities to the Company and the management of its hotels by MHI Hotels Services.

Management Agreements —Each of the operating hotels that the Partnership wholly-owned at June 30, 2013, December 31, 2012 and 2011, except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. The Partnership entered into a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019. Under both management agreements, MHI Hotels Services receives a base management fee, and if the hotels meet and exceed certain thresholds, an additional incentive management fee. The base management fee for any hotel is 2.0% of gross revenues for the first full fiscal year and partial fiscal year from the commencement date through December 31 of that year, 2.5% of gross revenues the second full fiscal year, and 3.0% of gross revenues for every year thereafter. Pursuant to the sale of the Holiday Inn Downtown in Williamsburg, Virginia, one of the hotels initially contributed to the Partnership upon its formation, MHI Hotels Services agreed that the property in Jeffersonville, Indiana shall substitute for the Williamsburg property under the master management agreement. The incentive management fee, if any, is due annually in arrears within 90 days of the end of the fiscal year and will be equal to 10.0% of the amount by which the gross operating profit of the hotels, on an aggregate basis, for a given year exceeds the gross operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive management fee may not exceed 0.25% of gross revenues of all of the hotels included in the incentive fee calculation.

F-21

For the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010, MHI Hotels Services earned $1,415,439, $1,457,006, $2,818,842, $2,469,853 and $2,082,627, respectively, in management fees, which are included in indirect expenses in the accompanying statements of operations.

Employee Medical Benefits— The Partnership pays the cost of employee medical benefits for its employees, as well as those employees that work exclusively for our hotel properties, through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of MHI Hotels Services. For the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010, the Partnership paid $1,294,724, $1,220,888, $2,344,734, $2,448,431 and $2,185,475, respectively, for benefits, which are included in indirect expenses in the consolidated statements of operations.

Construction Management Services —The Partnership has engaged MHI Hotels Services to manage various aspects of renovations at various hotels. For the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010, the Partnership paid $0, $0, $0, $0 and $208,400, respectively, in construction management fees, which are capitalized as part of the cost of the renovations.

Redemption of Units in Operating Partnership —During the six months ended June 30, 2013 and the years ended December 31, 2012, 2011 and 2010, the Partnership redeemed a total of 39,600 units held by a trust controlled by two current members and one former member of our Board of Directors for a total of $111,519 pursuant to the terms of the Partnership Agreement.

Holders of the Preferred Stock and Essex Warrant —As set forth in the Articles Supplementary, the holders of Preferred Stock, Essex Illiquid, LLC and Richmond Hill Capital Partners, LLC, are entitled to elect one (1) member of the Company’s board of directors. The member of the board of directors elected by the holders of Preferred Stock holds executive positions in Essex Equity Capital Management, LLC, an affiliate of Essex Illiquid, LLC, as well as Richmond Hill Capital Partners, LLC.

On December 21, 2011, the Company entered into an amendment to its $10.0 million bridge loan agreement with Essex Equity High Income Joint Investment Vehicle, LLC, an affiliate of Essex Equity Capital Management, LLC, of which one member of the board of directors of the Company is a Managing Director, to extend the lender’s loan commitment by 17 months through May 31, 2013.

On December 21, 2011, the Company also amended the terms of the outstanding Essex Warrant. Pursuant to the Essex Warrant amendment, the exercise price per share of common stock covered by the Essex Warrant will be adjusted from time to time in the event of cash dividends upon common stock by deducting from such exercise price the per share amount of such cash dividends.

On June 15, 2012, the Company entered into an amendment of its then-existing Bridge Financing that provided, subject to a $1.5 million prepayment which the Company made on June 18, 2012, that the amount of undrawn term loan commitments increased to $7.0 million, of which $2.0 million was reserved to repay principal amounts outstanding on the Crowne Plaza Jacksonville Riverfront hotel property.

On July 10, 2012, the Company amended the terms of the outstanding Essex Warrant by establishing a modified excepted holder limit (as defined in the Company’s Articles of Amendment and Restatement) for the Investors.

F-22

On March 26, 2013, the Company redeemed 1,902 shares of Preferred Stock for an aggregate redemption price of approximately $2.1 million plus the payment of related accrued and unpaid cash and stock dividends. The redemption resulted in a prepayment fee pursuant to the provisions of the Articles Supplementary of approximately $0.2 million.

10. Retirement Plans

The Partnership began a 401(k) plan for qualified employees on April 1, 2006. The plan is subject to “safe harbor” provisions which require that the Partnership match 100.0% of the first 3.0% of employee contributions and 50.0% of the next 2.0% of employee contributions. All Partnership matching funds vest immediately in accordance with the “safe harbor” provisions. Partnership contributions to the plan for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010 were $36,719, $35,806, $54,865, $46,890 and $43,787, respectively.

11. Unconsolidated Joint Venture

The Partnership owns a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that had an option to purchase a three-acre development site with parking garage adjacent to the hotel and which leased the parking garage for use by the hotel; and (iv) the entity that owned the junior participation in the existing mortgage. Carlyle owns a 75.0% indirect controlling interest in all these entities. The joint venture purchased the property on August 8, 2007 and began operations on September 18, 2007. Summarized financial information for this investment, which is accounted for under the equity method, is as follows:

December 31,
2011

December 31,
2012

June 30, 2013

(unaudited)

ASSETS

Investment in hotel property, net

67,682,291

65,899,055

65,176,882

Cash and cash equivalents

2,589,871

3,298,009

3,098,076

Accounts receivable

255,233

301,921

159,870

Prepaid expenses, inventory and other assets

2,059,130

1,409,924

955,101

TOTAL ASSETS

72,586,525

70,908,909

69,389,929

LIABILITIES

Mortgage loan, net

33,600,000

33,100,000

32,600,000

Accounts payable and other accrued liabilities

2,817,582

2,995,271

2,633,014

Advance deposits

301,952

257,950

372,762

TOTAL LIABILITIES

36,719,534

36,353,221

35,605,776

TOTAL MEMBERS’ EQUITY

35,866,991

34,555,688

33,784,153

TOTAL LIABILITIES AND MEMBERS’ EQUITY

72,586,525

70,908,909

69,389,929

F-23

Year Ended
December 31,
2010

Year Ended
December 31,
2011

Year Ended
December 31,
2012

Six months ended
June 30,
2012

Six months ended
June 30,
2013

(unaudited)

Revenue

Rooms department

10,957,552

12,012,048

13,279,070

7,463,159

8,498,298

Food and beverage department

2,094,611

2,580,101

2,529,851

1,355,163

1,392,985

Other operating departments

1,085,434

1,107,392

1,238,243

616,608

785,964

Total revenue

14,137,597

15,699,541

17,047,164

9,434,930

10,677,247

Expenses

Hotel operating expenses

Rooms department

2,384,074

2,514,887

2,847,660

1,482,667

1,624,736

Food and beverage department

1,643,261

1,909,535

1,996,968

1,064,924

1,041,169

Other operating departments

622,769

581,402

596,842

342,618

289,890

Indirect

6,427,040

6,191,902

6,661,672

3,475,831

3,675,768

Total hotel operating expenses

11,077,144

11,197,726

12,103,142

6,366,040

6,631,563

Depreciation and amortization

2,184,219

2,196,212

2,362,692

1,282,969

1,073,955

General and administrative

199,372

83,040

79,380

50,971

57,843

Total operating expenses

13,460,735

13,476,978

14,545,214

7,699,980

7,763,361

Operating income

676,862

2,222,563

2,501,950

1,734,950

2,913,886

Interest expense

(1,134,528

)

(1,780,283

)

(1,758,244

)

(875,584

)

(867,723

)

Interest income

4,883

—

Loss on expiration of option purchase

—

(75,000

)

—

Unrealized gain (loss) on hedging activities

520,505

(607,656

)

(55,008

)

(148,509

)

182,302

Net income (loss)

67,722

(240,376

)

688,698

710,857

2,228,465

12. Indirect Hotel Operating Expenses

Indirect hotel operating expenses consists of the following expenses incurred by the hotels:

Year Ended
December 31,
2010

Year Ended
December 31,
2011

Year Ended
December 31,
2012

Six months ended
June 30,
2012

Six months ended
June 30,
2013

(unaudited)

General and administrative

6,157,354

6,454,042

6,813,616

3,423,990

3,559,576

Sales and marketing

6,645,736

6,644,654

7,133,300

3,646,245

3,713,767

Repairs and maintenance

4,178,563

4,518,327

4,606,547

2,314,391

2,251,966

Utilities

4,480,836

4,609,509

4,425,441

2,166,007

2,026,216

Franchise fess

2,434,020

2,627,147

2,875,875

1,488,310

1,594,353

Management fees, including incentive

2,082,627

2,469,853

2,818,842

1,457,006

1,415,440

F-24

Year Ended
December 31,
2010

Year Ended
December 31,
2011

Year Ended
December 31,
2012

Six months ended
June 30,
2012

Six months ended
June 30,
2013

Property taxes

2,397,671

2,621,896

2,643,931

1,374,636

1,168,410

Insurance

1,232,735

1,276,527

1,369,800

661,205

716,395

Other

416,617

562,236

232,258

110,908

125,495

Total indirect hotel operating expenses

30,026,159

31,784,191

32,919,610

16,642,698

16,571,618

13. Income Taxes

Our consolidated financial statements include the operations of our taxable REIT subsidiary, which is subject to federal, state and local income taxes on its taxable income. In certain jurisdictions, the operations of the Partnership are subject to state and local taxes as well. The components of the provision for (benefit from) income taxes for the six months ended June 30, 2013 and 2012 and the years ended December 31, 2012, 2011 and 2010 are as follows:

Year Ended
December 31,
2010

Year Ended
December 31,
2011

Year Ended
December 31,
2012

Six months ended
June 30,
2012

Six months ended
June 30,
2013

(unaudited)

Current:

Federal

—

113,919

(113,699

)

(48,967

)

50,501

State and local

40,309

106,347

2,461

8,109

56,575

40,309

220,266

(111,238

)

(40,858

)

107,076

Deferred:

Federal

163,548

576,136

1,136,334

868,764

1,006,149

State and local

10,487

109,053

276,133

234,815

261,648

174,035

685,189

1,412,467

1,103,579

1,267,797

214,344

905,455

1,301,229

1,062,721

1,374,873

A reconciliation of the statutory federal income tax provision (benefit) to the Company’s provision for (benefit from) income tax is as follows (in thousands):

Year Ended
December 31,
2010

Year Ended
December 31,
2011

Year Ended
December 31,
2012

Six months ended
June 30,
2012

Six months ended
June 30,
2013

(unaudited)

Statutory federal income tax benefit

(1,032,981

)

(1,893,728

)

(1,369,004

)

(1,381,738

)

(95,147

)

Effect of non-taxable REIT loss

1,196,529

2,583,783

2,391,639

2,201,535

1,151,797

State income tax provision

50,796

215,400

278,594

242,924

318,223

214,344

905,455

1,301,229

1,062,721

1,374,873

F-25

As of June 30, 2013 and as of December 31, 2012 and 2011, the Partnership had a net deferred tax asset of approximately $1.3 million, $2.6 million and $4.1 million, respectively, of which, approximately $0.6 million, $1.9 million and $3.4 million, respectively, are due to accumulated net operating losses. These loss carryforwards will begin to expire in 2028 if not utilized by such time. As of June 30, 2013 and as of December 31, 2012 and 2011, approximately $0.3 million, $0.4 million and $0.4 million, respectively, of the deferred tax asset is attributable to the Partnership’s share of start-up expenses related to the Crowne Plaza Hollywood Beach Resort and start-up expenses related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore, all of which were not deductible when incurred and are now being amortized over 15 years. The remainder of the deferred tax asset is attributable to year-to-year timing differences for accrued, but not deductible, vacation and sick pay. The Partnership believes that it is more likely than not that the deferred tax asset will be realized and that no valuation allowance is required.

14. Earnings (Loss) per Unit

The computation of basic and diluted earnings per unit is presented below.

Year ended
December 31,
2010

Year ended
December 31,
2011

Year ended
December 31,
2012

Six months ended
June 30,
2012

Six months ended
June 30,
2013

(unaudited)

Numerator

Net loss

(3,252,261

)

(6,475,243

)

(5,327,711

)

(5,126,655

)

(1,654,717

)

Denominator

Weighted average number of units outstanding

12,893,444

12,934,325

12,973,953

12,974,306

13,037,064

Dilutive effect of stock awards

16,000

—

Dilutive effect of warrant

—

183,442

651,608

451,354

911,582

Weighted average number of common shares outstanding for dilutive computation

12,909,444

13,117,767

13,625,561

13,425,660

13,948,646

Basic net loss per unit

(0.25

)

(0.50

)

(0.41

)

(0.40

)

(0.13

)

Diluted net loss per unit

(0.25

)

(0.50

)

(0.39

)

(0.38

)

(0.12

)

F-26

Diluted net income (loss) per share takes into consideration the pro forma dilution of certain unvested stock awards during 2010 as well as the Warrant discussed in Note 6 issued in April 2011.

15. Quarterly Operating Results (Unaudited)

Quarters Ended 2012

March 31

June 30

September 30

December 31

Total revenue

20,025,146

25,112,522

21,771,213

20,434,338

Total operating expenses

18,719,004

20,410,903

19,577,732

18,330,698

Net operating income

1,306,142

4,701,619

2,193,481

2,103,640

Net income (loss)

(2,980,344

)

(2,146,311

)

(2,095,198

)

1,894,143

Quarters Ended 2011

March 31

June 30

September 30

December 31

Total revenue

18,535,572

23,129,720

20,015,186

19,492,027

Total operating expenses

17,586,783

19,351,054

19,191,343

18,381,485

Net operating income (loss)

948,789

3,778,666

823,843

1,110,542

Net income (loss)

(1,336,470

)

(243,501

)

(1,494,902

)

(3,400,370

)

16. Subsequent Events

On July 11, 2013, the Company (and Partnership) paid a quarterly dividend (distribution) of $0.035 per common share (and unit) to those stockholders (and unitholders) of record on June 14, 2013.

On July 22, 2013, the Company (and Partnership) authorized payment of a quarterly dividend (distribution) of $0.04 per common share (and unit) to those stockholders (and unitholders) of record as of September 13, 2013. The dividend (distribution) is to be paid on October 11, 2013.

On August 1, 2013, the Partnership obtained a $15.6 million mortgage with CIBC, Inc. on the DoubleTree by Hilton Raleigh Brownstone – University in Raleigh, North Carolina. The mortgage bears interest at a rate of 4.78% and provides for level payments of principal and interest on a monthly basis under a 30-year amortization schedule. The maturity date is August 1, 2018. Approximately $0.7 million of the loan proceeds were placed into a restricted reserve which can be disbursed to the Partnership upon satisfaction of certain financial performance criteria. The remaining proceeds of the mortgage were used to repay the existing indebtedness, to pay closing costs, to make a special distribution to the Company of approximately $2.7 million with respect to its Preferred Interest to facilitate the redemption of 2,460 shares of the Company’s Preferred Stock and for working capital. The redemption resulted in a prepayment fee of approximately $0.2 million.

On August 2, 2013, the Partnership changed its name from MHI Hospitality, L.P. to Sotherly Hotels LP.

F-27

SOTHERLY HOTELS INC.

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION

AS OF DECEMBER 31, 2012

(in thousands)


			Initial Costs				Costs Capitalized Subsequent to Acquisition				Gross Amount At End of Year													Life on Which Depreciation on Latest Statement of
Description	Encum- brances		Land		Building & Improvements		Land		Building & Improvements		Land		Building & Improvements		Total		Accumulated Depreciation			Date of Construction		Date Acquired		Operations is Computed
Crowne Plaza Hampton Marina Hampton, Virginia	$	7,560	$	1,061	$	6,733	$	33	$	3,302	$	1,094	$	10,035	$	11,129	$	(1,304	)		1988		2008	3-39 years
Crowne Plaza Jacksonville Riverfront Jacksonville, Florida		14,135		7,090		14,604		51		2,813		7,141		17,417		24,558		(3,442	)		1970		2005	3-39 years
Crowne Plaza Tampa Westshore Tampa, Florida		13,872		4,153		9,670		273		21,965		4,426		31,635		36,061		(3,728	)		1973		2007	3-39 years
Hilton Philadelphia Airport Philadelphia, Pennsylvania		29,503		2,100		22,031		84		3,599		2,184		25,630		27,814		(5,604	)		1972		2004	3-39 years
Hilton Savannah DeSoto Savannah, Georgia		22,051		600		13,562		14		10,876		614		24,438		25,052		(5,698	)		1968		2004	3-39 years
Hilton Wilmington Riverside Wilmington, North Carolina		21,417		785		16,829		112		9,967		897		26,796		27,693		(8,103	)		1970		2004	3-39 years
DoubleTree by Hilton Brownstone - University Raleigh, North Carolina		7,817		815		7,416		184		4,623		999		12,039		13,038		(2,852	)		1971		2004	3-39 years
Holiday Inn Laurel West Laurel, Maryland		7,300		900		9,443		187		2,416		1,087		11,859		12,946		(2,985	)		1985		2004	3-39 years
Sheraton Louisville Riverside Jeffersonville, Indiana		12,019		782		6,891		206		14,469		988		21,360		22,348		(2,961	)		1972		2006	3-39 years

	$	135,674	$	18,286	$	107,179	$	1,144	$	74,030	$	19,430	$	181,209	$	200,639	$	(36,677	)

F-28

RECONCILIATION OF REAL ESTATE AND ACCUMULATED DEPRECIATION

RECONCILIATION OF REAL ESTATE


Balance at December 31, 2009	$	192,529
Improvements		3,394
Disposal of Assets		(37	)
Balance at December 31, 2010	$	195,886
Improvements		3,380
Disposal of Assets		(307	)
Balance at December 31, 2011	$	198,959
Improvements		1,807
Disposal of Assets		(127	)
Balance at December 31, 2012	$	200,639

RECONCILIATION OF ACCUMULATED DEPRECIATION


Balance at December 31, 2009	$	20,871
Current Expense		5,295
Disposal of Assets		(21	)
Balance at December 31, 2010	$	26,145
Current Expense		5,325
Disposal of Assets		(166	)
Balance at December 31, 2011	$	31,304
Current Expense		5,500
Disposal of Assets		(127	)
Balance at December 31, 2012	$	36,677

F-29

Senior Unsecured Notes

SOTHERLY HOTELS LP

LOGO

Senior Unsecured Notes

PROSPECTUS

SANDLER O’NEILL + PARTNERS, L.P.

, 2013

Until , 2013, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

Item 31. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses of the sale and distribution of the securities being registered (assuming no exercise of the underwriter’s over-allotment option), all of which are being borne by the Registrant.


SEC registration fee	$	3,137.20
FINRA filing fee		3,950
NASDAQ listing fee		*
Printing fees		*
Legal fees and expenses		*
Accounting fees and expense		*
Trustee fees and expenses		*
Blue sky fees and expenses		*
Miscellaneous		*

Total	$	*

*	To be filed by amendment.

All expenses, except the SEC registration fee, the FINRA filing fee and the NASDAQ listing fee, are estimated.

Item 32. Sales To Special Parties.

Not applicable.

Item 33. Recent Sales of Unregistered Securities.

In April 2011, the Operating Partnership’s general partner, Sotherly, sold to Essex Illiquid, LLC and Richmond Hill Capital Partners, LP in a private placement 25,000 shares of Sotherly’s Series A Cumulative Redeemable Preferred Stock and a warrant to purchase 1,900,000 shares of Sotherly’s common stock, par value $0.01 per share, for a purchase price of $25.0 million, the proceeds of which were contributed to the Operating Partnership in exchange for a series A preferred interests and a warrant to purchase 1,900,000 partnership units. The Operating Partnership used the net proceeds from this offering to partially prepay the amounts owed by Sotherly under its credit agreement. The securities described above were issued in reliance on Section 4(2) of the Securities Act.

Item 34. Indemnification of Directors and Officers.

Subject to any terms, conditions or restrictions set forth in the Operating Partnership’s partnership agreement, Section 17-108 of the Delaware Revised Uniform Limited Partnership Act empowers a Delaware limited partnership to indemnify and hold harmless any partner or other person from and against all claims and demands whatsoever. The amended and restated partnership agreement of the Operating Partnership generally requires the Operating Partnership to indemnify Sotherly and the directors, officers and employees of Sotherly, and any affiliates of either Sotherly or the Operating Partnership and certain other specific persons to the fullest extent permitted by the law against all losses, claims, damages, liabilities, including reasonable legal fees and expenses, or similar events relating to the operations of the Operating Partnership except for those which arise from bad faith, improper receipt of a personal benefit or where there was reasonable knowledge that the act or omission leading to the activity was unlawful.

II - 1

Sotherly provides insurance from a commercial carrier against certain liabilities that could be incurred by the Company’s directors and officers.

Item 35. Treatment of Proceeds from Stock Being Registered.

Not applicable.

Item 36. Financial Statements and Exhibits.

(a)

Financial Statements . The following financial statements are filed as part of this registration statement on Form S-11.


Sotherly Hotels LP
Report of Independent Registered Public Accounting Firm			F-2

Consolidated Balance Sheets for Sotherly Hotels LP as of June 30, 2013 and December 31, 2012 and 2011			F-3

Consolidated Statements of Operations for Sotherly Hotels LP for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010			F-4

Consolidated Statements of Changes in Partners’ Capital for Sotherly Hotels LP for the six months ended June 30, 2013 and for the years ended December 31, 2012, 2011 and 2010			F-5

Consolidated Statements of Cash Flows for Sotherly Hotels LP for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012, 2011 and 2010			F-6

Notes to Consolidated Financial Statements			F-7

Schedule III—Real Estate and Accumulated Depreciation as of December 31, 2012			F-28

(b)

Exhibits . The Exhibit Index filed herewith and appearing immediately before the exhibits hereto is incorporated by reference.

Item 37. Undertakings.

(a)	The undersigned registrant hereby undertakes that:

1) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

(b)	The undersigned registrant hereby further undertakes that:

1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration state in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

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2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

Pursuant to the requirements of the Securities Act, as amended, the Issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Williamsburg, Commonwealth of Virginia, on August 9, 2013.


SOTHERLY HOTELS LP,

by its General Partner, SOTHERLY HOTELS INC.

By:		/s/ D AVID R. F OLSOM
Name:		David R. Folsom
Its:		President and Chief Operating Officer

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Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:


Name and Signature	Title	Date

/ S / A NDREW M. S IMS	Chief Executive Officer and Chairman of the Board of Directors of Sotherly Hotels Inc.	August 9, 2013
Andrew M. Sims	(Principal Executive Officer of Sotherly Hotels Inc.)

/ S / D AVID R. F OLSOM	President and Director of Sotherly Hotels Inc.	August 9, 2013
David R. Folsom

/ S / A NTHONY E. D OMALSKI	Chief Financial Officer of Sotherly Hotels Inc.	August 9, 2013
Anthony E. Domalski	(Principal Financial Officer and Principal Accounting Officer of Sotherly Hotels Inc.)


Gen. Anthony C. Zinni	Director of Sotherly Hotels Inc.


J. Paul Carey	Director of Sotherly Hotels Inc.

/ S / E DWARD S. S TEIN *		August 9, 2013
Edward S. Stein	Director of Sotherly Hotels Inc.

/ S / D AVID J. B EATTY *		August 9, 2013
David J. Beatty	Director of Sotherly Hotels Inc.

/ S / J AMES P. O’ HANLON *		August 9, 2013
James P. O’Hanlon	Director of Sotherly Hotels Inc.

/ S / K IM E. S IMS *		August 9, 2013
Kim E. Sims	Director of Sotherly Hotels Inc.


Ryan P. Taylor	Director of Sotherly Hotels Inc.

*	Executed pursuant to power of attorney.

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EXHIBIT INDEX


Exhibit No.		Description of Exhibit

1.1		Form of Underwriting Agreement by and among Sotherly Hotels Inc., Sotherly Hotels LP and Sandler O’Neill & Partners, L.P. as representative of the Underwriters named therein*

3.1		Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP ⁽¹⁾

3.2		Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP ⁽²⁾

3.3		Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of Sotherly Hotels LP

4.1		Form of Senior Unsecured Note*

4.2		Form of Indenture by and among Sotherly Hotels LP and Wilmington Trust, National Association, as trustee*

4.3		Warrant, dated April 18, 2011, by MHI Hospitality, L.P. issued to Sotherly Hotels Inc.

5.1		Opinion of Baker & McKenzie LLP*

8.1		Opinion of Baker & McKenzie LLP with respect to tax matters*

10.1		Strategic Alliance Agreement between MHI Hospitality Corporation, MHI Hospitality, L.P. and MHI Hotels Services, LLC. ⁽³⁾

10.2		Master Management Agreement by and between MHI Hospitality TRS, LLC and MHI Hotels Services, LLC. ⁽³⁾

10.3		Amendment Number 2, dated January 14, 2008 to the Master Management Agreement, dated December 21, 2004, as amended, by and between MHI Hospitality TRS, LLC and MHI Hotels Services, LLC. ⁽⁴⁾

10.4		Contribution Agreement dated August 23, 2004 by and between the owners of Capitol Hotel Associates L.P., L.L.P. and MHI Hospitality, L.P. ⁽⁵⁾

10.5		Contribution Agreement dated August 23, 2004 by and between the owners of Savannah Hotel Associates LLC and MHI Hospitality, L.P. ⁽⁵⁾

10.6		Contribution Agreement dated August 23, 2004 by and between KDCA Partnership, MAVAS LLC, and MHI Hospitality, L.P. ⁽¹⁾

10.7		Contribution Agreement dated September 8, 2004 by and between Elpizo Limited Partnership, Phileo Land Corporation and MHI Hospitality, L.P. ⁽¹⁾

10.8		Asset Purchase Agreement dated August 19, 2004 by and between Accord LLC, West Laurel Corporation and MHI Hotels Services, LLC. ⁽¹⁾

10.9		Agreement to Assign and Sublease Common Space Lease and Form of Sublease by and between MHI Hospitality, L.P. and MHI Hotels, LLC. ⁽³⁾

10.10		Agreement to Assign and Sublease Commercial Space Lease and Form of Sublease by and between MHI Hospitality, L.P. and MHI Hotels Two, Inc. ⁽³⁾

10.11		Lease Agreement by and between Philadelphia Hotel Associates, LP and MHI Hospitality TRS, LLC (with a schedule of eight additional agreements that are substantially identical in all material respects to the Lease agreement, except as identified in such schedule, and are not being filed herewith per Instruction 2 to Item 601 of Regulation S-K). ⁽³⁾

10.12		Management Restructuring Agreement by and between MHI Hospitality TRS, LLC, MHI Hotels Services, LLC and MHI Hospitality, L.P. ⁽⁶⁾

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Exhibit No.		Description of Exhibit

10.13		Contribution Agreement by and between MHI Hotels Services, LLC, MHI Hotels, LLC and MHI Hotels Two, Inc. ⁽³⁾

10.14		Loan Agreement dated as of July 22, 2005, by and between MHI Jacksonville LLC and Mercantile Safe Deposit and Trust Company. ⁽ ⁷ ⁾

10.15		Promissory Note dated as of July 22, 2005, made by MHI Jacksonville LLC to Mercantile Safe Deposit and Trust Company. ⁽⁷⁾

10.16		Purchase, Sale and Contribution Agreement by and between BIT Holdings Seventeen, Inc, MHI Hospitality, L.P., and MHI Hotels, LLC. ⁽⁸⁾

10.17		Purchase Agreement by and between MCZ/Centrum Florida VI and MHI Hollywood LLC. ⁽⁹⁾

10.18		Third Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood, LLC. ⁽¹⁰⁾

10.19		Fourth Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood, LLC, dated September 1, 2006. ⁽¹⁰⁾

10.20		Fifth Amendment to Purchase Agreement by and between MCZ/Centrum Florida XIX, LLC and MHI Hollywood, LLC. ⁽¹¹⁾

10.21		First Amendment to the Purchase Agreement dated as of June 15, 2006, by and between Jay Ganesh, Inc., Hiren Patel, and Capitol Hotel Associates, LP, dated as of July 25, 2006. ⁽¹²⁾

10.22		Second Amendment to the Purchase Agreement dated as of June 15, 2006, by and between Jay Ganesh, Inc., Hiren Patel, and Capitol Hotel Associates, LP, dated as of August 4, 2006. ⁽¹²⁾

10.23		Purchase Agreement dated July 6, 2006, between Riverfront Inn, LLC and MHI Hospitality Corporation. ⁽¹³⁾

10.24		Strategic Alliance Agreement dated September 8, 2006 by and among MHI Hospitality, L.P., MHI Hospitality Corporation and Coakley & Williams Hotel Management Company. ⁽¹⁴⁾

10.25		Promissory Note dated March 29, 2007, made by Capitol Hotel Associates, L.P., L.L.P. and MONY Life Insurance Company. ⁽¹⁵⁾

10.26		Limited Liability Company Agreement of MHI/Carlyle Hotel Investment Program I, L.L.C. dated April 26, 2007. ⁽¹⁶⁾

10.27		Limited Liability Company Agreement of MHI/Carlyle Hotel Lessee Program I, L.L.C. dated April 26, 2007. ⁽¹⁶⁾

10.28		Program Agreement for MHI/Carlyle Hotel Investment Program I, L.L.C. and MHI/Carlyle Hotel Lessee Program I, L.L.C. dated April 26, 2007. ⁽¹⁶⁾

10.29		Agreement to Purchase Hotel dated May 25, 2007 between MCZ/Centrum Florida VI Owner, L.L.C. and MHI Hollywood LLC. ⁽¹¹⁾

10.30		Purchase Agreement between MHI Hospitality Corporation and VanTampa Plaza Hotel, Inc. dated July 16, 2007. ⁽¹⁷⁾

10.31		Promissory Note dated August 2, 2007 made by Savannah Hotel Associates L.L.C., to the order of MONY Life Insurance Company. ⁽¹⁸⁾

10.32		Assumption and Consent Agreement by and among Hampton Hotel Associates LLC, US Bank National Association and Hampton Redevelopment and Housing Authority dated April 24, 2008. ⁽¹⁹⁾

10.33		Loan Agreement between Hampton Redevelopment and Housing Authority and Olde Hampton Hotel Associates dated December 1, 1998. ⁽ ¹⁹ ⁾

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Exhibit No.		Description of Exhibit

10.34		$7,430,000 Hampton Redevelopment and Housing Authority First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project) Series 1998A. ⁽¹⁹⁾

10.35		Indenture of Trust between Hampton Redevelopment and Housing Authority and Crestar Bank dated December 1, 1998. ⁽¹⁹⁾

10.36		Promissory Note by MHI Hotel Investments Holdings, LLC, dated February 9, 2009. ⁽²⁰⁾

12.1		Schedule of Computation of Ratio of Earnings to Fixed Charges

21.1		List of Subsidiaries of Sotherly Hotels LP

23.1		Consent of PBMares, LLP

23.2		Consent of Baker & McKenzie LLP (included in Exhibits 5.1 and 8.1)*

24.1		Power of attorney (included in signature page)†

25.1		A Statement of Eligibility on Form T-1 of Wilmington Trust, National Association, as the Trustee under the Indenture

*	To be filed by amendment.

†	Previously filed.

(1)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004.

(2)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2011.

(3)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, filed with the Securities and Exchange Commission on November 9, 2011.

(4)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2008.

(5)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Pre-Effective Amendment No. 6 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 15, 2004.

(6)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Pre-Effective Amendment No. 3 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on November 15, 2004.

(7)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2005.

(8)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, filed with the Securities and Exchange Commission on August 11, 2005.

(9)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, filed with the Securities and Exchange Commission on November 10, 2005.

(10)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006.

(11)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 2007.

(12)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, filed with the Securities and Exchange Commission on August 8, 2006.

(13)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 26, 2006.

(14)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission on March 22, 2007.

(15)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 2, 2007.

(16)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 2, 2007.

(17)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2007.

(18)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2007.

(19)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, filed with the Securities and Exchange Commission on May 7, 2008.

(20)	Incorporated by reference to the document previously filed as an exhibit to Sotherly’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 13, 2009.

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EXHIBIT 3.3

AMENDMENT NO. 2

TO THE

AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP

MHI HOSPITALITY, L.P.

THIS AMENDMENT NO. 2 TO THE AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF MHI HOSPITALITY, L.P. (as amended, the “ Partnership Agreement ”) is made as of the 2 ^nd day of August, 2013 (the “ Amendment ”), and is executed by Sotherly Hotels Inc., a Maryland Corporation (the “ Company ”), as the General Partner and on behalf of the existing Limited Partners of MHI Hospitality, L.P. (the “ Partnership ”).

WITNESSETH:

WHEREAS, the Partnership was formed pursuant to the Partnership Agreement;

WHEREAS , the Company, acting in its capacity as General Partner of the Partnership, adopted written resolutions to amend the Partnership Agreement to change the name of the Partnership to “Sotherly Hotels LP” (the “ Name Change ”) effective upon the filing of a Certificate of Amendment of Limited Partnership with the Delaware Secretary of State (the “ Certificate of Amendment ”);

WHEREAS , the Certificate of Amendment was filed with the Delaware Secretary of State on August 2, 2013; and

WHEREAS, pursuant to the authority granted to the General Partner under the Partnership Agreement, the General Partner desires to amend the Partnership Agreement to reflect the Name Change.

NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the General Partner hereby amends the Partnership Agreement as follows:

Definitions . Capitalized terms used herein, unless otherwise defined herein, shall have the same meanings as set forth in the Partnership Agreement.

Name, Office and Registered Agent . Section 2.01 of the Partnership Agreement is hereby deleted in its entirety, and the following is hereby substituted in place thereof (new text bold and underlined):

Name, Office and Registered Agent . The name of the Partnership is Sotherly Hotels LP The specified office and place of business of the Partnership shall be at 410 West Francis Street , Williamsburg, Virginia. The General Partner may at any time change the location of such office, provided the General Partner gives notice to the Partners of any such change. The name of the Partnership’s registered agent is The Corporation Trust Company which is a Delaware corporation. The sole duty of the registered agent as such is to forward to the Partnership any notice that is served on it as registered agent.

All other instances of the use of the name “MHI Hospitality, L.P.” shall be deleted and replaced with the name “Sotherly Hotels LP”.

Continuing Effect of Partnership Agreement . Except as modified herein, the Partnership Agreement is hereby ratified and confirmed in its entirety and shall remain and continue in full force and effect, provided, however, that to the extent there shall be a conflict between the provisions of the Partnership Agreement and this Amendment the provisions in this Amendment will prevail. All references in any document to the Partnership Agreement shall mean the Partnership Agreement, as amended hereby.

[Signature follows on next page]

IN WITNESS WHEREOF , the undersigned has executed this Amendment to the Amended and Restated Agreement of Limited Partnership of MHI Hospitality, L.P. effective as of the date first above mentioned.


GENERAL PARTNER: Sotherly Hotels Inc.

By:		/s/ David R. Folsom

Name:		David R. Folsom
Title:		Chief Operating Officer and President

S IGNATURE P AGE TO A MENDMENT N O . 2 TO A GREEMENT OF L IMITED P ARTNERSHIP OF S OTHERLY H OTELS L.P.

EXHIBIT 4.3

THIS WARRANT AND ANY PARTNERSHIP UNITS ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THIS WARRANT NOR ANY SUCH UNITS MAY BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT.

WARRANT

To Purchase Partnership Units of

MHI Hospitality, L.P. (the “ Partnership ”)

THIS IS TO CERTIFY that MHI Hospitality Corporation, the general partner of the Partnership (the “ General Partner ”), having its principal place of business at 410 West Francis Street, Williamsburg, Virginia 23185, or its registered assigns, is entitled upon the exercise hereof at any time during the Exercise Period (as hereinafter defined) to purchase the number of Partnership Units set forth opposite the General Partner’s name on Schedule 1 (subject to adjustment as provided herein) at an Exercise Price of $2.25 per Partnership Unit (such Exercise Price and the number of Partnership Units purchasable hereunder being subject to adjustment as provided herein), and to exercise the other rights, powers and privileges hereinafter provided, all on the terms and subject to the conditions hereinafter set forth.

ARTICLE I

DEFINITIONS

The terms defined in this ARTICLE I, whenever used in this Warrant, shall have the respective meanings hereinafter specified.

“ Closing Date ” means April 18, 2011.

“ Commission ” means the Securities and Exchange Commission or any other Federal agency from time to time administering the Securities Act.

“ Essex Warrant ” means the warrant dated as of Closing Date issued to Essex Illiquid, LLC and Richmond Hill Capital Partners, LP by the General Partner and all warrants issued upon the partial exercise, transfer or division of or in substitution for any Essex Warrant.

“ Exercise Period ” means the period commencing on the Closing Date and terminating on the date that is five years and six calendar months following the Closing Date.

“ Exercise Price ” means the price per Partnership Unit set forth in the preamble to this Warrant, as such price may be adjusted pursuant to ARTICLE IV .

“ General Partner ” has the meaning set forth in the preamble.

“ Issuable Warrant Units ” means the number of Partnership Units issuable from time to time upon exercise of this Warrant.

“ Issued Warrant Units ” means (a) the cumulative total of the Partnership Units issued from time to time upon exercise of the Warrant, plus (b) any Partnership Units issued as a dividend with respect to such units or as part of a unit split affecting such units.

“ Notice of Exercise ” means the form of Notice of Exercise appearing at the end of this Warrant.

“ Opinion of Counsel ” means an opinion of counsel experienced in Securities Act or bank regulatory matters, as the case may be, chosen by the Partnership.

“ Partnership ” means MHI Hospitality, L.P., a Delaware limited partnership.

“ Partnership Agreement ” means the Amended and Restated Agreement of Limited Partnership, as amended, of the Partnership.

“ Partnership Unit ” has the meaning set forth in the Partnership Agreement.

“ Person ” means any unincorporated organization, association, corporation, individual, sole proprietorship, partnership, joint venture, trust institution, entity, party or government (including any instrumentality, division, agency, body or department thereof).

“ Securities Act ” means the Securities Act of 1933, as amended, or any successor Federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time.

“ Warrant ” means the warrant dated as of Closing Date issued to the General Partner and all warrants issued upon the partial exercise, transfer or division of or in substitution for any Warrant.

“ Warrant Units ” means the Issuable Warrant Units plus the Issued Warrant Units.

Whenever used in this Warrant, any noun or pronoun shall be deemed to include both the singular and plural and to cover all genders, and the words “herein,” “hereof,” and “hereunder” and words of similar import shall refer to this instrument as a whole, including any amendments hereto.

ARTICLE II

EXERCISE OF WARRANT

2.1. Obligation to Exercise . Pursuant to Section 4.02(a) of the Partnership Agreement, if at any time the Essex Warrant is exercised by the holder thereof, the General Partner shall concurrently or immediately thereafter exercise this Warrant with an aggregate exercise price which shall be equal to the aggregate exercise price realized by the General Partner from such exercise of the Essex Warrant, subject to the terms and conditions of this Article II and Article IV . For the avoidance of doubt, the General Partner shall not be permitted to exercise this Warrant in the event the Essex Warrant has not been exercised by the holder thereof.

2.2. Manner of Exercise; Issuance of Partnership Units . To exercise this Warrant, the General Partner shall deliver to the Partnership, concurrently or immediately after the General Partner has received notice of exercise of the Essex Warrant by the holder thereof, (i) a Notice of Exercise in the form of Exhibit 2.2 hereto duly executed by the General Partner specifying the number of Partnership Units to be purchased, (ii) an amount equal to the aggregate Exercise Price for all Partnership Units as to which this Warrant is then being exercised and (iii) this Warrant. At the option of the General Partner, payment of the Exercise Price shall be made by (a) wire transfer of funds to an account in a bank located in the United States designated by the Partnership for such purpose or (b) certified or official bank check payable to the order of the Partnership.

Upon receipt of the required deliveries, the Partnership shall, as promptly as practicable, and in any event within five business days thereafter, cause to be issued and delivered to the General Partner or, subject to ARTICLE V , the transferee designated in the Notice of Exercise, a certificate or certificates representing Partnership Units equal in the aggregate to the number of Partnership Units specified in the Notice of Exercise (but not exceeding the maximum number of units issuable upon exercise of this Warrant). Such certificate or certificates shall be registered in the name of the General Partner (or its nominee) or in the name of such transferee, as the case may be.

If this Warrant is exercised in part, the Partnership shall, at the time of delivery of such certificate or certificates, unless the Exercise Period has expired, issue and deliver to the General Partner or, subject to Section 3.2 and ARTICLE V , the transferee so designated in the Notice of Exercise, a new Warrant evidencing the right of the holder hereof or such transferee to purchase the aggregate number of Partnership Units for which this Warrant shall not have been exercised, and this Warrant shall be canceled.

2.3. Effectiveness of Exercise . Unless otherwise requested by the General Partner, this Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the holder or transferee so designated in the Notice of Exercise shall be deemed to have become a holder of record of such units for all purposes, as of the close of business on the date the Notice of Exercise, together with payment of the Exercise Price and this Warrant, is received by the Partnership.

2.4. Continued Validity . A holder of Partnership Units issued upon the exercise of this Warrant, in whole or in part, shall continue to be entitled to all rights to which a holder of this Warrant is entitled pursuant to the provisions of this Warrant except such rights as by their terms apply solely to a holder of a Warrant.

ARTICLE III

REGISTRATION, TRANSFER AND EXCHANGE

3.1. Maintenance of Registration Books . The Partnership shall keep at its principal office in Williamsburg, Virginia or Rockville, Maryland a register in which the Partnership shall provide for the registration, transfer and exchange of this Warrant. The Partnership shall not at any time, except upon the dissolution, liquidation or winding up of the Partnership, and as subject to Section 3.2 of this Warrant, close such register so as to result in preventing or delaying the exercise or transfer of this Warrant.

3.2. Transfer and Exchange . The General Partner may not offer, sell, assign, hypothecate, pledge or otherwise transfer this Warrant without the prior written consent of the Partnership, which consent may be granted or withheld in its sole and absolute discretion.

3.3. Replacement . Upon receipt of evidence reasonably satisfactory to the Partnership of the loss, theft, destruction or mutilation of this Warrant and (a) in the case of any such loss, theft or destruction, upon delivery of an indemnity reasonably satisfactory to the Partnership in form and amount, or (b) in the case of any such mutilation, upon surrender of such Warrant for cancellation at the principal office of the Partnership, the Partnership, at its expense, will execute and deliver, in lieu thereof, a new Warrant.

3.4. Ownership . The Partnership and any agent of the Partnership may treat the Persons in whose name this Warrant is registered on the register kept at the principal office of the Partnership as the owners and holder thereof for all purposes, notwithstanding any notice to the contrary, except that, if and when this Warrant is properly assigned in blank, the Partnership may (but shall not be obligated to) treat the bearer thereof as the owner of this Warrant for all purposes, notwithstanding any notice to the contrary. This Warrant, if properly assigned, may be exercised by a new holder without first having a new Warrant issued.

ARTICLE IV

ANTIDILUTION PROVISIONS

4.1. Adjustment of Number of Partnership Units Purchasable . The Exercise Price and the number of Partnership Units that the General Partner is entitled to purchase shall be subject to adjustment in the same manner and to the same extent as the exercise price and the number of shares of common stock of the General Partner issuable upon exercise of the Essex Warrant are adjusted pursuant to the terms of the Essex Warrant. For the avoidance of doubt, in accordance with Section 4.02(a)(ii)(y) of the Partnership Agreement, upon the exercise of the Essex Warrant and receipt of the exercise price therefor, the General Partner shall pay the Exercise Price of this Warrant in the form of a contribution to the capital of the Partnership in an amount equal to the exercise price paid to the General Partner by such exercising party in connection with the exercise of the Essex Warrant and the General Partner shall then be issued additional Partnership Units equal to the number of shares of common stock of the General Partner delivered by the General Partner to the exercising party of the Essex Warrant.

ARTICLE V

RESTRICTIONS ON TRANSFER

5.1. Legend on Warrants and Certificates . Each Warrant shall bear a legend in substantially the following form:

“This Warrant and any Partnership Units issuable upon the exercise of this Warrant have not been registered under the Securities Act of 1933, as amended, and neither this Warrant nor any such units may be transferred in the absence of such registration or an exemption therefrom under such Act.”

In case any Partnership Units are issued upon the exercise in whole or in part of this Warrant or are thereafter transferred, in either case under such circumstances that no registration under the Securities Act is required, each certificate representing such units shall bear on the face thereof the following legend:

“The units represented by this certificate have not been registered under the Securities Act of 1933, as amended, and any transfer thereof is subject to the conditions specified in the Warrant dated as of April 18, 2011 originally issued by MHI Hospitality, L.P. (the “ Partnership ”) to the General Partner of the Partnership to purchase Partnership Units of the Partnership. A copy of the form of such Warrant is on file with the General Partner of the Partnership at its address in Williamsburg, Virginia or Rockville, Maryland, and will be furnished without charge by the Partnership to the holder of this certificate upon written request to the General Partner of the Partnership at such address.”

5.2. Termination of Restrictions . The restrictions imposed under this ARTICLE V upon the transferability of this Warrant, or of Issuable Warrant Units or Issued Warrant Units, shall cease when (a) a registration statement covering such Issuable Warrant Units or Issued Warrant Units becomes effective under the Securities Act or (b) the Partnership receives an Opinion of Counsel that such restrictions are no longer required in order to ensure compliance with the Securities Act. When such restrictions terminate, the Partnership shall, or shall instruct its transfer agent and registrar to, issue new certificates in the name of the holder not bearing the legends required under Section 5.1 .

ARTICLE VI

[RESERVED]

ARTICLE VII

[RESERVED]

ARTICLE VIII

MISCELLANEOUS

8.1. Nonwaiver . No course of dealing or any delay or failure to exercise any right, power or remedy hereunder on the part of the holder hereof shall operate as a waiver of or otherwise prejudice such holder’s rights, powers or remedies.

8.2. Holder Not Unitholder . Prior to the exercise of this Warrant as hereinbefore provided, the holder hereof shall not be entitled to any of the rights of a unitholder of the Partnership with respect to the Partnership Units underlying the Warrant including, without limitation, the right as a unitholder to (a) vote on or consent to any proposed action of the Partnership or (b) receive (i) dividends or any other distributions made to unitholders, (ii) notice of or attend any meetings of unitholders of the Partnership or (iii) notice of any other proceedings of the Partnership.

8.3. Notices . Any notice, demand or delivery to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if sent by first class mail, postage prepaid, addressed to (a) the holder of this Warrant or Issued Warrant Units at its last known address appearing on the books of the Partnership maintained for such purpose or (b) the Partnership at its principal office at 410 West Francis Street, Williamsburg, VA 23185, Attention: Andrew M. Sims, Chief Executive Officer of the General Partner. The holder of this Warrant and the Partnership may each designate a different address by notice to the other pursuant to this Section 8.3 .

8.4. Remedies . The Partnership stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Partnership in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.

8.5. Successors and Assigns . This Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Partnership, the holder hereof and (to the extent provided herein) the holder of Issued Warrant Units, and shall be enforceable by such holder.

8.6. Modification and Severability . If, in any action before any court or agency legally empowered to enforce any provision contained herein, any provision hereof is found to be unenforceable, then such provision shall be deemed modified to the extent necessary to

make it enforceable by such court or agency. If any such provision is not enforceable as set forth in the preceding sentence, the unenforceability of such provision shall not affect the other provisions of this Agreement, but this Agreement shall be construed as if such unenforceable provision had never been contained herein.

8.7. Integration . This Warrant replaces all prior agreements, supersedes all prior negotiations and constitutes the entire agreement of the parties with respect to the transactions contemplated herein.

8.8. Amendment . This Warrant may not be modified or amended except by written agreement of the Partnership and the General Partner.

8.9. Headings . The headings of the Articles and Sections of this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

8.10. GOVERNING LAW . THIS WARRANT SHALL BE GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF NEW YORK.

[remainder of page intentionally left blank]

Dated as of April 18, 2011


MHI HOSPITALITY, L.P.
BY: GENERAL PARTNER:

MHI Hospitality Corporation

By:		/s/ David R. Folsom
Name:		David R. Folsom
Title:		Chief Operating Officer and President

Attest:


By:		/s/ Rhonda Smith
		Name: Rhonda Smith
		Title: Assistant

Schedule 1

THE HOLDER


Holder	Number of Partnership Units
MHI Hospitality Corporation		1,900,000

EXHIBIT 2.2

NOTICE OF EXERCISE FORM

(To be executed only upon partial or full

exercise of the within Warrant)

The undersigned registered holder of the within Warrant irrevocably exercises the within Warrant for and purchases Partnership Units of MHI HOSPITALITY, L.P. (the “ Partnership ”) and herewith makes payment therefor in the amount of $ , all at the price and on the terms and conditions specified in the within Warrant, and requests that a certificate (or certificates in denominations of units) for the Partnership Units of hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) , whose address is , and, if such Partnership Units shall not include all the Partnership Units issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of Partnership Units of the Partnership not being purchased hereunder be issued in the name of and delivered to (choose one) (a) the undersigned or (b) , whose address is .

Dated: , .


Signature Guaranteed:		By:
			(Signature of Registered Holder)



By:
	[Title:]

EXHIBIT 12.1

RATIO OF EARNINGS TO FIXED CHARGES


	Six Months Ended June 30, 2013			Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
*Earnings from continuing operations before fixed charges*
Loss from continuing operations	$	(279,844	)	$	(4,026,482	)	$	(5,569,788	)	$	(3,037,917	)	$	(4,817,713	)	$	(2,395,709	)
Equity (income) loss from less than fifty percent owned affiliates		(557,116	)		172,172			60,094			(16,931	)		249,367			(48,496	)
Fixed charges		5,013,191			12,382,146			10,821,815			10,030,517			9,932,426			8,413,513
Amortization of capitalized interest		38,900			77,799			77,799			77,799			71,836			24,509
Distributed income from less than fifty percent owned affiliates		750,000			500,000			437,500			238,386			318,521			149,317
Capitalized interest		—			—			—			—			(270,555	)		(1,602,053	)

Earnings from continuing operations before fixed charges	$	4,965,131		$	8,761,291		$	5,827,420		$	7,291,851		$	5,483,882		$	4,541,081

*Fixed charges*
Interest expense	$	5,013,191		$	12,382,146		$	10,821,815		$	10,030,517		$	9,661,871		$	6,811,460
Capitalized interest		—			—			—			—			270,555			1,602,053

Fixed charges		5,013,191			12,382,146			10,821,815			10,030,517			9,932,426			8,413,513

*Ratio of earnings to fixed charges*		0.99			0.71			0.54			0.73			0.55			0.54

*Deficiency*	$	48,060		$	3,620,855		$	4,994,395		$	2,738,663		$	4,448,544		$	3,872,432

EXHIBIT 21.1

SUBSIDIARIES OF REGISTRANT


Name		Jurisdiction of Organization/Incorporation
MHI Hospitality TRS, LLC		Delaware

MHI Hospitality TRS Holding, Inc.		Maryland

MHI Louisville TRS, LLC		Delaware

MHI Raleigh TRS, LLC		Delaware

MHI GP LLC		Delaware

Laurel Hotel Associates LLC		Maryland

Philadelphia Hotel Associates LP		Pennsylvania

Brownestone Partners, LLC		North Carolina

Capitol Hotel Associates L.P., L.L.P.		Virginia

Savannah Hotel Associates LLC		Virginia

MHI Jacksonville LLC		Delaware

Louisville Hotel Associates, LLC		Delaware

MHI Hotel Investments Holdings, LLC		Delaware

MHI Hospitality TRS II, LLC		Delaware

Tampa Hotel Associates, LLC		Delaware

Hampton Hotel Associates, LLC		Delaware

Raleigh Hotel Associates, LLC		Delaware

MHI Asset Recovery, LLC		Delaware

MHI Recovery Management Services, LLC		Delaware

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of the General Partner of

Sotherly Hotels LP (formerly MHI Hospitality, L.P.)

410 West Francis Street

Williamsburg, Virginia 23185

We consent to the use in this Registration Statement (No. 333-189821) on Form S-11 of Sotherly Hotels LP (formerly MHI Hospitality, L.P.) of our report dated August 9, 2013, relating to our audits of the consolidated financial statements and financial statement schedule, appearing in the Prospectus, which is part of this Registration Statement.

We also consent to the reference to our firm under the caption “Experts” in such Prospectus.

/s/ PBMares, LLP

Norfolk, Virginia

August 9, 2013

EXHIBIT 25.1

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM T-1

STATEMENT OF ELIGIBILITY

UNDER THE TRUST INDENTURE ACT OF 1939

OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE

CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A

TRUSTEE PURSUANT TO SECTION 305(b)(2)

WILMINGTON TRUST, NATIONAL ASSOCIATION

(Exact name of trustee as specified in its charter)

16-1486454

(I.R.S. employer identification no.)

1100 North Market Street

Wilmington, DE 19890

(Address of principal executive offices)

Robert C. Fiedler

Vice President and Counsel

1100 North Market Street

Wilmington, Delaware 19890

(302) 651-8541

(Name, address and telephone number of agent for service)

SOTHERLY HOTELS LP

(Exact name of obligor as specified in its charter)

Delaware

20-1965427

(State of

incorporation)

(I.R.S. employer

identification no.)

410 W. Francis Street

Williamsburg, Virginia

23185

(Address of principal executive offices)

(Zip Code)

Senior Unsecured Notes due 2018

(Title of the indenture securities)

Item 1.

GENERAL INFORMATION. Furnish the following information as to the trustee:

(a)

Name and address of each examining or supervising authority to which it is subject.

Comptroller of Currency, Washington, D.C.

Federal Deposit Insurance Corporation, Washington, D.C.

(b)

Whether it is authorized to exercise corporate trust powers.

Yes.

Item 2.

AFFILIATIONS WITH THE OBLIGOR . If the obligor is an affiliate of the trustee, describe each affiliation:

Based upon an examination of the books and records of the trustee and upon information furnished by the obligor, the obligor is not an affiliate of the trustee.

Item 16.

LIST OF EXHIBITS. Listed below are all exhibits filed as part of this Statement of Eligibility and Qualification.

A copy of the Charter for Wilmington Trust, National Association, incorporated by reference to Exhibit 1 of Form T-1.

The authority of Wilmington Trust, National Association to commence business was granted under the Charter for Wilmington Trust, National Association, incorporated herein by reference to Exhibit 1 of Form T-1.

The authorization to exercise corporate trust powers was granted under the Charter for Wilmington Trust, National Association, incorporated herein by reference to Exhibit 1 of Form T - 1.

A copy of the existing By-Laws of Trustee, as now in effect, incorporated herein by reference to Exhibit 4 of form T-1.

Not applicable.

The consent of Trustee as required by Section 321(b) of the Trust Indenture Act of 1939, incorporated herein by reference to Exhibit 6 of Form T-1.

Current Report of the Condition of Trustee, published pursuant to law or the requirements of its supervising or examining authority, attached as Exhibit 7.

Not applicable.

SIGNATURE

Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, Wilmington Trust, National Association, a national banking association organized and existing under the laws of the United States of America, has duly caused this Statement of Eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Wilmington and State of Delaware on the 8 day of August, 2013.


WILMINGTON TRUST, NATIONAL ASSOCIATION

By:		/s/ W. Thomas Morris, II
Name:		W. Thomas Morris, II
Title:		Vice President

EXHIBIT 1

CHARTER OF WILMINGTON TRUST, NATIONAL ASSOCIATION

ARTICLES OF ASSOCIATION

WILMINGTON TRUST, NATIONAL ASSOCIATION

For the purpose of organizing an association to perform any lawful activities of national banks, the undersigned do enter into the following articles of association:

FIRST. The title of this association shall be Wilmington Trust, National Association.

SECOND. The main office of the association shall be in the City of Wilmington, County of New Castle, State of Delaware. The general business of the association shall be conducted at its main office and its branches.

THIRD. The board of directors of this association shall consist of not less than five nor more than twenty-five persons, unless the OCC has exempted the bank from the 25-member limit. The exact number is to be fixed and determined from time to time by resolution of a majority of the full board of directors or by resolution of a majority of the shareholders at any annual or special meeting thereof. Each director shall own common or preferred stock of the association or of a holding company owning the association, with an aggregate par, fair market or equity value $1,000. Determination of these values may be based as of either (i) the date of purchase or (ii) the date the person became a director, whichever value is greater. Any combination of common or preferred stock of the association or holding company may be used.

Any vacancy in the board of directors may be filled by action of a majority of the remaining directors between meetings of shareholders. The board of directors may not increase the number of directors between meetings of shareholders to a number which:

exceeds by more than two the number of directors last elected by shareholders where the number was 15 or less; or

exceeds by more than four the number of directors last elected by shareholders where the number was 16 or more, but in no event shall the number of directors exceed 25, unless the OCC has exempted the bank from the 25-member limit.

Directors shall be elected for terms of one year and until their successors are elected and qualified. Terms of directors, including directors selected to fill vacancies, shall expire at the next regular meeting of shareholders at which directors are elected, unless the directors resign or are removed from office. Despite the expiration of a director’s term, the director shall continue to serve until his or her successor is elected and qualifies or until there is a decrease in the number of directors and his or her position is eliminated.

Honorary or advisory members of the board of directors, without voting power or power of final decision in matters concerning the business of the association, may be appointed by resolution of a majority of the full board of directors, or by resolution of shareholders at any annual or special meeting. Honorary or advisory directors shall not be counted to determine the number of directors of the association or the presence of a quorum in connection with any board action, and shall not be required to own qualifying shares.

FOURTH. There shall be an annual meeting of the shareholders to elect directors and transact whatever other business may be brought before the meeting. It shall be held at the main office or any other convenient place the board of directors may designate, on the day of each year specified therefor in the bylaws, or, if that day falls on a legal holiday in the state in which the association is located, on the next following banking day. If no election is held on the day fixed, or in the event of a legal holiday on the following banking day, an election may be held on any subsequent day within 60 days of the day fixed, to be designated by the board of directors, or, if the directors fail to fix the day, by shareholders representing two-thirds of the shares issued and outstanding. In all cases at least 10 days advance notice of the time, place and purpose of a shareholders’ meeting shall be given to the shareholders by first class mail, unless the OCC determines that an emergency circumstance exists. The sole shareholder of the bank is permitted to waive notice of the shareholders’ meeting.

In all elections of directors, the number of votes each common shareholder may cast will be determined by multiplying the number of shares such shareholder owns by the number of directors to be elected. Those votes may be cumulated and cast for a single candidate or may be distributed among two or more candidates in the manner selected by the shareholder. If, after the first ballot, subsequent ballots are necessary to elect directors, a shareholder may not vote shares that he or she has already fully cumulated and voted in favor of a successful candidate. On all other questions, each common shareholder shall be entitled to one vote for each share of stock held by him or her.

Nominations for election to the board of directors may be made by the board of directors or by any stockholder of any outstanding class of capital stock of the association entitled to vote for election of directors. Nominations other than those made by or on behalf of the existing management shall be made in writing and be delivered or mailed to the president of the association not less than 14 days nor more than 50 days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than 21 days notice of the meeting is given to shareholders, such nominations shall be mailed or delivered to the president of the association not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholder:

The name and address of each proposed nominee.

The principal occupation of each proposed nominee.

The total number of shares of capital stock of the association that will be voted for each proposed nominee.

The name and residence address of the notifying shareholder.

The number of shares of capital stock of the association owned by the notifying shareholder.

Nominations not made in accordance herewith may, in his/her discretion, be disregarded by the chairperson of the meeting, and the vote tellers may disregard all votes cast for each such nominee. No bylaw may unreasonably restrict the nomination of directors by shareholders.

A director may resign at any time by delivering written notice to the board of directors, its chairperson, or to the association, which resignation shall be effective when the notice is delivered unless the notice specifies a later effective date.

A director may be removed by shareholders at a meeting called to remove the director, when notice of the meeting stating that the purpose or one of the purposes is to remove the director is provided, if there is a failure to fulfill one of the affirmative requirements for qualification, or for cause; provided, however, that a director may not be removed if the number of votes sufficient to elect the director under cumulative voting is voted against the director’s removal.

FIFTH. The authorized amount of capital stock of this association shall be ten thousand shares of common stock of the par value of one hundred dollars ($100) each; but said capital stock may be increased or decreased from time to time, according to the provisions of the laws of the United States.

No holder of shares of the capital stock of any class of the association shall have any preemptive or preferential right of subscription to any shares of any class of stock of the association, whether now or hereafter authorized, or to any obligations convertible into stock of the association, issued, or sold, nor any right of subscription to any thereof other than such, if any, as the board of directors, in its discretion, may from time to time determine and at such price as the board of directors may from time to time fix. Preemptive rights also must be approved by a vote of holders of two-thirds of the bank’s outstanding voting shares. Unless otherwise specified in these articles of association or required by law, (1) all matters requiring shareholder action, including amendments to the articles of association, must be approved by shareholders owning a majority voting interest in the outstanding voting stock, and (2) each shareholder shall be entitled to one vote per share.

Unless otherwise specified in these articles of association or required by law, all shares of voting stock shall be voted together as a class, on any matters requiring shareholder approval. If a proposed amendment would affect two or more classes or series in the same or a substantially similar way, all the classes or series so affected must vote together as a single voting group on the proposed amendment.

Shares of one class or series may be issued as a dividend for shares of the same class or series on a pro rata basis and without consideration. Shares of one class or series may be issued as share dividends for a different class or series of stock if approved by a majority of the votes entitled to be cast by the class or series to be issued, unless there are no outstanding shares of the class or series to be issued. Unless otherwise provided by the board of directors, the record date for determining shareholders entitled to a share dividend shall be the date authorized by the board of directors for the share dividend.

Unless otherwise provided in the bylaws, the record date for determining shareholders entitled to notice of and to vote at any meeting is the close of business on the day before the first notice is mailed or otherwise sent to the shareholders, provided that in no event may a record date be more than 70 days before the meeting.

If a shareholder is entitled to fractional shares pursuant to a stock dividend, consolidation or merger, reverse stock split or otherwise, the association may: (a) issue fractional shares; (b) in lieu of the issuance of fractional shares, issue script or warrants entitling the holder to receive a full share upon surrendering enough script or warrants to equal a full share; (c) if there is an established and active market in the association’s stock, make reasonable arrangements to provide the shareholder with an opportunity to realize a fair price through sale of the fraction, or purchase of the additional fraction required for a full share; (d) remit the cash equivalent of the fraction to the shareholder; or (e) sell full shares representing all the fractions at public auction or to the highest bidder after having solicited and received sealed bids from at least three licensed stock brokers; and distribute the proceeds pro rata to shareholders who otherwise would be entitled to the fractional shares. The holder of a fractional share is entitled to exercise the rights for shareholder, including the right to vote, to receive dividends, and to participate in the assets of the association upon liquidation, in proportion to the fractional interest. The holder of script or warrants is not entitled to any of these rights unless the script or warrants explicitly provide for such rights. The script or warrants may be subject to such additional conditions as: (1) that the script or warrants will become void if not exchanged for full shares before a specified date; and (2) that the shares for which the script or warrants are exchangeable may be sold at the option of the association and the proceeds paid to scriptholders.

The association, at any time and from time to time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. Obligations classified as debt, whether or not subordinated, which may be issued by the association without the approval of shareholders, do not carry voting rights on any issue, including an increase or decrease in the aggregate number of the securities, or the exchange or reclassification of all or part of securities into securities of another class or series.

SIXTH. The board of directors shall appoint one of its members president of this association, and one of its members chairperson of the board and shall have the power to appoint one or more vice presidents, a secretary who shall keep minutes of the directors’ and shareholders’ meetings and be responsible for authenticating the records of the association, and such other officers and employees as may be required to transact the business of this association.

A duly appointed officer may appoint one or more officers or assistant officers if authorized by the board of directors in accordance with the bylaws.

The board of directors shall have the power to:

Define the duties of the officers, employees, and agents of the association.

Delegate the performance of its duties, but not the responsibility for its duties, to the officers, employees, and agents of the association.

Fix the compensation and enter into employment contracts with its officers and employees upon reasonable terms and conditions consistent with applicable law.

Dismiss officers and employees.

Require bonds from officers and employees and to fix the penalty thereof.

Ratify written policies authorized by the association’s management or committees of the board.

Regulate the manner in which any increase or decrease of the capital of the association shall be made, provided that nothing herein shall restrict the power of shareholders to increase or decrease the capital of the association in accordance with law, and nothing shall raise or lower from two-thirds the percentage required for shareholder approval to increase or reduce the capital.

Manage and administer the business and affairs of the association.

Adopt initial bylaws, not inconsistent with law or the articles of association, for managing the business and regulating the affairs of the association.

10)

Amend or repeal bylaws, except to the extent that the articles of association reserve this power in whole or in part to shareholders.

11)

Make contracts.

12)

Generally perform all acts that are legal for a board of directors to perform.

SEVENTH. The board of directors shall have the power to change the location of the main office to any other place within the limits of Wilmington, Delaware, without the approval of the shareholders, or with a vote of shareholders owning two-thirds of the stock of such association for a relocation outside such limits and upon receipt of a certificate of approval from the Comptroller of the Currency, to any other location within or outside the limits of Wilmington Delaware, but not more than 30 miles beyond such limits. The board of directors shall have the power to establish or change the location of any branch or branches of the association to any other location permitted under applicable law, without approval of shareholders, subject to approval by the Comptroller of the Currency.

EIGHTH. The corporate existence of this association shall continue until termination according to the laws of the United States.

NINTH. The board of directors of this association, or any one or more shareholders owning, in the aggregate, not less than 50 percent of the stock of this association, may call a special meeting of shareholders at any time. Unless otherwise provided by the bylaws or the laws of the United States, a notice of the time, place, and purpose of every annual and special meeting of the shareholders shall be given at least 10 days prior to the meeting by first-class mail, unless the OCC determines that an emergency circumstance exists. If the association is a wholly-owned subsidiary, the sole shareholder may waive notice of the shareholders’ meeting. Unless otherwise provided by the bylaws or these articles, any action requiring approval of shareholders must be effected at a duly called annual or special meeting.

TENTH. For purposes of this Article Tenth, the term “institution-affiliated party” shall mean any institution-affiliated party of the association as such term is defined in 12 U.S.C. 1813(u).

Any institution-affiliated party (or his or her heirs, executors or administrators) may be indemnified or reimbursed by the association for reasonable expenses actually incurred in connection with any threatened, pending or completed actions or proceedings and appeals therein, whether civil, criminal, governmental, administrative or investigative, in accordance with and to the fullest extent permitted by law, as such law now or hereafter exists; provided, however, that when an administrative proceeding or action instituted by a federal banking agency results in a final order or settlement pursuant to which such person: (i) is assessed a civil money penalty, (ii) is removed from office or prohibited from participating in the conduct of the affairs of the association, or (iii) is required to cease and desist from or to take any affirmative action described in 12 U.S.C. 1818(b) with respect to the association, then the association shall require the repayment of all legal fees and expenses advanced pursuant to the next succeeding paragraph and may not indemnify such institution-affiliated parties (or their heirs, executors or administrators) for expenses, including expenses for legal fees, penalties or other payments incurred. The association shall provide indemnification in connection with an action or proceeding (or part thereof) initiated by an institution-affiliated party (or by his or her heirs, executors or administrators) only if such action or proceeding (or part thereof) was authorized by the board of directors.

Expenses incurred by an institution-affiliated party (or by his or her heirs, executors or administrators) in connection with any action or proceeding under 12 U.S.C. 164 or 1818 may be paid by the association in advance of the final disposition of such action or proceeding upon (a) a determination by the board of directors acting by a quorum consisting of directors who are not parties to such action or proceeding that the institution-affiliated party (or his or her heirs, executors or administrators) has a reasonable basis for prevailing on the merits, (b) a determination that the indemnified individual (or his or her heirs, executors or administrators) will have the financial capacity to reimburse the bank in the event he or she does not prevail, (c) a determination that the payment of expenses and fees by the association will not adversely affect the safety and soundness of the association, and (d) receipt of an undertaking by or on behalf of such institution-affiliated party (or by his or her heirs, executors or administrators) to repay such advancement in the event of a final order or settlement pursuant to which such person: (i) is assessed a civil money penalty, (ii) is removed from office or prohibited from participating in the conduct of the affairs of the association, or (iii) is required to cease and desist from or to take any affirmative action described in 12 U.S.C. 1818(b) with respect to the association. In all other instances, expenses incurred by an institution-affiliated party (or by his or her heirs, executors or administrators) in connection with any action or proceeding as to which indemnification may be given under these articles of association may be paid by the association in advance of the final disposition of such action or proceeding upon (a) receipt of an undertaking by or on behalf of such institution-affiliated party (or by or on behalf of his or her heirs, executors or administrators) to repay such advancement in the event that

such institution-affiliated party (or his or her heirs, executors or administrators) is ultimately found not to be entitled to indemnification as authorized by these articles of association and (b) approval by the board of directors acting by a quorum consisting of directors who are not parties to such action or proceeding or, if such a quorum is not obtainable, then approval by stockholders. To the extent permitted by law, the board of directors or, if applicable, the stockholders, shall not be required to find that the institution-affiliated party has met the applicable standard of conduct provided by law for indemnification in connection with such action or proceeding.

In the event that a majority of the members of the board of directors are named as respondents in an administrative proceeding or civil action and request indemnification, the remaining members of the board may authorize independent legal counsel to review the indemnification request and provide the remaining members of the board with a written opinion of counsel as to whether the conditions delineated in the first four paragraphs of this Article Tenth have been met. If independent legal counsel opines that said conditions have been met, the remaining members of the board of directors may rely on such opinion in authorizing the requested indemnification.

In the event that all of the members of the board of directors are named as respondents in an administrative proceeding or civil action and request indemnification, the board shall authorize independent legal counsel to review the indemnification request and provide the board with a written opinion of counsel as to whether the conditions delineated in the first four paragraphs of this Article Tenth have been met. If legal counsel opines that said conditions have been met, the board of directors may rely on such opinion in authorizing the requested indemnification.

To the extent permitted under applicable law, the rights of indemnification and to the advancement of expenses provided in these articles of association (a) shall be available with respect to events occurring prior to the adoption of these articles of association, (b) shall continue to exist after any restrictive amendment of these articles of association with respect to events occurring prior to such amendment, (c) may be interpreted on the basis of applicable law in effect at the time of the occurrence of the event or events giving rise to the action or proceeding, or on the basis of applicable law in effect at the time such rights are claimed, and (d) are in the nature of contract rights which may be enforced in any court of competent jurisdiction as if the association and the institution-affiliated party (or his or her heirs, executors or administrators) for whom such rights are sought were parties to a separate written agreement.

The rights of indemnification and to the advancement of expenses provided in these articles of association shall not, to the extent permitted under applicable law, be deemed exclusive of any other rights to which any such institution affiliated party (or his or her heirs, executors or administrators) may now or hereafter be otherwise entitled whether contained in these articles of association, the bylaws, a resolution of stockholders, a resolution of the board of directors, or an agreement providing such indemnification, the creation of such other rights being hereby expressly authorized. Without limiting the generality of the foregoing, the rights of indemnification and to the advancement of expenses provided in these articles of association shall not be deemed exclusive of any rights, pursuant to statute or otherwise, of any such institution-affiliated party (or of his or her heirs, executors or administrators) in any such action or proceeding to have assessed or allowed in his or her favor, against the association or otherwise, his or her costs and expenses incurred therein or in connection therewith or any part thereof.

If this Article Tenth or any part hereof shall be held unenforceable in any respect by a court of competent jurisdiction, it shall be deemed modified to the minimum extent necessary to make it enforceable, and the remainder of this Article Tenth shall remain fully enforceable.

The association may, upon affirmative vote of a majority of its board of directors, purchase insurance to indemnify its institution-affiliated parties to the extent that such indemnification is allowed in these articles of association; provided, however, that no such insurance shall include coverage to pay or reimburse any institution-affiliated party for the cost of any judgment or civil money penalty assessed against such person in an administrative proceeding or civil action commenced by any federal banking agency. Such insurance may, but need not, be for the benefit of all institution-affiliated parties.

ELEVENTH. These articles of association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. The association’s board of directors may propose one or more amendments to the articles of association for submission to the shareholders.

EXHIBIT 4

BY-LAWS OF WILMINGTON TRUST, NATIONAL ASSOCIATION

AMENDED AND RESTATED BYLAWS

WILMINGTON TRUST, NATIONAL ASSOCIATION

ARTICLE I

Meetings of Shareholders

Section 1. Annual Meeting . The annual meeting of the shareholders to elect directors and transact whatever other business may properly come before the meeting shall be held at the main office of the association, Rodney Square North, 1100 Market Street, City of Wilmington, State of Delaware, at 1:00 o’clock p.m. on the first Tuesday in March of each year, or at such other place and time as the board of directors may designate, or if that date falls on a legal holiday in Delaware, on the next following banking day. Notice of the meeting shall be mailed by first class mail, postage prepaid, at least 10 days and no more than 60 days prior to the date thereof, addressed to each shareholder at his/her address appearing on the books of the association. If, for any cause, an election of directors is not made on that date, or in the event of a legal holiday, on the next following banking day, an election may be held on any subsequent day within 60 days of the date fixed, to be designated by the board of directors, or, if the directors fail to fix the date, by shareholders representing two-thirds of the shares. In these circumstances, at least 10 days’ notice must be given by first class mail to shareholders.

Section 2. Special Meetings . Except as otherwise specifically provided by statute, special meetings of the shareholders may be called for any purpose at any time by the board of directors or by any one or more shareholders owning, in the aggregate, not less than fifty percent of the stock of the association. Every such special meeting, unless otherwise provided by law, shall be called by mailing, postage prepaid, not less than 10 days nor more than 60 days prior to the date fixed for the meeting, to each shareholder at the address appearing on the books of the association a notice stating the purpose of the meeting.

The board of directors may fix a record date for determining shareholders entitled to notice and to vote at any meeting, in reasonable proximity to the date of giving notice to the shareholders of such meeting. The record date for determining shareholders entitled to demand a special meeting is the date the first shareholder signs a demand for the meeting describing the purpose or purposes for which it is to be held.

A special meeting may be called by shareholders or the board of directors to amend the articles of association or bylaws, whether or not such bylaws may be amended by the board of directors in the absence of shareholder approval.

If an annual or special shareholders’ meeting is adjourned to a different date, time, or place, notice need not be given of the new date, time or place, if the new date, time or place is announced at the meeting before adjournment, unless any additional items of business are to be considered, or the association becomes aware of an intervening event materially affecting any matter to be voted on more than 10 days prior to the date to which the meeting is adjourned. If a new record date for the adjourned meeting is fixed, however, notice of the adjourned meeting must be given to persons who are shareholders as of the new record date. If, however, the meeting to elect the directors is adjourned before the election takes place, at least ten days’ notice of the new election must be given to the shareholders by first-class mail.

Section 3. Nominations of Directors . Nominations for election to the board of directors may be made by the board of directors or by any stockholder of any outstanding class of capital stock of the association entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the existing management of the association, shall be made in writing and shall be delivered or mailed to the president of the association and the Comptroller of the Currency, Washington, D.C., not less than 14 days nor more than 50 days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than 21 days’ notice of the meeting is given to shareholders, such nomination shall be mailed or delivered to the president of the association not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholder:

(1)

The name and address of each proposed nominee;

(2)

The principal occupation of each proposed nominee;

(3)

The total number of shares of capital stock of the association that will be voted for each proposed nominee;

(4)

The name and residence of the notifying shareholder; and

(5)

The number of shares of capital stock of the association owned by the notifying shareholder.

Nominations not made in accordance herewith may, in his/her discretion, be disregarded by the chairperson of the meeting, and upon his/her instructions, the vote tellers may disregard all votes cast for each such nominee.

Section 4. Proxies . Shareholders may vote at any meeting of the shareholders by proxies duly authorized in writing, but no officer or employee of this association shall act as proxy. Proxies shall be valid only for one meeting, to be specified therein, and any adjournments of such meeting. Proxies shall be dated and filed with the records of the meeting. Proxies with facsimile signatures may be used and unexecuted proxies may be counted upon receipt of a written confirmation from the shareholder. Proxies meeting the above requirements submitted at any time during a meeting shall be accepted.

Section 5. Quorum . A majority of the outstanding capital stock, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders, unless otherwise provided by law, or by the shareholders or directors pursuant to Article IX, Section 2, but less than a quorum may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by law or by the articles of association, or by the shareholders or directors pursuant to Article IX, Section 2. If a meeting for the election of directors is not held on the fixed date, at least 10 days’ notice must be given by first-class mail to the shareholders.

ARTICLE II

Directors

Section 1. Board of Directors . The board of directors shall have the power to manage and administer the business and affairs of the association. Except as expressly limited by law, all corporate powers of the association shall be vested in and may be exercised by the board of directors.

Section 2. Number . The board of directors shall consist of not less than five nor more than twenty-five members, unless the OCC has exempted the bank from the 25-member limit. The exact number within such minimum and maximum limits is to be fixed and determined from time to time by resolution of a majority of the full board of directors or by resolution of a majority of the shareholders at any meeting thereof.

Section 3. Organization Meeting . The secretary or treasurer, upon receiving the certificate of the judges of the result of any election, shall notify the directors-elect of their election and of the time at which they are required to meet at the main office of the association, or at such other place in the cities of Wilmington, Delaware or Buffalo, New York, to organize the new board of directors and elect and appoint officers of the association for the succeeding year. Such meeting shall be held on the day of the election or as soon thereafter as practicable, and, in any event, within 30 days thereof. If, at the time fixed for such meeting, there shall not be a quorum, the directors present may adjourn the meeting, from time to time, until a quorum is obtained.

Section 4. Regular Meetings . The Board of Directors may, at any time and from time to time, by resolution designate the place, date and hour for the holding of a regular meeting, but in the absence of any such designation, regular meetings of the board of directors shall be held, without notice, on the first Tuesday of each March, June and September, and on the second Tuesday of each December at the main office or other such place as the board of directors may designate. When any regular meeting of the board of directors falls upon a holiday, the meeting shall be held on the next banking business day unless the board of directors shall designate another day.

Section 5. Special Meetings . Special meetings of the board of directors may be called by the Chairman of the Board of the association, or at the request of two or more directors. Each member of the board of directors shall be given notice by telegram, first class mail, or in person stating the time and place of each special meeting.

Section 6. Quorum . A majority of the entire board then in office shall constitute a quorum at any meeting, except when otherwise provided by law or these bylaws, but a lesser number may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. If the number of directors present at the meeting is reduced below the number that would constitute a quorum, no business may be transacted, except selecting directors to fill vacancies in conformance with Article II, Section 7. If a quorum is present, the board of directors may take action through the vote of a majority of the directors who are in attendance.

Section 7. Meetings by Conference Telephone. Any one or more members of the board of directors or any committee thereof may participate in a meeting of such board or committees by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation in a meeting by such means shall constitute presence in person at such meeting.

Section 8. Procedures . The order of business and all other matters of procedure at every meeting of the board of directors may be determined by the person presiding at the meeting.

Section 9. Removal of Directors . Any director may be removed for cause, at any meeting of stockholders notice of which shall have referred to the proposed action, by vote of the stockholders. Any director may be removed without cause, at any meeting of stockholders notice of which shall have referred to the proposed action, by the vote of the holders of a majority of the shares of the Corporation entitled to vote. Any director may be removed for cause, at any meeting of the directors notice of which shall have referred to the proposed action, by vote of a majority of the entire Board of Directors.

Section 10. Vacancies . When any vacancy occurs among the directors, a majority of the remaining members of the board of directors, according to the laws of the United States, may appoint a director to fill such vacancy at any regular meeting of the board of directors, or at a special meeting called for that purpose at which a quorum is present, or if the directors remaining in office constitute fewer than a quorum of the board of directors, by the affirmative vote of a majority of all the directors remaining in office, or by shareholders at a special meeting called for that purpose in conformance with Section 2 of Article I. At any such shareholder meeting, each shareholder entitled to vote shall have the right to multiply the number of votes he or she is entitled to cast by the number of vacancies being filled and cast the product for a single candidate or distribute the product among two or more candidates. A vacancy that will occur at a specific later date (by reason of a resignation effective at a later date) may be filled before the vacancy occurs but the new director may not take office until the vacancy occurs.

ARTICLE III

Committees of the Board

The board of directors has power over and is solely responsible for the management, supervision, and administration of the association. The board of directors may delegate its power, but none of its responsibilities, to such persons or committees as the board may determine.

The board of directors must formally ratify written policies authorized by committees of the board of directors before such policies become effective. Each committee must have one or more member(s), and who may be an officer of the association or an officer or director of any affiliate of the association, who serve at the pleasure of the board of directors. Provisions of the articles of association and these bylaws governing place of meetings, notice of meeting, quorum and voting requirements of the board of directors, apply to committees and their members as well. The creation of a committee and appointment of members to it must be approved by the board of directors.

Section 1. Loan Committee . There shall be a loan committee composed of not less than 2 directors, appointed by the board of directors annually or more often. The loan committee, on behalf of the bank, shall have power to discount and purchase bills, notes and other evidences of debt, to buy and sell bills of exchange, to examine and approve loans and discounts, to exercise authority regarding loans and discounts, and to exercise, when the board of directors is not in session, all other powers of the board of directors that may lawfully be delegated. The loan committee shall keep minutes of its meetings, and such minutes shall be submitted at the next regular meeting of the board of directors at which a quorum is present, and any action taken by the board of directors with respect thereto shall be entered in the minutes of the board of directors.

Section 2. Investment Committee . There shall be an investment committee composed of not less than 2 directors, appointed by the board of directors annually or more often. The investment committee, on behalf of the bank, shall have the power to ensure adherence to the investment policy, to recommend amendments thereto, to purchase and sell securities, to exercise authority regarding

investments and to exercise, when the board of directors is not in session, all other powers of the board of directors regarding investment securities that may be lawfully delegated. The investment committee shall keep minutes of its meetings, and such minutes shall be submitted at the next regular meeting of the board of directors at which a quorum is present, and any action taken by the board of directors with respect thereto shall be entered in the minutes of the board of directors.

Section 3. Examining Committee . There shall be an examining committee composed of not less than 2 directors, exclusive of any active officers, appointed by the board of directors annually or more often. The duty of that committee shall be to examine at least once during each calendar year and within 15 months of the last examination the affairs of the association or cause suitable examinations to be made by auditors responsible only to the board of directors and to report the result of such examination in writing to the board of directors at the next regular meeting thereafter. Such report shall state whether the association is in a sound condition, and whether adequate internal controls and procedures are being maintained and shall recommend to the board of directors such changes in the manner of conducting the affairs of the association as shall be deemed advisable.

Notwithstanding the provisions of the first paragraph of this section 3, the responsibility and authority of the Examining Committee may, if authorized by law, be given over to a duly constituted audit committee of the association’s parent corporation by a resolution duly adopted by the board of directors.

Section 4. Trust Audit Committee. There shall be a trust audit committee in conformance with Section 1 of Article V.

Section 5. Other Committees . The board of directors may appoint, from time to time, from its own members, compensation, special litigation and other committees of one or more persons, for such purposes and with such powers as the board of directors may determine.

However, a committee may not:

(1)

Authorize distributions of assets or dividends;

(2)

Approve action required to be approved by shareholders;

(3)

Fill vacancies on the board of directors or any of its committees;

(4)

Amend articles of association;

(5)

Adopt, amend or repeal bylaws; or

(6)

Authorize or approve issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares.

Section 6. Committee Members’ Fees . Committee members may receive a fee for their services as committee members and traveling and other out-of-pocket expenses incurred in attending any meeting of a committee of which they are a member. The fee may be a fixed sum to be paid for attending each meeting or a fixed sum to be paid quarterly, or semiannually, irrespective of the number of meetings attended or not attended. The amount of the fee and the basis on which it shall be paid shall be determined by the Board of Directors.

ARTICLE IV

Officers and Employees

Section 1. Chairperson of the Board . The board of directors shall appoint one of its members to be the chairperson of the board to serve at its pleasure. Such person shall preside at all meetings of the board of directors. The chairperson of the board shall supervise the carrying out of the policies adopted or approved by the board of directors; shall have general executive powers, as well as the specific powers conferred by these bylaws; and shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned by the board of directors.

Section 2. President . The board of directors shall appoint one of its members to be the president of the association. In the absence of the chairperson, the president shall preside at any meeting of the board of directors. The president shall have general executive powers and shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice to the office of president, or imposed by these bylaws. The president shall also have and may exercise such further powers and duties as from time to time may be conferred or assigned by the board of directors.

Section 3. Vice President . The board of directors may appoint one or more vice presidents. Each vice president shall have such powers and duties as may be assigned by the board of directors. One vice president shall be designated by the board of directors, in the absence of the president, to perform all the duties of the president.

Section 4. Secretary . The board of directors shall appoint a secretary, treasurer, or other designated officer who shall be secretary of the board of directors and of the association and who shall keep accurate minutes of all meetings. The secretary shall attend to the giving of all notices required by these bylaws; shall be custodian of the corporate seal, records, documents and papers of the association; shall provide for the keeping of proper records of all transactions of the association; shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice to the office of treasurer, or imposed by these bylaws; and shall also perform such other duties as may be assigned from time to time, by the board of directors.

Section 5. Other Officers . The board of directors may appoint one or more assistant vice presidents, one or more trust officers, one or more assistant secretaries, one or more assistant treasurers, one or more managers and assistant managers of branches and such other officers and attorneys in fact as from time to time may appear to the board of directors to be required or desirable to transact the business of the association. Such officers shall respectively exercise such powers and perform such duties as pertain to their several offices, or as may be conferred upon or assigned to them by the board of directors, the chairperson of the board, or the president. The board of directors may authorize an officer to appoint one or more officers or assistant officers.

Section 6. Tenure of Office . The president and all other officers shall hold office for the current year for which the board of directors was elected, unless they shall resign, become disqualified, or be removed; and any vacancy occurring in the office of president shall be filled promptly by the board of directors.

Section 7. Resignation . An officer may resign at any time by delivering notice to the association. A resignation is effective when the notice is given unless the notice specifies a later effective date.

ARTICLE V

Fiduciary Activities

Section 1. Trust Audit Committee. There shall be a Trust Audit Committee composed of not less than 2 directors, appointed by the board of directors, which shall, at least once during each calendar year make suitable audits of the association’s fiduciary activities or cause suitable audits to be made by auditors responsible only to the board, and at such time shall ascertain whether fiduciary powers have been administered according to law, Part 9 of the Regulations of the Comptroller of the Currency, and sound fiduciary principles. Such committee: (1) must not include any officers of the bank or an affiliate who participate significantly in the administration of the bank’s fiduciary activities; and (2) must consist of a majority of members who are not also members of any committee to which the board of directors has delegated power to manage and control the fiduciary activities of the bank.

Notwithstanding the provisions of the first paragraph of this section 1, the responsibility and authority of the Trust Audit Committee may, if authorized by law, be given over to a duly constituted audit committee of the association’s parent corporation by a resolution duly adopted by the board of directors.

Section 2. Fiduciary Files. There shall be maintained by the association all fiduciary records necessary to assure that its fiduciary responsibilities have been properly undertaken and discharged.

Section 3. Trust Investments. Funds held in a fiduciary capacity shall be invested according to the instrument establishing the fiduciary relationship and applicable law. Where such instrument does not specify the character and class of investments to be made, but does vest in the association investment discretion, funds held pursuant to such instrument shall be invested in investments in which corporate fiduciaries may invest under applicable law.

ARTICLE VI

Stock and Stock Certificates

Section 1. Transfers . Shares of stock shall be transferable on the books of the association, and a transfer book shall be kept in which all transfers of stock shall be recorded. Every person becoming a shareholder by such transfer shall in proportion to such shareholder’s shares, succeed to all rights of the prior holder of such shares. The board of directors may impose conditions upon the transfer of the stock reasonably calculated to simplify the work of the association with respect to stock transfers, voting at shareholder meetings and related matters and to protect it against fraudulent transfers.

Section 2. Stock Certificates . Certificates of stock shall bear the signature of the president (which may be engraved, printed or impressed) and shall be signed manually or by facsimile process by the secretary, assistant secretary, treasurer, assistant treasurer, or any other officer appointed by the board of directors for that purpose, to be known as an authorized officer, and the seal of the association shall be engraved thereon. Each certificate shall recite on its face that the stock represented thereby is transferable only upon the books of the association properly endorsed.

The board of directors may adopt or use procedures for replacing lost, stolen, or destroyed stock certificates as permitted by law.

The association may establish a procedure through which the beneficial owner of shares that are registered in the name of a nominee may be recognized by the association as the shareholder. The procedure may set forth:

(1)

The types of nominees to which it applies;

(2)

The rights or privileges that the association recognizes in a beneficial owner;

(3)

How the nominee may request the association to recognize the beneficial owner as the shareholder;

(4)

The information that must be provided when the procedure is selected;

(5)

The period over which the association will continue to recognize the beneficial owner as the shareholder;

(6)

Other aspects of the rights and duties created.

ARTICLE VII

Corporate Seal

Section 1. Seal . The seal of the association shall be in such form as may be determined from time to time by the board of directors. The president, the treasurer, the secretary or any assistant treasurer or assistant secretary, or other officer thereunto designated by the board of directors shall have authority to affix the corporate seal to any document requiring such seal and to attest the same. The seal on any corporate obligation for the payment of money may be facsimile.

ARTICLE VIII

Miscellaneous Provisions

Section 1. Fiscal Year . The fiscal year of the association shall be the calendar year.

Section 2. Execution of Instruments . All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments or documents may be signed, executed, acknowledged, verified, delivered or accepted on behalf of the association by the chairperson of the board, or the president, or any vice president, or the secretary, or the treasurer, or, if in connection with the exercise of fiduciary powers of the association, by any of those offices or by any trust officer. Any such instruments may also be executed, acknowledged, verified, delivered or accepted on behalf of the association in such other manner and by such other officers as the board of directors may from time to time direct. The provisions of this section 2 are supplementary to any other provision of these bylaws.

Section 3. Records . The articles of association, the bylaws and the proceedings of all meetings of the shareholders, the board of directors, and standing committees of the board of directors shall be recorded in appropriate minute books provided for that purpose. The minutes of each meeting shall be signed by the secretary, treasurer or other officer appointed to act as secretary of the meeting.

Section 4. Corporate Governance Procedures. To the extent not inconsistent with federal banking statutes and regulations, or safe and sound banking practices, the association may follow the Delaware General Corporation Law, Del. Code Ann. tit. 8 (1991, as amended 1994, and as amended thereafter) with respect to matters of corporate governance procedures.

Section 5. Indemnification. For purposes of this Section 5 of Article VIII, the term “institution-affiliated party” shall mean any institution-affiliated party of the association as such term is defined in 12 U.S.C. 1813(u).

In the event that a majority of the members of the board of directors are named as respondents in an administrative proceeding or civil action and request indemnification, the remaining members of the board may authorize independent legal counsel to review the indemnification request and provide the remaining members of the board with a written opinion of counsel as to whether the conditions delineated in the first four paragraphs of this Section 5 of Article VIII have been met. If independent legal counsel opines that said conditions have been met, the remaining members of the board of directors may rely on such opinion in authorizing the requested indemnification.

In the event that all of the members of the board of directors are named as respondents in an administrative proceeding or civil action and request indemnification, the board shall authorize independent legal counsel to review the indemnification request and provide the board with a written opinion of counsel as to whether the conditions delineated in the first four paragraphs of this Section 5 of Article VIII have been met. If legal counsel opines that said conditions have been met, the board of directors may rely on such opinion in authorizing the requested indemnification.

To the extent permitted under applicable law, the rights of indemnification and to the advancement of expenses provided in these articles of association (a) shall be available with respect to events occurring prior to the adoption of these bylaws, (b) shall continue to exist after any restrictive amendment of these bylaws with respect to events occurring prior to such amendment, (c) may be interpreted on the basis of applicable law in effect at the time of the occurrence of the event or events giving rise to the action or proceeding, or on the basis of applicable law in effect at the time such rights are claimed, and (d) are in the nature of contract rights which may be enforced in any court of competent jurisdiction as if the association and the institution-affiliated party (or his or her heirs, executors or administrators) for whom such rights are sought were parties to a separate written agreement.

The rights of indemnification and to the advancement of expenses provided in these bylaws shall not, to the extent permitted under applicable law, be deemed exclusive of any other rights to which any such institution-affiliated party (or his or her heirs, executors or administrators) may now or hereafter be otherwise entitled whether contained in the association’s articles of association, these bylaws, a resolution of stockholders, a resolution of the board of directors, or an agreement providing such indemnification, the creation of such other rights being hereby expressly authorized. Without limiting the generality of the foregoing, the rights of indemnification and to the advancement of expenses provided in these bylaws shall not be deemed exclusive of any rights, pursuant to statute or otherwise, of any such institution-affiliated party (or of his or her heirs, executors or administrators) in any such action or proceeding to have assessed or allowed in his or her favor, against the association or otherwise, his or her costs and expenses incurred therein or in connection therewith or any part thereof.

If this Section 5 of Article VIII or any part hereof shall be held unenforceable in any respect by a court of competent jurisdiction, it shall be deemed modified to the minimum extent necessary to make it enforceable, and the remainder of this Section 5 of Article VIII shall remain fully enforceable.

The association may, upon affirmative vote of a majority of its board of directors, purchase insurance to indemnify its institution-affiliated parties to the extent that such indemnification is allowed in these bylaws; provided, however, that no such insurance shall include coverage for a final order assessing civil money penalties against such persons by a bank regulatory agency. Such insurance may, but need not, be for the benefit of all institution-affiliated parties.

ARTICLE IX

Inspection and Amendments

Section 1. Inspection . A copy of the bylaws of the association, with all amendments, shall at all times be kept in a convenient place at the main office of the association, and shall be open for inspection to all shareholders during banking hours.

Section 2. Amendments . The bylaws of the association may be amended, altered or repealed, at any regular meeting of the board of directors, by a vote of a majority of the total number of the directors except as provided below, and provided that the following language accompany any such change.

EXHIBIT 6

Section 321(b) Consent

Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as amended, Wilmington Trust, National Association hereby consents that reports of examinations by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon requests therefor.


	WILMINGTON TRUST,
	NATIONAL ASSOCIATION

Dated: August 8, 2013	By:	/s/ W. Thomas Morris, II
	Name:	W. Thomas Morris, II
	Title:	Vice President

EXHIBIT 7

REPORT OF CONDITION

WILMINGTON TRUST, NATIONAL ASSOCIATION

As of the close of business on June 30, 2013:


	Thousands of Dollars
ASSETS
Cash and balances due from depository institutions:		861,797
Securities:		4,845
Federal funds sold and securities purchased under agreement to resell:		0
Loans and leases held for sale:		0
Loans and leases net of unearned income, allowance:		536,692
Premises and fixed assets:		11,954
Other real estate owned:		32
Investments in unconsolidated subsidiaries and associated companies:		0
Direct and indirect investments in real estate ventures:		0
Intangible assets:		5,874
Other assets:		61,387
Total Assets:		1,482,581

	Thousands of Dollars
LIABILITIES
Deposits		875,593
Federal funds purchased and securities sold under agreements to repurchase		115,500
Other borrowed money:		0
Other Liabilities:		75,755
Total Liabilities		1,066,848

	Thousands of Dollars
EQUITY CAPITAL
Common Stock		1,000
Surplus		383,507
Retained Earnings		31,968
Accumulated other comprehensive income		(742	)
Total Equity Capital		415,733
Total Liabilities and Equity Capital		1,482,581