SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

(Amendment No.     )

Filed by the registrant  x

Filed by a party other than the registrant  ¨

Check the appropriate box:

MHI Hospitality Corporation

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of filing fee (Check the appropriate box):

MHI HOSPITALITY CORPORATION

March 23, 200622, 2007

Dear Stockholder:

On behalf of the Board of Directors and management of MHI Hospitality Corporation (the “Company”), I cordially invite you to attend the 20062007 Annual Meeting of Stockholders (the “Annual Meeting”) to be held at the Boar’s Head Inn, located at 200 Ednam Drive, Charlottesville,Kingsmill Resort Conference Center, 1010 Kingsmill Road, Williamsburg, Virginia on Tuesday,Friday, April 25, 200627, 2007 at 10:9:00 a.m., local time. The attached Notice of Annual Meeting and Proxy Statement describe the formal business to be transacted at the Annual Meeting. During the Annual Meeting, I will report on the operations of the Company. Directors and officers of the Company, as well as a representative of PKF Witt Mares, PLC, certified public accountants, will be present to respond to any questions you may have.

You will be asked to elect seven directors and to ratify the appointment of PKF Witt Mares, PLC as the Company’s independent accountants for the fiscal year ending December 31, 2006.2007. The Board of Directors has unanimously approved each of these proposals and recommends that you vote FOR them.

Your vote is important, regardless of the number of shares you own and regardless of whether you plan to attend the Annual Meeting. I encourage you to read the enclosed proxy statement carefully and sign and return your enclosed proxy card as promptly as possible because a failure to do so could cause a delay in the Annual Meeting and additional expense to the Company. A postage-paid return envelope is provided for your convenience. This will not prevent you from voting in person, but it will assure that your vote will be counted if you are unable to attend the Annual Meeting. If you do decide to attend the Annual Meeting and feel for whatever reason that you want to change your vote at that time, you will be able to do so. If you are planning to attend the Annual Meeting, please let us know by marking the appropriate box on the proxy card.

Sincerely yours,

/s/    ANDREW M. SIMS

Andrew M. Sims

Chairman of the Board President and Chief Executive Officer

814 Capitol Landing Road,4801 Courthouse Street, Suite 201 Williamsburg, Virginia 2318523188

MHI HOSPITALITY CORPORATION

814 CAPITOL LANDING ROAD4801 COURTHOUSE STREET, SUITE 201

WILLIAMSBURG, VIRGINIA 2318523188

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON APRIL 25, 200627, 2007

NOTICE IS HEREBY GIVEN that the 20062007 Annual Meeting of Stockholders (the “Annual Meeting”) of MHI Hospitality Corporation (the “Company”), will be held at the Boar’s Head Inn,Kingsmill Resort Conference Center, located at 200 Ednam Drive, Charlottesville,1010 Kingsmill Road, Williamsburg, Virginia, on Tuesday,Friday, April 25, 200627, 2007 at 10:9:00 a.m., local time, for the following purposes:

The Boardboard of Directorsdirectors is not aware of any other business to come before the Annual Meeting. Stockholders of record at the close of business on March 1, 20062007 are the stockholders entitled to notice of and to vote at the Annual Meeting and any adjournments thereof.

A copy of the Company’s 2006 Annual Report for the year ended December 31, 2005 is enclosed.

YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WE ENCOURAGE YOU TO VOTE BY PROXY SO THAT YOUR SHARES WILL BE REPRESENTED AND VOTED AT THE ANNUAL MEETING EVEN IF YOU CANNOT ATTEND. ALL STOCKHOLDERS OF RECORD CAN VOTE BY WRITTEN PROXY CARD. HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM YOUR RECORD HOLDER TO VOTE IN PERSON AT THE ANNUAL MEETING.

BY ORDER OF THE BOARD OF DIRECTORS

/s/    WILLIAM J. ZAISER

WILLIAM J. ZAISER

SECRETARY

Williamsburg, VirginiaVA

March 23, 200622, 2007

IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM AT THE ANNUAL MEETING. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.

PROXY STATEMENT

OF

MHI HOSPITALITY CORPORATION

814 CAPITOL LANDING ROAD4801 COURTHOUSE STREET, SUITE 201

WILLIAMSBURG, VIRGINIA 2318523188

ANNUAL MEETING OF STOCKHOLDERS

APRIL 25, 200627, 2007

This Proxy Statement is furnished in connection with the solicitation of proxies by the Boardboard of Directorsdirectors of MHI Hospitality Corporation (the “Company”) to be used at the 20062007 Annual Meeting of Stockholders which will be held at the Boar’s Head Inn,Kingsmill Resort Conference Center, located at 200 Ednam Drive, Charlottesville,1010 Kingsmill Road, Williamsburg, Virginia, on Tuesday,Friday, April 25, 2006, 10:27, 2007, 9:00 a.m., local time (the “Annual Meeting”). The accompanying Notice of Annual Meeting of Stockholders and this Proxy Statement are being mailed to stockholders on or about March 23, 2006.22, 2007.

All properly executed written proxies that are delivered pursuant to this proxy statement will be voted on all matters that properly come before the Annual Meeting for a vote. If your signed proxy specifies instructions with respect to matters being voted upon, your shares will be voted in accordance with your instructions. If no instructions are specified, your shares will be voted (a) FOR the election as directors of thedirector nominees named in Proposal I, (b) FOR Proposal II (ratification of independent registered public accountants)accounting firm), and (c) in the discretion of the proxy holders, as to any other matters that may properly come before the Annual Meeting. Your proxy may be revoked at any time prior to being voted by: (i) filing with the Company’s Corporate Secretary (William J. Zaiser, at 814 Capitol Landing Road,4801 Courthouse Street, Suite 201, Williamsburg, Virginia 23185)23188) written notice of such revocation; (ii) submitting a duly executed proxy bearing a later date; or (iii) attending the Annual Meeting and giving the Corporate Secretary notice of your intention to vote in person.

VOTING SECURITIES AND VOTE REQUIRED

The Boardboard of Directorsdirectors has fixed the close of business on March 1, 20062007 (the “Record Date”) as the record date for the determination of stockholders who are entitled to notice of, and to vote at, the Annual Meeting. On the Record Date, there were 6,704,0006,845,500 shares of the Company’s common stock, $0.01 par value, (the “Common Stock”), outstanding. Each stockholder of record on the Record Date is entitled to one vote for each share held.

The presence in person or by proxy of at least a majority of the outstanding shares of Common Stockcommon stock entitled to vote is necessary to constitute a quorum at the Annual Meeting. Shares represented by proxies received but marked as abstentions, if any, will be included in the calculation of the number of shares considered to be present at the meeting. Shares held in a broker’s account that are not voted by the broker or other nominee (“broker non-votes”) will be treated as shares present at the meeting for purposes of determining the presence of a quorum, but will not be treated as shares present and entitled to vote with respect to those matters for which no vote is cast. In the event there are not sufficient votes for a quorum or to ratify any proposals at the time of the Annual Meeting, the Annual Meeting may be adjourned in order to permit the further solicitation of proxies.

As to the election of directors, the enclosed proxy being provided by the Board enables a stockholder to vote for“FOR” the election of the nominees as submitted as Proposal I proposed by the Board,board of directors, or to withhold authority to vote for the nominee being proposed. Directors are elected by a plurality of votes of the shares present in person or represented by proxy at a meeting and entitled to vote in the election of directors.

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As to the ratification of the independent accountants, which is submitted as Proposal II, a stockholder may: (i) vote “FOR” the ratification; (ii) vote “AGAINST” the ratification; or (iii) “ABSTAIN” with respect to the ratification. Unless otherwise required by law, Proposal II and all other matters shall be determined by a majority of votes cast affirmatively or negatively without regard to (a) broker non-votes, or (b) proxies marked “ABSTAIN” as to that matter.

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PRINCIPAL HOLDERS

The following table sets forth the beneficial ownership of shares of common stock as of December 31, 2005March 1, 2007 for each person or group known to the Company to be holding more than 5% of the common stock, for each director and named executive officer and for the directors and executive officers of the Company as a group. As of March 1, 2007, the Company had outstanding 6,845,500 shares of its common stock, $.01 par value per share. The number of shares shown represents the number of shares of common stock the person “beneficially owns,” as determined by the rules of the SEC, including the number of shares that may be issued upon redemption of partnership interests (“Units”)or units in MHI Hospitality, Limited Partnership, L.P. (the “Operating Partnership”)., which we will refer to as the Operating Partnership. The Operating Partnership is controlled by the Company as its sole general partner. The Operating Partnership is obligated to redeem each Unitunit at the request of the holder thereof for the cash value of one share of common stock or, at the Company’s option, one share of common stock.

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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers and the beneficial owners of more than 10% of the Common Stockcommon stock to file reports of ownership and changes in ownership of their equity securities of the Company with the Securities and Exchange Commission and to furnish the Company with copies of such reports. To the best of the Company’sour knowledge, all of the filings by the Company’sour directors and executive officers with the exception of one filing on a Form 4 for William Zaiser, Andrew Sims, Christopher Sims and Kim Sims, were made on a timely basis during the 20052006 fiscal year. The Form 4 transactions for those persons were made on a Form 5 filed with the SEC on February 14, 2006. The Company isWe are not aware of any beneficial owners of more than 10% of our common stock other than as disclosed in the Common Stock.Principal Holders Table.

PROPOSAL I—ELECTION OF DIRECTORS

The directors of the Company are elected by the stockholders annually. Each director’s term of office expires at the annual meeting.Annual Meeting. Each of the directors has been nominated for election at the meetingAnnual Meeting to hold office until the 20072008 annual meeting of stockholders and until their successors are elected and qualified. The Board of Directors currently consists of seven members. Andrew M. Sims, General Anthony C. Zinni, Kim E. Sims, Christopher L. Sims, Edward S. Stein, David J. BeattyJames P. O’Hanlon and J. Paul Carey, or “Nominees”, have been nominated by the Boardboard of Directorsdirectors for terms of one year each (collectively, the “Nominees”).each.

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The persons named as proxies in the enclosed proxy card intend to vote “FOR” the election of the Nominees, unless the proxy card is marked to indicate that such authorization is expressly withheld. Should one or more of the Nominees withdraw or be unable to serve (which the Boardboard of Directorsdirectors does not expect) or should any other vacancy occur in the Boardboard of Directors,directors, it is the intention of the persons named in the enclosed proxy card to vote “FOR” the election of such persons as may be recommended by the Boardboard of Directors.directors. If there are no substitute nominees, the size of the Boardboard of Directorsdirectors may be reduced.

Biographical Information

The principal business experience of each director and executive officer of the Company is set forth below. The executive officers and all directors have held their present positions for five years unless otherwise stated.

Nominees for Directors:

Andrew M. Sims,49,50, is our President, Chief Executive Officerpresident, chief executive officer and Chairmanchairman of the Boardboard and has served in such capacity since our inception.inception in August 2004. He served as President of MHI Hotels Services, LLC (“MHI Hotels Services”), our management company, from 1995 until December 2004 after serving for seven years as vice president of finance and development. As President of MHI Hotels Services, LLC, Mr. Sims oversaw company operations as well as the areas of accounting and finance, marketing, development and franchise relations. Andrew Sims is the brother of directors Kim and Christopher Sims. Mr. Sims currently serves on the franchise advisory board for Hilton Hotels. Mr. Sims serves as a director of MHI Hotels Services.Services, LLC.

General Anthony C. Zinni,62, (USMC Ret.) became a Directordirector in December 2004 upon completion of our initial public offering.offering and is currently a member of our audit committee. General Zinni 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. General Zinni served as a professor at William & Mary College and at Virginia Military Institute, a position he held since November 2000. General Zinni currently serves as a director and member of the compensationgovernance committee of BAE Systems.Systems and a director of DynCorp.

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Kim E. Sims,51,52, became a Directordirector upon completion of our initial public offering in December 2004 and is the President and a Directordirector of MHI Hotels Services.Services, LLC, a position he has held since December 2004. Mr. Sims has served as Executive Vice President of Operations of MHI Hotels Services, sinceLLC from 1995 providing 27until 2004 and has provided 28 years of service there. Kim Sims is the brother of Andrew and Christopher Sims.

Christopher L. Sims,47,48, became a Directordirector upon completion of our initial public offering and is an Officerofficer and Directordirector of MHI Hotels Services. He joined MHI Hotels Services, LLC in 1981 first as sales and general manager for the Best Western Maryland Inn in College Park until his promotion in 1988 to vice president of sales and marketing.marketing, the position he currently holds. He is First Vice Presidenta member of the board of directors of the Prince George Conference and Visitors Bureau and a member of Hospitality Sales and Marketing Association International. Christopher Sims is the brother of Andrew and Kim Sims.

Edward S. Stein,59,60, became a Directordirector upon completion of our initial public offering in December 2004 and is Chairmanchairman of the Nominating, Corporate Governancenominating, corporate governance and Compensation Committee.compensation committee and is a member of the 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, business law and licensing since 1974. He is admitted to the Virginia Bar and is a member of the Norfolk and Portsmouth, Virginia Bar Associations.

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David J. Beatty,James P. O’Hanlon,62,63, became a Directordirector in March 2007. 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 completionits formation in May 1999. Prior to his employment with Dominion Generation, Mr. O’Hanlon was with a subsidiary of our initial public offering.Virginia Power since 1989 and served as vice president-Nuclear Services, vice president-Nuclear Operations and subsequently, senior vice president-Nuclear. He began his 32-year careeris a Captain (retired) 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 specializes in placing debt and equity for the lodging industry. He has been President of Guest Quarters, Inc., Treasurer and CFO of Guest Quarters Development Group and President of mortgage financing for Lawson-Essex, Inc.U.S. Naval Reserves.

J. Paul Carey,47,48, became a Directordirector prior to completion of the initial public offering in December 2004 and serves as the Chairmanchairman of the Audit Committee.audit committee and is a member of the nominating, corporate governance and compensation committee. He is currently the Managing Partner for JPT Partners, a privately held investment partnership created to acquire and manage transactiontransaction- processing companies in the education and financial services industry. Mr. Carey also serves as the Chairman for Campus Partners, LLC, the leading Perkins and Campus based loan service in the country.industry, a position he has 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 Trustees for the University System of Maryland College Park Foundation and for Trinity College.Stone Ridge School. Mr. Carey also serves on the board of directors of Campus Partners, a leading processor of campus based student loans.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF THE ABOVE NOMINEES.

Executive Officers of the Company Who Are Not Directors

William J. Zaiser,59,60, is our Executive Vice President, Chief Financial Officerexecutive vice president, chief financial officer and Treasurer.treasurer and corporate secretary, positions he has held since our inception in August 2004. A certified public accountant, he is responsible for financial analysis, cash management, insurance, investment and financial reporting. Mr. Zaiser began his career with MHI Hotels Services, LLC as a computer consultant, and became the first corporate controller for MHI Hotels Services.Services, LLC. In 1990, he was elected to the Board of Directors and was promoted to Vice President of Accounting for MHI Hotels Services.Services, LLC, a position he held until August 2004. As Vice President of Accounting, Mr. Zaiser was responsible for financial analysis, cash management, insurance, investment and financial reporting. Before joining the hospitality industry, Mr. Zaiser was an instructor of mathematics at both the University of Maryland and Montgomery College, and is a licensed CPA in the State of Maryland. Mr. Zaiser is a member of the American Institute of Certified Public Accountants and the Hospitality Financial and Technology Professionals.

David R. Folsom,41,42, is our Executive Vice Presidentexecutive vice president and Chief Operating Officer.chief operating officer. He was appointed to that position in January 2006. Mr. Folsom assists the Chief Executive Officerchief executive officer in the execution of the Company’sour strategic business plan and coordinates the Company’sour capital raising and borrowing efforts, as well as sourcing

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and conducting due diligence on potential acquisitions to facilitate the Company’s growth. Prior to joining MHI,our company, Mr. Folsom was Vice President of Paragon Real Estate, a Cleveland-based early stage real estate venture focusing on distressed multi-family assets. HeFrom 2001 to 2005, he was also formerly 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 MHIour company public in 2004.

Julia Farr Connolly,40, is our vice-president and chief compliance officer. She joined us in January 2005 as compliance counsel and was appointed an officer by the board of directors in July 2006. Ms. Connolly is responsible for all aspects of the legal compliance and corporate governance of our company. Prior to joining us, from 1998 to 2004 she was a part-time associate with the law offices of Roger M. Adelman, practicing civil and criminal litigation. Ms. Connolly served as an associate with the law firm of Kirkpatrick & Lockhart Nicholson

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Graham LLP from 1993 to 1997, where she specialized in areas of investment management and securities litigation. From 2001 to 2003, Ms. Connolly also consulted with the investment adviser, Farr, Miller & Washington, LLC, in areas of general corporate law.

Anthony E. Domalski,45, is our vice-president and chief accounting officer. He joined our company 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 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.

Meetings and Certain Committees of the Board of Directors

Independent Directors

At least a majority of the Company’s directors and all of the members of the Audit Committeeaudit committee and the Nominating, Corporate Governancenominating, corporate governance and Compensationcompensation committee, which we refer to as the NC&C Committee, must meet the test of “independence” as defined by the listing standards of the American Stock Exchange or AMEX. The AMEX standards provide that to qualify as an “independent” director, in addition to satisfying certain bright-line criteria, the Boardboard of Directorsdirectors must affirmatively determine that a director has no material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company). The BoardOur board of Directorsdirectors has determined that each of Messrs. Carey, Beatty,O’Hanlon, Stein, and Zinni satisfies the bright-line criteria and that none has a relationship with the Company that would interfere with such person’s ability to exercise independent judgment as a member of the Board.board. Therefore, the Company believeswe believe that each of such directors is independent under the AMEX rules. Mr. David J. Beatty served as an independent member of the board of directors from our initial public offering in December 2004 until his resignation on February 22, 2007.

The Boardboard of Directorsdirectors conducts its business through meetings of the Boardboard of Directorsdirectors and through its committees. During the fiscal year ended December 31, 2005,2006, the Boardboard of Directorsdirectors of the Companyour company held four4 regular meetings and no special meetings. No directordirectors of the Company attended fewer than 75% of the total meetings of the Boardboard of Directorsdirectors and committee meetings on which such Boardboard member served during this period. In addition to other committees, asAll seven directors attended the 2006 annual meeting of stockholders. As of December 31, 2005, the Company2006, our company had an Audit Committeeaudit committee and a Nominating, Corporate Governancenominating, corporate governance and Compensation Committee.compensation committee.

The Nominating, Corporate Governance and CompensationNC&C Committee of the Company is currently comprised of Directorsdirectors Stein Carey and Beatty.Carey. All members of the Nominating, Corporate Governance and CompensationNC&C Committee are independent in accordance with the listing standards of the American Stock Exchange.AMEX. This standing committee recommends to its Board of Directors adetermines the salary for the president and chief executive officer, executive vice-president and approveschief financial officer salary adjustments.and the executive vice-president and chief operating officer. The purpose of the Nominating, Corporate Governance and CompensationNC&C Committee is to make recommendations to the Boardboard of Directorsdirectors regarding corporate governance policies and practices, recommend criteria for membership on the board of directors, nominate members to the Boardboard of Directors,directors, make recommendations to the Boardboard of Directorsdirectors concerning the membership, size and responsibilities of each of the committees, develop general policy relating to compensation and benefits, determine compensation for, and evaluate the performance of, our executive officers and administer our 2004 Long-Term Incentive Plan. The Nominating, Corporate Governance and CompensationNC&C Committee met threefour times during fiscal year 2005.2006. The Company has adopted a written nominating committee charter that sets forth itsthe specific functions and responsibilities of the committee. The Nominating, Corporate Governance and CompensationNC&C Committee Chartercharter is available on our website atwww.MHIHospitality.com.www.MHIHospitality.com.

The Audit Committee,audit committee, a standing committee, is currently comprised of Directorsdirectors Carey, BeattyStein and Stein.Zinni. All members of the Audit Committeeaudit committee are independent in accordance with the listing standards of the American Stock Exchange.AMEX. The Audit Committee

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audit committee meets with the independent accountants, PKF Witt Mares, PLC, to discuss the annual audit and any related matters. The Audit Committeeaudit committee is further responsible for internal controls for financial reporting. The Audit Committeeaudit committee has adopted a written charter. The audit committee charter which is attached to this proxy statement as Appendix A.available on our website atwww.MHIHospitality.com. The Audit Committeeaudit committee met 11ten times in fiscal year 2005.2006.

The Boardboard of Directorsdirectors has determined that J. Paul Carey qualifies as “audit committee financial expert” as defined in Item 401(h)407(d)(5) of Regulation S-K, and that he is “independent” asin accordance with the term is used in Item 7(d)(3)(iv)listing standards of Schedule 14A under the Securities Exchange Act.AMEX.

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Report of the Audit Committee

For the fiscal year ended December 31, 2005,2006, the Audit Committee: (i) reviewed and discussed the Company’s audited financial statements with management, (ii) discussed with the Company’s independent auditor, PKF Witt Mares, PLC, all matters required to be discussed under Statement on Auditing Standards No. 61, and (iii) received PKF Witt Mares, PLC disclosures regarding PKF Witt Mares’Mares, PLC’ independence as required by Independence Standards Board Standard No. 1 and discussed with PKF Witt Mares, PLC its independence. Based on the foregoing review and discussions, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Reportannual report on Form 10-K for the fiscal year ended December 31, 2005.2006.

Audit Committee:

J. Paul Carey- Chairman

David J. Beatty

Edward S. Stein

Anthony C. Zinni

Director Nomination Process

The Nominating, Corporate Governance and CompensationNC&C Committee of the Boardboard of Directors alsodirectors acts as a nominating committee for the selection of nominees for director.

In determining appropriate candidates to nominate to the Boardboard of Directors,directors, the Nominating, Corporate Governance and CompensationNC&C Committee will generally consider a number of factors, including the age, expertise, business experience, character, willingness to serve actively and other board memberships of the candidate. The NC&C Committee also assesses the board’s size and composition, corporate governance policies and AMEX listing standards when nominating candidates. There are no minimum qualifications that the NC&C Committee has established for a candidate recommended to the board of directors by the NC&C Committee.

In nominating members to the Boardboard of Directors,directors, the Nominating, Corporate Governance and CompensationNC&C Committee will consider nominees recommended by stockholders so long as the recommendation is submitted to our corporate secretary within the timeframe required to request a proposal that will be included in the proxy materials for our next annual meeting of stockholders. However, the Nominating, Corporate Governance and CompensationNC&C Committee may, in its sole discretion, reject any such recommendation for any reason.

Mr. O’Hanlon, who was appointed to the board of directors in March 2007 to fill Mr. Beatty’s board vacancy until the Annual Meeting, and who was approved by the NC&C Committee for inclusion in the proxy card to stand for election at the Annual Meeting, was recommended to the board of directors by our chief executive officer.

Under the terms of our strategic alliance agreement, MHI Hotels Services, LLC, which we refer to as MHI Hotels Services, has the right to nominate one person for election to our Boardboard of Directorsdirectors at each annual meeting of stockholders for so long as Andrew Sims, Kim Sims, Christopher Sims and their affiliates and

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families own not less than 1.5 million Unitsunits or shares of our common stock. MHI Hotels ServicesServices’ nominee for director is Kim Sims. Mr. Sims is not considered independent under the corporate governance standards of the American Stock Exchange.AMEX.

In addition, Andrew Sims’ employment agreement with us provides that we must nominate him to serve as a director. The nomination right afforded to MHI Hotels Services and that provided for under AndrewMr. Sims’ employment agreement are subject to the determination of the Nominating, Corporate Governance and CompensationNC&C Committee in connection with each annual or special meeting of stockholders at which directors will be elected that the nominee satisfies the standards established by the committee for service on the board. If AndrewMr. Sims fails to be nominated to our Boardboard of Directorsdirectors or is involuntarily removed from our Boardboard of Directors,directors, unless for cause or vote by the stockholders, he will receive, among other things, a severance payment equal to five times his combined salary base and actual bonus compensation for the preceding fiscal year. AndrewMr. Sims is not independent under the corporate governance standards of the American Stock Exchange.AMEX.

The Boardboard of Directorsdirectors believes that its procedures comply with the requirements of the American Stock ExchangeAMEX and provide adequate assurance that nominations are approved by independent directors.

Stockholder Communications

The Boardboard of Directorsdirectors does not have a formal process for stockholders to send communications to the Board.board. In view of the infrequency of stockholder communications to the Boardboard of Directors,directors, the Boardboard does not believe that a formal process is necessary. Written communications received by the Companyour company from stockholders are shared with the full Boardboard no later than the next regularly scheduled Boardboard meeting. The Boardboard encourages, but does not require, directors to attend the annual meeting of stockholders.

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DIRECTOR AND EXECUTIVE COMPENSATION

Director Compensation Discussion and Analysis

The NC&C Committee is responsible for developing our policies relating to compensation and benefits, determining compensation for, and evaluating the performance of, certain of our executive officers, and administering our 2004 Long-Term Incentive Plan, which we refer to as our Long-Term Incentive Plan. The NC&C Committee determines compensation for our three most highly paid executive officers: the chairman and chief executive officer, the executive vice-president and chief financial officer, and the executive vice-president and chief operating officer. We payrefer to these three executive officers as our independent, non-employee director’s feesprincipal executive officers.

Objectives of Our Compensation Program

The NC&C Committee’s principal objective in establishing compensation policies is to develop and administer a comprehensive program designed to attract and retain outstanding managers. The NC&C Committee’s guidelines for their services as directors. Independent, non-employee directors receive annual compensation of $15,000, plusour principal executive officers are designed to provide fair and competitive levels of total compensation, while linking elements of compensation with performance. A further objective of our compensation policies is to provide incentives and reward each principal executive officer for his contribution to our company. To that end, the NC&C Committee believes executive compensation packages provided by us to the principal executive officers, should include both cash and stock-based compensation that reward performance as measured against established goals.

Our principal executive officers are evaluated annually for performance according to individual responsibilities and contributions, as well as broader measures related to corporate performance and results. The NC&C Committee has structured our annual and long-term incentive-based cash and non-cash executive compensation to motivate our principal executive officers to achieve the goals set by us and reward the executives for achieving those goals.

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Compensation Consultant

During 2006, the NC&C Committee retained the services of HVS Executive Search, a fee of $750 (plus out-of-pocket expenses)compensation consulting firm, which we refer to as HVS, to review and comment on our existing compensation plan and policies and to make recommendations for attendance in person at each meetingplan enhancements. At the request of the BoardNC&C Committee, HVS provided market data relating to compensation programs for senior executives in a peer group identified by HVS and offered opinions on the methodology used by the NC&C Committee to set base salary, bonus and long-term incentives.

HVS chose 19 companies that were involved in the development, ownership and/or management of Directors,hotels and $750restaurants. The median market capitalization of the peer group was $95 million. In making its compensation decisions, the NC&C Committee compared each element of compensation and total compensation of each principal executive officer against executives who hold similar responsibilities within the peer group. The NC&C Committee took HVS’s recommendations into consideration when determining salary increases and used them as a basis to establish the bonus and equity components of our principal executive officers’ compensation for fiscal year 2007.

The NC&C Committee did not request HVS to give opinions on the compensation programs for the chief accounting officer or the chief compliance officer.

Role of Chief Executive Officer in Compensation Decisions

Our chief executive officer makes recommendations to the NC&C Committee for the total compensation, including salary, cash bonus and stock awards, for the principal executive officers of our company. The NC&C Committee takes into consideration the recommendations of our chief executive officer for compensation to our principal executive officers in light of the compensation policies it has established.

Our chief executive officer also develops performance goals for our executive vice-president and chief financial officer and executive vice-president and chief operating officer in consultation with the NC&C Committee, and the NC&C Committee approves the performance goals. Our chief executive office also reviews the annual performance of these two principal executive officers with the NC&C Committee. Our board of directors sets the annual personal performance goals for the chief executive officer.

With respect to fiscal 2006, our chief executive officer solely determined the compensation for our vice president and chief accounting officer and vice-president and chief compliance officer. In 2007, the procedure for setting compensation for our vice-president and chief accounting officer and our vice-president and chief compliance officer changed. In response to the appointment of these two individuals as officers of our company by the board of directors in July 2006, the NC&C Committee amended its charter to modify the procedures utilized to set compensation for these officers. The procedure for setting compensation for our vice president and chief accounting officer and our vice-president and chief compliance officer is as follows: (i) our chief executive officer will make a preliminary recommendation of compensation for these two officers; (ii) the NC&C Committee will review the proposed compensation set by the chief executive officer; and (iii) the NC&C Committee will make a recommendation to the full board of directors relating to the compensation for these two officers. In setting the base salaries of the vice-president and chief accounting officer and vice-president and chief compliance officer, our chief executive officer considers the officer’s position, level and scope of responsibility and conducts an evaluation of base salaries of other similar positions in comparable companies. Our company currently does not have employment contracts with these officers.

Our chief executive officer also recommends to the NC&C Committee annual stock awards to our vice president and chief accounting officer and vice-president and chief compliance officer for consideration and approval. The NC&C Committee considers such recommendations in making stock awards.

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Elements of our Compensation Plan

Elements of compensation for our principal executive officers consist principally of base salary, performance bonuses and awards of shares of restricted common stock under our Long-Term Incentive Plan. In determining each element of compensation for each committee meeting attendedprincipal executive officer, the NC&C Committee primarily considers:

Elements of compensation for our vice-president and chief accounting officer and vice-president and chief compliance officer consist of base salary and awards of restricted common stock pursuant to our Long-Term Incentive Plan. In making a preliminary recommendation of each element of compensation for these two officers, our chief executive officer, and then subsequently, the NC&C Committee, primarily considers the officer’s position, level and scope of responsibility and an evaluation of base salaries and other benefits of other executive officers of comparable companies. Our chief executive officer also considers individual performance of each executive officer and then reports the performance of these officers to the NC&C Committee for its consideration.

Base Salary

The original base salary amounts of the principal executive officers were provided for in their employment agreements and are subject to adjustment pursuant to the terms of those agreements. The NC&C Committee made an adjustment in 2007 to our chief executive officer’s base salary, based on its analysis of salaries for chief executives in the peer group. In setting base salaries, and annually considering adjustments, the NC&C Committee uses an evaluation process considering the officer’s position, level and scope of responsibility and an evaluation of base salaries and other benefits of other executive officers of comparable companies, including an analysis of our company’s current operating results. It is the goal of the NC&C Committee to establish fair base salary compensation for our principal executive officers based on our company’s operating performance relative to comparable peer companies. Annually, the chief executive officer makes a recommendation regarding salary levels for the NC&C Committee’s consideration. In addition, HVS has provided relevant market data relating to base salary for each principal executive officer position. HVS has recommended that the NC&C Committee maintain the principal executive officers’ salaries within the first quartile of its peer group based on our company’s relative size and growth strategy.

The original base salary amounts for our vice president and chief accounting officer and vice-president and chief compliance officer were determined by using an evaluation process considering the officer’s position, level and scope of responsibility and an evaluation of base salaries and other benefits of other executive officers of comparable REITs. Commencing in 2007, our chief executive officer will annually evaluate the individual performance of these two executive officers to make an initial determination whether the base salary should be increased and will report his conclusions to the NC&C Committee for its consideration and recommendation to the board of directors.

Cash Bonus Plan

Under the employment agreements with the principal executive officers, each principal executive officer is eligible to receive a feebonus in amounts between 20%-30% of $375. Directors who are also officersbase salary. The NC&C Committee has reviewed these agreements and has determined in the best interests of the Company to structure a cash bonus plan that may

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award above or employeesbelow the 20%-30% range indicated in the agreements subject to certain metrics described below being met. The NC&C Committee considers three quantifiable metrics to determine the actual bonus payment for the principal executive officers:

The NC&C Committee assigns equal weight to each of the foregoing metrics in determining the cash bonus. The NC&C Committee has determined that for 2007, the annual target bonus for our chief executive officer will be $100,000 and the annual target bonus for each of our Company or are affiliated with MHI Hotels Services LLCchief financial officer and our chief operating officer will be $50,000. Each metric, if fully realized, is apportioned 33.3% to the target bonus goal.

Currently, our company has not established a cash bonus program for our vice-president and chief accounting officer and our vice-president and chief compliance officer.

Long-Term Stock Plan

The NC&C Committee is in the process of formulating a stock-based compensation program to facilitate the administration of our 2004 Long-Term Incentive Plan. It will be paid any director fees. Directors Edward Stein and J. Paul Carey will receive an additional $5,000 perput into effect this fiscal year for their servicescompensation determinations. The long-term stock program is structured to retain and provide an equity-based incentive to the executive officers for dedicated long-term service as chairwell as achievement of long-term operational and financial goals that will ultimately be reflected in stock value. Under the Nominating, Corporate Governance and Compensation, and Audit Committees, respectively. Additionally, we issued 1,000long-term stock program, each principal executive officer is eligible to receive shares of restricted stock over a three to eachfive year period if certain goals to be established by the NC&C Committee are attained and if employment is continuous until the shares vest. The deferred stock grants to our executive vice-president and chief operating officer in his employment agreement are not subject to the requirements of this long-term stock program.

Currently, our vice-president and chief accounting officer and vice-president and chief compliance officer are eligible to receive stock awards under the Long-Term Incentive Plan, but are not considered for awards granted by the NC&C Committee pursuant to the long-term stock program.

Tax Considerations

Section 162(m) of the independent directors upon completionInternal Revenue Code generally sets a limit of our initial public offering. Although distributions will be paid on all restricted stock, whether or not vested, at the same rate and$1.0 million on the same date as on sharesamount of our common stock, these holders willannual compensation paid to an executive officer (other than certain enumerated categories of compensation, including performance-based compensation) that may be prohibited from selling such shares until they vest. Alldeducted by a publicly-held company. It is the policy of the sharesboard of restricted stock were fully vested on December 21, 2005,directors and the first anniversaryNC&C Committee to seek to qualify executive compensation for deductibility to the extent that such policy is consistent with our overall objectives and executive compensation policy. None of the dateexecutive officers received compensation in 2006 in excess of grant. For the year ended December 31, 2005, board and committee fees totaled approximately $82,000.limits imposed under Section 162(m).

Executive Compensation

Summary Compensation Table.

The following table sets forth the cash and non-cash compensation awarded to or earned by Messrs. Sims, Zaiser, Folsom, Domalski and ZaiserMs. Connolly during the past fiscal year. No otherMr. Domalski, our vice-president and chief accounting officer, and Ms. Connolly, our vice-president and chief compliance officer, were appointed executive officer had a salary and bonus during the fiscal year ended December 31, 2005 that exceeded $100,000 for services renderedofficers by our board of directors in all capacities to the Company.July 2006.

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Summary Compensation Table

Grants of Plan Based Awards

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OurOption Exercises or Stock Vested

No other compensation has been awarded to, earned by, or paid to any of our executive officers includingwhich is required to be reported in the above summary compensation table.

2006 Base Salary

During 2006, our principal executive officers’ compensation consisted only of base salary. For 2006 and 2007, each executive officer received a 4% increase to the base salary. In addition to this 4% increase, for 2007, the NC&C Committee increased Mr. Sims salary 10% to $266,760. The NC&C Committee determined that our chief executive officer’s salary required an increase to remain competitive based in part on the peer group analysis presented to the NC&C Committee. It also determined that our chief financial officer’s salary was currently within the targeted range of the peer group and that our chief operating officer’s salary was sufficiently competitive.

For 2006, our vice-president and chief accounting officer who joinedand vice-president and chief compliance officer’s compensation consisted only of base salary. For 2006 and 2007, these two officers received a 4% increase to the base salary. For 2007, each of these two officers’ salary was increased an additional $7,500 in recognition of attaining officer status within our company.

2006 Bonuses Awarded

The NC&C Committee did not award any bonuses to the principal executive officers for fiscal year 2006. In making its decision, the NC&C Committee considered the following factors:

As there is no guaranteed minimum bonus. Webonus program established for our vice-president and chief accounting officer and our vice-president and chief compliance officer, no bonuses were awarded to these two officers in 2006.

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Stock Awards Granted

The NC&C Committee did not paymake any bonusawards of restricted stock based on performance in fiscal year 2006. In making its decision, the NC&C Committee considered the following factors:

Our chief executive officer did not recommend to the NC&C Committee any awards of restricted stock to our vice-president and chief accounting officer and vice-president and chief compliance officer based on their performance in 2004 orfiscal year 2006. He recommended that increases in salary for 2007, instead of stock awards, to each officer would make the officers’ base salary compensation more competitive within their peer group. In June 2006, these officers were granted restricted stock awards based on their performance in 2005. In future periods, bonuses may be payable to

Employment Agreements

The employment agreements with Messrs. Sims, Zaiser and Folsom in amounts between 20% and 30% of their base salary subject to achieving quantitative performance goals to be established annually by the Nominating, Corporate Governance and Compensation committee of the board of directors.

Employment Agreements

The employment agreements with Andrew Sims, William Zaiser and David Folsom provide for antheir annual salary and possible additional compensation in the form of $225,000 for Andrew Sims, $175,000 for William Zaisercash bonus and $150,000 for Mr. Folsom. Messrs. Sims, Zaiser and Folsomrestricted stock awards. Each principal executive officer will receive customary benefits, including a term life insurance policy of $1 million and disability insurance in an amount so that each will receive the same monthly payments as under his respective employment agreement in the event of his disability. As described below, the employment agreements provide these officers with severance benefits if their employment ends under certain circumstances. We believe that the agreements will benefit us by helping to retain the executivesprincipal executive officers and by allowing them to focus on their duties without the distraction of the concern for their personal situations in the event of a possible change in control of our Company.company. We have not entered into employment agreements with Mr. Domalski and Ms. Connolly.

Mr. Sims’ and Mr. Zaiser’s agreements have an initial term beginning December 21, 2004 and ending on December 31, 2009. Mr. Folsom’s has an initial term beginning January 9, 2006 and ending on December 31, 2010. Thereafter, the term of the agreements will be extended for an additional year, on each anniversary of the effective date of the offering, unless either party gives 180 days prior written notice that the term will not be extended.

Andrew Sims’ employment agreement with us provides that we must nominate him to serve as a member of our Boardboard of Directors,directors, must include him in the proxy materials delivered to stockholders in connection with a stockholder meeting to elect directors, and recommend him for election, and must continue to nominate and recommend him for election to our board for so long as he serves as our president and chief executive officer; subject, however, to the determination of our Nominating, Corporate Governance and CompensationNC&C Committee that he satisfies the standards established for service on our board of directors. If AndrewMr. Sims fails to be nominated to our Boardboard of Directorsdirectors or is involuntarily removed from our Boardboard of Directors,directors, other than for cause or vote by the stockholders, he will receive, among other things, a severance payment equal to five times his combined salary base and actual bonus compensation for the preceding fiscal year, plus indemnification for tax on such amounts.

Each of these executivesprincipal executive officers will be entitled to receive benefits under his respective employment agreement if we terminate the executive’s employment without cause or the executive resigns with good reason or if there is a change in control of our Companycompany during the term of the agreement. Under these scenarios, Messrs. Sims and Zaiser are entitled to receive the following:

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In the event that Mr. Folsom’s employment is terminated without cause or he resigns for good reason, Mr. Folsom is entitled to receivedreceive the sum of the following amounts:

EachDIRECTOR COMPENSATION

The NC&C Committee reviews the level of compensation of our non-employee directors on an annual basis. To determine how appropriate the current level of compensation for our non-employee directors is, the NC&C Committee has historically obtained data from a number of difference sources including publicly available data describing director compensation in peer companies. In fiscal year 2006, the NC&C Committee also considered competitive data provided by HVS, our compensation consultant.

We compensate our independent, non-employee directors for their services as directors through a mixture of cash and equity-based compensation. Independent, non-employee directors receive annual compensation of $15,000, plus a fee of $750 (plus out-of-pocket expenses) for attendance in person at each meeting of the executivesboard of directors, and $750 for each committee meeting attended in person. Directors who attend meetings telephonically receive a fee of $375. Directors who are also officers or employees of our company or are affiliated with MHI Hotels Services LLC are not paid any director fees. Directors Edward Stein and J. Paul Carey receive an additional $5,000 per year for their services as chair of the NC&C and Audit Committees, respectively.

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On an annual basis, the NC&C Committee makes a recommendation to the board of directors for awards of restricted stock to each independent, non-employee director for its consideration and approval. On June 1, 2006, each independent, non-employee director named above received 1,000 shares of stock that were fully vested on December 31, 2006. On January 16, 2007, each independent non-employee director named above received 1,500 shares that will vest on December 31, 2007. Mr. Beatty’s stock grant of 1,500 restricted shares was forfeited pursuant to the terms of the Stock Award Agreement between him and our company upon his resignation on February 22, 2007. Although distributions are paid on all restricted stock, whether or not vested, at the same rate and on the same date as on shares of our common stock, these holders will be eligible to receive payments to compensateprohibited from selling such shares until they vest. To date, the executive forstock awards have been restricted until the additional taxes, if any, imposed on the executive under Section 4999last day of the Internal Revenue Code by reason of receipt of excess parachute payments.

Each of the executives has agreed, absent a written waiver from us, during the term of their employment and for a one-year period thereafter, not to, directly or indirectly, engagefiscal year in certain activities that would be in competition with us.which they were granted.

2004 Long-Term Incentive Plan

We have established our 2004 Long-Term Incentive Plan for the purpose of recruiting and retaining our and our affiliates’ executive officers, employees, non-employee directors and consultants. The Long-Term Incentive Plan authorizes the issuance of options to purchase shares of common stock and the grant of stock awards, deferred shares, performance shares and performance units.

Administration of the Long-Term Incentive Plan is carried out by the Nominating, Corporate Governance and Compensation Committee of the Board of Directors, which we refer to in this section as theNC&C Committee. The NC&C Committee may delegate a portion of its authority under the Long-Term Incentive Plan to one or more officers.

Our officers and employees and those of our operating partnership and other subsidiaries are eligible to participate in the Long-Term Incentive Plan. Our non-employee directors and other persons that provide consulting services to us and our subsidiaries are also eligible to participate in the Long-Term Incentive Plan.

To date, noneCompensation Committee Report

The Nominating, Corporate Governance and Compensation Committee of our executive officers or directorsthe Company has been granted optionsreviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Nominating, Corporate Governance and Compensation Committee recommended to purchase sharesthe Board of our common stock underDirectors that the Long-Term Incentive Plan or otherwiseCompensation Discussion and no executive officer has received any stock award, deferred shares, performance shares or performance units.Analysis be included in this Proxy Statement.

THE NOMINATING, CORPORATE GOVERNANCE AND COMPENSATION COMMITTEE

Edward S. Stein, Chairman

J. Paul Carey, Committee Member

Compensation Committee Interlocks and Insider Participation.

The CompensationDuring fiscal year 2006, the NC&C Committee currently consistsconsisted of Directorsdirectors Stein, BeattyCarey, and Carey.former director Beatty. Please see section entitled Certain Relationships and Related Transactions for a discussion of a related party transaction involving former director Beatty. No member of the Committeecommittee is, or was, an executive officer of another company whose board of directors has a comparable committee on which one of the Company’s executive officers serves. None of the executive officers of the Company is, or was during 2005,2006, a member of a comparable compensation committee of a company of which any of the directors of the Company is an executive officer.

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Compensation Committee Report on Executive Compensation

Report of the Nominating, Corporate Governance and Compensation Committee

The Nominating, Corporate Governance and Compensation Committee of the Board of Directors, which consists of three independent directors, Edward Stein, David Beatty and J. Paul Carey, is responsible for developing a general policy relating to compensation and benefits, determining compensation for, and evaluating the performance of, our executive officers, and administering our 2004 Long-Term Incentive Plan.

The Committee’s principal objective in establishing compensation policies is to develop and administer a comprehensive program designed to attract and retain outstanding managers. The Compensation Committee’s guidelines for compensation of executives are designed to provide fair and competitive levels of total compensation, while integrating pay with performance.

Executive officers are evaluated annually for performance according to individual responsibilities and contributions, as well as broader measures related to the Company’s performance and results. The Committee met 3 times in 2005. In addition to establishing and approving the compensation of the executive officers for 2006, including uniform raises of 4% of base salary, the Committee agreed to retain the services of HVS Executive Search, a compensation consulting firm, to review and comment on the Company’s existing compensation plan and policies and to make recommendations for plan enhancements.

Compensation may consist principally of base salary, performance bonuses and awards of shares of restricted common stock under the Company’s 2004 Long-Term Incentive Plan. The restricted common stock awards are intended to provide incentives to the executive officers to work towards achieving long-term operational and financial goals that will ultimately be reflected in stock value.

Section 162(m) of the Internal Revenue Code generally sets a limit of $1.0 million on the amount of annual compensation paid to an executive officer (other than certain enumerated categories of compensation, including performance-based compensation) that may be deducted by a publicly-held company. It is the policy of the Board of Directors and the Committee to seek to qualify executive compensation for deductibility to the extent that such policy is consistent with the Company’s overall objectives and executive compensation policy. None of the Company’s executive officers received compensation in 2005 in excess of the limits imposed under Section 162(m).

During 2005, the Company’s compensation for its executive officers consisted principally of base salary. The base salary amounts are provided for in each executive officer’s employment agreement. In setting these base salaries, the Board of Directors used an evaluation process considering the officer’s position, level and scope of responsibility and an evaluation of base salaries and other benefits of other executive officers of comparable REITS, including an analysis of the Company’s current operating results.

2005 Chief Executive Officer Compensation

During 2004, the Company entered into an employment agreement with Mr. Andrew Sims, the Company’s President and Chief Executive Officer. The employment agreement provided Mr. Sims a base salary for 2005 at an annual rate of $225,000, which amount is subject to annual increase by the Nominating, Corporate Governance and Compensation Committee. In the view of the Board of Directors, the initial base salary provided to Mr. Sims under his employment agreement is roughly comparable to, if not slightly lower than the average base salary awarded by comparable companies to their chief executive officers. In addition, short term compensation is provided in the form of annual bonuses. No bonus has been paid for 2005, but Mr. Sims was awarded 5,000 shares of restricted stock. For 2006, the Nominating, Corporate Governance and Compensation Committee expects that Mr. Sims may be awarded an annual bonus of up to 30% of his base salary, but the Committee will study the recommendations of the independent consultant before making any final decisions.

Compensation Committee:

Edward S. Stein—Chairman

David J. Beatty

J. Paul Carey

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Comparison of Stockholder Return

The following graph compares the performance of the Company’s common stock during the December 31, 2005 fiscal year with SNL REIT Hotel Index, prepared by SNL Financial, LLC, and the Russell 2000 Index.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, with a median market capitalization of approximately $395 million. The SNL Hotel REIT Index is currently comprised of 15 publicly traded hotel REITs, organized for purposes substantially similar to that of the Company.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In accordance with our audit committee charter and procedures established by the committee, our audit committee is responsible for reviewing and approving the terms and conditions of all related party transactions. Any material financial transaction with a director or executive officer of our company or a member of the immediate family of a director or officer would need to be approved by our audit committee prior to our company entering into such transaction.

Former Director David J. Beatty

In connection with the sale of our Williamsburg property in August 2006, TowneBank Commercial Mortgage, LLC (“TowneBank Commercial Mortgage”), a wholly-owned subsidiary of TowneBank, acted as a mortgage broker for the purchaser. Pursuant to a fee sharing agreement between TowneBank Commercial Mortgage and a commercial real estate agent representing the Company executed at the closing, TowneBank Commercial Mortgage was entitled to receive a portion of the brokerage fee, totaling $71,250, payable by the Company. Further, the purchaser of the property had entered into a separate agreement with TowneBank Commercial Mortgage resulting in an additional $50,000 fee payable to TowneBank Commercial Mortgage in connection with the sale of the Williamsburg property. These fees were placed in escrow at the closing and were subject to being paid back to the Company if the financing provided by the Company to the purchaser was not refinanced within a year of the closing. David Beatty is the President of TowneBank Commercial Mortgage and, at the time of the transaction, was a member of the board of directors. Pursuant to an arrangement with TowneBank Commercial Mortgage, the Company understands that Mr. Beatty personally benefited from the fee paid by the Company in an approximate amount of up to $35,000 and also benefited from the fee paid by the purchaser in an approximate amount of up to $25,000. Although the board of directors approved the sale of the Williamsburg property prior to its closing, the fee sharing arrangement entered into by TowneBank Commercial Mortgage at the closing was not submitted to the audit committee for prior approval consistent with its charter and the procedures established by the committee.

On February 20, 2007, General Zinni replaced Mr. Beatty as a member of the Audit Committee, and on February 22, 2007, Mr. Beatty resigned as a director of the Company.

Transactions With MHI Hotels Services LLC

MHI Hotels Services is currently the management company for each of our hotels and our leased condominium resort property.

Purchase of Initial Hotelsproperties.

MHI Hotels Services, our management company, is owned and controlled by Andrew Sims, our chairman and chief executive officer, Kim Sims and Christopher Sims, two of our directors, William Zaiser, our executive vice president and chief financial officer, and Steve Smith, the Executive Vice President of MHI Hotels Services. Two of our current directors, Kim and Christopher Sims, are currently officers and employees of MHI Hotels Services. Andrew, Kim and Christopher Sims and William 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 Hotel Services, and (ii) unless a majority of our 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 Jacksonville Hilton Riverfront, acquired in July 2005, is managed by MHI Hotels Services. The Sheraton Louisville Riverside Hotel, currently closed for renovation, will be managed by MHI Hotels Services.

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In addition, during the term of the agreement, MHI Hotels Services has the right to nominate one person for election to our board of directors at our annual meeting of stockholders, subject to the approval of such nominee by our Nominating, Corporate Governance and CompensationNC&C Committee for so long as certain of our 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 or shares of our common stock.

Management Agreements

Pursuant to the terms of a management agreement, we engaged MHI Hotels Services as the property manager for our seven hotels, and intend to offer MHI Hotels Services the opportunity to manage any future hotels that we lease to our TRS Lessee. OurCertain of our executive officers and certain of our directors are also directors of MHI Hotels Services.

The management agreement has a term of 10 years for our six initial hotels and a term of 10 years for each hotel we acquire in the future, including the Hilton Jacksonville Riverfront Hotel. Additionally, MHI Hotels Services benefits from the payment of management fees by us pursuant to our management agreement. MHI Hotels Services receives a base management fee equal to a percentage of the hotel’s revenues (2.0% for the first year, 2.5% for the second year and 3.0% thereafter). During the third quarter of 2006, we sold the Holiday Inn Downtown Williamsburg and purchased the former Louisville Ramada Riverfront Inn, substituting the Louisville property for the Williamsburg property pursuant to the terms of the management agreement. Pursuant to the 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.

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

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On July 22, 2005, an indirect subsidiary of the Company acquired the Hilton Jacksonville Riverfront Hotel in Jacksonville, Florida from BIT Holdings Seventeen, Inc., for an aggregate price of $22 million. MHI Hotels, LLC (“MHI Hotels”), an affiliate of MHI Hotels Services, contributed furniture, fixtures and equipment used in the operation of the hotel and assigned its leasehold interest and other rights relating to the property to the purchaser in exchange for 90,570 units in the Company’s operating partnership, MHI Hospitality L.P., valued at approximately $913,000. MHI Hospitality L.P. agreed to provide MHI Hotels the ability to guarantee on a bottom dollar basis, a sum in connection with the loan on the Hilton Jacksonville Riverfront Hotel. MHI Hotels previously had leased the hotel from the seller pursuant to a long-term lease. The Company’s Audit Committee approved the terms of the transaction with respect to MHI Hotels.

MHI Hotels Services also provides construction services for the Company.Company under the terms of the management agreement. In 2005, the Company engaged2006, MHI Hotels Services to managemanaged the renovation of the Hilton Philadelphia Airport.Jacksonville Riverfront and the Sheraton Louisville Riverside Hotel. For the year ended December 31, 2005,2006, the Company paid $70,000$340,000 in construction management fees.

Shell Island Resort

In connection with our space leases for the Shell Island Resort, we entered into sublease arrangements with MHI Hotels LLC and MHI Hotels Two, Inc., affiliates of our management Company,company, MHI Hotels Services. Under the sublease arrangements, MHI Hotels LLC and MHI Hotels Two, Inc. paidwill pay us a fixed annual rent of $640,000. In September 2005, MHI Hotels Services was assigned the sublease through a merger with MHI Hotels Two, Inc.

PROPOSAL II—RATIFICATION OF APPOINTMENT OF ACCOUNTANTS

PKF Witt Mares, PLC (formerly, Witt Mares & Company PLC ) was the Company’s independent registered public accountantsaccounting firm for the 20052006 fiscal year. The Boardboard of Directorsdirectors has appointed PKF Witt Mares, PLC to be its independent accountants for the fiscal year ending December 31, 2006,2007, subject to ratification by the Company’sour stockholders. The engagement of PKF Witt Mares, PLC was approved in advance by the Audit Committee.audit committee. A representative of PKF Witt Mares, PLC is expected to be present at the Annual Meeting to respond to

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stockholders’ questions and will have the opportunity to make a statement if the representative so desires. If the stockholders fail to ratify the appointment, the audit committee will reconsider its selection.

Audit Fees. The aggregate fees billed by PKF Witt Mares, PLC for professional services rendered for the audit of the Company’s annual consolidated financial statements, and for the review of the consolidated financial statements included in the Company’s Quarterly Reportsquarterly reports on Form 10-Q and for audits of acquisitions, consents and the review of Company filings with the Securities and Exchange Commission for the fiscal years ended December 31, 2006 and 2005 were $200,891 and 2004 were $174,890, and $236,621, respectively.

Audit Related Fees. The aggregate fees billed by PKF Witt Mares, PLC for assurancefees associated with audit services not required by statute or regulation and related services related to the audit of the annual financial statements and tofor the review of the quarterly financial statements for the years ended December 31, 2006 and 2005 were $2,945 and 2004 were $39,425, and $77,101, respectively.

Tax Fees. The aggregate fees billed by PKF Witt Mares, PLC for professional services rendered for tax compliance, tax advice or tax planning for the years ended December 31, 2006 and 2005 were $99,988 and 2004 were $166,557, and $8,350, respectively.

All Other Fees. The aggregate fees billed by PKF Witt Mares, PLC for professional services rendered for services or products other than those listed under the captions “Audit Fees,” “Audit-Related Fees,” and “Tax Fees” for the years ended December 31, 2006 and 2005 were $7,470 and 2004 were $8,300, and $2,045, respectively, and consisted of assistance in accounting matters, trust examinationscommunications with the Securities and assistance with benefit plans.Exchange Commission and issues relating to the Company’s internal controls.

It is the Audit Committee’saudit committee’s policy to pre-approve all audit and non-audit services prior to the engagement of the Company’s independent auditoraccountants to perform any service. All of the services listed above for 20052006 and 20042005 were approved by the Audit Committeeaudit committee prior to the service being rendered. No services were approved pursuant to the de minimus exception of the Sarbanes-Oxley Act of 2002. The Audit Committee has determined that the

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provision by PKF Witt Mares PLC (formerly Witt, Mares & Company, PLC) of services described under “Audit-Related Fees,” “Tax Fees,” and “Other Fees” is compatible with maintaining PKF Witt Mares PLC (formerly Witt, Mares & Company, PLC’s) independence from management and the Company.

Ratification of the appointment of the accountants requires the affirmative vote of a majority of the votes cast by the stockholders of the Company at the Annual Meeting. The Board of Directors recommends that stockholders vote

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” the ratification of the appointment ofTHE RATIFICATION OF THE APPOINTMENT OF PKF Witt Mares as the Company’s accountants for the 2006 fiscal year.WITT MARES, PLC AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE 2007 FISCAL YEAR.

STOCKHOLDER PROPOSALS

Proposals of stockholders to be presented at the 20072008 annual meeting of stockholders must be received by the Corporate Secretary of the Company at 814 Capitol Landing Road,4801 Courthouse Street, Suite 201, Williamsburg, VA 2318523188 prior to November 23, 2006,2007, which is 120 calendar days prior to the anniversary of the mailing of this proxy statement, to be considered for inclusion in the 20072008 proxy material. If a stockholder wishes to present a proposal at the 20072008 annual meeting, whether or not the proposal is intended to be included in the 20072008 proxy material, the bylaws require that the stockholder give advance written notice to the secretary of the Company not less than 90 nor more than 120 days prior to the anniversary of the mailing date of the 20062007 annual meeting materials.

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OTHER MATTERS

The Board of Directors is not aware of any business to come before the Annual Meeting other than those matters described above in this Proxy Statement. However, if any other matters should properly come before the Annual Meeting, it is intended that proxies in the accompanying form will be voted in respect thereof in accordance with the judgment of the person or persons voting the proxies.

MISCELLANEOUS

The cost of soliciting proxies will be borne by the Company. The Company will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy materials to the beneficial owners of Common Stock. In addition to solicitations by mail, directors, officers, and regular employees of the Company may solicit proxies personally or by telegraph or telephone without additional compensation.

The Company’s 20052006 Annual Report to Stockholders accompanies this proxy statement.Proxy Statement. Such Annual Report is not to be treated as a part of the proxy solicitation material or as having been incorporated herein by reference. A copy of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20052006 will be furnished without charge to stockholders as of the Record Date upon written request to the Corporate Secretary, MHI Hospitality Corporation, 814 Capitol Landing Road,4801 Courthouse Street, Suite 201, Williamsburg, Virginia 23185.23188.

BY ORDER OF THE BOARD OF DIRECTORS

Williamsburg, Virginia

March 23, 200622, 2007

14

Appendix A

CHARTER

OF THE

AUDIT COMMITTEE

OF

THE BOARD OF DIRECTORS

OF

MHI HOSPITALITY CORPORATION

(THE “CORPORATION”)

PURPOSE

The primary purposes of the committee are to oversee the following on behalf of the board of directors:

The committee also has the purpose of preparing the audit committee report that SEC rules require the Corporation to include in its annual proxy statement.

The committee’s function is one of oversight only and does not relieve management of its responsibilities for preparing financial statements that accurately and fairly present the Corporation’s financial results and condition, nor the independent auditors of their responsibilities relating to the audit or review of financial statements.

ORGANIZATION

Number of members. The committee must consist of at least three directors. The board may designate a committee member as the chairperson of the committee, or if the board does not do so, the committee members will appoint a committee member as chairperson by a majority vote of the authorized number of committee members.

Independence. All committee members must have been determined by the board to be independent, as defined and to the extent required in the applicable SEC rules and American Stock Exchange listing standards, as they may be amended from time to time (the “listing standards”), for purposes of audit committee membership.

Financial literacy and Audit Committee Financial Expert. Each committee member must be financially literate upon appointment to the committee, as determined by the board in accordance with the listing standards. At all times, there should be at least one committee member who, as determined by the board, is an audit committee financial expert as defined in the SEC rules.

Appointment. Subject to any requirements of the listing standards, the board may appoint and remove committee members in accordance with the Corporation’s bylaws. Committee members will serve for such terms as the board may fix, and in any case at the board’s will, whether or not a specific term is fixed.

Service on other audit committees. The Corporation does not limit the number of public company audit committees on which a committee member serves, but if a member does serve on more than two other public company audit committees, the board must have determined that this simultaneous service would not impair the member’s ability to serve on the Corporation’s audit committee, and the Corporation must disclose this determination in its proxy statement for its annual meeting.

INDEPENDENT AUDITORS AND THEIR SERVICES

Overall authority. The committee has the sole authority and direct responsibility for the appointment, compensation, retention, termination, evaluation and oversight of the work of the independent auditors engaged by the Corporation for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for the Corporation. The independent auditors report directly to the committee. The committee’s authority includes resolution of disagreements between management and the auditors regarding financial reporting and the receipt of communications from the auditors as may be required under professional standards applicable to the auditors.

Terms of audit and non-audit engagements. The committee must pre-approve all audit, review, attest and permissible non-audit services (including any permissible internal control-related services) to be provided to the Corporation or its subsidiaries by the independent auditors. The committee may establish pre-approval policies and procedures in compliance with applicable SEC rules.

ANNUAL FINANCIAL REPORTING

As often and to the extent the committee deems necessary or appropriate, but at least annually in connection with the audit of each fiscal year’s financial statements, the committee will:

QUARTERLY FINANCIAL REPORTING

The committee’s quarterly review will normally include:

OTHER FUNCTIONS

Annual review of this charter. The committee will review and assess the adequacy of this charter annually and recommend any proposed changes to the full board.

Annual review of performance. The committee will evaluate its performance as the audit committee on an annual basis.

Earnings releases and other financial guidance. The committee will discuss with management earnings press releases and other published financial information or guidance provided to analysts and rating agencies. This may be conducted generally as to types of information and presentations, and need not include advance review of each release, other information or guidance.

Compliance. The committee, to the extent it deems necessary or appropriate, will periodically review with management the Corporation’s disclosure controls and procedures, internal control over financial reporting and systems and procedures to promote compliance with laws.

Risk assessment. The committee will periodically:

Conduct codes. The committee will conduct any activities relating to the Corporation’s code(s) of conduct and ethics as may be delegated from time to time to the committee by the board.

Complaints and anonymous submissions. The committee will establish and maintain procedures for:

If the committee or the board so determines, the submission procedures may also include a method for interested parties to communicate directly with the board’s presiding director or with the non-management directors as a group.

Related party transactions. It is the Corporation’s policy that the Corporation will not enter into transactions required to be disclosed under item 404 of the SEC’s Regulation S-K or any other related party transactions unless the committee or another independent body of the board first reviews and approves the transactions.

Internal control over financial reporting. The committee will periodically discuss and review, as appropriate, with the internal auditor, management and the independent auditors:

Reports from legal counsel. The committee will review and take appropriate action with respect to any reports to the committee from legal counsel for the Corporation concerning any material violation of securities law or breach of fiduciary duty or similar violation by the Corporation, its subsidiaries or any person acting on their behalf.

Other reviews and functions. The committee, as it may consider appropriate, may consider and review with the full board of directors, Corporation management, internal or outside legal counsel, the independent auditors or any other appropriate person any other topics relating to the purposes of the committee that may come to the committee’s attention. The committee may perform any other activities consistent with this charter, the

Corporation’s corporate governance documents and applicable listing standards, laws and regulations as the committee or the board of directors considers appropriate.

MEETINGS, REPORTS AND RESOURCES

Meetings. The committee will meet as often as it determines is necessary, but not less than quarterly. The committee may also act by unanimous written consent in lieu of a meeting. The committee may meet by telephone conference or by any other means permitted under Maryland law. The committee will meet separately and periodically with management (including the chief financial officer and chief accounting officer), internal auditors (or other personnel responsible for the internal audit function) and independent auditors. To the extent the committee deems necessary or appropriate, it will also discuss with the Corporation’s general counsel any legal matters that may materially impact the Corporation’s financial statements, internal control over financial reporting or compliance policies. In addition, the committee may meet from time to time with any other persons, as it deems necessary or appropriate.

Procedures. The committee may establish its own procedures, including the formation and delegation of authority to subcommittees, in a manner not inconsistent with this charter, the bylaws or the listing standards and SEC rules. The chairperson or a majority of the committee members may call meetings of the committee. A majority of the authorized number of committee members constitutes a quorum for the transaction of committee business, and the vote of a majority of the committee members present at a meeting at which a quorum is present will be the act of the committee, unless in either case a greater number is required by this charter, the bylaws or the listing standards. The committee will keep written minutes of its meetings and deliver copies of the minutes to the corporate secretary for inclusion in the corporate records.

Reports. The committee will timely prepare the audit committee report required to be included in the Corporation’s annual meeting proxy statement, and report to the board on the other matters relating to the committee or its purposes, as required by the listing standards or SEC rules. The committee will also report to the board annually the overall results of its annual review of the independent auditors’ qualifications, performance and independence and the annual review by the committee of its own performance. The committee also will report to the board on the major items covered by the committee at each committee meeting, and provide additional reports to the board as the committee may determine to be appropriate, including review with the full board of any issues that arise from time to time with respect to the quality or integrity of the Corporation’s financial statements, the Corporation’s compliance with legal or regulatory requirements, the performance and independence of the independent auditors or the performance of the internal audit function.

Committee access and investigations. The committee is at all times authorized to have direct, independent and confidential access to the independent auditors and to the Corporation’s other directors, management and personnel to carry out the committee’s purposes. The committee is authorized to conduct or authorize investigations into any matters relating to the purposes, duties or responsibilities of the committee.

Committee advisers and funding. As the committee deems necessary to carry out its duties, it is authorized to select, engage (including approval of the fees and terms of engagement), oversee, terminate and obtain advice and assistance from outside independent legal, accounting or other advisers or consultants. The Corporation will provide for appropriate funding, as determined by the committee, for payment of:

Reliance on others. Nothing in this charter is intended to preclude or impair the protection provided in Section 2-405.1(c) of the Maryland General Corporation Law for good faith reliance by members of the committee on reports or other information provided by others.20

ANNUAL MEETING OF STOCKHOLDERS

This proxy is being solicited on behalf of the Board of Directors.

April 25, 200627, 2007

The undersigned hereby appoints the Board of Directors of MHI Hospitality Corporation (the “Company”), or its designee, with full powers of substitution, to act as attorneys and proxies for the undersigned, to vote all shares of Common Stock of the Company which the undersigned is entitled to vote at the 20062007 Annual Meeting of Stockholders (the “Annual Meeting”), to be held at the Boar’s Head Inn,Kingsmill Resort Conference Center, located at 200 Ednam Drive, Charlottesville,1010 Kingsmill Road, Williamsburg, Virginia on Tuesday,Friday, April 25, 2006,27, 2007, at 10:9:00 a.m., local time, and at any and all adjournments thereof, in the following manner:

THIS SIGNED PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS IS PRESENTED AT THE ANNUAL MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE ANNUAL MEETING.

Should the above signed be present and elect to vote at the Annual Meeting, or at any adjournments thereof, and after notification to the Corporate Secretary of the Company at the Annual Meeting of the stockholder’s decision to terminate this proxy, the power of said attorneys and proxies shall be deemed terminated and of no further force and effect. The undersigned may also revoke this proxy by filing a subsequently dated proxy or by written notification to the Secretary of the Company of his or her decision to terminate this proxy.

The above signed acknowledges receipt from the Company prior to the execution of this proxy of an annual report, a Notice of Annual Meeting of Stockholders and a proxy statement dated March 22, 2007.

Please sign exactly as your name appears on this proxy. If shares are held jointly, each holder should sign. When signing as attorney, executor, administrator, trustee, or guardian, please give full title as such. If signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.

PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY

PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.

IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.

Detach above card, sign, date and mail in postage paid envelope provided.