Exhibit 99.1
COMBINED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS’ REPORT
AFFORDABLE HOSPITALITY ASSOCIATES, L.P.
AND
METRO JFK ASSOCIATES, LLC
DECEMBER 31, 2005 AND 2004
Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
TABLE OF CONTENTS
PAGE | ||
INDEPENDENT AUDITORS’ REPORT | 1 | |
COMBINED FINANCIAL STATEMENTS | ||
COMBINED BALANCE SHEETS | 2 | |
COMBINED STATEMENTS OF OPERATION | 3 | |
COMBINED STATEMENTS OF EQUITY (DEFICIT) | 4 | |
COMBINED STATEMENTS OF CASH FLOWS | 5 | |
NOTES TO COMBINED FINANCIAL STATEMENTS | 6 |
Reznick Group, P.C. 500 East Pratt Street Suite 200 Baltimore, MD 21202-3100 | Tel: (410) 783-4900 Fax: (410) 727-0460 www.reznickgroup.com Baltimore, MD 21202-3100 |
INDEPENDENT AUDITORS’ REPORT
Board of Directors
Hersha Hospitality Trust, Inc.
We have audited the accompanying combined balance sheets of Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC (the Hotels) as of December 31, 2005 and 2004, and the related combined statements of operations, equity (deficit) and cash flows for the years then ended. These combined financial statements are the responsibility of the Owners’ management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Hotels as of December 31, 2005 and 2004, and the results of their operations, the changes in equity (deficit) and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
REZNICK GROUP, P.C. | ||
Baltimore, Maryland | ||
March 10, 2006 |
Atlanta | n | Baltimore | n | Bethesda | n | Charlotte | n | Chicago | n | Sacramento | n | Tysons Corner |
Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
COMBINED BALANCE SHEETS
December 31, 2005 and 2004
December 31, | |||||||
2005 | 2004 | ||||||
ASSETS | |||||||
INVESTMENT IN HOTEL PROPERTIES | |||||||
Land | $ | 1,650,000 | $ | 1,650,000 | |||
Building and improvements | 45,051,155 | 24,087,820 | |||||
Furniture and equipment | 2,573,861 | 526,027 | |||||
Furniture and equipment under capital lease | 2,001,457 | 2,001,457 | |||||
51,276,473 | 28,265,304 | ||||||
Less accumulated depreciation, including amounts for furniture and equipment under capital lease of $1,143,688 and $1,429,610, respectively | 5,096,289 | 3,375,386 | |||||
Net investment in hotel properties | 46,180,184 | 24,889,918 | |||||
OTHER ASSETS | |||||||
Cash | 677,204 | 61,340 | |||||
Accounts receivable | 927,272 | 262,971 | |||||
Inventory | 9,541 | 4,528 | |||||
Prepaid expenses | 28,347 | 18,067 | |||||
Real estate tax escrow | 496,974 | 189,828 | |||||
Other assets, net of accumulated amortization of $511,223 and $396,309, respectively | 905,507 | 523,289 | |||||
$ | 49,225,029 | $ | 25,949,941 | ||||
LIABILITIES AND PARTNERS’/MEMBERS’ EQUITY (DEFICIT) | |||||||
LIABILITIES | |||||||
Mortgages and loans payable | $ | 36,476,098 | $ | 18,345,848 | |||
Mortgages and loans payable - related party | 11,229,853 | 4,353,934 | |||||
Accrued interest | 392,654 | - | |||||
Accounts payable and accrued expenses | 1,648,890 | 791,547 | |||||
Capital lease obligation | 1,119,447 | 1,414,384 | |||||
Due to affiliates | 1,346,885 | 1,253,249 | |||||
Total liabilities | 52,213,827 | 26,158,962 | |||||
PARTNERS’/MEMBERS’ EQUITY (DEFICIT) | |||||||
Partners’/members’ equity (deficit) | (2,988,798 | ) | (209,021 | ) | |||
Total partners’/members’ equity (deficit) | (2,988,798 | ) | (209,021 | ) | |||
$ | 49,225,029 | $ | 25,949,941 |
See notes to combined financial statements
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
COMBINED STATEMENTS OF OPERATIONS
Years ended December 31, 2005 and 2004
December 31, | |||||||
2005 | 2004 | ||||||
Revenue | |||||||
Room revenue | $ | 12,293,525 | $ | 5,846,827 | |||
Food revenue | 542,043 | 51,579 | |||||
Telephone revenue | 95,131 | 35,057 | |||||
Other revenue | 1,000,790 | 292,506 | |||||
Total revenue | 13,931,489 | 6,225,969 | |||||
Expenses | |||||||
Food | 475,720 | 212,503 | |||||
Beverage | 14,277 | - | |||||
Telephone | 35,833 | 23,448 | |||||
Parking | 292,602 | 290,860 | |||||
Salaries and wages | 3,266,530 | 1,583,702 | |||||
Management contract | 559,656 | 218,592 | |||||
Advertising | 22,578 | 19,560 | |||||
Utilities | 482,206 | 251,557 | |||||
Repairs and maintenance | 89,057 | 152,713 | |||||
Insurance | 103,522 | 149,496 | |||||
Real estate taxes | 376,581 | 87,082 | |||||
Other operational | 865,583 | 409,595 | |||||
General and administrative | 1,826,832 | 635,670 | |||||
Franchise fees | 1,098,178 | 460,385 | |||||
Interest expense | 3,449,128 | 2,291,556 | |||||
Ground lease | 353,430 | - | |||||
Depreciation | 1,720,903 | 927,935 | |||||
Amortization | 114,914 | 108,080 | |||||
Total expenses | 15,147,530 | 7,822,734 | |||||
Net loss | $ | (1,216,041 | ) | $ | (1,596,765 | ) |
See notes to combined financial statements
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
COMBINED STATEMENTS OF EQUITY (DEFICIT)
Years ended December 31, 2005 and 2004
Balance, December 31, 2003 | $ | 1,387,744 | ||
Net loss | (1,596,765 | ) | ||
Balance, December 31, 2004 | (209,021 | ) | ||
Distributions | (5,571,393 | ) | ||
Contributions | 4,007,657 | |||
Net loss | (1,216,041 | ) | ||
Balance, December 31, 2005 | $ | (2,988,798 | ) |
See notes to combined financial statements
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
COMBINED STATEMENTS OF CASH FLOWS
Years ended December 31, 2005 and 2004
December 31, | |||||||
2005 | 2004 | ||||||
Cash flows from operating activities | |||||||
Net loss | $ | (1,216,041 | ) | $ | (1,596,765 | ) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities | |||||||
Depreciation and amortization | 1,835,817 | 1,036,015 | |||||
(Increase) decrease in assets | |||||||
Accounts receivable | (664,301 | ) | 8,946 | ||||
Inventory | (5,013 | ) | - | ||||
Prepaid expenses | (10,280 | ) | (1,417 | ) | |||
Increase (decrease) in liabilities | |||||||
Accounts payable and accrued expenses | 857,343 | 367,207 | |||||
Accrued interest | 392,654 | - | |||||
Net cash provided by (used in) operating activities | 1,190,179 | (186,014 | ) | ||||
Cash flows from investing activities | |||||||
Franchise fees paid | (78,450 | ) | - | ||||
Net (deposits to) withdrawals from real estate tax escrow | (307,146 | ) | 18,892 | ||||
Investment in hotel property | (1,386,996 | ) | (129,908 | ) | |||
Proceeds from sale of fixed assets | - | 936,049 | |||||
Net cash (used in) provided by investing activities | (1,772,592 | ) | 825,033 | ||||
Cash flow from financing activities | |||||||
Mortgage principal payments | (14,741,759 | ) | (1,908,965 | ) | |||
Proceeds from mortgages payable | 12,897,928 | 566,093 | |||||
Proceeds from notes payable affiliates | 5,000,000 | - | |||||
Payments under capital lease | (294,937 | ) | (263,693 | ) | |||
Due to affiliates | 93,636 | 1,222,452 | |||||
Distributions to partners | (5,571,393 | ) | - | ||||
Contributions by partners | 4,007,657 | - | |||||
Loan costs paid | (192,855 | ) | - | ||||
Net cash provided by (used in) financing activities | 1,198,277 | (384,113 | ) | ||||
NET INCREASE IN CASH | 615,864 | 254,906 | |||||
Cash, beginning | 61,340 | (193,566 | ) | ||||
Cash, end | $ | 677,204 | $ | 61,340 | |||
Supplemental disclosure of cash flow information | |||||||
Cash paid during the year for interest | $ | 3,056,474 | $ | 2,291,556 | |||
Supplemental disclosure of noncash investing and financing activities | |||||||
During 2005, the Owners purchased hotel property in the amount of $21,850,000 through the assumption of a mortgage in the amount of $13,850,000 and the issuance of a note payable in the amount of $8,000,000. |
See notes to combined financial statements
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NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The combined financial statements are a combination of the balance sheets, statements of operations, partner's/members' equity (deficit) and cash flows of two entities under common ownership (Hersha Affiliates) and management (Hersha Hospitality Management, LP) (collectively the Owners). The entities combined in these financial statements consist of the following:
Entity | Hersha Affiliates Ownership Pct | |||
Affordable Hospitality Assocaites, L.P. | 100 | % | ||
Metro JFK Associates, LLC | 100 | % |
The above entities owned and operated the following hotel properties, whose operations are combined in these financial statements.
Hotel Property | Date Opened | Rooms | Location | |||
Hampton Inn Philadelphia | May, 2001 | 250 | Philadelphia, PA | |||
Hilton Garden Inn | February, 2005 | 194 | JFK Airport, NY |
Affordable Hospitality Associates, L.P. owned and operated the Hampton Inn, Philadelphia since its inception.
On February 1, 2005, the Hersha Affiliates obtained a 50% interest in Metro 10 Hotels, LLC, which owned and operated the Hilton Garden Inn from February 1, 2005 (date opened) through November 28, 2005. On November 28, 2005, Metro JFK Associates, LLC purchased the hotel assets from Metro 10 Hotels, LLC and operated the hotel through December 31, 2005.
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
Metro 10 Hotels, LLC's operating activity is reflected in the combined statements of operations for the year ended December 31, 2005.
All intercompany transactions and balances have been eliminated in combination.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported accounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Investment in Hotel Properties
The hotel properties are stated at cost. Depreciation is provided for in amounts sufficient to relate the costs of depreciable assets to operations by use of accelerated methods over their estimated useful lives:
Building and improvements | 7 - 39 years | |
Furniture and equipment | 7 years |
Maintenance and repairs are charged to operations as incurred. Additions and major improvements are capitalized. Upon sale or disposition, both the asset and related accumulated depreciation are relieved and the related gain or loss is included in operations.
The Owners evaluate long-lived assets for potential impairment by analyzing the operating results, trends and prospects for the properties and considering any other events and circumstances which might indicate potential impairment.
Franchise Fees
Franchise fees are amortized over the terms of the corresponding agreements using the straight-line method.
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
Loan Costs
Loan costs are amortized over the terms of the corresponding agreements using the straight-line method.
Ground Lease Asset
Amounts represent the excess of the fair value of the assumed ground lease over the total cost under the remaining term of the lease. The asset is being amortized over the term of the lease using the straight-line method.
Inventories
Consist of food, beverage and hotel supplies and are stated at the lower of cost or market.
Revenue Recognition
Room and other revenue are recognized as earned.
Accounts Receivable and Bad Debts
Accounts receivable are charged to bad debt expense when they are determined to be uncollectible based upon periodic review of the accounts by management. Accounting principles generally accepted in the United States of America require that the allowance method be used to recognize bad debt expense; however, the effects of using the direct write-off method is not materially different from the results that would have been obtained under the allowance method.
Advertising Costs
Advertising costs are expensed as incurred; including costs incurred under the terms of the franchise agreements.
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
Income Taxes
No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners/members on their respective income tax returns.
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
NOTE 2 - OTHER ASSETS
As of December 31, 2005 and 2004 other assets consisted of the following:
2005 | 2004 | ||||||
Franchise fees | $ | 134,700 | $ | 56,250 | |||
Financing fees | 1,056,203 | 863,348 | |||||
Ground lease asset | 225,827 | - | |||||
1,416,730 | 919,598 | ||||||
Accumulated amortization | (511,223 | ) | (396,309 | ) | |||
$ | 905,507 | $ | 523,289 |
Amortization expense related to the above assets for five years following December 31, 2005 is as follows:
December 31, 2006 | $ | 108,592 | ||
2007 | $ | 108,592 | ||
2008 | $ | 49,776 | ||
2009 | $ | 20,369 | ||
2010 | $ | 20,369 |
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
NOTE 3 - MORTGAGES AND LOANS PAYABLE
Mortgages and loans payable at December 31, 2005 and 2004 consists of the following:
December 31, | |||||||
2005 | 2004 | ||||||
Hampton Inn Philadelphia | |||||||
Mortgage payable to The Union Labor Life Insurance Company in monthly installments of principal and interest of $114,405, bearing interest at the 8.5% per annum through maturity on June 1, 2008. The loan is secured by the land and building. | $ | 12,083,620 | $ | 12,448,356 | |||
Mortgage payable to Philadelphia Industrial Development Corporation in monthly installments of principal and interest of $65,528, bearing interest at the 7.51% per annum through maturity in September 2016. The loan is secured by the land and building. | 5,542,478 | 5,897,492 |
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
December 31, | |||||||
2005 | 2004 | ||||||
Hilton Garden Inn | |||||||
Mortgage to GE Capital Franchise Finance Corporation payable in monthly installments of principal and interest of $91,964, commencing January 1, 2006, bearing interest at the LIBOR rate plus 2.75% per annum (7.01 percent at December 31, 2005) through maturity in December 2010. The loan is secured by the building. | 13,000,000 | - | |||||
Total mortgages payable | 30,626,098 | 18,345,848 | |||||
Hilton Garden Inn | |||||||
Note payable to Metro Ten Hotel, LLC, LTD bearing interest at 6% per annum through maturity in March 2006, when all outstanding principal and unpaid interest are due. The note is guaranteed by one of the members. | 5,850,000 | - | |||||
Total notes payable | 5,850,000 | - | |||||
Total mortgages and notes payable | $ | 36,476,098 | $ | 18,345,848 |
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
Annual principal payments on the mortgages for the five years following December 31, 2005 are as follows:
December 31, 2006 | $ | 10,981,287 | ||
2007 | 3,208,546 | |||
2008 | 3,453,193 | |||
2009 | 3,716,565 | |||
2010 | 4,000,099 | |||
Thereafter | 11,116,408 | |||
$ | 36,476,098 |
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
NOTE 4 - MORTGAGE AND LOANS PAYABLE -RELATED PARTY
Loans payable to related parties at December 31, 2005 and 2004 consists of the following:
December 31, | |||||||
2005 | 2004 | ||||||
Hampton Inn Philadelphia | |||||||
Mortgage payable to Hersha Hospitality Trust, a related party, in monthly installments of interest only at 10% per annum through maturity on December 31, 2005. The loan is secured by the land and building. | $ | 850,000 | $ | - | |||
Note payable to Shreenathji Enterprises, LTD, an affiliate of a partner, in monthly installments of interest only at 8.58% per annum at December 31, 2005 and 15% per annum at December 31, 2004. The note is unsecured and due on demand. | 4,541,673 | 3,536,934 | |||||
Note payable to Hersha United Construction, an affiliate of a partner, the note is noninterest bearing, unsecured and due on demand. | 328,000 | 328,000 | |||||
Note payable to The Stern Group, an affiliate of a partner, the note is noninterest bearing, unsecured and due on demand. | 340,000 | 340,000 | |||||
Note payable to York Hunter Carribe, an affiliate of a partner, the note is noninterest bearing, unsecured and due on demand. | 149,000 | 149,000 |
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
December 31, | |||||||
2005 | 2004 | ||||||
Hilton Garden Inn | |||||||
Note payable to Hersha Hospitality Trust, an affiliate of a partner, in monthly installments of interest only at 8.00% per annum. The note is unsecured and due on demand. | 5,000,000 | - | |||||
Note payable to Shreenathji Enterprises, LTD, an affiliate of the members, the note is noninterest bearing, unsecured and due on demand. | 21,180 | - | |||||
Total mortgages payable | $ | 11,229,853 | $ | 4,353,934 |
Annual principal payments on the mortgages for the five years following December 31, 2005 are as follows:
December 31, 2006 | $ | 11,229,853 | ||
2007 | - | |||
2008 | - | |||
2009 | - | |||
2010 | - | |||
Thereafter | - | |||
$ | 11,229,853 |
NOTE 5 - OBLIGATIONS UNDER CAPITAL LEASE
The Hampton Inn Philadelphia has entered into an equipment lease requiring monthly payments of $34,213 through the lease term ending in 2008. Future minimum lease payments under the agreement, together with the present value of the minimum are as follows:
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
December 31, 2006 | $ | 410,553 | ||
2007 | 410,553 | |||
2008 | 410,553 | |||
1,231,659 | ||||
Less amount representing interest | 112,212 | |||
Present value of minimum lease payments | $ | 1,119,447 |
NOTE 6 - GROUND LEASE
Pursuant to the lease entered into between David Levine and Metro 10 Hotels, LLC on July 1, 2001 and its subsequent assumption by Metro JFK Associates, LLC effective September 9, 2005 with an original term of 99 years. The lease calls for a fixed monthly lease payment which increases at fixed amounts over the life of the lease. For the year ended December 31, 2005, rent expense on a straight-line basis was incurred in the amount of $353,430 which exceeded the minimum rent under the lease of $300,536, resulting in a liability of $53,074 which is included in accounts payable and accrued expenses.
The future minimum lease payments are as follows:
December 31, 2006 | $ | 388,233 | ||
2007 | 396,003 | |||
2008 | 403,923 | |||
2009 | 412,005 | |||
2010 | 420,246 | |||
Thereafter | 37,906,176 | |||
$ | 39,926,586 |
NOTE 7 - RELATED PARTY TRANSACTIONS
Management Fee
All the hotels are managed by Hersha Hospitality Management, LP, an affiliate of the partners/members in the hotels, pursuant to an agreement which provides for a management fee of 3% - 3.5% of gross room revenue plus certain additional fees for bookkeeping and technology fees as described in the management agreement. For the years ended 2005 and 2004 total fees of $559,656 and $218,592, respectively, were incurred, of which $504,000 and $218,592 remains payable at December 31, 2005 and 2004, respectively, and are included in accounts payable and accrued expenses.
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Affordable Hospitality Associates, L.P. and Metro JFK Associates, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED
December 31, 2005 and 2004
Due to affiliates
Affiliates of the partners/members in the hotels have advanced monies to cover certain development and operating costs of the hotel properties. The advances are non-interest bearing and due on demand. As of December 31, 2005 and 2004, the amounts owed to affiliates were $1,346,885 and $1,253,249, respectively.
NOTE 8 - FRANCHISE AGREEMENTS
Pursuant to the franchise agreements entered into between the Owners and Promus Hotel, Inc. (Hampton Inn Philadelphia) and Hilton Hotels Corporation (Hilton Garden Inn) the hotels are required to payment monthly royalty and marketing fees which collective range from 8% to 9.3% of gross revenue. During the years ended December 31, 2005 and 2004, total fees to paid to the franchisors amounted to $1,098,178 and $460,385, respectively.
NOTE 9 - SUBSEQUENT EVENT
On February 15, 2006, Hersha Hospitality Trust completed the acquisition of an eighty percent partnership interest in Affordable Hospitality Associates, LP for a purchase price of $27.9 million, including $21 million in debt and $6.9 in cash.
On February 16, 2006, Hersha Hospitality Trust completed the acquisition of substantially all of the assets of Metro JFK Associates, LLC for a purchase price of $29 million, including $13 million assumed in debt and the remainder paid for with cash on hand and borrowings under a credit line with Commerce Bank.
In connection with the purchase of the hotel properties, except as noted above, all related party mortgages and loans payable were paid in full.
NOTE 10 - CONCENTRATION OF CREDIT RISK
The Owners maintain their cash accounts with major financial institutions. The cash balances consist of checking accounts. The checking accounts are insured by the Federal Deposit Insurance Corporation up to $100,000 for each entity. As of December 31, 2005, the checking account balances exceed the federally insured limits by $206,413. The Owners have not experienced any losses with respect to bank balances in excess of government provided insurance and do not believe that a significant concentration of credit risk exists with respect to these cash balances as of December 31, 2005.
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