| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Basis of Presentation and Principles
of Consolidation The Company’s consolidated financial
statements include its accounts and the accounts of its subsidiaries over which it has control. All intercompany balances and transactions
are eliminated in consolidation. The Company prepares its unaudited consolidated
financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Act of 1934
(the “Exchange Act”). Accordingly, the consolidated financial statements do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring items) considered necessary for a fair presentation in accordance with GAAP have been included. Results for the nine
months ended September 30, 2016 may not be indicative of the results that may be expected for the full year of 2016. For further
information, please read the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2015. The Company includes the accounts of its
consolidated subsidiaries in its consolidated financial statements when the Company is the primary beneficiary for entities deemed
to be variable interest entities (“VIEs”) through which the Company has a controlling interest. Interests in entities
acquired are evaluated based on GAAP, which requires the consolidation of VIEs in which the Company is deemed to have the controlling
financial interest. The Company has the controlling financial interest if the Company has the power to direct the activities of
the VIE that most significantly impact its economic performance and the obligation to absorb losses or receive benefits from the
VIE that could be significant to the Company. If the interest in the entity is determined not to be a VIE, then the entity is evaluated
for consolidation based on legal form, economic substance, and the extent to which the Company has control and/or substantive participating
rights under the respective ownership agreement. There are judgments and estimates involved in determining if an entity in which
the Company has an investment is a VIE. The entity is evaluated to determine if it is a VIE by, among other things, determining
if the equity investors as a group have a controlling financial interest in the entity and if the entity has sufficient equity
at risk to finance its activities without additional subordinated financial support. The Company did not have any VIE interests
as of September 30, 2016. Use of Estimates The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying
consolidated financial statements. Actual results could differ from those estimates. Organization and Offering Costs Organization and offering costs of the
Company are paid directly by the Company or may be incurred by the Advisor on behalf of the Company. Pursuant to the Advisory Agreement
between the Company and the Advisor, the Company is obligated to reimburse the Advisor or its affiliates, as applicable, for organization
and offering costs incurred by the Advisor associated with the public offering by the Company, provided that within 60 days of
the last day of the month in which a public offering ends, the Advisor is obligated to reimburse the Company to the extent organization
and offering costs incurred by the Company in connection with the completed public offering exceed 15.0% of the gross offering
proceeds from the sale of the Company’s shares of common stock in the completed public offering. Such organization and offering
costs include selling commissions and dealer manager fees paid to a dealer manager, legal, accounting, printing and other offering
expenses, including marketing, salaries and direct expenses of the Advisor’s employees and employees of the Advisor’s
affiliates and others. Any reimbursement of the Advisor or its affiliates for organization and offering costs will not exceed actual
expenses incurred by the Advisor. All offering costs, including selling commissions
and dealer manager fees, are recorded as an offset to additional paid-in-capital, and all organization costs are recorded as an
expense when the Company has an obligation to reimburse the Advisor. As of September 30, 2016, total offering
costs for the Offering were $9,334,719, comprised of $6,213,655 of offering costs incurred directly by the Company and $3,121,064
in offering costs incurred by and reimbursable to the Advisor. As of September 30, 2016, the Company had $890,103 payable to the
Advisor for reimbursable offering costs. Income Taxes The Company intends to make an election
to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the taxable year ending
December 31, 2016. The Company did not meet all of the qualifications to be a REIT under the Internal Revenue Code for the year
ended December 31, 2015 and the period from July 25, 2014 (inception) to December 31, 2014, including not having 100 shareholders
for a sufficient number of days in 2015. Prior to qualifying to be taxed as a REIT, the Company is subject to normal federal and
state corporation income taxes. The Company accounts for income taxes using
the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
The Company records a valuation allowance for net deferred tax assets that are not expected to be realized. Provided that the Company qualifies as
a REIT, it generally will not be subject to federal corporate income tax to the extent it distributes its REIT taxable income to
its stockholders, so long as it distributes at least 90% of its REIT taxable income (which is computed without regard to the dividends
paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP) and satisfies
the other organizational and operational requirements for qualification as a REIT. Even if the Company qualifies for taxation as
a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its
undistributed income. The Company leases the hotels it acquires to wholly-owned taxable REIT subsidiaries that are subject to federal,
state and local income taxes. The Company has reviewed tax positions
under GAAP guidance that clarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions.
The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position
taken, or expected to be taken, in a tax return. A tax position may only be recognized in the consolidated financial statements
if it is more likely than not that the tax position will be sustained upon examination. The Company had no material uncertain tax
positions as of September 30, 2016. The preparation of the Company’s
various tax returns requires the use of estimates for federal and state income tax purposes. These estimates may be subjected to
review by the respective taxing authorities. A revision to an estimate may result in an assessment of additional taxes, penalties
and interest. At this time, a range in which the Company’s estimates may change is not expected to be material. The Company
will account for interest and penalties relating to uncertain tax positions in the current period results of operations, if necessary.
The Company has tax years 2014 and 2015 remaining subject to examination by various federal and state tax jurisdictions. For more
information, see Note 10, “Incomes Taxes.” Fair Value Measurement Fair value measures are classified into
a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs
such as quoted prices in active markets. Level 2: Directly or indirectly
observable inputs, other than quoted prices in active markets. Level 3: Unobservable inputs
for which there is little or no market data, which require a reporting entity to develop its own assumptions. Assets and liabilities measured at fair
value are based on one or more of the following valuation techniques: Market approach: Prices and
other relevant information generated by market transactions involving identical or comparable assets or liabilities. Cost approach: Amount required
to replace the service capacity of an asset (replacement cost). Income approach: Techniques
used to convert future income amounts to a single amount based on market expectations (including present-value, option-pricing,
and excess-earnings models). The Company’s estimates of fair value
were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret
market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material
effect on the estimated fair value amounts. The Company classifies assets and liabilities in the fair value hierarchy based on
the lowest level of input that is significant to the fair value measurement. The Company elected not to use the fair
value option in recording its financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable,
notes payable, and accounts payable and accrued expenses. With the exception of the Company’s fixed-rate notes payable, the
carrying amounts of these financial instruments approximate their fair values due to their short-term nature. For the fair value
of the Company’s notes payable, see Note 4, “Debt.” Concentration of Credit Risk As of September 30, 2016, the Company had
cash and cash equivalents and restricted cash deposited in certain financial institutions in excess of federally insured levels.
The Company diversifies its cash and cash equivalents with several banking institutions in an attempt to minimize exposure to any
one of these institutions. The Company regularly monitors the financial stability of these financial institutions and believes
that it is not exposed to any significant credit risk in cash and cash equivalents or restricted cash. Valuation and Allocation of Hotel
Properties — Acquisition Upon acquisition, the purchase price of
hotel properties is allocated to the tangible assets acquired, consisting of land, buildings and furniture, fixtures and equipment,
any assumed debt, identified intangible assets and asset retirement obligations, if any, based on their fair values. Acquisition
costs are charged to expense as incurred. Initial valuations are subject to change during the measurement period, but the measurement
period ends as soon as the information is available. The measurement period shall not exceed one year from the acquisition date. Land values are derived from appraisals
and building values are calculated as replacement cost less depreciation or estimates of the relative fair value of these assets
using discounted cash flow analyses or similar methods. The value of furniture, fixtures and equipment is based on their fair value
using replacement costs less depreciation. Any difference between the fair value of the hotel property acquired and the purchase
price of the hotel property is recorded as goodwill or gain on acquisition of hotel property. The Company determines the fair value of
any assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar
terms and remaining maturities that the Company believes it could obtain at the date of acquisition. Any difference between the
fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the
loan as interest expense. In allocating the purchase price of each
of the Company’s properties, the Company makes assumptions and uses various estimates, including, but not limited to, the
estimated useful lives of the assets, the cost of replacing certain assets and discount rates used to determine present values.
The Company uses Level III inputs to value acquired properties. Many of these estimates are obtained from independent third party
appraisals. However, the Company is responsible for the source and use of these estimates. These estimates require judgment and
are subject to being imprecise; accordingly, if different estimates and assumptions were derived, the valuation of the various
categories of the Company’s hotel properties or related intangibles could in turn result in a difference in the depreciation
or amortization expense recorded in the Company’s consolidated financial statements. These variances could be material to
the Company’s results of operations and financial condition. Valuation and Allocation of Hotel
Properties — Ownership Investment in hotel properties is recorded
at cost less accumulated depreciation. Major improvements that extend the life of an asset are capitalized and depreciated over
a period equal to the shorter of the life of the improvement or the remaining useful life of the asset. The costs of ordinary repairs
and maintenance are charged to expense when incurred. Depreciation expense is computed using
the straight-line method based upon the following estimated useful lives:
Estimated
Useful Lives
Buildings and improvements 39-40
Exterior improvements 10-20
Furniture, fixtures and equipment 5-10 Impairments The Company monitors events and changes
in circumstances indicating that the carrying amount of a hotel property may not be recoverable. When such events or changes in
circumstances are present, the Company assesses potential impairment by comparing estimated future undiscounted cash flows expected
to be generated over the life of the asset from operating activities and from its eventual disposition, to the carrying amount
of the asset. In the event that the carrying amount exceeds the estimated future undiscounted cash flows, the Company recognizes
an impairment loss to adjust the carrying amount of the asset to estimated fair value for assets held for use and fair value less
costs to sell for assets held for sale. There were no such impairment losses for the three or nine months ended September 30, 2016. In evaluating a hotel property for impairment,
the Company makes several estimates and assumptions, including, but not limited to, the projected date of disposition of the property,
the estimated future cash flows of the property during the Company’s ownership and the projected sales price of the property.
A change in these estimates and assumptions could result in a change in the estimated undiscounted cash flows or fair value of
the Company’s hotel properties which could then result in different conclusions regarding impairment and material changes
to the Company’s consolidated financial statements. Revenue Recognition Hotel revenues, including room, food, beverage
and other ancillary revenues, are recognized as the related services are delivered. Revenue is recorded net of any sales and other
taxes collected from customers. Cash and Cash Equivalents Cash and cash equivalents represent cash
on hand or held in banks and short-term investments with an initial maturity of three months or less at the date of purchase. Restricted Cash Restricted cash includes reserves for property
taxes, as well as reserves for property improvements and replacement of furniture, fixtures, and equipment, as required by certain
management or mortgage debt agreement restrictions and provisions. Accounts Receivable The Company takes into consideration certain
factors that require judgments to be made as to the collectability of receivables. Collectability factors taken into consideration
are the amounts outstanding, payment history and financial strength of the customer, which, taken as a whole, determines the valuation.
Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts
receivable that is estimated to be uncollectible. Prepaid Expenses and Other Assets Prepaid expenses include prepaid property
insurance and hotel operating expenses. Other assets include the Company’s deferred income tax asset. Deferred Franchise Costs Deferred franchise costs are recorded
at cost and amortized over the term of the respective franchise contract on a straight-line basis. Accumulated amortization of
deferred franchise costs was $11,226 and $1,700 as of September 30, 2016 and December 31, 2015, respectively. Expected future
amortization of deferred franchise costs as of September 30, 2016 is as follows:
Years Ending December 31 Franchise Costs
2016 $ 4,430
2017 17,720
2018 17,720
2019 17,720
2020 17,720
Thereafter 163,464
Total $ 238,774 Debt Issuance Costs In accordance with ASU No. 2015-03, “Simplifying
the Presentation of Debt Issuance Costs,” debt issuance costs are presented as a direct deduction from the carrying value
of the notes payable on the consolidated balance sheets. Debt issuance costs are amortized as a component of interest expense
over the term of the related debt using the straight-line method, which approximates the interest method. All periods presented
have been reclassified to conform with this presentation. Accumulated amortization of debt issuance costs was $291,526 and $6,932
as of September 30, 2016 and December 31, 2015, respectively. Expected future amortization of debt issuance costs as of September
30, 2016 is as follows:
Years Ending December 31 Loan Costs
2016 $ 81,557
2017 83,802
2018 83,802
2019 83,802
2020 84,032
Thereafter 450,777
Total $ 867,772 Earnings (Loss) per Share Earnings (loss) per share (“EPS”)
is calculated based on the weighted average number of shares outstanding during each period. Basic and diluted EPS are the same
for all periods presented. Non-vested shares of restricted common stock totaling 7,500 and 0 shares as of September 30, 2016 and
2015, respectively, held by the Company’s independent directors are included in the calculation of basic EPS because such
shares have been issued and participate in dividends. Comprehensive Income For the periods presented, there were no
differences between reported net income (loss) and comprehensive income (loss). Recent Accounting Pronouncements In January 2016, the FASB issued ASU No.
2016-01, “Recognition and Measurement of Financial Assets and Liabilities,” which enhances the reporting requirements
surrounding the measurement of financial instruments and requires equity securities to be measured at fair value with changes in
the fair value recognized through net income. ASU No. 2016-01 is effective for the Company’s fiscal year commencing on January
1, 2018. The Company does not anticipate that the adoption of ASU No. 2016-01 will have a material effect on the Company’s
consolidated financial position or the Company’s consolidated results of operations. In February 2016, the FASB issued ASU No.
2016-02, “Leases,” which changes lessee accounting to reflect the financial liability and right-of-use asset that are
inherent to leasing an asset on the balance sheet. ASU No. 2016-02 is effective for the Company’s fiscal year commencing
on January 1, 2019, but early adoption is permitted. The Company is evaluating the effect that ASU 2016-02 will have on the Company’s
consolidated financial statements and related disclosures. The Company has not yet selected a transition date nor has the Company
determined the effect of ASU No. 2016-02 on the Company’s consolidated financial position or the Company’s consolidated
results of operations. In March 2016, the FASB issued ASU No.
2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies the accounting for income taxes
for certain equity-based awards to employees. ASU No. 2016-09 is effective for the Company’s fiscal year commencing on January
1, 2017. The Company does not anticipate that the adoption of ASU No. 2016-09 will have a material effect on the Company’s
consolidated financial position or the Company’s consolidated results of operations. |
