| INVESTMENT IN HOTEL PROPERTIES | 3. INVESTMENT IN HOTEL PROPERTIES Investment in hotel properties as of September 30, 2022 and December 31, 2021 consisted of the following: September 30, December 31, 2022 2021 Land and land improvements $ 32,017,963 $ 20,034,309 Building and building improvements 234,670,996 144,883,150 Furniture, fixtures, and equipment 21,044,890 13,986,611 Right-of-use asset - ground lease 7,275,131 — Construction in progress 3,651,739 8,433 Investment in hotel properties, at cost 298,660,719 178,912,503 Less: accumulated depreciation (14,960,196) (9,487,728) Investment in hotel properties, net $ 283,700,523 $ 169,424,775 As of September 30, 2022, the Company consolidated eighteen hotel properties, consisting of seventeen hotel properties owned by the Company and an equity and profits interest in the parent of the entity which holds a leasehold interest in one hotel property, with an aggregate of 2,177 rooms located in nine states. On August 10, 2022, the Company consolidates a variable interest entity (“VIE”) that owns one hotel in El Paso, Texas (the “El Paso University Property”). The Company is the primary beneficiary of this VIE as the Company has the power to direct the activities that most significantly affect its economic performance. Additionally, the Company has the obligation to absorb its losses and the right to receive benefits that could be significant to it. Accordingly, the Company initially recognized the VIE’s assets, liabilities, and noncontrolling interest at fair value. The Company’s condensed consolidated balance sheet includes the following assets and liabilities of this entity: September 30, December 31, 2022 2021 Assets Investment in hotel properties, net of accumulated depreciation of $188,306 and $0 $ 22,248,542 $ — Cash and cash equivalents 890,293 — Restricted cash 2,061,135 — Accounts receivable, net 226,787 — Prepaid expenses and other assets 119,305 — Total Assets $ 25,546,062 $ — Liabilities Debt, net $ 12,592,057 $ — Finance lease liability 4,862,172 — Accounts payable 563,891 — Accrued expenses 351,374 — Other liabilities 337,027 — Total liabilities $ 18,706,521 $ — Acquisitions of Hotel Properties The Company acquired six properties and an equity and profits interest in the parent of the entity which holds a leasehold interest in one hotel property during the nine months ended September 30, 2022. The Company acquired four properties during the year ended December 31, 2021. Each of the Company’s hotel acquisitions to date have been determined to be asset acquisitions. The table below outlines the details of the properties acquired during the nine months ended September 30, 2022. 2022 Acquisitions Number Date of Guest Purchase Transaction % Hotel Property Type Location Acquired Rooms Price Costs Total Interest Hampton Inn & Suites Limited-Service Fargo, ND January 18, 2022 90 $ 11,440,000 (1) $ 302,222 $ 11,742,222 100 % Courtyard by Marriott Select-Service El Paso, TX February 8, 2022 90 15,120,000 (2) 333,234 15,453,234 100 % Fairfield Inn & Suites Limited-Service Lakewood, CO March 29, 2022 142 18,800,000 (3) 862,117 19,662,117 100 % Residence Inn Extended-Stay Fort Collins, CO August 3, 2022 113 15,800,000 (4) 546,009 16,346,009 100 % Hilton Garden Inn Select-Service Pineville, NC August 25, 2022 113 10,930,000 (5) 347,149 11,277,149 100 % Hilton Garden Inn Select-Service Charlotte, NC August 25, 2022 112 15,440,000 (6) 416,387 15,856,387 100 % 660 $ 87,530,000 $ 2,807,118 $ 90,337,118 (1) Includes the issuance of $4,091,291 in Series T LP Units of the Operating Partnership. (2) Includes the issuance of $4,600,000 in Common Limited Partnership Units of the Operating Partnership. (3) Includes the issuance of $5,638,000 in Series T LP Units of the Operating Partnership. (4) Includes the issuance of $3,703,690 in Series T LP Units of the Operating Partnership. (5) Includes the issuance of $2,729,211 in Series T LP Units of the Operating Partnership. (6) Includes the issuance of $6,427,546 in Series T LP Units of the Operating Partnership. The table below outlines the details of the properties acquired during the year ended December 31, 2021. 2021 Acquisitions Number Date of Guest Purchase Transaction % Hotel Property Type Location Acquired Rooms Price Costs Total Interest Courtyard by Marriott Select-Service Aurora, CO February 4, 2021 141 $ 23,610,000 (1) $ 458,129 $ 24,068,129 100 % Holiday Inn Select-Service El Paso, TX May 12, 2021 175 10,300,000 (2) 361,019 10,661,019 100 % Hilton Garden Inn Select-Service Houston, TX August 3, 2021 182 19,910,000 (3) 918,353 20,828,353 100 % Sheraton Hotel Full-Service Northbrook, IL December 3, 2021 160 11,400,000 (4) 340,005 11,740,005 100 % 658 $ 65,220,000 $ 2,077,506 $ 67,297,506 (1) Includes the issuance of $6,742,757 in Series T LP Units of the Operating Partnership. (2) Includes the issuance of $2,100,000 in Series T LP Units of the Operating Partnership. (3) Includes the issuance of $6,910,000 in Series T LP Units of the Operating Partnership. (4) Includes the issuance of $6,179,000 in Series T LP Units and $1,521,000 in Common Limited Partnership Units of the Operating Partnership. In addition, on August 10, 2022, the Company acquired a 24.9% equity and profits interest in High Desert Garden Holdings, LLC, which is the parent of the entity which holds a leasehold interest in the Hilton Garden Inn, located in El Paso, Texas (the “El Paso University Property”) in exchange for a capital contribution of $3.2 million. The El Paso University Property is a select-service hotel with 153 guest rooms. See “—2022 Business Combinations” below for additional information regarding this transaction. The allocation of the aggregate purchase price in accordance with GAAP guidance prescribed in ASC Topic 805, Business Combinations For the Nine Months Ended September 30, For the Year Ended December 31, 2022 2021 Land and land improvements $ 11,905,779 $ 9,694,077 Building and building improvements 73,094,990 58,503,137 Furniture, fixtures, and equipment 5,336,349 4,597,353 Total assets acquired 90,337,118 72,794,567 Above market ground lease (1) — (5,497,061) Total liabilities assumed — (5,497,061) Total purchase price (2) $ 90,337,118 $ 67,297,506 Assumed mortgage debt 7,198,709 — Net purchase price $ 83,138,409 $ 67,297,506 (1) The above market ground lease is recognized on the consolidated balance sheet within Other Liabilities as of December 31, 2021. See Northbrook Property Above Market Ground Lease discussion below. (2) Total purchase price includes purchase price plus all transaction costs. All acquisitions completed during the nine months ended September 30, 2022 and the year ended December 31, 2021 were considered asset acquisitions under ASC 805. Eleven of the hotel properties owned by the Company as of September 30, 2022 are subject to management agreements with NHS, LLC dba National Hospitality Services (“NHS”) with an initial term expiring on December 31 of the fifth full calendar year following the effective date of the agreement, which will automatically renew for successive five-year five one The seller of the Pineville Property, an affiliate of Beacon, was entitled to additional cash consideration if the property exceeds certain performance criteria based on increases in the property’s net operating income (“NOI”) for a selected 12-month period of time. At any time during the period beginning April 1, 2021 through the date of the final NOI determination (on or about April 30, 2023), the seller of the property could have made a one-time election to receive the additional consideration. The variable amount of the additional consideration, if any, was based on the excess of the property’s actual NOI over a base NOI for the applicable 12-month calculation period divided by the stated cap rate for such calculation period. As of September 30, 2022, no amounts were owed or paid to the seller of the Pineville Property, and no election to receive the additional consideration had been made. As of the date of this filing, the period to elect to receive additional consideration has passed with no election being made. 2022 Acquisitions through September 30, 2022 Hampton Inn & Suites Fargo Medical Center – Fargo, North Dakota On January 18, 2022, the Operating Partnership acquired a Hampton Inn & Suites hotel property in Fargo, North Dakota (the “Fargo Property”) for contractual consideration comprised of $7.2 million in debt, $150,000 in cash and the issuance of $4.1 million in Series T LP Units of the Operating Partnership. The Series T LP Units will convert into Common LP Units of the Operating Partnership beginning 36 months, or in the event the Operating Partnership is then in the process of transacting a sale of the Operating Partnership’s assets or another significant capital event necessitating a conversion is then in process, after January 18, 2022, at which point the value will be calculated pursuant to the terms of an Amended and Restated Contribution Agreement, dated January 18, 2022. The number of Common LP Units to be issued to the contributor based on such conversion may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $11.4 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable. Courtyard El Paso Airport – El Paso, Texas On February 8, 2022, the Operating Partnership acquired a Courtyard by Marriott hotel property in El Paso, Texas (the “El Paso Airport Property”) for contractual consideration comprised of $10.0 million in debt, $620,000 in cash and the issuance of $4.6 million in Common LP Units. Fairfield Inn & Suites Denver Southwest Lakewood – Lakewood, Colorado On March 29, 2022, the Operating Partnership acquired a Fairfield Inn & Suites hotel property in Lakewood, Colorado (the “Lakewood Property”) for contractual consideration of $12.6 million in debt, $552,000 in cash and approximately $6.2 million in Series T LP Units of the Operating Partnership. The Series T LP Units will convert into Common LP Units of the Operating Partnership beginning 36 months, or in the event the Operating Partnership is then in the process of transacting a sale of the Operating Partnership’s assets or another significant capital event necessitating a conversion is then in process, up to 48 months, after March 29, 2022, at which point the value will be calculated pursuant to the terms of an Amended and Restated Contribution Agreement, dated March 29, 2022. The number of Common LP Units to be issued to the contributor based on such conversion may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $18.8 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable. Residence Inn by Marriott Fort Collins – Fort Collins, Colorado On August 3, 2022, the Operating Partnership acquired a Residence Inn by Marriott hotel property in Fort Collins, Colorado (the “Fort Collins Property”) for contractual consideration comprised of $11.5 million in debt, the issuance of 560,369 Series T LP Units of the Operating Partnership, and approximately $600,000 in cash at closing. The Series T Limited Units will convert into Common Limited Units of the Operating Partnership beginning 36 months , or at the option of the contributor, up to 48 months , after the closing, or upon the sale of the Fort Collins RI property or substantially all of the Operating Partnership’s assets, at which point . Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $15.8 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable. Hilton Garden Charlotte North – Charlotte, North Carolina On August 25, 2022, the Operating Partnership acquired a Hilton Garden Inn hotel property in Charlotte, North Carolina (the “Charlotte Property”) for contractual consideration comprised of the payoff of the existing loan secured by the Charlotte Property in the amount of . Hilton Garden Pineville – Pineville, North Carolina On August 25, 2022, the Operating Partnership acquired a Hilton Garden Inn hotel property in Pineville, North Carolina (the “Pineville HGI Property”) for . 2022 Business Combinations Hilton Garden Inn El Paso University – El Paso, Texas On August 10, 2022, the Operating Partnership acquired an equity and profits interest in High Desert Garden Holdings, LLC, a Delaware limited liability company (“HDGH”), the parent of the entity which holds a leasehold interest in a Hilton Garden Inn located in El Paso, Texas (the “El Paso University Property”) pursuant to a Reorganization and Membership Interest Purchase Agreement dated as of August 10, 2022 by and among the Operating Partnership, Roma Commercial, Inc., ASI Capital, LLC, and VB Hotel Group A, LLC and pursuant toa First Amendment to the Fourth Amended and Restated Operating Agreement of High Desert Garden Holdings, LLC (collectively and as amended (the “El Paso University Amended Agreements”)). High Desert Investors, LP, a Delaware limited partnership (“HDI”), a wholly-owned subsidiary of HDGH, holds a leasehold interest in real estate and the El Paso University Property located on such real estate. Pursuant to the El Paso University Amended Agreements, the Operating Partnership acquired a 24.9% membership interest in HDGH in exchange for a capital contribution of $3.2 million. The Operating Partnership has the unconditional right, at any time prior to December 31, 2027 and at its discretion, to acquire all membership interest in HDGH on the terms and conditions as provided in the El Paso University Amended Agreements. After paying any member loans, the Operating Partnership will receive 100% of distributions from operations, subject to annual cash distributions for members that existed before the El Paso University Amended Agreements (the “Prior Members”), which are entitled to up to 6.0% of the value of the Prior Member’s ownership percentage, depending upon the net operating income (“NOI”) of the El Paso University Hotel Property during each such applicable year. The Operating Partnership will fund any capital requirements for HDGH and has the option to fund such requirements by making a loan to HDGH at a 12% per annum interest rate. HDI is the borrower (“Borrower”) under a loan in the original principal amount of $14.4 million which is secured by HDI’s leasehold interest in the El Paso University Property and the real estate on which it is located. The loan has a fixed interest rate of 4.939% per annum and matures on August 6, 2025. In connection with the transactions effected through the El Paso University Amended Agreements, Corey Maple, a director and executive officer of the Company, entered into a guaranty with the lender to guarantee payment, when due, of the loan amount and the performance of agreements by Borrower contained in the loan documents, as further described in the guaranty. The Company accounted for this transaction as a business combination in accordance with GAAP guidance prescribed in ASC Topic 805, Business Combination In connection with this transaction, the Company allocated the purchase price of HDGH based on the estimated fair value of assets acquired and liabilities assumed as follows: August 10, 2022 Assets Building $ 16,700,000 Furniture, fixtures & equipment 900,000 Right-of-use asset - ground lease 4,862,172 Cash and cash equivalents 36,790 Restricted cash 1,305,636 Accounts receivable, net 168,974 Prepaid expenses and other assets 107,291 Total Assets $ 24,080,863 Liabilities Debt $ 12,781,084 Finance lease liability 4,862,172 Accounts payable 237,636 Accrued expenses 1,970,554 Other liabilities 419,336 Total liabilities $ 20,270,782 Assets in excess of liabilities (gain on acquisition of VIE) $ 3,810,081 2021 Acquisitions The Courtyard by Marriott in Aurora, Colorado (the “Aurora Property”) was acquired on February 4, 2021 for contractual consideration comprised of $15.0 million in debt, $1.9 million in cash paid at closing and the issuance of $6.7 million in Series T LP Units of the Operating Partnership. The Series T LP Units will convert into Common LP Units of the Operating Partnership beginning 36 months, or at the option of the contributor, up to 48 months, after February 4, 2021, at which point the value will be calculated pursuant to the terms of a Contribution Agreement, dated as of September 1, 2020, as amended on February 4, 2021. The number of Common LP Units to be issued to the contributor based on such conversion may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $23.6 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable. On May 12, 2021, the Operating Partnership acquired the Holiday Inn El Paso West Sunland Park hotel property in El Paso, Texas (the “El Paso HI Property”) for contractual consideration comprised of $7.9 million in debt, $300,000 in cash paid at closing and the issuance of $2.1 million in Series T LP Units of the Operating Partnership. The Series T LP Units will convert into Common LP Units of the Operating Partnership beginning 36 months, or in the event the Operating Partnership is then in the process of transacting a sale of the Operating Partnership’s assets or another significant capital event necessitating a conversion is then in process, up to 48 months, after May 12, 2021, at which point the value will be calculated pursuant to the terms of an Amended and Restated Contribution Agreement, dated May 12, 2021. The number of Common LP Units to be issued to the contributor based on such conversion may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $10.3 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable. On August 3, 2021, the Operating Partnership acquired the Hilton Garden Inn Houston Bush Intercontinental Airport hotel property in Houston, Texas (the “Houston Property”) for contractual consideration comprised of $13.0 million in debt, $719,000 in cash paid at closing and the issuance of $6.9 million Series T LP Units of the Operating Partnership. The Series T LP Units will convert into Common LP Units of the Operating Partnership beginning 36 months, or in the event the Operating Partnership is then in the process of transacting a sale of the Operating Partnership’s assets or another significant capital event necessitating a conversion is then in process, up to 48 months, after August 3, 2021, at which point the value will be calculated pursuant to the terms of the Second Amended and Restated Contribution Agreement, dated August 3, 2021. The number of Common LP Units to be issued to the contributor based on such conversion may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $19.9 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable. On December 3, 2021, the Operating Partnership acquired the Sheraton Hotel Chicago Northbrook hotel property located in Northbrook, Illinois (the “Northbrook Property”) for contractual consideration comprised of $3.7 million in debt, the issuance by the Operating Partnership of $6.2 million Series T Limited Units of the Operating Partnership and $1.5 million in Common Limited Partnership Units of the Operating Partnership. The Series T LP Units will convert into Common LP Units of the Operating Partnership beginning 36 months, or at the option of the contributor, up to 48 months, after December 3, 2021, at which point the value will be calculated pursuant to the terms of an Amended & Restated Contribution Agreement dated December 3, 2021. The number of Common LP Units to be issued to the contributor based on such conversion may be higher or lower than the initial valuation of the Series T LP Units. Accordingly, the aggregate purchase price used for the acquisition accounting noted in the tables above and below of $11.4 million, was determined to be the value assigned by a third-party appraisal, as the appraisal value was more reliably measurable. Northbrook Property Above Market Ground Lease On December 3, 2021, in connection with the purchase of the Northbrook Property, the Company recognized an above market ground lease liability of $5,497,061, which was recognized on the consolidated balance sheet within Other Liabilities. The Company assumed the ground lease 15 years into a 61-year lease maturing in 2067. The yearly base rent, paid monthly, increases 3% every year through maturity. As of September 30, 2022, the Company’s finance lease had a discount rate of 7.75%. Upon adoption of ASU No. 2016-02 on January 1, 2022, the Company derecognized the above market ground lease liability by reclassifying it as a partial offset to the beginning right-of-use asset related to this financing lease. At adoption of the new standard, the Company recognized a lease liability of $7,975,757 and a right-of-use asset of $2,478,696, which included the derecognition of the above-market ground lease liability. For the nine months ended September 30, 2022, the Company recognized interest expense of $467,280 and right-of-use amortization expense of $40,414 related to the finance lease. El Paso University Property Ground Lease On August 10, 2022, in connection with the El Paso University Property, the Company recognized a finance lease liability of $4,862,172 and a right-of-use asset of $4,862,172 related to a ground lease assumed. The Company assumed the ground lease with a remaining term of 32 years, maturing in 2054. Annual rentals are comprised of a base rent due at the beginning of the year plus, if applicable, a percent of revenue in excess of the base rent. The annual base rent is adjusted every five years The following table reconciles the undiscounted cash flows for each of the next five years and total of the remaining years to the finance lease liability included in the Company’s consolidated balance sheet as of September 30, 2022. 2022 $ 110,324 2023 596,767 2024 610,237 2025 624,112 2026 645,791 Thereafter 44,677,307 Total finance lease payments 47,264,538 Interest (34,284,944) Present value of finance lease liabilities $ 12,979,594 |
