Apple REIT Nine, Inc. (Form: 10-Q, Received: 08/13/2012 15:21:30)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______

Commission File Number 000-53603

Apple REIT Nine, Inc.

(Exact name of registrant as specified in its charter)

Virginia	26-1379210
(State or other jurisdiction	(IRS Employer
of incorporation or organization)	Identification No.)

814 East Main Street
Richmond, Virginia	23219
(Address of principal executive offices)	(Zip Code)

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer x		Smaller reporting company ¨
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Number of registrant’s common shares outstanding as of August 1, 2012: 181,694,226

APPLE REIT NINE, INC.

This Form 10-Q includes references to certain trademarks or service marks. The Courtyard® by Marriott, Fairfield Inn® by Marriott, Fairfield Inn and Suites® by Marriott, TownePlace Suites® by Marriott, SpringHill Suites® by Marriott, Residence Inn® by Marriott and Marriott® trademarks are the property of Marriott International, Inc. or one of its affiliates. The Hampton Inn®, Hampton Inn and Suites®, Homewood Suites® by Hilton, Embassy Suites Hotels®, Hilton Garden Inn®, Home2 Suites® by Hilton and Hilton trademarks are the property of Hilton Worldwide or one or more of its affiliates. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above referenced terms are used.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Apple REIT Nine, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

	June 30,			December 31,
	2012			2011
	(unaudited)
Assets
Investment in real estate, net of accumulated depreciation of $119,188 and $93,179, respectively	$	1,480,164		$	1,480,722
Real estate held for sale		0			158,552
Cash and cash equivalents		7,388			30,733
Note receivable, net		25,471			0
Due from third party managers, net		17,715			9,605
Other assets, net		21,544			21,355
Total Assets	$	1,552,282		$	1,700,967

Liabilities
Notes payable	$	152,602		$	124,124
Accounts payable and accrued expenses		12,812			13,253
Total Liabilities		165,414			137,377

Shareholders' Equity
Preferred stock, authorized 30,000,000 shares; none issued and outstanding		0			0
Series A preferred stock, no par value, authorized 400,000,000 shares; issued and outstanding 182,305,158 and 182,883,617 shares, respectively		0			0
Series B convertible preferred stock, no par value, authorized 480,000 shares; issued and outstanding 480,000 shares		48			48
Common stock, no par value, authorized 400,000,000 shares; issued and outstanding 182,305,158 and 182,883,617 shares, respectively		1,801,535			1,807,175
Distributions greater than net income		(414,715	)		(243,633	)
Total Shareholders' Equity		1,386,868			1,563,590

Total Liabilities and Shareholders' Equity	$	1,552,282		$	1,700,967

See notes to consolidated financial statements.

Index

Apple REIT Nine, Inc.

Consolidated Statements of Operations

Unaudited

(in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Revenues:
Room revenue	$	88,047		$	77,069		$	167,600		$	142,938
Other revenue		9,063			7,323			17,601			13,492
Total revenue		97,110			84,392			185,201			156,430

Expenses:
Operating expense		24,239			21,120			46,651			39,325
Hotel administrative expense		6,956			6,355			13,581			12,013
Sales and marketing		8,211			7,040			15,582			13,193
Utilities		3,417			3,274			6,704			6,482
Repair and maintenance		3,293			3,215			6,518			6,048
Franchise fees		3,916			3,349			7,395			6,177
Management fees		3,173			2,750			6,246			5,155
Taxes, insurance and other		5,370			4,489			10,543			9,022
General and administrative		2,327			2,011			4,931			3,545
Acquisition related costs		430			1,733			461			4,348
Depreciation expense		13,166			12,178			26,009			23,476
Total expenses		74,498			67,514			144,621			128,784

Operating income		22,612			16,878			40,580			27,646

Interest expense, net		(1,579	)		(1,198	)		(2,955	)		(1,733	)

Income from continuing operations		21,033			15,680			37,625			25,913

Income from discontinued operations		1,525			4,716			6,792			9,432

Net income	$	22,558		$	20,396		$	44,417		$	35,345

Basic and diluted net income per common share
From continuing operations	$	0.11		$	0.08		$	0.20		$	0.14
From discontinued operations		0.01			0.03			0.04			0.05
Total basic and diluted net income per common share	$	0.12		$	0.11		$	0.24		$	0.19

Weighted average common shares outstanding - basic and diluted		182,110			182,621			182,236			182,118

See notes to consolidated financial statements.

Index

Apple REIT Nine, Inc.

Consolidated Statements of Cash Flows

Unaudited

(in thousands )

	Six Months Ended
	June 30,
	2012			2011
Cash flows from operating activities:
Net income	$	44,417		$	35,345
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation, including discontinued operations		26,009			24,676
Amortization of deferred financing costs, fair value adjustments and other non-cash expenses, net		247			277
Straight-line rental income		(1,975	)		(3,093	)
Changes in operating assets and liabilities:
Increase in due from third party managers, net		(8,110	)		(8,038	)
Decrease (increase) in other assets, net		(839	)		109
Increase (decrease) in accounts payable and accrued expenses		(1,658	)		1,076
Net cash provided by operating activities		58,091			50,352

Cash flows from investing activities:
Cash paid for acquisitions		(14,832	)		(130,708	)
Proceeds from sale of assets, net		135,416			0
Deposits and other disbursements for potential acquisitions, net		0			(5,848	)
Capital improvements		(9,204	)		(10,013	)
Increase in capital improvement reserves		(941	)		(1,014	)
Interest received on note receivable		840			0
Net cash provided by (used in) investing activities		111,279			(147,583	)

Cash flows from financing activities:
Net proceeds related to issuance of Units		26,210			29,406
Redemptions of Units		(31,990	)		(7,166	)
Distributions paid to common shareholders		(215,499	)		(80,044	)
Proceeds from notes payable		30,000			0
Payments of notes payable		(1,262	)		(975	)
Deferred financing costs		(174	)		(407	)
Net cash used in financing activities		(192,715	)		(59,186	)

Decrease in cash and cash equivalents		(23,345	)		(156,417	)

Cash and cash equivalents, beginning of period		30,733			224,108

Cash and cash equivalents, end of period	$	7,388		$	67,691

Non-cash transactions:
Notes payable assumed in acquisitions	$	0		$	25,942
Note receivable issued from sale of assets	$	60,000		$	0

See notes to consolidated financial statements.

Index

Apple REIT Nine, Inc.

Notes to Consolidated Financial Statements

1. Organization and Summary of Significant Accounting Policies

Apple REIT Nine, Inc., together with its wholly owned subsidiaries (the “Company”), is a Virginia corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. The Company was formed to invest in income-producing real estate in the United States. Initial capitalization occurred on November 9, 2007 and operations began on July 31, 2008 when the Company acquired its first hotel. The Company concluded its best-efforts offering of Units (each Unit consists of one common share and one Series A preferred share) in December 2010. The Company’s fiscal year end is December 31. The Company has no foreign operations or assets and its operating structure includes only one segment. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. Although the Company has an interest in a variable interest entity through its note receivable, it is not the primary beneficiary and therefore does not consolidate the entity. As of June 30, 2012, the Company owned 89 hotels located in 27 states with an aggregate of 11,371 rooms.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its 2011 Annual Report on Form 10-K. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2012.

Significant Accounting Policies

The preparation of the financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Earnings Per Common Share

Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. There were no potential common shares with a dilutive effect for the three and six months ended June 30, 2012 or 2011. As a result, basic and dilutive outstanding shares were the same. Series B convertible preferred shares are not included in earnings per common share calculations until such time that such shares are eligible to be converted to common shares.

2. Property Acquisition

On May 31, 2012, the same day the hotel opened for business, the Company purchased a newly constructed Home2 Suites by Hilton hotel located in Nashville, Tennessee for $16.7 million. The hotel has 119 rooms and is managed by Vista Host, Inc. under an agreement with terms and fees similar to the Company’s existing management agreements. The purchase price was funded primarily with the proceeds received from the Company’s $30 million non-revolving line of credit. In conjunction with the acquisition, the Company paid approximately $0.4 million in acquisition related costs, including $0.3 million, representing 2% of the gross purchase price, as a brokerage commission to Apple Suites Realty Group, Inc. (“ASRG”), which is 100% owned by Glade M. Knight, the Company’s Chairman and Chief Executive Officer, and approximately $0.1 million in other acquisition related costs, including title, legal and other related costs. These costs are included in acquisition related costs in the Company’s consolidated statements of operations for the six months ended June 30, 2012. No goodwill was recorded in connection with this acquisition.

3. Disposition and Discontinued Operations

In August 2011, the Company entered into a contract for the potential sale of its 406 acres of land and land improvements located on 110 sites in the Ft. Worth, Texas area (the “110 parcels”) for a total sale price of $198.4 million. The 110 parcels were acquired in April 2009 for a total purchase price of $147.3 million and were leased to a subsidiary of Chesapeake Energy Corporation under a long term lease for the production of natural gas. On April 27, 2012, the Company completed the sale of its 110 parcels and received approximately $138.4 million in cash proceeds and issued a note receivable totaling $60.0 million to the purchaser. The note, which approximates fair market value, is secured by a junior lien on the 110 parcels. The stated interest rate on the note is 10.5%. The note requires interest only payments for the first three years of the note. After the first three years, interest is accrued and payments will only be received once the purchaser extinguishes its senior loan with a third party. Once the senior loan is repaid, the Company will receive all payments from the existing lease on the 110 parcels until fully repaid or the note reaches maturity which is April 2049. Although the purchaser is not affiliated with the Company, a partner of the purchaser is also a member of the Board of Directors of Apple REIT Ten, Inc. In conjunction with the sale, the Company incurred a brokerage commission to ASRG totaling approximately $4.0 million, representing 2% of the gross sales price. Of this amount, approximately $2.8 million was paid to ASRG during the second quarter of 2012 and the remaining $1.2 million will be paid upon repayment of the $60.0 million note. The $4.0 million commission has been recorded as a reduction to the deferred gain on sale as described below.

The total gain on sale was approximately $33.7 million (total sale price of $198.4 million less carrying value totaling $160.5 million, ASRG fee totaling $4.0 million and closing costs totaling $0.2 million). In accordance with the Accounting Standards Codification on real estate sales, the sales transaction is being accounted for under the cost recovery method, therefore the gain on sale and interest earned on the note will be deferred until cash payments by the purchaser, including principal and interest on the note due to the Company and the payment of the $138.4 million at closing exceed the Company’s cost basis of the 110 parcels sold. The note receivable is included in the Company’s consolidated balance sheet, net of the total deferred gain. As of June 30, 2012, the note receivable, net was $25.5 million, including $60 million note receivable, plus $0.3 million interest receivable, offset by $33.7 million deferred gain and $1.1 million deferred interest earned. Prior to the sale, the 110 parcels were classified in the consolidated balance sheets as real estate held for sale and were recorded at their carrying amount, totaling approximately $158.6 million as of December 31, 2011, which included real estate net book value totaling $141.8 million and straight-line rent receivable totaling $16.8 million. The 110 parcels was a separate reportable segment and the results of operations for these properties have been classified in the consolidated statements of operations in the line item income from discontinued operations.

The following table sets forth the components of income from discontinued operations for the three and six months ended June 30, 2012 and 2011 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Rental revenue	$	1,532	$	5,342	$	6,826	$	10,685
Operating expenses		7		26		34		53
Depreciation expense		0		600		0		1,200
Income from discontinued operations	$	1,525	$	4,716	$	6,792	$	9,432

Prior to the sale, the lease was classified as an operating lease and rental income was recognized on a straight line basis over the initial term of the lease. Rental revenue includes $0.4 million and $1.5 million of adjustments to record rent on the straight line basis for three months ended June 30, 2012 and 2011, and $2.0 million and $3.1 million of adjustments to record rent on the straight line basis for the six months ended June 30, 2012 and 2011.

In May 2012, the Company entered into a Loan Agreement (the “Loan Agreement”) with Bank of America, N.A. The Loan Agreement provides for a $30 million non-revolving line of credit with a maturity date of November 15, 2012. Interest will be payable quarterly on the outstanding balance based on an annual rate of Daily LIBOR (the London Interbank Offered Rate) plus 2.75%. Under the terms and conditions of the Loan Agreement, the Company may make voluntary prepayments in whole or in part, at any time, which will permanently reduce the remaining available line of credit. The Loan Agreement is guaranteed by Glade M. Knight, the Company’s Chairman and Chief Executive Officer and is secured by assets of Mr. Knight. Mr. Knight will not receive any consideration in exchange for providing this guaranty and security. Proceeds of the loan were used by the Company for general working capital purposes, including the purchase of a hotel in May 2012, capital expenditures, distributions and redemptions. The independent directors of the Company’s Board of Directors approved Mr. Knight providing a guaranty under the Loan Agreement. At June 30, 2012, the Loan Agreement had an outstanding principal balance of $30 million, at an interest rate of approximately 3.0%.

5. Fair Value of Financial Instruments

The Company estimates the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of the debt obligation with similar credit terms and credit characteristics which are Level 3 inputs. Market rates take into consideration general market conditions and maturity. As of June 30, 2012, the carrying value and estimated fair value of the Company’s debt was approximately $152.6 million and $154.1 million. As of December 31, 2011, the carrying value and estimated fair value of the Company’s debt was approximately $124.1 million and $121.9 million. As of June 30, 2012, the carrying value of the $60 million note receivable as discussed in note 3 approximates fair market value. The carrying value of the Company’s other financial instruments approximates fair value due to the short-term nature of these financial instruments.

The Company has, and is expected to continue to engage in, significant transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. The Company’s independent members of the Board of Directors oversee and annually review the Company’s related party relationships (which include the relationships discussed in this section) and are required to approve any significant modifications to the contracts, as well as any new significant related party transactions. There were no changes to the contracts discussed in this section and no new significant related party transactions during the six months ended June 30, 2012 (other than the loan guarantee discussed in note 4). The Board of Directors is not required to approve each individual transaction that falls under the related party relationships. However, under the direction of the Board of Directors, at least one member of the Company’s senior management team approves each related party transaction.

The Company has a contract with ASRG, to acquire and dispose of real estate assets for the Company. A fee of 2% of the gross purchase price or gross sale price in addition to certain reimbursable expenses is paid to ASRG for these services. As of June 30, 2012, payments to ASRG for fees under the terms of this contract related to the acquisition of assets have totaled approximately $33.4 million since inception. Of this amount, the Company incurred approximately $0.3 million and $3.3 million for the six months ended June 30, 2012 and 2011, which is included in acquisition related costs in the Company’s consolidated statements of operations. In addition, as discussed in note 3, the Company incurred a brokerage commission to ASRG totaling approximately $4.0 million related to the sale of the Company’s 110 parcels in April 2012, which has been recorded as a reduction to the deferred gain on sale. Of this amount, approximately $2.8 million was paid to ASRG during the second quarter of 2012 and the remaining $1.2 million will be paid upon repayment of the $60 million note.

The Company is party to an advisory agreement with Apple Nine Advisors, Inc. (“A9A”), pursuant to which A9A provides management services to the Company. A9A provides these management services through an affiliate called Apple Fund Management LLC (“AFM”), which is a subsidiary of Apple REIT Six, Inc. An annual advisory fee ranging from 0.1% to 0.25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable to A9A for these management services. Total advisory fees incurred by the Company under the advisory agreement are included in general and administrative expenses and totaled approximately $1.5 million and $1.0 million for the six months ended June 30, 2012 and 2011, respectively. The increase is due to the Company reaching the next fee tier under the advisory agreement. At December 31, 2011, $1.0 million of the 2011 advisory fee had not been paid and was included in accounts payable and accrued expenses in the Company’s consolidated balance sheet. This amount was paid during the first quarter of 2012. At June 30, 2012, $0.7 million of the 2012 advisory fee had not been paid and was included in accounts payable and accrued expenses in the Company’s consolidated balance sheet.

In addition to the fees payable to ASRG and A9A, the Company reimbursed to A9A or ASRG or paid directly to AFM on behalf of A9A or ASRG approximately $1.0 million for both the six months ended June 30, 2012 and 2011. The expenses reimbursed were approximately $0.1 million and $0.2 million respectively, for costs reimbursed under the contract with ASRG and approximately $0.9 million and $0.8 million respectively for costs reimbursed under the contract with A9A. The costs are included in general and administrative expenses and are for the Company’s proportionate share of the staffing and related costs provided by AFM at the direction of A9A.

AFM is an affiliate of Apple Six Advisors, Inc., Apple Seven Advisors, Inc. , Apple Eight Advisors, Inc. , Apple Nine Advisors, Inc., Apple Ten Advisors, Inc., ASRG and Apple Six Realty Group, Inc., (collectively the “Advisors” which are wholly owned by Glade M. Knight). As such, the Advisors provide management services through the use of AFM to, respectively, Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc., Apple REIT Ten, Inc. and the Company (collectively the “Apple REIT Entities”). Although there is a potential conflict on time allocation of employees due to the fact that a senior manager, officer or staff member will provide services to more than one company, the Company believes that the executives and staff compensation sharing arrangement described more fully below allows the companies to share costs yet attract and retain superior executives and staff. The cost sharing structure also allows each entity to maintain a much more cost effective structure than having separate staffing arrangements. Amounts reimbursed to AFM include both compensation for personnel and “overhead” (office rent, utilities, benefits, office supplies, etc.) used by the companies. Since the employees of AFM perform services for the Apple REIT Entities and Advisors at the direction of the Advisors, individuals, including executive officers, receive their compensation at the direction of the Advisors and may receive consideration directly from the Advisors.

The Advisors and Apple REIT Entities allocate all of the costs of AFM among the Apple REIT Entities and the Advisors. The allocation of costs from AFM is reviewed at least annually by the Compensation Committees of the Apple REIT Entities. In making the allocation, management of each of the entities and their Compensation Committee consider all relevant facts related to each company’s level of business activity and the extent to which each company requires the services of particular personnel of AFM. Such payments are based on the actual costs of the services and are not based on formal record keeping regarding the time these personnel devote to the Company, but are based on a good faith estimate by the employee and/or his or her supervisor of the time devoted by the employee to the Company. As part of this arrangement, the day to day transactions may result in amounts due to or from the Apple REIT Entities. To efficiently manage cash disbursements, an individual Apple REIT Entity may make payments for any or all of the related companies. The amounts due to or from the related Apple REIT Entity are reimbursed or collected and are not significant in amount.

ASRG and A9A are 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the Company. Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Ten, Inc. Members of the Company’s Board of Directors are also on the Board of Directors of Apple REIT Six, Inc., Apple REIT Seven, Inc., and Apple REIT Eight, Inc.

Included in other assets, net on the Company’s consolidated balance sheet is a 24% equity investment in Apple Air Holding, LLC (“Apple Air”). The other members of Apple Air are Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Eight, Inc. Through its equity investment the Company has access to Apple Air’s aircraft for acquisition, asset management and renovation purposes. The Company’s equity investment was approximately $2.0 million and $2.1 million as of June 30, 2012 and December 31, 2011. The Company has recorded its share of income and losses of the entity under the equity method of accounting and adjusted its investment in Apple Air accordingly. For the six months ended June 30, 2012 and 2011, the Company recorded a loss of approximately $95,000 and $90,000 respectively, as its share of the net loss of Apple Air, which primarily relates to the depreciation of the aircraft, and is included in general and administrative expense in the Company’s consolidated statements of operations.

The Company has incurred legal fees associated with the Legal Proceedings discussed herein. The Company also incurs other professional fees such as accounting, auditing and reporting. These fees are included in general and administrative expense in the Company’s consolidated statements of operations. To be cost effective, these services received by the Company are shared as applicable across the other Apple REIT Entities. The professionals cannot always specifically identify their fees for one company; therefore management allocates these costs across the companies that benefit from the services.

7. Shareholders’ Equity

Special Distribution

As discussed in note 3, on April 27, 2012, the Company completed the sale of its 110 parcels for a total sale price of $198.4 million and received approximately $138.4 million in cash proceeds and issued a note receivable totaling $60.0 million to the purchaser. In conjunction with the sale, the Board of Directors approved a special distribution of $0.75 per Unit, totaling $136.1 million on May 17, 2012 to shareholders of record on May 11, 2012 (the “Special Distribution”).

In accordance with the Company’s Articles of Incorporation, the liquidation preference of each share of Series A preferred stock has been reduced by the amount of the Special Distribution, or from $11.00 to $10.25 per share. As a result of the sale and Special Distribution, the Company’s Board of Directors changed the annualized distribution rate from $0.88 per Unit to $0.83 per Unit beginning with the June 2012 distribution. Additionally, the offering price per Unit under the Company’s Dividend Reinvestment Plan has been adjusted by the amount of the Special Distribution (from $11.00 to $10.25), and the purchase price per Unit under the Company’s Unit Redemption Program has been adjusted by the amount of the Special Distribution (from $11.00 to $10.25 for the maximum purchase price, based on the original purchase price and length of time such Units have been held by the shareholder).

Monthly Distributions

For the three months ended June 30, 2012 and 2011, the Company made monthly distributions (excluding the Special Distribution noted above) of $0.2158 and $0.22 per common share for a total of $39.3 million and $40.1 million. For the six months ended June 30, 2012 and 2011, the Company made monthly distributions (excluding the Special Distribution) of $0.4358 and $0.44 per common share for a total of $79.4 million and $80.0 million. As discussed herein, in conjunction with the Special Distribution, in May 2012 the Company’s Board of Directors reduced the annual distribution rate from $0.88 to $0.83 per common share. The reduction was effective with the June 2012 distribution. The distribution will continue to be paid monthly. Total distributions (including the Special Distribution) for the three months ended June 30, 2012 and 2011 totaled $175.4 million and $40.1 million, and $215.5 million and $80.0 million for the six months ended June 30, 2012 and 2011.

Unit Redemption Program

In July 2009, the Company instituted a Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year. Since the inception of the program through April 2012 (the last scheduled redemption date during the three months ended June 30, 2012), shareholders were permitted to request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned for less than three years, or 100% of the price paid per Unit if the Units have been owned more than three years. As discussed herein, beginning with the July 2012 redemption, the purchase price per Unit under the Company’s Unit Redemption Program has been adjusted by the amount of the Special Distribution (from $11.00 to $10.25 for the maximum purchase price, based on the original purchase price and length of time such Units have been held by the shareholder). The maximum number of Units that may be redeemed in any given year is five percent of the weighted average number of Units outstanding during the 12-month period immediately prior to the date of redemption. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. Since inception of the program through June 30, 2012, the Company has redeemed approximately 7.8 million Units representing $81.2 million, including 3.0 million Units in the amount of $32.0 million and 697,000 Units in the amount of $7.2 million redeemed during the six months ended June 30, 2012 and 2011, respectively. As contemplated in the program, beginning with the July 2011 redemption, the scheduled redemption date for the third quarter of 2011, the Company redeemed Units on a pro-rata basis. Prior to July 2011, the Company redeemed 100% of redemption requests. The following is a summary of the Unit redemptions during 2011 and the first six months of 2012:

Redemption Date	Requested Unit Redemptions		Units Redeemed		Redemption Requests Not Redeemed

January 2011		318,891		318,891		0
April 2011		378,367		378,367		0
July 2011		3,785,039		1,549,058		2,235,981
October 2011		8,410,322		1,511,997		6,898,325
January 2012		10,689,219		1,507,187		9,182,032
April 2012		11,229,890		1,509,922		9,719,968

Index

Dividend Reinvestment Plan

In December 2010, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include purchasing Units under the Company’s Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. As discussed herein, beginning in May 2012, the offering price per Unit under the Company’s Dividend Reinvestment Plan has been adjusted by the amount of the Special Distribution (from $11.00 to $10.25). The Company has registered 20.0 million Units for potential issuance under the plan. During the six months ended June 30, 2012 and 2011, approximately 2.4 million Units, representing $26.2 million and 2.7 million Units, representing $29.6 million in proceeds to the Company, were issued under the plan. Since inception of the plan through June 30, 2012, approximately 7.8 million Units, representing $85.3 million in proceeds to the Company, were issued under the plan.

8. Pro Forma Information (Unaudited)

The following unaudited pro forma information for the three and six months ended June 30, 2012 and 2011 is presented as if the acquisitions of the Company’s hotels acquired after December 31, 2010, had occurred on the latter of January 1, 2011 or the opening date of the hotel. The pro forma information does not purport to represent what the Company’s results of operations would actually have been if such transactions, in fact, had occurred on these applicable dates, nor does it purport to represent the results of operations for future periods. Amounts are in thousands, except per share data.

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Total revenues	$	97,110	$	85,958	$	185,201	$	162,366

Income from continuing operations	$	21,033	$	16,813	$	37,625	$	26,973
Income from discontinued operations		1,525		4,716		6,792		9,432
Net income	$	22,558	$	21,529	$	44,417	$	36,405

Basic and diluted net income per common share
From continuing operations	$	0.11	$	0.09	$	0.20	$	0.15
From discontinued operations		0.01		0.03		0.04		0.05
Total basic and diluted net income per common share	$	0.12	$	0.12	$	0.24	$	0.20

The pro forma information reflects adjustments for actual revenues and expenses of the 12 hotels acquired after December 31, 2010 for the respective period prior to acquisition by the Company. Net income has been adjusted as follows: (1) interest income and expense have been adjusted to reflect the reduction in cash and cash equivalents required to fund the acquisitions; (2) interest expense related to prior owners’ debt which was not assumed has been eliminated; (3) depreciation has been adjusted based on the Company’s basis in the hotels; and (4) transaction costs have been adjusted for the acquisition of existing businesses.

9. Legal Proceedings

The term the “Apple REIT Companies” means Apple REIT Nine, Inc. (the “Company”), Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Ten, Inc.

On December 13, 2011, the United States District Court for the Eastern District of New York ordered that three putative class actions, Kronberg, et al. v. David Lerner Associates, Inc., et al. , Kowalski v. Apple REIT Ten, Inc., et al. , and Leff v. Apple REIT Ten, Inc., et al. , be consolidated and amended the caption of the consolidated matter to be In re Apple REITs Litigation . The District Court also appointed lead plaintiffs and lead counsel for the consolidated action and ordered lead plaintiffs to file and serve a consolidated complaint by February 17, 2012. The Company was previously named as a party in all three of the above mentioned class action lawsuits.

On February 17, 2012, lead plaintiffs and lead counsel in the In re Apple REITs Litigation , Civil Action No. 1:11-cv-02919-KAM-JO, filed an amended consolidated complaint in the United States District Court for the Eastern District of New York against the Company, Apple Suites Realty Group, Inc., Apple Eight Advisors, Inc., Apple Nine Advisors, Inc., Apple Ten Advisors, Inc., Apple Fund Management, LLC, Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Ten, Inc., their directors and certain officers, and David Lerner Associates, Inc. and David Lerner. The consolidated complaint, purportedly brought on behalf of all purchasers of Units in the Company and the other Apple REIT Companies, or those who otherwise acquired these Units that were offered and sold to them by David Lerner Associates, Inc., or its affiliates and on behalf of subclasses of shareholders in New Jersey, New York, Connecticut and Florida, asserts claims under Sections 11, 12 and 15 of the Securities Act of 1933. The consolidated complaint also asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, negligence, and unjust enrichment, and claims for violation of the securities laws of Connecticut and Florida. The complaint seeks, among other things, certification of a putative nationwide class and the state subclasses, damages, rescission of share purchases and other costs and expenses.

On April 18, 2012, the Company, and the other Apple REIT Companies, served a motion to dismiss the consolidated complaint in the In re Apple REITs Litigation . The Company and the other Apple REIT Companies accompanied their motion to dismiss the consolidated complaint with a memorandum of law in support of their motion to dismiss the consolidated complaint. The briefing period for any motion to dismiss was completed on July 13, 2012.

The Company believes that any claims against it, its officers and directors and other Apple entities are without merit, and intends to defend against them vigorously. At this time, the Company cannot reasonably predict the outcome of these proceedings or provide a reasonable estimate of the possible loss or range of loss due to these proceedings, if any.

10. Subsequent Events

In July 2012, the Company declared and paid approximately $12.6 million, or $0.069167 per outstanding common share, in distributions to its common shareholders, of which approximately $4.0 million or 393,000 Units were reinvested under the Company’s Dividend Reinvestment Plan.

In July 2012, under the guidelines of the Company’s Unit Redemption Program, the Company redeemed approximately 1.0 million Units in the amount of $10.0 million. As contemplated in the program, the Company redeemed Units on a pro-rata basis, whereby a percentage of each requested redemption was fulfilled at the discretion of the Company’s Board of Directors. This redemption was approximately 9% of the total 10.7 million requested Units to be redeemed, with approximately 9.7 million requested Units not redeemed.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are typically identified by use of terms such as “may,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “target,” “goal,” “plan,” “should,” “will,” “predict,” “potential,” and similar expressions that convey the uncertainty of future events or outcomes. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the ability of the Company to implement its acquisition strategy and operating strategy; the Company’s ability to manage planned growth; changes in economic cycles; the outcome of current and future litigation, regulatory proceedings or inquiries; and competition within the real estate industry. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in the quarterly report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In addition, the Company’s qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the Company’s financial statements and the notes thereto, as well as the risk factors described in the Company’s filings with the Securities and Exchange Commission. Any forward-looking statement that the Company makes speaks only as of the date of this report. The Company undertakes no obligation to publically update or revise any forward-looking statements or cautionary factors, as a result of new information, future events, or otherwise, except as required by law.

Apple REIT Nine, Inc., together with its wholly owned subsidiaries (the “Company”) was formed to invest in income-producing real estate in the United States. The Company was initially capitalized November 9, 2007, with its first investor closing on May 14, 2008. The Company completed its best-efforts offering of Units (each Unit consists of one common share and one Series A preferred share) in December 2010. The Company has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. Prior to the Company’s first hotel acquisition on July 31, 2008, the Company had no revenue, exclusive of interest income. As of June 30, 2012, the Company owned 89 hotels (one acquired during 2012, 11 purchased and one newly constructed hotel opened during 2011, 43 purchased during 2010, 12 acquired during 2009 and 21 acquired during 2008). Accordingly, the results of operations include only results from the date of ownership of the properties.

Although hotel performance can be influenced by many factors including local competition, local and general economic conditions in the United States and the performance of individual managers assigned to each hotel, performance of the hotels as compared to other hotels within their respective local markets, in general, has met the Company’s expectations for the period owned. Beginning in 2011 and continuing through the first half of 2012, the hotel industry and Company’s revenues and operating income have shown improvement from the significant decline in the industry during 2008 through 2010. Although there is no way to predict future general economic conditions, the Company anticipates mid single digit revenue percentage increases for comparable hotels for 2012 as compared to 2011. In evaluating financial condition and operating performance, the most important indicators on which the Company focuses are revenue measurements, such as average occupancy, average daily rate (“ADR”), revenue per available room (“RevPAR”) and market yield which compares an individual hotel’s results to others in its local market, and expenses, such as hotel operating expenses, general and administrative and other expenses described below.

The following is a summary of the results from continuing operations of the 89 hotels owned as of June 30, 2012 for their respective periods of ownership by the Company:

	Three Months Ended June 30,															Six Months Ended June 30,
(in thousands, except statistical data)	2012			Percent of Revenue			2011			Percent of Revenue			Percent Change			2012			Percent of Revenue			2011			Percent of Revenue			Percent Change

Total revenue	$	97,110			100	%	$	84,392			100	%		15	%	$	185,201			100	%	$	156,430			100	%		18	%
Hotel operating expenses		53,205			55	%		47,103			56	%		13	%		102,677			55	%		88,393			57	%		16	%
Taxes, insurance and other expense		5,370			6	%		4,489			5	%		20	%		10,543			6	%		9,022			6	%		17	%
General and administrative expense		2,327			2	%		2,011			2	%		16	%		4,931			3	%		3,545			2	%		39	%

Acquisition related costs		430						1,733						-75	%		461						4,348						-89	%
Depreciation		13,166						12,178						8	%		26,009						23,476						11	%
Interest expense, net		1,579						1,198						32	%		2,955						1,733						71	%

Number of hotels		89						86						3	%		89						86						3	%
Average Market Yield ⁽¹⁾		123						123						0	%		124						122						2	%
ADR	$	112					$	107						5	%	$	112					$	108						4	%
Occupancy		77	%					74	%					4	%		73	%					70	%					4	%
RevPAR	$	86					$	79						9	%	$	82					$	76						8	%
Total rooms sold⁽ ² ⁾		783,545						714,861						10	%		1,492,334						1,321,609						13	%
Total rooms available⁽ ³ ⁾		1,022,903						967,393						6	%		2,041,998						1,877,945						9	%

(1) Calculated from data provided by Smith Travel Research, Inc. ® Excludes hotels under renovation or opened less than two years during the applicable periods.
(2) Represents the number of room nights sold during the period.
(3) Represents the number of rooms owned by the Company multiplied by the number of nights in the period.

Index

The term the “Apple REIT Companies” means Apple REIT Nine, Inc. (the “Company”), Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Ten, Inc.

As noted above, the Company commenced operations in July 2008 upon the purchase of its first hotel property. The following table summarizes the location, brand, manager, date acquired, number of rooms and gross purchase price for each of the 89 hotels the Company owned as of June 30, 2012. All dollar amounts are in thousands.

City

State

Brand

Manager

Date Acquired

Rooms

Gross Purchase Price

Tucson

Hilton Garden Inn

Western

7/31/2008

125

18,375

Santa Clarita

Courtyard

Dimension

9/24/2008

140

22,700

Charlotte

Homewood Suites

McKibbon

9/24/2008

112

5,750

Allen

Hampton Inn & Suites

Gateway

9/26/2008

103

12,500

Twinsburg

Hilton Garden Inn

Gateway

10/7/2008

142

17,792

Lewisville

Hilton Garden Inn

Gateway

10/16/2008

165

28,000

Duncanville

Hilton Garden Inn

Gateway

10/21/2008

142

19,500

Santa Clarita

Hampton Inn

Dimension

10/29/2008

128

17,129

Santa Clarita

Residence Inn

Dimension

10/29/2008

16,600

Santa Clarita

Fairfield Inn

Dimension

10/29/2008

9,337

Beaumont

Residence Inn

Western

10/29/2008

133

16,900

Pueblo

Hampton Inn & Suites

Dimension

10/31/2008

8,025

Allen

Hilton Garden Inn

Gateway

10/31/2008

150

18,500

Bristol

Courtyard

LBA

11/7/2008

175

18,650

Durham

Homewood Suites

McKibbon

12/4/2008

122

19,050

Hattiesburg

Residence Inn

LBA

12/11/2008

9,793

Jackson

Courtyard

Vista

12/16/2008

15,200

Jackson

Hampton Inn & Suites

Vista

12/30/2008

12,600

Pittsburgh

Hampton Inn

Vista

12/31/2008

132

20,458

Fort Lauderdale

Hampton Inn

Vista

12/31/2008

109

19,290

Frisco

Hilton Garden Inn

Western

12/31/2008

102

15,050

Round Rock

Hampton Inn

Vista

3/6/2009

11,500

Panama City

Hampton Inn & Suites

LBA

3/12/2009

11,600

Austin

Homewood Suites

Vista

4/14/2009

17,700

Austin

Hampton Inn

Vista

4/14/2009

124

18,000

Dothan

Hilton Garden Inn

LBA

6/1/2009

104

11,601

Troy

Courtyard

LBA

6/18/2009

8,696

Orlando

Fairfield Inn & Suites

Marriott

7/1/2009

200

25,800

Orlando

SpringHill Suites

Marriott

7/1/2009

200

29,000

Clovis

Hampton Inn & Suites

Dimension

7/31/2009

11,150

Rochester

Hampton Inn & Suites

Raymond

8/3/2009

124

14,136

Johnson City

Courtyard

LBA

9/25/2009

9,880

Baton Rouge

SpringHill Suites

Dimension

9/25/2009

119

15,100

Houston

Marriott

Western

1/8/2010

206

50,750

Albany

Fairfield Inn & Suites

LBA

1/14/2010

7,920

Panama City

TownePlace Suites

LBA

1/19/2010

103

10,640

Clovis

Homewood Suites

Dimension

2/2/2010

12,435

Jacksonville

TownePlace Suites

LBA

2/16/2010

9,200

Miami

Hampton Inn & Suites

Dimension

4/9/2010

121

11,900

Anchorage

Embassy Suites

Stonebridge

4/30/2010

169

42,000

Boise

Hampton Inn & Suites

Raymond

4/30/2010

186

22,370

Rogers

Homewood Suites

Raymond

4/30/2010

126

10,900

St. Louis

Hampton Inn & Suites

Raymond

4/30/2010

126

16,000

Oklahoma City

Hampton Inn & Suites

Raymond

5/28/2010

200

32,657

Ft. Worth

TownePlace Suites

Western

7/19/2010

140

18,435

City

State

Brand

Manager

Date Acquired

Rooms

Gross Purchase Price

Lafayette

Hilton Garden Inn

LBA

7/30/2010

153

17,261

West Monroe

Hilton Garden Inn

InterMountain

7/30/2010

134

15,639

Silver Spring

Hilton Garden Inn

White

7/30/2010

107

17,400

Rogers

Hampton Inn

Raymond

8/31/2010

122

9,600

St. Louis

Hampton Inn

Raymond

8/31/2010

190

23,000

Kansas City

Hampton Inn

Raymond

8/31/2010

122

10,130

Alexandria

Courtyard

LBA

9/15/2010

9,915

Grapevine

Hilton Garden Inn

Western

9/24/2010

110

17,000

Nashville

Hilton Garden Inn

Vista

9/30/2010

194

42,667

Indianapolis

SpringHill Suites

White

11/2/2010

130

12,800

Mishawaka

Residence Inn

White

11/2/2010

106

13,700

Phoenix

Courtyard

White

11/2/2010

164

16,000

Phoenix

Residence Inn

White

11/2/2010

129

14,000

Mettawa

Residence Inn

White

11/2/2010

130

23,500

Mettawa

Hilton Garden Inn

White

11/2/2010

170

30,500

Austin

Hilton Garden Inn

White

11/2/2010

117

16,000

Novi

Hilton Garden Inn

White

11/2/2010

148

16,200

Warrenville

Hilton Garden Inn

White

11/2/2010

135

22,000

Schaumburg

Hilton Garden Inn

White

11/2/2010

166

20,500

Salt Lake City

SpringHill Suites

White

11/2/2010

143

17,500

Austin

Fairfield Inn & Suites

White

11/2/2010

150

17,750

Austin

Courtyard

White

11/2/2010

145

20,000

Chandler

Courtyard

White

11/2/2010

150

17,000

Chandler

Fairfield Inn & Suites

White

11/2/2010

110

12,000

Tampa

Embassy Suites

White

11/2/2010

147

21,800

Andover

SpringHill Suites

Marriott

11/5/2010

136

6,500

Philadelphia (Collegeville)

Courtyard

White

11/15/2010

132

20,000

Holly Springs

Hampton Inn & Suites

LBA

11/30/2010

124

14,880

Philadelphia (Malvern)

Courtyard

White

11/30/2010

127

21,000

Arlington

Hampton Inn & Suites

Western

12/1/2010

9,900

Irving

Homewood Suites

Western

12/29/2010

10,250

Mount Laurel

Homewood Suites

Tharaldson

1/11/2011

118

15,000

West Orange

Courtyard

Tharaldson

1/11/2011

131

21,500

Texarkana

Hampton Inn & Suites

InterMountain

1/31/2011

9,100

Fayetteville

Home2 Suites

LBA

2/3/2011

118

11,397

Manassas

Residence Inn

Tharaldson

2/16/2011

107

14,900

San Bernardino

Residence Inn

Tharaldson

2/16/2011

13,600

Alexandria

SpringHill Suites

Marriott

3/28/2011

155

24,863

(1)

Dallas

Hilton

5/17/2011

224

42,000

Santa Ana

Courtyard

Dimension

5/23/2011

155

24,800

Lafayette

SpringHill Suites

LBA

6/23/2011

103

10,232

Tucson

TownePlace Suites

Western

10/6/2011

124

15,852

El Paso

Hilton Garden Inn

Western

12/19/2011

145

19,974

Nashville

Home2 Suites

Vista

5/31/2012

119

16,660

Total

11,371

1,546,839

(1) The Company acquired land and began construction for this hotel during 2009. Hotel construction was completed by the Company and the hotel opened for business on March 28, 2011. The gross purchase price includes the acquisition of land and construction costs.

Index

The purchase price for the properties acquired through June 30, 2012, net of debt assumed, was funded primarily by the Company’s best-efforts offering of Units, completed in December 2010. The Company assumed approximately $122.4 million of debt secured by 13 of its hotel properties and $3.8 million of unsecured debt in connection with one of its hotel properties. The Company also used the proceeds of its best-efforts offering to pay approximately $30.5 million, representing 2% of the gross purchase price for these properties, as a brokerage commission to Apple Suites Realty Group, Inc. (“ASRG”), 100% owned by Glade M. Knight, the Company’s Chairman and Chief Executive. The Company leases all of its hotels to its wholly-owned taxable REIT subsidiary (or a subsidiary thereof) under master hotel lease agreements.

No goodwill was recorded in connection with any of the acquisitions.

Results of Operations

During the period from the Company’s initial capitalization on November 9, 2007 to July 30, 2008, the Company owned no properties, had no revenue, exclusive of interest income and was primarily engaged in capital formation activities. The Company began operations on July 31, 2008 when it purchased its first hotel. As of June 30, 2012, the Company owned 89 hotels with 11,371 rooms as compared to 86 hotels, with a total of 10,982 rooms as of June 30, 2011. As a result of the acquisition activity during 2011 and 2012, a comparison of operations for 2012 to prior periods is not representative of the results that would have occurred if all properties had been owned for the entire periods presented.

Hotel performance is impacted by many factors including economic conditions in the United States as well as each locality. During the period from the second half of 2008 through 2010, the overall weakness in the U.S. economy had a considerable negative impact on both consumer and business travel. As a result, hotel revenue in most markets in the United States declined from levels of 2007 and the first half of 2008. However, economic conditions have shown evidence of improvement in 2011 and the first half of 2012. Although the Company expects continued improvements in 2012, it is not anticipated that revenue and operating income for comparable hotels will reach pre-recession levels in 2012. The Company’s hotels in general have shown results consistent with industry and brand averages for the period of ownership.

The Company’s principal source of revenue is hotel revenue consisting of room and other related revenue. For the three months ended June 30, 2012 and 2011, the Company had hotel revenue of $97.1 million and $84.4 million, respectively. For the six months ended June 30, 2012 and 2011, the Company had hotel revenue of $185.2 million and $156.4 million, respectively. This revenue reflects hotel operations for the 89 hotels owned as of June 30, 2012 for their respective periods of ownership by the Company. For the three months ended June 30, 2012 and 2011, the hotels achieved combined average occupancy of 77% and 74%, ADR of $112 and $107 and RevPAR of $86 and $79. For the six months ended June 30, 2012 and 2011, the hotels achieved combined average occupancy of 73% and 70%, ADR of $112 and $108 and RevPAR of $82 and $76. ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR.

During 2012, the Company has experienced an increase in demand as demonstrated by the improvement in average occupancy for its comparable hotels of 4% in both the second quarter of 2012 and the first half of 2012 as compared to the same period of 2011. In addition, also signifying a stabilizing economy, the Company experienced an increase in ADR of 4% for comparable hotels for both the second quarter of 2012 and first half of 2012 as compared to the same period in 2011. With continued demand and room rate improvement, the Company and industry are forecasting a mid single digit percentage increase in revenue for 2012 as compared to 2011 for comparable hotels. While reflecting the impact of post-recessionary levels of single-digit growth in national economic activity, the Company’s hotels also continue to be leaders in their respective markets. The Company’s average Market Yield for the first six months of 2012 and 2011 was 124 and 122, respectively. The Market Yield is a measure of each hotel’s RevPAR compared to the average in the market, with 100 being the average (the index excludes hotels under renovation or open less than two years) and is provided by Smith Travel Research, Inc.®, an independent company that tracks historical hotel performance in most markets throughout the world. The Company will continue to pursue market opportunities to improve revenue.

In addition, seven of the hotels owned as of June 30, 2012 have opened since the beginning of 2011. Generally, newly constructed hotels require 12-24 months to establish themselves in their respective markets. Therefore, revenue is below anticipated or market levels for this period of time.

Hotel operating expenses relate to the 89 hotels owned as of June 30, 2012 for their respective periods owned and consist of direct room expenses, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. For the three months ended June 30, 2012 and 2011, hotel operating expenses totaled $53.2 million or 55% of total revenue and $47.1 million or 56% of total revenue. For the six months ended June 30, 2012 and 2011, hotel operating expenses totaled $102.7 million or 55% of total revenue and $88.4 million or 57% of total revenue. Seven of the hotels owned have opened since the beginning of 2011and as a result, hotel operating expenses as a percentage of total revenue for these hotels are higher than is expected once the properties have established themselves within their respective markets. In addition, operating expenses were impacted by several hotel renovations, with approximately 13,000 and 7,000 room nights out of service during the first six months of 2012 and 2011, respectively due to such renovations. Although operating expenses will increase as revenue increases, the Company will continue to work with its management companies to reduce costs as a percentage of revenue where possible while maintaining quality and service levels at each property.

Taxes, insurance, and other expense for the three months ended June 30, 2012 and 2011 totaled $5.4 million or 6% of total revenue and $4.5 million or 5% of total revenue. For the six months ended June 30, 2012 and 2011, taxes, insurance, and other expense totaled $10.5 million or 6% of total revenue and $9.0 million or 6% of total revenue. As discussed above, with the addition of seven newly opened hotels in the past 18 months, taxes, insurance and other expenses as a percentage of revenue is anticipated to decline as the properties become established in their respective markets. For comparable hotels, real estate taxes have decreased due to successful appeals of tax assessments at some locations. These decreases were partially offset by higher taxes for certain properties due to the reassessment of property values by localities resulting from the improved economy. Also, for comparable hotels, 2012 insurance rates have increased due to property and casualty carriers’ losses world-wide in the past year.

General and administrative expense for the three months ended June 30, 2012 and 2011 was $2.3 million and $2.0 million. For the six months ended June 30, 2012 and 2011, general and administrative expenses were $4.9 million and $3.5 million. The principal components of general and administrative expense are advisory fees and reimbursable expenses, legal fees, accounting fees, the Company’s share of the loss in its investment in Apple Air Holding, LLC, and reporting expenses. During the six months ended June 30, 2012 and 2011, the Company incurred approximately $0.8 million and $0.4 million, respectively in legal costs, an increase over prior year due to the legal matters discussed herein and continued costs related to responding to staff of the Securities and Exchange Commission (“SEC”). The SEC staff has been conducting a non-public investigation, which is focused principally on the adequacy of certain disclosures in the Company’s filings with the SEC beginning in 2008, as well as the Company’s review of certain transactions involving the Company and the other Apple REIT Companies. We intend to continue to cooperate with the SEC staff, and are engaging in a dialogue with the SEC staff concerning these issues and the roles of certain officers. We do not believe the issues raised by the SEC staff affect the material accuracy of the Company's Consolidated Balance Sheets, Consolidated Statements of Operations or Consolidated Statements of Cash Flows. At this time, the Company cannot predict the outcome of this investigation as to the Company or any of its officers, nor can we predict the timing associated with any such conclusion or resolution. The Company anticipates it will continue to incur significant legal costs for at least the remainder of 2012 related to these matters. Also, during the fourth quarter of 2011, the Company began to incur costs associated with its evaluation of a potential consolidation transaction with Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Eight, Inc. (the “other Apple REITs”). Total costs incurred during the six months ended June 30, 2012 were approximately $0.6 million. In May 2012, it was determined by the Board of Directors of the Company and the Board of Directors of each of the other Apple REITs not to move forward with the potential consolidation transaction at that time.

Acquisition related costs for the three months ended June 30, 2012 and 2011 were $0.4 million and $1.7 million, and $0.5 million and $4.3 million for the six months ended June 30, 2012 and 2011. The decline was due to the reduction in acquisitions from nine hotels and one newly constructed hotel during the first six months of 2011 to one acquisition in May 2012. The costs include title, legal, accounting, pre-opening and other related costs, as well as the brokerage commission paid to ASRG for the properties acquired or newly opened during the respective period.

Depreciation expense for the three months ended June 30, 2012 and 2011 was $13.2 million and $12.2 million, and $26.0 million and $23.5 million for the six months ended June 30, 2012 and 2011. Depreciation expense primarily represents expense of the Company’s 89 hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment) for their respective periods owned. The increase was due to the increase in the number of properties owned and renovations completed during 2011 and the first six months of 2012.

Interest expense for the three months ended June 30, 2012 and 2011 was $1.8 million and $1.6 million, respectively and is net of approximately $0.1 million and $0 of interest capitalized associated with renovation and construction projects. Interest expense for the six months ended June 30, 2012 and 2011 was $3.3 million and $2.6 million, respectively and is net of approximately $0.3 million and $0.4 million of interest capitalized associated with renovation and construction projects. Interest expense primarily arose from debt assumed with the acquisition of 14 of the Company’s hotels (two loan assumptions during the first half of 2011, five in 2010, three in 2009, and four in 2008) and borrowings on its $30 million non-revolving line of credit in May 2012. During the three months ended June 30, 2012 and 2011, the Company also recognized $0.2 million and $0.4 million in interest income, and $0.3 million and $0.9 million for the six months ended June 30, 2012 and 2011, primarily representing interest on excess cash invested in short-term money market instruments and two mortgage notes acquired during 2010 which are secured by two hotels. One of the notes totaling $11.0 million was repaid by the borrower in December 2011.

Discontinued Operations

The following table sets forth the components of income from discontinued operations for the three and six months ended June 30, 2012 and 2011 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Rental revenue	$	1,532	$	5,342	$	6,826	$	10,685
Operating expenses		7		26		34		53
Depreciation expense		0		600		0		1,200
Income from discontinued operations	$	1,525	$	4,716	$	6,792	$	9,432

The Company has, and is expected to continue to engage in, significant transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. The Company’s independent members of the Board of Directors oversee and annually review the Company’s related party relationships (which include the relationships discussed in this section) and are required to approve any significant modifications to the contracts, as well as any new significant related party transactions. There were no changes to the contracts discussed in this section and no new significant related party transactions during the six months ended June 30, 2012 (other than the loan guarantee discussed herein). The Board of Directors is not required to approve each individual transaction that falls under the related party relationships. However, under the direction of the Board of Directors, at least one member of the Company’s senior management team approves each related party transaction.

The Company has a contract with ASRG, to acquire and dispose of real estate assets for the Company. A fee of 2% of the gross purchase price or gross sale price in addition to certain reimbursable expenses is paid to ASRG for these services. As of June 30, 2012, payments to ASRG for fees under the terms of this contract related to the acquisition of assets have totaled approximately $33.4 million since inception. Of this amount, the Company incurred approximately $0.3 million and $3.3 million for the six months ended June 30, 2012 and 2011, which is included in acquisition related costs in the Company’s consolidated statements of operations. In addition, as discussed herein, the Company incurred a brokerage commission to ASRG totaling approximately $4.0 million related to the sale of the Company’s 110 parcels in April 2012, which has been recorded as a reduction to the deferred gain on sale. Of this amount, approximately $2.8 million was paid to ASRG during the second quarter of 2012 and the remaining $1.2 million will be paid upon repayment of the $60 million note.

Liquidity and Capital Resources

The Company was initially capitalized on November 9, 2007, with its first investor closing on May 14, 2008. The Company completed its best-efforts offering of Units in December 2010.

In May 2012, the Company entered into a Loan Agreement (the “Loan Agreement”) with Bank of America, N.A. The short-term Loan Agreement provides for a $30 million non-revolving line of credit with a maturity date of November 15, 2012. Interest will be payable quarterly on the outstanding balance based on an annual rate of Daily LIBOR (the London Interbank Offered Rate) plus 2.75%. Under the terms and conditions of the Loan Agreement, the Company may make voluntary prepayments in whole or in part, at any time, which will permanently reduce the remaining available line of credit. The Loan Agreement is guaranteed by Glade M. Knight, the Company’s Chairman and Chief Executive Officer and is secured by assets of Mr. Knight. Mr. Knight will not receive any consideration in exchange for providing this guaranty and security. Proceeds of the loan were used by the Company for general working capital purposes, including the purchase of a hotel in May 2012, capital expenditures, distributions and redemptions. The independent directors of the Company’s Board of Directors approved Mr. Knight providing a guaranty under the Loan Agreement. At June 30, 2012, the Loan Agreement had an outstanding principal balance of $30 million, at an interest rate of approximately 3%.

The Company’s principal sources of liquidity are cash on hand, the operating cash flow generated from the Company’s properties and interest received on the Company’s note receivables. In addition, the Company plans to borrow additional funds during the second half of 2012. The Company anticipates that cash on hand, cash flow from operations, interest received from notes receivables and future borrowings will be adequate to meet its anticipated liquidity requirements, including debt service (which includes the repayment of the $30 million loan discussed above), capital improvements, required distributions to shareholders (the Company is not required to make distributions at its current rate for REIT purposes), and planned Unit redemptions. The one development project the Company has planned will be funded by financing.

As discussed herein, on April 27, 2012, the Company completed the sale of its 110 parcels for a total sale price of $198.4 million and received approximately $138.4 million in cash proceeds and issued a note receivable totaling $60.0 million to the purchaser. In conjunction with the sale, the Board of Directors approved a special distribution of $0.75 per Unit, totaling $136.1 million on May 17, 2012 to shareholders of record on May 11, 2012 (the “Special Distribution”). It is anticipated that the Special Distribution will be treated as a return of capital for federal income tax purposes. In accordance with the Company’s Articles of Incorporation, the liquidation preference of each share of Series A preferred stock has been reduced by the amount of the Special Distribution, or from $11.00 to $10.25 per share. As a result of the sale and Special Distribution, the Company’s Board of Directors changed the annualized distribution rate from $0.88 per Unit to $0.83 per Unit beginning with the June 2012 distribution. Additionally, the offering price per Unit under the Company’s Dividend Reinvestment Plan has been adjusted by the amount of the Special Distribution (from $11.00 to $10.25), and the purchase price per Unit under the Company’s Unit Redemption Program has been adjusted by the amount of the Special Distribution (from $11.00 to $10.25 for the maximum purchase price, based on the original purchase price and length of time such Units have been held by the shareholder).

To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions (excluding the Special Distribution discussed above) during the first six months of 2012 totaled approximately $79.4 million and were paid at a monthly rate of $0.073334 per common share during the first five months of 2012, and at a rate of $0.069167 per common share for June 2012. For the same period the Company’s net cash generated from operations was approximately $58.1 million. Due to the inherent delay between raising capital and investing that same capital in income producing real estate, a portion of the distributions to date have been funded from proceeds from the Company’s completed initial public offering of Units (completed in December 2010) and borrowings on its non-revolving line of credit, and this portion of distributions is expected to be treated as a return of capital for federal income tax purposes.

In May 2008, the Company’s Board of Directors established a policy for an annualized distribution rate of $0.88 per common share, payable in monthly distributions. As noted above, with the payment of the Special Distribution in May 2012, the annualized distribution rate was reduced from $0.88 per common share to $0.83 per common share, payable in monthly distributions beginning June 2012. The Company intends to continue paying distributions on a monthly basis. The Company’s objective in setting an annualized distribution rate is to project a rate that will provide consistency over the life of the Company taking into account acquisitions, dispositions, capital improvements, ramp up of new properties and varying economic cycles. To meet this objective, the Company may require the use of debt and offering proceeds, in addition to cash from operations. Since a portion of distributions has to date been funded with proceeds from the offering of Units, proceeds from the sale of the 110 parcels and borrowings, the Company’s ability to maintain its current intended rate of distribution will be primarily based on the ability of the Company’s properties to generate cash from operations at this level, as well as the Company’s ability to obtain additional financing. Since there can be no assurance of the Company’s ability to obtain additional financing or that the properties owned by the Company will provide income at this level, there can be no assurance as to the classification or duration of distributions at the current rate. Proceeds of the offering which were distributed are not available for investment in properties.

Redemption Date	Requested Unit Redemptions		Units Redeemed		Redemption Requests Not Redeemed

January 2011		318,891		318,891		0
April 2011		378,367		378,367		0
July 2011		3,785,039		1,549,058		2,235,981
October 2011		8,410,322		1,511,997		6,898,325
January 2012		10,689,219		1,507,187		9,182,032
April 2012		11,229,890		1,509,922		9,719,968

Index

As noted in the table above, beginning with the July 2011 redemption, the total redemption requests exceeded the authorized amount of redemptions and, as a result, the Board of Directors has and will continue to limit the amount of redemptions as it deems prudent. Currently, the Company plans to redeem under its Unit Redemption Program at an annual rate of approximately 2% of weighted average Units for the remainder of 2012 (lowered from 3% for the first half of 2012 in conjunction with the Special Distribution).

The Company has on-going capital commitments to fund its capital improvements. The Company is required, under all of the hotel management agreements and certain loan agreements, to make available, for the repair, replacement, refurbishing of furniture, fixtures, and equipment, a percentage of gross revenues provided that such amount may be used for the Company’s capital expenditures with respect to the hotels. As of June 30, 2012, the Company held $9.0 million in reserves for capital expenditures. For the first six months of 2012, the Company spent approximately $9.2 million on capital expenditures and anticipates spending an additional $10 million for the remainder of the year. As discussed below, the Company has one development project planned. No significant costs for this project were incurred during the first six months of 2012.

On October 14, 2009, the Company entered into a ground lease for approximately one acre of land located in downtown Richmond, Virginia. In February 2012, the Company terminated the lease and entered into a contract to purchase the land for $3 million, which was completed in July 2012. The Company intends to use the land to build a Courtyard and Residence Inn. The Company continues to make progress towards the construction of these hotels, however, there are many conditions to beginning construction on the hotels, and there are no assurances that the Company will construct the hotels.

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, limit the operators’ ability to raise room rates. Currently the Company is not experiencing any material impact from inflation.

Business Interruption

Being in the real estate industry, the Company is exposed to natural disasters on both a local and national scale. Although management believes there is adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Company’s financial position or results of operations.

The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or, if necessary, any available other financing sources to make distributions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of June 30, 2012, the Company’s financial instruments were not exposed to significant market risk due to foreign currency exchange risk, commodity price risk or equity price risk. The Company will be exposed to interest rate risk due to possible changes in short term interest rates as it invests its cash, or borrows on its $30 million non-revolving line of credit. Based on the balance of the Company’s non-revolving line of credit at June 30, 2012, of $30 million, every 100 basis point change in interest rates could impact the Company’s annual net income by approximately $0.3 million, all other factors remaining the same. Based on the Company’s cash invested at June 30, 2012, of $7.4 million, every 100 basis points change in interest rates will impact the Company’s annual net income by approximately $74,000, all other factors remaining the same.

Item 4. Controls and Procedures

Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2012. There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The term the “Apple REIT Companies” means Apple REIT Nine, Inc. (the “Company”), Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Ten, Inc.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unit Redemption Program

In July 2009, the Company instituted a Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year. Since the inception of the program through April 2012 (the last scheduled redemption date during the three months ended June 30, 2012), shareholders were permitted to request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned for less than three years, or 100% of the price paid per Unit if the Units have been owned more than three years. In conjunction with the special distribution of $0.75 per Unit paid in May 2012, beginning with the July 2012 redemption, the purchase price per Unit under the Company’s Unit Redemption Program has been adjusted by the amount of the special distribution (from $11.00 to $10.25 for the maximum purchase price, based on the original purchase price and length of time such Units have been held by the shareholder). The maximum number of Units that may be redeemed in any given year is five percent of the weighted average number of Units outstanding during the 12-month period immediately prior to the date of redemption. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. As noted below, during 2011 and the first six months of 2012, the total redemption requests exceeded the authorized amount of redemptions and the Board of Directors has and will continue to limit the amount of redemptions as it deems prudent.

Since inception of the program through June 30, 2012, the Company has redeemed approximately 7.8 million Units representing $81.2 million. During the six months ended June 30, 2012, the Company redeemed approximately 3.0 million Units in the amount of $32.0 million. As contemplated in the program, beginning with the July 2011 redemption, the Company redeemed Units on a pro-rata basis with approximately 41% of the amount requested redeemed in the third quarter of 2011, approximately 18% of the amount requested redeemed in the fourth quarter of 2011, approximately 14% of the amount requested redeemed in the first quarter of 2012 and approximately 13% of the amount requested redeemed in April 2012 (the last scheduled redemption date during the three months ended June 30, 2012), leaving approximately 9.7 million Units requested but not redeemed. Prior to July 2011, the Company had redeemed 100% of redemption requests. The Company has a number of cash sources including cash from operations, dividend reinvestment plan proceeds, proceeds from borrowings and asset sales from which it can make redemptions. See the Company’s complete consolidated statements of cash flows for the six months ended June 30, 2012 and 2011 included in the Company’s interim financial statements in Item 1 of this Form 10-Q for a further description of the sources and uses of the Company’s cash flows. The following is a summary of redemptions during the second quarter of 2012 (no redemptions occurred in May and June of 2012).

Issuer Purchases of Equity Securities

(a)

(b)

(c)

(d)

Period

Total Number of Units Purchased

Average Price Paid per Unit

Total Number of Units Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Units that May Yet Be Purchased Under the Plans or Programs

April 2012

1,509,922

10.59

1,509,922

(1)

(1) The maximum number of Units that may be redeemed in any 12 month period is limited to up to five percent (5.0%) of the weighted average number of Units outstanding from the beginning of the 12 month period, subject to the Company’s right to change the number of Units to be redeemed.

Exhibit Number		Description of Documents

3.1		Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.1 to the registrant’s registration statement on Form S-11 (SEC File No. 333-147414) filed November 15, 2007 and effective April 25, 2008)
3.2		Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form S-11 (SEC File No. 333-147414) filed November 15, 2007 and effective April 25, 2008)

10.99		Third Amendment to Purchase and Sale Contract dated as of January 31, 2012 between Apple Nine Ventures Ownership, Inc. and 111 Realty Investors, LP (Incorporated by reference to Exhibit 10.99 to the registrant’s quarterly report on Form 10Q (SEC File No. 000-53603) filed May 7, 2012)

10.100		Fourth Amendment to Purchase and Sale Contract dated as of April 12, 2012 between Apple Nine Ventures Ownership, Inc. and 111 Realty Investors, LP (FILED HEREWITH )

10.101		Junior Secured Note dated as of April 27, 2012 between Apple Nine Ventures Ownership, Inc. and 111 Realty Investors, LP (FILED HEREWITH)

10.102		Loan Agreement dated as of April 27, 2012 between Apple Nine Ventures Ownership, Inc. and 111 Realty Partners, LP (FILED HEREWITH)

31.1		Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)

31.2		Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)

32.1		Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)

101		The following materials from Apple REIT Nine, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text and in detail (FURNISHED HEREWITH)

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Apple REIT Nine, Inc.

By:	/s/ G LADE M. K NIGHT	Date: August 13, 2012
	Glade M. Knight,
	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

By:	/s/ B RYAN P EERY	Date: August 13, 2012
	Bryan Peery,
	Chief Financial Officer (Principal Financial and Principal Accounting Officer)

FOURTH AMENDMENT TO PURCHASE AND SALE CONTRACT

(110 separate tracts of Real Property located in: Tarrant, Johnson, Dallas and Ellis Counties, Texas)

This FOURTH AMENDMENT TO PURCHASE AND SALE CONTRACT (hereafter called the “ Amendment ”) is made by and between Apple Nine Ventures Ownership, Inc., a Virginia corporation (hereafter called “ Seller ”) and 111 Realty Investors, LP, a Texas limited partnership (hereafter called “ Purchaser ”). This Amendment shall be effective as of the date written below.

WITNESSETH:

WHEREAS, Seller and Purchaser executed that certain Purchase and Sale Contract (the “Contract”) with an effective date of August 3, 2011 with respect to 110 separate tracts of Real Property located in: Tarrant, Johnson, Dallas and Ellis Counties, Texas and as more particularly described therein (hereafter called the “ Land ”); and

WHEREAS, Seller and Purchaser amended the Contract by executing that certain First Amendment To Purchase and Sale Contract (the “First Contract Amendment”) with an effective date of October 6, 2011; and

WHEREAS, Seller and Purchaser amended the Contract by executing that certain Second Amendment To Purchase and Sale Contract (the “Second Contract Amendment”) with an effective date of November 30, 2011; and

WHEREAS, Seller and Purchaser amended the Contract by executing that certain Third Amendment To Purchase and Sale Contract (the “Third Contract Amendment”) with an effective date of January 31, 2012; and

WHEREAS, the Seller and Purchaser desire to modify and amend the Contract as herein set forth.

NOW THEREFORE, for and in consideration of the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser agree as follows:

1.	Section 2, paragraph (a) of the Contract shall now include a sub-paragraph (i) adding the following:

(i.) The Purchase Price shall be paid as follows: (i) One Hundred Thirty Eight Million Four Hundred Thousand and No/100 Dollars ($138,400,000.00) (the “ Cash Portion ”) shall be due in cash at Closing (as defined in the Contract); and (ii) Sixty Million and No/100 Dollars ($60,000,000.00) (the “ Seller Subordinated Debt Portion ”) shall be paid pursuant to a promissory note made by Purchaser in favor of Seller which is in a form mutually acceptable to Seller and Purchaser. Such note shall be in the principal amount of the Seller Subordinated Debt Portion, shall bear interest at an annual rate of ten and one-half percent (10.5%), shall call for the payment of accrued interest on or before the sixth business day of each month for thirty six (36) months, shall have a maturity date co-terminous with the loan from Purchaser's senior secured lender, and shall be secured by a second lien deed of trust covering all of the Property made by Purchaser in favor of Seller which is in a form mutually acceptable to Seller and Purchaser. At Closing, Seller shall enter into a subordination agreement with Purchaser's senior secured lender in connection with such transaction, the form of such subordination agreement to be mutually acceptable to Seller and Purchaser's senior secured lender.

2.	Capitalized terms herein shall have the meaning stated in the Contract unless otherwise defined herein.

3.	Except as modified and amended hereby, the Contract shall continue in full force and effect, and is hereby ratified and affirmed.

4.	This Amendment may be executed in multiple counterparts, and by facsimile, each of which shall be deemed to be an original, and all of which together shall constitute but one agreement.

5.	The terms of this Amendment shall control over any conflicts between the terms of the Contract and the terms of this Amendment.

This Amendment shall be effective as of April 12, 2012.

Purchaser :	Seller:

111 Realty Investors, LP,	Apple Nine Ventures Ownership, Inc.,
a Texas limited partnership	a Virginia corporation

By: 111 GP, Inc.,
a Texas corporation, its general partner


By: /s/ Michael J. Mallick	By: /s/ David Buckley
Name: Michael J. Mallick	Name: David Buckley
Title: President	Title: Vice President

This instrument and the rights and obligations evidenced hereby are subordinate to any and all

liens, indebtedness, obligations and liabilities of 111 realty investors, LP, a texas limited

partnership, its successors and assigns, to (I) u.s. bank national association and/or its

successors and assigns as collateral trustee (the "collateral trustee") under the terms of that

certain collateral trust indenture dated of as of april 27, 2012 on behalf of the holders (the

"senior noteholders") from time to time of the adjustable rate senior secured notes due april

15, 2049 of 111 realty investors, lp and (II) the senior noteholders, in the manner and to the

extent set forth in that certain debt subordination agreement with collateral trustee dated

april 27, 2012, which reference is hereby made for a more full statement thereof and each

holder of this instrument, by its acceptance hereof, shall be bound by the provisions of such

debt subordination agreement.

111 Realty Investors, LP

Junior Secured Note

Due April 15, 2049

April 27, 2012

$60,000,000.00

111 Realty Investors, LP , a limited partnership organized under the laws of the State of Texas (the “Company” ), for value received, hereby promises to pay to or to the order of APPLE NINE VENTURES OWNERSHIP, INC., a Virginia corporation, or its assigns ("Junior Lender"), the principal amount of SIXTY MILLION AND NO/100 Dollars ($60,000,000.00) on April 15, 2049, together with interest at the Applicable Interest Rate (as defined below) from the date of issue until maturity (each computed on the basis of a 360-day year of 12 consecutive 30-day months). Prior to maturity, interest only payments calculated at the Applicable Interest Rate shall be due and payable on the 15 th day of each month following the date hereof; provided, however, that in accordance with the terms of that certain Debt Subordination Agreement dated of even date herewith between Junior Lender and Senior Noteholder, it is understood that after the payment tendered on May 15, 2015, no payments of accrued interest will be tendered to Junior Lender and accordingly all such accrued interest thereafter will be capitalized and added to the outstanding principal balance of this Note. For purposes hereof the term “Applicable Interest Rate” shall mean 10.5% per annum. At maturity the outstanding principal balance shall be due and payable in full. Notwithstanding anything to the contrary contained herein, in the event the tenant under the Chesapeake Lease (as defined in the Loan Agreement) has exercised its rights pursuant to Section 25 thereof to repurchase up to 29 sites, Junior Lender agrees that for every site purchased after the 14 th site that the principal balance of this Note shall be deemed reduced (i.e., without actual receipt of any funds) by an amount equal to $403,636.00 for each site repurchased thereafter (except that with regard to the repurchase of site number 15, the deemed amount shall only be $201,818.00); provided, however, that the foregoing shall cease to be applicable with regard to any sites purchased upon the earlier of (x) the 24 th month of this Note and (y) the date, if any, that Section 25 of the Chesapeake Lease is modified to eliminate the tenant's right to repurchase sites.

The Company further promises to pay interest at the rate that is the greater of (i) 2.0% per annum above the Applicable Interest Rate stated in the first paragraph of this Note and (ii) 2.0% over the rate of interest publicly announced by Citibank, N.A. in New York, New York as its “base” or “prime” rate, (i) on each overdue installment of principal, premium, if any, and (to the extent legally enforceable) upon each overdue installment of interest in each case from and after the due date of each such installment, whether by acceleration or otherwise, until paid and (ii) during the continuance of an Event of Default, on the unpaid balance hereof; provided, however, it is expressly acknowledged that payments being accrued after May 15, 2015 shall not be deemed to be overdue and the Company shall not be deemed to be in default hereunder (i.e., the Applicable Interest Rate shall remain at 10.5% per annum). Payments of principal, premium, if any, and interest shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts by wire transfer of immediately available funds, in such manner and at such other place in the United States of America as the holder hereof shall have designated to the Company in writing.

This Note is issued under and pursuant to the terms and provisions of the Loan Agreement dated of even date herewith (the “Loan Agreement” ) entered into by the Company and Junior Lender and secured by the Junior Deeds of Trust dated of even date herewith (collectively, the “Deed of Trust” ) from the Company to William Woodall, Esq., as trustee, in favor of Junior Lender, in respect of the Mortgaged Property described therein and the Ground Lease Agreement dated February 3, 2010 (as amended from time to time) between the Company (as successor-in-interest to Junior Lender), as landlord, and Chesapeake Operating Inc., a corporation organized under the laws of the State of Oklahoma, as tenant. This Note and the holder hereof are entitled to all the benefits provided for by the Loan Agreement and the Deed of Trust and the Other Related Agreements (as defined in the Loan Agreement), to which Loan Agreement, the Deed of Trust and such Other Related Agreements reference is hereby made for the statement thereof, including a description of the Mortgaged Property (as defined in the Deed of Trust), the nature and extent of the security and the rights of the holder of this Note and of the Company in respect thereof. Capitalized terms not otherwise defined herein shall have the respective meanings ascribed thereto in the Loan Agreement and/or the Deed of Trust.

Interest on this Note shall not exceed the maximum amount of non-usurious interest that may be contracted for, taken, reserved, charged, or received under law; any interest in excess of that maximum amount shall be credited on the principal of this Note or, if that has been paid, refunded. All interest paid or agreed to be paid to the holder of this Note shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period (including any renewal or extension) until payment in full of the principal so that the interest hereon for such full period shall not exceed the maximum amount permissible under applicable law.

This Note shall be governed by and construed in accordance with the laws of the State of Texas and the laws of the United States applicable to transactions in the State of Texas.

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This Note may be declared due prior to its expressed maturity and voluntary repayments may be made thereon by the Company, all in the events, on the terms and in the manner and amounts as provided in the Deed of Trust and/or the Loan Agreement.

111 Realty Investors, LP , a Texas limited partnership

By: 111 GP, Inc., a Texas corporation, its general partner

By: / s/ Michael J. Mallick

Name: Michael J. Mallick

Title: President

LOAN AGREEMENT

between

111 REALTY PARTNERS, L.P.

and

APPLE NINE VENTURES OWNERSHIP, INC.

Entered into as of April 27, 2012

This instrument and the rights and obligations evidenced hereby are subordinate to any and all liens, indebtedness, obligations and liabilities of 111 Realty Partners, L.P., a Texas limited partnership, its successors and assigns, to (i) U.S. Bank National Association and/or , its successors and assigns as collateral trustee (the " Collateral Trustee ") under the terms of that certain Collateral Trust Indenture dated as of April 27, 2012 on behalf of the holders (the " Senior Noteholders ") from time to time of the Adjustable Rate Senior Secured Notes due April 15, 2049 of 111 Realty Investors, LP and (ii) the Senior Noteholders, in the manner and to the extent set forth in that certain Debt Subordination Agreement with Collateral Trustee dated April 27, 2012, which reference is hereby made for a more full statement thereof and each holder of this instrument, by its acceptance hereof, shall be bound by the provisions of such Debt Subordination Agreement.

LOAN AGREEMENT

THIS LOAN AGREEMENT (“ Agreement ”) is entered into as of April 27, 2012, by and between 111 REALTY PARTNERS, L.P., a Texas limited partnership (“ Borrower ”), and APPLE NINE VENTURES OWNERSHIP, INC., a Virginia corporation (“ Lender ”).

R E C I T A L S

A. Borrower owns the surface estate to certain real property described in Exhibit A hereto and all improvements now or hereafter existing thereon (collectively, the “ Property ”).

B. Borrower desires to borrow from Lender, and Lender agrees to lend to Borrower, the amounts described below.

NOW, THEREFORE, Borrower and Lender agree as follows:

ARTICLE 1

DEFINITIONS

1.1 Defined Terms .

The following capitalized terms generally used in this Agreement shall have the meanings defined or referenced below. Certain other capitalized terms used only in specific sections of this Agreement are defined in such sections.

“ Affiliate ” – means, as to any Person, any other Person that, directly or indirectly, is in Control of, is Controlled by or is under common Control with such Person or is a director or officer of such Person or of an Affiliate of such Person.

“ Agreement ” – shall have the meaning ascribed to such term in the preamble hereto.

“ Bankruptcy Code ” – means the Bankruptcy Reform Act of 1978 (11 USC § 101-1330) as now or hereafter amended or recodified.

“ Borrower ” – means 111 Realty Partners, L.P.

“ Business Day ” – means a day of the week (but not a Saturday, Sunday or holiday) on which the offices of Lender are open to the public for carrying on substantially all of Lender’s business functions. Unless specifically referenced in this Agreement as a Business Day, all references to “days” shall be to calendar days.

“ Chattel Paper ” – shall have the meaning ascribed to such term in the Uniform Commercial Code.

“ Chesapeake Lease ” – means that certain Ground Lease Agreement between Chesapeake Operating, Inc., an Oklahoma corporation, as lessee, and Apple Nine Ventures Ownership, Inc., a Virginia corporation, as lessor, dated February 3, 2010, as amended from time to time and assigned by Apple Nine Ventures Ownership, Inc. to Borrower as of the date hereof.

“ Contracts ” – means all contracts, agreements, warranties, guaranties and representations relating to or governing the use, occupancy, operation, management, name or chain affiliation and/or guest reservation, repair and service of the Property, and all leases, occupancy agreements, concession agreements, and commitments to provide rooms or facilities in the future, including all amendments, modifications and supplements to any of the foregoing.

“ Control ” – means, with respect to any Person, the power to direct the management, operation and business of such Person, directly or indirectly, whether through the ownership of voting securities or other beneficial interests, by contract or otherwise.

“ Deed of Trust ” – means any mortgage, deed of trust, deed to secure debt, indemnity deed of trust, leasehold mortgage, leasehold deed of trust, any amendment to or amendment and restatement of any of the preceding, including without limitation, those that certain Junior Deed of Trust of even date herewith executed by Borrower, as trustor, to William M. Woodall, Esq., an individual, as trustee, for the benefit of Lender, as beneficiary (encumbering the Property), as such instrument may be hereafter amended, supplemented, replaced or modified.

“ Default ” – shall have the meaning ascribed to such term in Section 11.1.

“ Effective Date ” – shall have the meaning ascribed to such term in Section 2.3.

“ Equipment ” – shall have the meaning ascribed to such term in the Uniform Commercial Code.

“ GAAP ” – means generally accepted accounting principles as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the accounting profession), or in such other statements by such entity as may be in general use by significant segments of the U.S. accounting profession.

“ General Intangibles ” – shall have the meaning ascribed to such term in the Uniform Commercial Code.

“ Lender ” – means Apple Nine Ventures Ownership, Inc.

“ Loan ” – means the principal sum that Lender agrees to lend and Borrower agrees to borrow pursuant to the terms and conditions of this Agreement: SIXTY MILLION AND NO/100 DOLLARS ($60,000,000.00).

“ Loan Documents ” – means those documents, as hereafter amended, supplemented, replaced or modified, properly executed and in recordable form, if necessary, listed in Exhibit B as Loan Documents.

“ Maturity Date ” – means the April 15, 2049.

“ Note ” – means that certain Junior Secured Note of even date herewith, in the original principal amount of the Loan, executed by Borrower and payable to the order of Lender, as hereafter amended, supplemented, replaced or modified.

“ Other Related Documents ” – means those documents, as hereafter amended, supplemented, replaced or modified from time to time, properly executed and in recordable form, if necessary, listed in Exhibit B as Other Related Documents.

“ Person ” – means any individual, entity, corporation, general or limited partnership, limited liability company, joint venture, estate, trust, association or other entity or governmental authority.

“ Personal Property ” – means the Accounts, Chattel Paper, Contracts, Equipment, General Intangibles, Inventory, FF&E, vehicles and cash on hand at the Property; together with all books, records and files relating to any of the foregoing.

“ Proceeding ” – shall have the meaning ascribed to such term in Section 9.

“ Proceeds ” – shall have the meaning ascribed to such term in the Uniform Commercial Code, and shall include, without limitation, whatever is receivable or received when collateral or proceeds thereof is sold, leased, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including return premiums, with respect to any insurance relating thereto (whether or not Lender is loss payee thereof) and all rights to payment with respect to any cause of action relating to any of the collateral.

“ Prohibited Equity Transfer ” – shall have the meaning ascribed to such term in Section 13.2(a).

“ Prohibited Property Transfer ” – shall have the meaning ascribed to such term in Section Section 13.1(a).

“ Property ” – shall have the meaning ascribed to such term in Exhibit A .

“ Secured Obligations ” – shall have the meaning ascribed to such term in the Deed of Trust.

“ Senior Lender ” – means U.S. Bank National Association, as Trustee for the initial noteholders described in that certain Note Purchase Agreement of even date herewith by and among Borrower such trustee and such noteholders.

“Senior Loan” – means that certain $152,000,000 senior loan from U.S. Bank National Association, as Trustee and the initial noteholders described in that certain Note Purchase Agreement of even date herewith by and among Borrower, such trustee and such noteholders.

“Senior Loan Documents” – means all of the documents evidencing and securing the Senior Loan.

“ Tax ”, and collectively, “ Taxes ” – shall have the meaning ascribed to such term in Section 9.9.

“ Title Policy ” – means the TLTA Lender’s Policy of Title Insurance as issued by Chicago Title Insurance Company.

“ Transfer ” – shall mean any sale, installment sale, exchange, mortgage, pledge, hypothecation, assignment, encumbrance or other transfer, conveyance or disposition, and any termination, extinguishment, expiration, or merger of any ground lease interest, in any case whether voluntarily, involuntarily or by operation of law or otherwise.

“ Uniform Commercial Code ” – means the Uniform Commercial Code as in effect in the state in which the Property is located.

1.2 Exhibits Incorporated . All exhibits, schedules or other items attached hereto are incorporated into this Agreement by such attachment for all purposes.

ARTICLE 2

LOAN

2.1 Loan . Subject to the terms of this Agreement, Lender agrees to lend to Borrower and Borrower agrees to borrow from Lender the principal sum of SIXTY MILLION AND NO/100 DOLLARS ($60,000,000.00); said sum to be evidenced by the Note of even date herewith. The Note shall be secured, in part, by the Deed of Trust, of even date herewith, encumbering certain real property and improvements as legally defined therein.

2.2 Loan Documents . Borrower shall deliver to Lender concurrently with this Agreement each of the documents, properly executed and in recordable form, as applicable, described in Exhibit B as Loan Documents, together with those documents described in Exhibit B as Other Related Documents.

2.3 Effective Date . The date of the Loan Documents is for reference purposes only. The Effective Date (“ Effective Date ”) of delivery and transfer to Lender of the security under the Loan Documents and of Borrower’s and Lender’s obligations under the Loan Documents is the earlier of (a) the date the Deed of Trust is recorded in the Office of the County Recorder of the county or counties where the Property is located and (b) the date Lender authorizes the Loan proceeds to be released to Borrower.

2.4 Maturity Date . The Original Maturity Date of the Loan shall be April 15, 2049. On the Maturity Date, all sums due and owing under this Agreement and the other Loan Documents shall be repaid in full. All payments due to Lender under this Agreement, whether at the Maturity Date or otherwise, shall be paid in immediately available funds.

2.5 Credit for Principal Payments . Any payment made upon the outstanding principal balance of the Loan shall be credited as of the Business Day received, provided such payment is received by Lender no later than 11:00 a.m. (Eastern Standard Time or Eastern Daylight Time, as applicable) and constitutes immediately available funds. Any principal payment received after said time or which does not constitute immediately available funds shall be credited upon such funds having become unconditionally and immediately available to Lender.

2.6 Full Repayment and Reconveyance . Upon receipt of all sums owing and outstanding under the Loan Documents, Lender shall issue a full reconveyance of the Property from the lien of the Deed of Trust; provided , however , that all of the following conditions shall be satisfied at the time of, and with respect to, such reconveyance: (a) Lender shall have received all escrow, closing and recording costs, the costs of preparing and delivering such reconveyance and any sums then due and payable under the Loan Documents; and (b) Lender shall have received a written release satisfactory to Lender of any set aside letter, letter of credit or other form of undertaking which Lender has issued to any surety, governmental agency or any other party in connection with the Loan and/or the Property. Lender’s obligation to make further disbursements under the Loan shall terminate as to any portion of the Loan undisbursed as of the date of issuance of such release or reconveyance, and any commitment of Lender to lend any undisbursed portion of the Loan shall be canceled.

2.7 Partial Reconveyance of Property . At any time prior to the Maturity Date of the Loan, Lender shall, at Borrower’s request, issue a partial reconveyance from the lien of the Deed of Trust of one or more sites comprising the Property in accordance with the terms of the Deed of Trust.

2.8 Interest . Interest on the outstanding principal amount of the Loan shall be due and payable on the dates and at the rates specified in the Note. From and after May 15, 2015, no payment of the accrued interest under the Loan shall be required and instead such sum shall be capitalized each month. On the Maturity Date the Note shall be paid in full, including, without limitation, any capitalized interest thereon.

2.9 Principal .

(a) Mandatory Repayment . No repayment of the outstanding principal amount of the Loan shall be required during the term of the Loan so long as the Senior Loan remains outstanding. Following repayment in full of the Senior Loan, all proceeds owing Borrower under the Chesapeake Lease shall be remitted to Lender until the outstanding principal balance of the Note (as described therein) and all other sums due Lender under the Loan Documents have been paid in full.

(b) Election to Prepay . Borrower may prepay the Loan at any time without premium or penalty, subject to the terms of the Debt Subordination Agreement.

ARTICLE 3

DISBURSEMENT

3.1 Conditions Precedent . Lender’s obligation to make the disbursement of the Loan or take any other action under the Loan Documents shall be subject at all times to satisfaction of each of the following conditions precedent:

(a) There exists no Default, as defined in this Agreement, or Default as defined in any of the other Loan Documents or in the Other Related Documents, or event, omission or failure of condition which would constitute a Default after notice or lapse of time, or both; and

(b) Lender shall have received all Loan Documents, all Other Related Documents, other documents, instruments, policies, and forms of evidence or other materials requested by Lender under the terms of this Agreement or any of the other Loan Documents; and

(c) The Deed of Trust is a valid lien upon the Property and is prior and superior to all other liens and encumbrances thereon except the Senior Loan Documents and those approved by Lender in writing.

ARTICLE 4

[INTENTIONALLY OMITTED]

ARTICLE 5

[INTENTIONALLY OMITTED]

ARTICLE 6

INSURANCE

Borrower shall, while any obligation of Borrower under any Loan Document remains outstanding, maintain at Borrower’s sole expense, with licensed insurers approved by Lender, the following policies of insurance in form and substance satisfactory to Lender:

6.1 Title Insurance . A Title Policy in the approximate amount of $46,000,000 so that Borrower may avail itself of the Texas co-issuance rate regulations), together with any endorsements which Lender may require, insuring Lender, in the principal amount of the Loan, of the validity and the priority of the lien of the Deed of Trust upon the Property, subject only to the Senior Loan Documents and the matters approved by Lender in writing. During the term of the Loan, Borrower shall deliver to Lender, within ten (10) days of Lender’s written request, such other endorsements to the Title Policy as Lender may reasonably require with respect to the Property provided such endorsements are available in Texas.

6.2 Property Insurance . Borrower agrees to comply with Section 2.15 of the Senior Deed of Trust regarding insurance for the Mortgaged Property, which includes the obligation of Borrower to cause the tenant under the Chesapeake Lease to add Lender as an additional insured on its liability policy and to provide a certificate of insurance evidencing same to Lender.

ARTICLE 7

REPRESENTATIONS AND WARRANTIES

As a material inducement to Lender’s entry into this Agreement, Borrower represents and warrants to Lender as of the Effective Date and continuing thereafter that:

7.1 Authority/Enforceability . Borrower is in compliance with all laws and regulations applicable to its organization, existence and transaction of business and has all necessary rights and powers to own, improve and operate the Property as contemplated by the Loan Documents.

7.2 Binding Obligations . Borrower is authorized to execute, deliver and perform its obligations under the Loan Documents, and such obligations shall be valid and binding obligations of Borrower.

7.3 Formation and Organizational Documents . Borrower has delivered to Lender all formation and organizational documents of Borrower, the partners, joint venturers or members of Borrower (other than limited partners owning less than 11% of the interests of Borrower) if any, and all such formation and organizational documents remain in full force and effect and have not been amended or modified since they were delivered to Lender. Borrower shall immediately provide Lender with copies of any amendments or modifications of all such formation or organizational documents.

7.4 No Violation . Borrower’s execution, delivery, and performance under the Loan Documents do not: (a) require any consent or approval not heretofore obtained under any partnership agreement, operating agreement, articles of incorporation, bylaws or other document; (b) violate any governmental requirement applicable to the Property or any other statute, law, regulation or ordinance or any order or ruling of any court or governmental entity; (c) conflict with, or constitute a breach or default or permit the acceleration of obligations under any agreement, contract, lease, or other document by which Borrower is or the Property is bound or regulated; or (d) violate any statute, law, regulation or ordinance, or any order of any court or governmental entity.

7.5 Litigation . There are no claims, actions, suits, or proceedings pending, or to Borrower’s knowledge, threatened against Borrower or any Person in Control of Borrower.

7.6 No Material Adverse Change . There has been no material adverse change in the financial condition of Borrower since the dates of the latest financial statements furnished to Lender and, except as otherwise disclosed to Lender in writing, Borrower has not entered into any material transaction which is not disclosed in such financial statements.

7.7 Business Loan . The Loan is a business loan transaction in the stated amount solely for the purpose of carrying on the business of Borrower and none of the proceeds of the Loan will be used for the personal, family or agricultural purposes of Borrower.

7.8 Enforceability . The Loan Documents are not subject to any right of rescission, set-off, counterclaim or defense by Borrower, including the defense of usury, nor would the exercise of any of the terms of the Loan Documents, or the exercise of any right thereunder, render the Loan Documents unenforceable, and Borrower has not asserted any right of rescission, set-off, counterclaim or defense with respect thereto.

7.9 Survival of Representations . Borrower makes all of the representations and warranties set forth herein and in the other Loan Documents as of the date of this Agreement, the Effective Date and the date of each disbursement by Lender to Borrower of Loan proceeds, and agrees that all of the representations and warranties set forth herein and in the other Loan Documents shall survive for so long as any amount remains owing to Lender under this Agreement or any of the other Loan Documents. All representations, warranties, covenants and agreements made in this Agreement or in the other Loan Documents by Borrower shall be deemed to have been relied upon by Lender notwithstanding any investigation heretofore or hereafter made by Lender or on its behalf.

ARTICLE 8

HAZARDOUS MATERIALS

8.1 BORROWER HEREBY AGREES TO DEFEND, INDEMNIFY AND HOLD HARMLESS LENDER, ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, SUCCESSORS AND ASSIGNS FROM AND AGAINST ANY AND ALL LOSSES, DAMAGES, LIABILITIES, CLAIMS, ACTIONS, JUDGMENTS, COURT COSTS AND LEGAL OR OTHER EXPENSES (INCLUDING, WITHOUT LIMITATION, ATTORNEYS’ FEES AND EXPENSES) WHICH LENDER MAY INCUR AS A DIRECT OR INDIRECT CONSEQUENCE OF THE USE, GENERATION, MANUFACTURE, STORAGE, DISPOSAL, THREATENED DISPOSAL, TRANSPORTATION OR PRESENCE OF HAZARDOUS MATERIALS IN, ON, UNDER OR ABOUT THE PROPERTY. BORROWER SHALL IMMEDIATELY PAY TO LENDER UPON DEMAND ANY AMOUNTS OWING UNDER THIS INDEMNITY, TOGETHER WITH INTEREST FROM THE DATE THE INDEBTEDNESS ARISES UNTIL PAID AT THE RATE OF INTEREST APPLICABLE TO THE PRINCIPAL BALANCE OF THE NOTE. BORROWER’S DUTY AND OBLIGATIONS TO DEFEND, INDEMNIFY AND HOLD HARMLESS LENDER SHALL SURVIVE THE CANCELLATION OF THE NOTE AND THE RELEASE, RECONVEYANCE OR PARTIAL RECONVEYANCE OF THE DEED OF TRUST.

ARTICLE 9

COVENANTS OF BORROWER

9.1 Performance of Obligations . Borrower shall promptly pay and perform all of its obligations hereunder and under the other Loan Documents when due.

9.2 Expenses . Borrower shall immediately pay Lender upon demand all costs and expenses incurred by Lender in connection with (a) the administration of this Agreement, the other Loan Documents and Other Related Documents for the term of the Loan; and (b) the enforcement or satisfaction by Lender of any of Borrower’s obligations under this Agreement, the other Loan Documents or the Other Related Documents.

9.3 Opinion of Legal Counsel . Borrower shall provide, at Borrower’s expense, an opinion of legal counsel in form and content satisfactory to Lender to the effect that: (a) upon due authorization, execution and recordation or filing as may be specified in the opinion, each of the Loan Documents shall be legal, valid and binding instruments, enforceable against the makers thereof in accordance with their respective terms; (b) Borrower is duly formed and has all requisite authority to enter into the Loan Documents and Other Related Documents to which they are parties; and (c) such other matters, incident to the transactions contemplated hereby, as Lender may reasonably request.

9.4 Chesapeake . Borrower shall:

(a) promptly perform and/or observe (or cause to be performed and/or observed) all of the covenants and agreements required to be performed and observed by Borrower, as landlord, or Borrower under the Chesapeake Lease and do all things necessary to preserve and to keep unimpaired the material rights of Borrower thereunder; and

(b) promptly notify Lender of any default or notice of non-compliance received by Borrower or delivered to Borrower in connection with the Chesapeake Lease.

9.5 Actions to Maintain Property . Borrower shall:

(a) if the Note is mutilated, destroyed, lost, or stolen, promptly deliver to Lender, in substitution therefore, a new promissory note containing the identical terms and conditions as the Note with a notation thereon of the unpaid principal and accrued and unpaid interest;

(b) upon Lender’s reasonable request, execute, deliver, record and furnish such documents as Lender may reasonably deem necessary or desirable to (i) perfect and maintain perfected as valid liens upon the Property and all other collateral the liens granted by Borrower to Lender under the Loan Documents, (ii) correct any errors of a typographical nature or inconsistencies which may be contained in any of the Loan Documents, and (iii) consummate fully the transaction contemplated under this Agreement;

(c) except as expressly permitted by this Agreement or the Deed of Trust, not transfer any portion of the Property or the beneficial ownership thereof without the prior written consent of Lender;

(d) pay to Lender all fees and recording costs, the costs of preparing any necessary documents, including attorney’s fees if any, and any other reasonable costs and expense associated with Lender’s exercise of rights hereunder.

9.6 Proceedings . If any legal proceedings are commenced seeking to enjoin or otherwise prevent or declare unlawful the use, occupancy, operation or maintenance of the Property or any portion thereof, or seeking any judgment or other relief against Borrower, (a “ Proceeding ”), or if any other Proceedings are filed, which, in Borrower’s reasonable judgment, could, if adversely determined, have a material adverse affect on the operation or financial condition of the Property or Borrower, Borrower shall immediately notify Lender in writing and to the extent permitted by law. Borrower, at its sole expense, shall (i) cause all Proceedings to be vigorously contested in good faith and (ii) in the event of an adverse ruling or decision, prosecute all allowable appeals therefrom. Without limiting the generality of the foregoing, Borrower shall resist the entry or seek the stay of any temporary or permanent injunction that may be entered and use its best efforts to bring about a favorable and speedy disposition of all such proceedings, as well as any others.

9.7 Correction of Defects . Within a commercially reasonable period of time after Borrower acquires knowledge of or is given notice of a material defect in the Property or any departure from other requirements of this Agreement, Borrower shall commence and continue with diligence, or cause others to commence and continue with diligence, to correct all such defects and departures (including, without limitation, any corrective action necessary to perfect and maintain perfected as valid liens upon the Property and all other collateral the liens granted by Borrower to Lender under the Loan Documents). Borrower shall endeavor to complete, or cause to be completed, such corrections within thirty (30) days after Borrower acquires such knowledge or is given such notice, or, if such corrections cannot reasonably be completed within thirty (30) days then within sixty (60) days in total. Upon Borrower acquiring knowledge of such defect (other than as a result of written notice to Borrower from Lender), Borrower shall promptly advise Lender in writing of such matter and the measures being taken to make such corrections, along with an estimate of the time of completion.

9.8 Operation of the Property . Except as permitted by Section __ of the Senior Deed of Trust, Borrower shall not, without Lender’s prior written consent: (a) surrender, terminate or cancel, the Chesapeake Lease, (b) reduce or consent to the reduction of or extension of, the term of the Chesapeake Lease; or (c) otherwise modify, change, supplement, alter or amend, or waive or release, any of its respective rights and remedies under the Chesapeake Lease in any material respect; provided, however, that Borrower shall be allowed to modify Section 25 of the Chesapeake Lease in accordance with the proposed amendment approved by Senior Lender.

9.9 Financial Statements . Borrower agrees to deliver quarterly unaudited financial statements regarding Borrower's operations within 30 days following the close of each calendar quarter as well as an annual audited financial statement of Borrower's operations within 120 days following the expiration of Borrower's fiscal year.

9.10 Additional Indebtedness . Borrower shall not, without the prior written consent of Lender, create, incur or assume any secured or unsecured direct, indirect or contingent indebtedness, other than (a) the Loan and (b) the Senior Loan.

9.11 Organizational Matters; Dissolution . Borrower shall not, without the prior written consent of Lender, make any changes to its organizational documents, or, without the prior written consent of Lender, that would adversely affect Borrower’s ability to own and operate the Property or Borrower’s ability to perform the Secured Obligations. Borrower shall not dissolve, terminate its existence, liquidate, merge with or consolidate into another Person.

9.12 Other Business . Borrower shall not engage in any business other than the ownership and operation of the Property as it is currently operated, or create, incur, assume, guarantee, become or remain liable for any obligation or indebtedness (whether personal or nonrecourse, secured or unsecured, and whether owed to a third party or to an Affiliate).

9.13 Further Assurances . Upon Lender’s request and at Borrower’s sole cost and expense, Borrower shall execute, acknowledge and deliver any other instruments and perform any other acts in each case necessary, desirable or proper, as determined by Lender, to carry out the purposes of this Agreement and the other Loan Documents or to perfect and preserve any liens created by the Loan Documents.

9.14 Assignment . Without the prior written consent of Lender, Borrower shall not assign Borrower’s interest under any of the Loan Documents, or in any monies due or to become due thereunder, and any assignment without such consent shall be void.

ARTICLE 10

RESERVED

ARTICLE 11

DEFAULTS AND REMEDIES

11.1 Default . The occurrence of any one or more of the following shall constitute an event of default (“ Default ”) under this Agreement and the other Loan Documents:

(a) Monetary . Borrower’s failure to pay when due any sums payable under the Note or any of the other Loan Documents; or

(b) Performance of Obligations . Borrower’s failure to perform any obligation other than those set forth in Section 11.1(a) above under any of the Loan Documents when such obligation is to be performed; provided , however , that if a cure period is specifically provided in the applicable provision giving rise to such obligation, Borrower’s failure to perform will not constitute a Default until such date as the specified cure period expires and provided further that if no cure period is specifically provided, the no Default shall be deemed to have occurred until Borrower fails to cure following thirty (30) days notice from Lender.; or

(d) Voluntary Bankruptcy; Insolvency; Dissolution . (i) The filing of a petition by Borrower for relief under the Bankruptcy Code, or under any other present or future state or federal law regarding bankruptcy, reorganization, insolvency or other debtor relief law; (ii) the filing of any pleading or an answer by Borrower in any involuntary proceeding under the Bankruptcy Code or other debtor relief law which admits the jurisdiction of the court or the petition’s material allegations regarding Borrower’s insolvency; (iii) a general assignment by Borrower for the benefit of creditors; or (iv) Borrower applying for, or the appointment of, a receiver, trustee, custodian, liquidator or similar official with respect to Borrower or any of its property; or

(e) Involuntary Bankruptcy . The failure of Borrower to effect a full dismissal of any involuntary petition under the Bankruptcy Code or under any other debtor relief law that is filed against Borrower or in any way restrains or limits Borrower or Lender regarding the Loan or the Property, prior to the earlier of the entry of any court order granting relief sought in such involuntary petition, or sixty (60) days after the date of filing of such involuntary petition; or

(f) Change In Management or Control . Lender determines that Michael Mallick is not, at any time, in Control of Borrower or any entity that controls Borrower; or

(g) Loss of Priority . The failure at any time of the Deed of Trust to be a valid second lien upon the Property or any portion thereof, other than as a result of any release or reconveyance of the Deed of Trust with respect to all or any portion of the Property pursuant to the terms and conditions of this Agreement; or

(h) Transfer of Assets or Ownership Interests . The sale, assignment, pledge, hypothecation, mortgage or transfer of all or a substantial portion of assets of Borrower or the ownership interests in Borrower except to the extent expressly permitted by the terms of the Senior Loan.

(i) Default Under Chesapeake Lease . The occurrence of a default by Borrower, as landlord, under the Chesapeake Lease that extends beyond any applicable cure period provided for therein; or

(s) Termination of Chesapeake Lease . The termination of the Chesapeake Lease; or

(t) Default under Other Loan Documents or Other Related Documents . The occurrence of a default under any other Loan Document or under any Other Related Document to the extent not already covered in the previous subsections above and following receipt of written notice and a period of thirty (30) days to cure same; or

(u) Acceleration Upon Default; Remedies . Upon the occurrence of any Default specified in this Article, Lender may, at its sole option, declare all sums owing to Lender under the Note, this Agreement and the other Loan Documents immediately due and payable. Upon such acceleration, Lender may, in addition to all other remedies permitted under this Agreement and the other Loan Documents and at law or equity, apply any sums in the Account to the sums owing under the Loan Documents and any and all obligations of Lender to fund further disbursements under the Loan shall terminate.

11.2 Disbursements to Third Parties . Upon the occurrence of a Default occasioned by Borrower’s failure to pay money to a third party as required by this Agreement, Lender may but shall not be obligated to make such payment from the Loan proceeds or other funds of Lender. If such payment is made from proceeds of the Loan, Borrower shall immediately deposit with Lender, upon written demand, an amount equal to such payment. If such payment is made from funds of Lender, Borrower shall immediately repay such funds upon written demand of Lender. In either case, the Default with respect to which any such payment has been made by Lender shall not be deemed cured until such deposit or repayment (as the case may be) has been made by Borrower to Lender.

11.3 Repayment of Funds Advanced . Any funds expended by Lender in the exercise of its rights or remedies under this Agreement and the other Loan Documents shall be payable to Lender upon demand, together with interest at the rate applicable to the principal balance of the Note from the date the funds were expended.

11.4 Rights Cumulative, No Waiver . All Lender’s rights and remedies provided in this Agreement and the other Loan Documents, together with those granted by law or at equity, are cumulative and may be exercised by Lender at any time. Lender’s exercise of any right or remedy shall not constitute a cure of any Default unless all sums then due and payable to Lender under the Loan Documents are repaid and Borrower has cured all other Defaults. No waiver shall be implied from any failure of Lender to take, or any delay by Lender in taking, action concerning any Default or failure of condition under the Loan Documents, or from any previous waiver of any similar or unrelated Default or failure of condition. Any waiver or approval under any of the Loan Documents must be in writing and shall be limited to its specific terms.

ARTICLE 12

[INTENTIONALLY OMITTED]

ARTICLE 13

DUE ON SALE/ENCUMBRANCE

13.1 Property Transfers .

(a) Prohibited Property Transfers . Borrower shall not cause or permit any Transfer of all or any part of or any direct or indirect legal or beneficial interest in the Property or the collateral (collectively, a “ Prohibited Property Transfer ”), including, without limitation, (i) a Lease of all or a material part of the Property for any purpose other than actual occupancy by a space tenant; and (ii) the Transfer of all or any part of Borrower’s right, title and interest in and to the Chesapeake Lease.

13.2 Equity Transfers .

(a) Prohibited Equity Transfers . Borrower shall not permit any direct or indirect holder or owner of an equity, ownership, membership, partnership, or voting interest in the Grantor (an “Existing Owner”) to sell, transfer, exchange or otherwise dispose of such interest in any transaction or series of transactions except as expressly permitted by the terms of the Senior Loan Documents.

13.3 Certificates of Ownership . Borrower shall deliver to Lender, at any time and from time to time, not more than five (5) days after Lender’s written request therefor, a certificate, in form acceptable to Lender, signed and dated by Borrower, listing the names of all Persons holding direct or indirect legal or beneficial interests in the Property.

ARTICLE 14

MISCELLANEOUS PROVISIONS

14.1 Indemnity . BORROWER HEREBY AGREES TO DEFEND, INDEMNIFY AND HOLD HARMLESS LENDER, ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, SUCCESSORS AND ASSIGNS FROM AND AGAINST ANY AND ALL LOSSES, DAMAGES, LIABILITIES, CLAIMS, ACTIONS, JUDGMENTS, COURT COSTS AND LEGAL OR OTHER EXPENSES (INCLUDING, WITHOUT LIMITATION, ATTORNEYS’ FEES AND EXPENSES) WHICH LENDER MAY INCUR AS A DIRECT OR INDIRECT CONSEQUENCE OF: (A) THE PURPOSE TO WHICH BORROWER APPLIES THE LOAN PROCEEDS; (B) THE FAILURE OF BORROWER TO PERFORM ANY OBLIGATIONS AS AND WHEN REQUIRED BY THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; (C) ANY FAILURE AT ANY TIME OF ANY OF BORROWER’S REPRESENTATIONS OR WARRANTIES TO BE TRUE AND CORRECT IN ALL MATERIAL RESPECTS; OR (D) ANY ACT OR OMISSION BY BORROWER WITH RESPECT TO ANY OF THE PROPERTY. BORROWER SHALL IMMEDIATELY PAY TO LENDER UPON DEMAND ANY AMOUNTS OWING UNDER THIS INDEMNITY, TOGETHER WITH INTEREST FROM THE DATE THE INDEBTEDNESS ARISES UNTIL PAID AT THE RATE OF INTEREST APPLICABLE TO THE PRINCIPAL BALANCE OF THE NOTE. BORROWER’S DUTY AND OBLIGATIONS TO DEFEND, INDEMNIFY AND HOLD HARMLESS LENDER SHALL SURVIVE CANCELLATION OF THE NOTE AND THE RELEASE, RECONVEYANCE OR PARTIAL RECONVEYANCE OF THE DEED OF TRUST.

14.2 Form of Documents . The form and substance of all documents, instruments, and forms of evidence to be delivered to Lender under the terms of this Agreement and any of the other Loan Documents shall be subject to Lender’s approval and shall not be modified, superseded or terminated in any respect without Lender’s prior written approval.

14.3 No Third Parties Benefited . No Person other than Lender and Borrower and their permitted successors and assigns shall have any right of action under any of the Loan Documents.

14.4 Notices . All notices, demands, or other communications under this Agreement and the other Loan Documents shall be in writing and shall be delivered to the appropriate party at the address set forth on the signature page of this Agreement (subject to change from time to time by written notice to all other parties to this Agreement). All notices, demands or other communications shall be considered as properly given if delivered personally or sent by first class United States Postal Service mail, postage prepaid, except that notice of Default may be sent by certified mail, return receipt requested, or by Overnight Express Mail or by overnight commercial courier service, charges prepaid. Notices so sent shall be effective three (3) days after mailing, if mailed by first class mail, and otherwise upon receipt; provided , however , that non-receipt of any communication as the result of any change of address of which the sending party was not notified or as the result of a refusal to accept delivery shall be deemed receipt of such communication.

14.5 Attorney-in-Fact . Following an Event of Default, Borrower hereby irrevocably appoints and authorizes Lender, as Borrower’s attorney-in-fact, which agency is coupled with an interest, to execute and/or record in Lender’s or Borrower’s name any notices, instruments or documents that Lender deems appropriate to protect Lender’s interest under any of the Loan Documents.

14.6 Actions . Borrower agrees that Lender, in exercising the rights, duties or liabilities of Lender or Borrower under the Loan Documents, may commence, appear in or defend any action or proceeding purporting to affect the Property or the Loan Documents, and Borrower shall immediately reimburse Lender upon demand for all such expenses so incurred or paid by Lender, including, without limitation, attorneys’ fees and expenses and court costs.

14.7 Right of Contest . Borrower may contest in good faith any claim, demand, levy or assessment by any Person other than Lender which would constitute a Default if: (a) Borrower pursues the contest diligently, in a manner which Lender determines is not prejudicial to Lender, and does not impair the rights of Lender under any of the Loan Documents; and (b) Borrower deposits with Lender any funds or other forms of assurance which Lender in good faith determines from time to time appropriate to protect Lender from the consequences of the contest being unsuccessful. Borrower’s compliance with this Section shall operate to prevent such claim, demand, levy or assessment from becoming a Default.

14.8 Relationship of Parties . The relationship of Borrower and Lender under the Loan Documents is, and shall at all times remain, solely that of borrower and lender, and Lender neither undertakes nor assumes any responsibility or duty to Borrower or to any third party with respect to the Property, except as expressly provided in this Agreement and the other Loan Documents.

14.9 Delay Outside Lender’s Control . Lender shall not be liable in any way to Borrower or any third party for Lender’s failure to perform or delay in performing under the Loan Documents (and Lender may suspend or terminate all or any portion of Lender’s obligations under the Loan Documents) if such failure to perform or delay in performing results directly or indirectly from, or is based upon, the action, inaction, or purported action, of any governmental or local authority, or because of war, rebellion, insurrection, strike, lock-out, boycott or blockade (whether presently in effect, announced or in the sole judgment of Lender deemed probable), or from any Act of God or other cause or event beyond Lender’s control.

14.10 Attorneys’ Fees and Expenses; Enforcement . If any attorney is engaged by Lender to enforce or defend any provision of this Agreement, any of the other Loan Documents or Other Related Documents, or as a consequence of any Default under the Loan Documents, with or without the filing of any legal action or proceeding, and including, without limitation, any fees and expenses incurred in any bankruptcy proceeding of Borrower, then Borrower shall immediately pay to Lender, upon demand, the amount of all attorneys’ fees and expenses and all costs incurred by Lender in connection therewith, together with interest thereon from the date of such demand until paid at the rate of interest applicable to the principal balance of the Note as specified therein.

14.11 Immediately Available Funds . Unless otherwise expressly provided for in this Agreement, all amounts payable by Borrower to Lender shall be payable only in United States currency, immediately available funds.

14.12 Lender’s Consent . Wherever in this Agreement there is a requirement for Lender’s consent and/or a document to be provided or an action taken “to the satisfaction of Lender”, it is understood by such phrase that any such action shall not be binding upon Lender unless its consent, right or judgment is exercised in writing in a reasonable manner given the specific facts and circumstance applicable at the time.

14.13 Lender’s Agents . Lender may designate an agent or independent contractor to exercise any of Lender’s rights under this Agreement and any of the other Loan Documents. Any reference to Lender in any of the Loan Documents shall include Lender’s agents, employees or independent contractors. Borrower shall pay the costs of such agent or independent contractor either directly to such Person or to Lender in reimbursement of such costs, as applicable.

14.14 Severability . If any provision or obligation under this Agreement and the other Loan Documents shall be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that provision shall be deemed severed from the Loan Documents and the validity, legality and enforceability of the remaining provisions or obligations shall remain in full force as though the invalid, illegal, or unenforceable provision had never been a part of the Loan Documents, provided , however , that if the rate of interest or any other amount payable under the Note or this Agreement or any other Loan Document, or the right of collectability therefore, are declared to be or become invalid, illegal or unenforceable, Lender’s obligations to make advances under the Loan Documents shall not be enforceable by Borrower.

14.15 Heirs, Successors and Assigns . Except as otherwise expressly provided under the terms and conditions of this Agreement, the terms of the Loan Documents shall bind and inure to the benefit of the heirs, successors and assigns of the parties.

14.16 Time . Time is of the essence of each and every term of this Agreement.

14.17 Headings . All article, section or other headings appearing in this Agreement and any of the other Loan Documents are for convenience of reference only and shall be disregarded in construing this Agreement and any of the other Loan Documents.

14.18 Governing Law .

(a) THIS AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS ARISING HEREUNDER AND THEREUNDER, AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO THIS AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS, THE RELATIONSHIP OF THE PARTIES HEREUNDER AND THEREUNDER, AND/OR THE INTERPRETATION AND ENFORCEMENT OF THE RIGHTS AND DUTIES OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE (WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS) AND ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA.

(b) ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR BORROWER ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY AT LENDER’S OPTION BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN THE STATE OF TEXAS AND BORROWER WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING.

14.19 Modification, Waiver in Writing . No modification, amendment, extension, discharge, termination or waiver of any provision of this Agreement or of any other Loan Document, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in a writing signed by the party against whom enforcement is sought, and then such waiver or consent shall be effective only in the specific instance, and for the purpose, for which given. Except as otherwise expressly provided herein, no notice to, or demand on Borrower, shall entitle Borrower to any other or future notice or demand in the same, similar to other circumstances.

14.20 USA Patriot Act Notice, Compliance. The USA Patriot Act of 2001 (Public Law 107-56) and federal regulations issued with respect thereto require all financial institutions to obtain, verify and record certain information that identifies individuals or business entities which open an “account” with such financial institution. Consequently, Lender may from time to time request, and Borrower shall provide to Lender, Borrower’s name, address, tax identification number and/or such other identification information as shall be necessary for Lender to comply with federal law. An “account” for this purpose may include, without limitation, a deposit account, cash management service, a transaction or asset account, a credit account, a loan or other extension of credit, and/or other financial services product.

14.21 Integration; Interpretation . The Loan Documents contain or expressly incorporate by reference the entire agreement of the parties with respect to all matters related to the Loan and supersede all prior negotiations or agreements, written or oral. The Loan Documents shall not be modified except by written instrument executed by all parties. Any reference to the Loan Documents includes any amendments, renewals or extensions now or hereafter approved by Lender in writing.

14.22 Counterparts . To facilitate execution, this document may be executed in as many counterparts as may be convenient or required. It shall not be necessary that the signature of, or on behalf of, each party, or that the signature of all Persons required to bind any party, appear on each counterpart. All counterparts shall collectively constitute a single document. It shall not be necessary in making proof of this document to produce or account for more than a single counterpart containing the respective signatures of, or on behalf of, each of the parties hereto. Any signature page to any counterpart may be detached from such counterpart without impairing the legal effect of the signatures thereon and thereafter attached to another counterpart identical thereto except having attached to it additional signature pages.

[Signatures Appear on the Next Page]

IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement as of the date appearing on the first page of this Agreement.

“ LENDER ”

APPLE NINE VENTURES OWNERSHIP, INC., a Virginia corporation

By: /s/ David Buckley

Name: David Buckley

Title: Vice President

Lender’s Address:

Apple Nine Ventures Ownership, Inc.

814 E. Main Street

Richmond, VA 23219

Attention: Bryan Peery

with a copy to:

Apple REIT Nine, Inc.

814 E. Main Street

Richmond, VA 23219

Attention: David P. Buckley

“ BORROWER ”

111 Realty Investors, LP , a Texas limited partnership

By: 111 GP, Inc., a Texas corporation, its general partner

By: /s/ Michael J. Mallick

Name: Michael J. Mallick

Title: President

A-1

EXHIBIT A - DESCRIPTION OF PROPERTY

That certain Real Property set forth in the conveyance deeds of even date herewith from Lender, as seller, to Borrower, as buyer.

A-2

EXHIBIT B - DOCUMENTS

Exhibit B to LOAN AGREEMENT between 111 Realty Partners, L.P., as “Borrower”, and Apple Nine Ventures Ownership, Inc., as “Lender”, dated as of April 27, 2012.

Loan Documents . The documents listed below, numbered 1.1 through 1.5, inclusive, and amendments, modifications and supplements thereto which have received the prior written consent of Lender, together with any documents executed in the future that are approved by Lender and that recite that they are “Loan Documents” for purposes of this Agreement are collectively referred to herein as the Loan Documents.

1.1

This Agreement.

1.2

The Junior Secured Note of even date herewith in the original principal amount of the Loan made by Borrower payable to the order of Lender.

1.3

The Deeds of Trust of even date herewith executed by Borrower, as trustor, to William Woodall, Esq., as Trustee, for the benefit of Lender, as Beneficiary, with respect to the Property.

1.4

Uniform Commercial Code National UCC Financing Statement (Form UCC-1) of even date herewith naming Borrower as Debtor and Lender as Secured Party, to be filed in the Office of the Secretary of State of the State of Texas.

1.5

Debt Subordination Agreement by and between Senior Lender and Lender.

I, Glade M. Knight, certify that:

1. I have reviewed this report on Form 10-Q of Apple REIT Nine, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: August 13, 2012		/s/ G LADE M. K NIGHT
		Glade M. Knight Chief Executive Officer
		APPLE REIT NINE, Inc.

I, Bryan Peery, certify that:

1. I have reviewed this report on Form 10-Q of Apple REIT Nine, Inc.;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.


Date: August 13, 2012		/s/ B RYAN P EERY
		Bryan Peery Chief Financial Officer APPLE REIT NINE, Inc.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Apple REIT Nine, Inc., (the “Company”) on Form 10-Q for the quarter ending June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of June 30, 2012, and for the period then ended.

/s/ G LADE M. K NIGHT
Glade M. Knight
Chief Executive Officer

/s/ B RYAN P EERY
Bryan Peery
Chief Financial Officer

August 13, 2012

			Page Number
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheets – June 30, 2012 and December 31, 2011	3
		Consolidated Statements of Operations - Three and six months ended June 30, 2012 and 2011	4
		Consolidated Statements of Cash Flows – Six months ended June 30, 2012 and 2011	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
	Item 4.	Controls and Procedures	27
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
	Item 6.	Exhibits	30
Signatures			31