SUMMIT HOTEL PROPERTIES LLC - FORM 10-Q

Attached files

file	filename
EX-31.2 - SUMMIT HOTEL PROPERTIES LLC	v201800_ex31-2.htm
EX-31.1 - SUMMIT HOTEL PROPERTIES LLC	v201800_ex31-1.htm
EX-32.1 - SUMMIT HOTEL PROPERTIES LLC	v201800_ex32-1.htm
EX-32.2 - SUMMIT HOTEL PROPERTIES LLC	v201800_ex32-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2010

¨ 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: 000-51955

SUMMIT HOTEL PROPERTIES, LLC

(Exact name of registrant as specified in its charter)

South Dakota

(State or other jurisdiction

of incorporation or organization)

20-0617340

(I.R.S. Employer Identification No.)

2701 South Minnesota Avenue, Suite 6

Sioux Falls, SD 57105

(Address of principal executive

offices, including zip code)

(605) 361-9566

(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. x Yes o No

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 ¨ 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 in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer x	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 x No

The number of Class A Membership Units outstanding as of November 12, 2010, was 1,166.62 and the number of Class A-1 Membership Units outstanding as of November 12, 2010, was 437.83.

TABLE OF CONTENTS

		Page
	PART I	3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (Unaudited)	4
	Condensed Consolidated Statement of Changes in Members’ Equity for the nine months ended September 30, 2010 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28

	PART II	29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Removed and Reserved	30
Item 5.	Other Information	30
Item 6.	Exhibits	31
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32.1
	Exhibit 32.2

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

SUMMIT HOTEL PROPERTIES, LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2010 (Unaudited) AND DECEMBER 31, 2009

	2010			2009
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	11,247,069		$	8,239,225
Restricted cash		2,556,224			1,755,053
Trade receivables		4,772,974			2,608,198
Prepaid expenses and other		3,529,906			1,416,480
Total current assets		22,106,173			14,018,956

PROPERTY AND EQUIPMENT, NET		454,982,656			482,767,601

OTHER ASSETS
Deferred charges and other assets, net		4,670,836			4,828,185
Land held for sale		23,242,004			12,226,320
Other noncurrent assets		4,027,649			4,074,179
Restricted cash		939,465			331,190
Total other assets		32,879,954			21,459,874

TOTAL ASSETS	$	509,968,783		$	518,246,431

LIABILITIES AND MEMBERS’ EQUITY

CURRENT LIABILITIES
Current portion of long-term debt	$	146,378,800		$	134,370,900
Lines of credit		19,992,785			21,457,943
Accounts payable		1,290,568			1,088,265
Related party accounts payable		436,953			494,248
Accrued expenses		12,204,358			9,182,013
Total current liabilities		180,303,464			166,593,369

LONG-TERM DEBT, NET OF CURRENT PORTION		255,826,259			270,353,750

COMMITMENTS AND CONTINGENCIES

MEMBERS’ EQUITY
Class A, 1,166.62 units issued and outstanding		56,678,580			59,961,958
Class A-1, 437.83 units issued and outstanding		33,589,994			34,244,056
Class B, 81.36 units issued and outstanding		1,294,277			1,804,718
Class C, 173.60 units issued and outstanding		(16,099,328	)		(13,086,957	)
Total Summit Hotel Properties, LLC members’ equity		75,463,523			82,923,775
Noncontrolling interest		(1,624,463	)		(1,624,463	)
Total equity		73,839,060			81,299,312

TOTAL LIABILITIES AND MEMBERS’ EQUITY	$	509,968,783		$	518,246,431

See Note to Condensed Consolidated Financial Statements

SUMMIT HOTEL PROPERTIES, LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

	Three Months Ended						Nine Months Ended
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009

REVENUES
Room revenues	$	36,935,600		$	31,620,101		$	102,874,263		$	91,095,662
Other hotel operations revenues		664,897			590,321			1,938,680			1,708,635
		37,600,497			32,210,422			104,812,943			92,804,297

COSTS AND EXPENSES
Direct hotel operations		12,324,874			10,942,625			35,351,300			31,415,257
Other hotel operating expenses		4,879,357			4,413,378			14,056,399			12,564,374
General, selling and administrative		6,713,018			5,890,767			18,810,080			17,861,695
Repairs and maintenance		1,321,522			1,411,181			3,395,690			5,048,783
Depreciation and amortization		6,805,779			5,601,084			20,327,601			16,984,804
Loss on impairment of assets		-			6,504,925			-			6,504,925
		32,044,550			34,763,960			91,941,070			90,379,838

INCOME FROM OPERATIONS		5,555,947			(2,553,538	)		12,871,873			2,424,459

OTHER INCOME (EXPENSE)
Interest income		12,055			10,770			35,614			29,189
Interest expense		(6,818,469	)		(4,301,651	)		(19,519,570	)		(12,639,306	)
Gain (loss) on disposal of assets		(334	)		(28,895	)		(39,723	)		(4,335	)
		(6,806,748	)		(4,319,776	)		(19,523,679	)		(12,614,452	)

INCOME (LOSS) FROM CONTINUING OPERATIONS		(1,250,801	)		(6,873,314	)		(6,651,806	)		(10,189,993	)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS		-			(335,736	)		-			1,464,808

NET INCOME (LOSS) BEFORE INCOME TAXES		(1,250,801	)		(7,209,050	)		(6,651,806	)		(8,725,185	)

STATE INCOME TAX EXPENSE		(45,000	)		(20,370	)		(273,185	)		(20,370	)

NET INCOME (LOSS)		(1,295,801	)		(7,229,420	)		(6,924,991	)		(8,745,555	)

NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST		-			393,240			-			207,328

NET INCOME (LOSS) ATTRIBUTABLE TO SUMMIT HOTEL PROPERTIES, LLC	$	(1,295,801	)	$	(7,622,660	)	$	(6,924,991	)	$	(8,952,883	)

BASIC AND DILUTED EARNINGS PER $100,000 CAPITAL UNIT	$	(696.89	)	$	(4,322.04	)	$	(3,724.29	)	$	(5,243.52	)

WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING FOR CALCULATION OF BASIC AND DILUTED EARNINGS PER CAPITAL UNIT (based on $100,000 investment)		1,859.41			1,763.67			1,859.41			1,707.42

See Note to Condensed Consolidated Financial Statements

SUMMIT HOTEL PROPERTIES, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 (Unaudited)

																		Equity
	# of																	Attributable to
	Capital																	Noncontrolling
	Units		Class A			Class A-1			Class B			Class C			Total			Interest

BALANCES, JANUARY 1, 2010		1,859.41	$	59,961,958		$	34,244,056		$	1,804,718		$	(13,086,957	)	$	82,923,775		$	(1,624,463	)

Net Income (Loss)		-		(2,889,660	)		(512,519	)		(510,441	)		(3,012,371	)		(6,924,991	)		-

Distributions to members		-		(393,718	)		(141,543	)		-			-			(535,261	)		-

BALANCES, SEPTEMBER 30, 2010		1,859.41	$	56,678,580		$	33,589,994		$	1,294,277		$	(16,099,328	)	$	75,463,523		$	(1,624,463	)

See Note to Condensed Consolidated Financial Statements

SUMMIT HOTEL PROPERTIES, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

	2010			2009

OPERATING ACTIVITIES
Net income (loss)	$	(6,924,991	)	$	(8,745,555	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization		20,327,601			17,138,752
Amortization of prepaid lease		35,550			-
Unsuccessful project costs		-			1,065,840
(Gain) loss on disposal of assets		39,723			(1,297,488	)
Loss on impairment of assets		-			6,504,925
Changes in current assets and liabilities:
Trade receivables		(2,164,776	)		(1,308,463	)
Prepaid expenses and other		(2,113,426	)		1,417,544
Accounts payable and related party accounts payable		145,008			(5,613,554	)
Accrued expenses		3,022,345			147,857
Restricted cash released (funded)		(801,171	)		(699,681	)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		11,565,863			8,610,177

INVESTING ACTIVITIES
Land and hotel acquisitions and construction in progress		(1,191,422	)		(10,167,860	)
Purchases of other property & equipment		(1,050,096	)		(9,809,112	)
Proceeds from asset dispositions, net of closing costs		10,980			207,814
Restricted cash released (funded)		(608,275	)		717,903

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(2,838,813	)		(19,051,255	)

FINANCING ACTIVITIES
Proceeds from issuance of long-term debt		4,271,847			-
Principal payments on long-term debt		(6,791,438	)		(5,185,186	)
Financing fees on long-term debt		(1,199,196	)		(614,092	)
Proceeds from issuance of notes payable and line of credit		-			4,598,831
Principal payments on notes payable and line of credit		(1,465,158	)		(276,329	)
Proceeds from equity contributions		-			12,385,707
Distributions to members		(535,261	)		(8,999,279	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(5,719,206	)		1,909,652

NET CHANGE IN CASH AND CASH EQUIVALENTS		3,007,844			(8,531,426	)

CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD		8,239,225			18,153,435

END OF PERIOD	$	11,247,069		$	9,622,009

See Note to Condensed Consolidated Financial Statements

SUMMIT HOTEL PROPERTIES, LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

	2010			2009

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash payments for interest, net of the amounts capitalized below	$	19,069,854		$	12,653,385

Interest capitalized	$	-		$	2,786,468

Cash payments for state income taxes, net of refunds	$	(3,726	)	$	512,810

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL INFORMATION:

Construction in progress financed through related party accounts payable	$	-		$	1,098,940

Construction in progress financed through accounts payable	$	-		$	5,130,917

Construction in progress financed through issuance of debt	$	-		$	44,489,363

Issuance of long-term debt to refinance existing long-term debt	$	-		$	8,440,000

Conversion of debt to equity	$	-		$	3,449,150

Sale proceeds used to payoff long-term debt	$	-		$	6,134,285

See Note to Condensed Consolidated Financial Statements

SUMMIT HOTEL PROPERTIES, LLC

NOTE TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

NOTE 1 -

SELECTED SUPPLEMENTARY INFORMATION

Basis of Presentation

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on interim periods. Accordingly, certain information and footnotes required by the accounting principles generally accepted in the United States for complete financial statements have been omitted. Interim results may not be indicative of fiscal year performance because of seasonal and other factors. These interim statements should be read in conjunction with the financial statements and notes thereto included in our Form 10-K filing for the year ended December 31, 2009. In management’s opinion, all adjustments made were normal and recurring in nature and were necessary for a fair statement of the results of the interim period. The December 31, 2009 balance sheet has been derived from the Company’s audited financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

The condensed consolidated financial statements include the accounts of the Company and Summit Group of Scottsdale, Arizona, LLC. The effects of all intercompany accounts and transactions have been eliminated. The Company is a Class A Member and receives a 10% priority distribution on their capital contribution before distributions to other classes. Class A members may also receive additional operating distributions based on their Sharing Ratio. These additional distributions are determined by the managing member and are based on excess cash from operations after normal operating expenses, loan payments, priority distributions, and reserves. Any income generated by the LLC is first allocated to Class A members up to the 10% priority return, therefore, there was no income allocated to the noncontrolling interest during the first three quarters of 2010.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform with current year presentation.

Adopted Accounting Standards

In January 2010, the Financial Accounting Standards Board (FASB) issued an update (ASU No. 2010-06) to Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, to improve disclosure requirements regarding transfers, classes of assets and liabilities, and inputs and valuation techniques. This update is effective for interim and annual reporting periods beginning after December 15, 2009. The Company adopted this ASC update on January 1, 2010, and it had no material impact on the consolidated financial statements.

In February 2010, the FASB issued an update (ASU No. 2010-09) to ASC 855, Subsequent Events, by removing the requirement for an SEC filer to disclose the date through which that filer had evaluated subsequent events. The Company has adopted this change and therefore has removed the related disclosure from the “Basis of Presentation.”

SUMMIT HOTEL PROPERTIES, LLC

NOTE TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

Future Adoption of Accounting Standards

Certain provisions of ASU No. 2010-06 to ASC 820, Fair Value Measurements and Disclosures, related to separate line items for all purchases, sales, issuances, and settlements of financial instruments valued using Level 3 are effective for fiscal years beginning after December 15, 2010. The Company does not believe that this adoption will have a material impact on the financial statements or disclosures.

Fair Value

The Company adopted the provisions of FASB ASC 820, Fair Value Measurements and Disclosures, effective January 1, 2008. FASB ASC 820 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. Fair value is defined under generally accepted accounting principles as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value, as required by Topic 820 of the FASB ASC, must maximize the use of observable inputs and minimize the use of unobservable inputs.

Our estimates of the fair value of financial instruments as of September 30, 2010, were determined using available market information and appropriate valuation methods, including discounted cash flow analysis. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

The carrying amounts of cash and cash equivalents, restricted cash, receivables, accounts payable and other liabilities approximate fair value due to the short-term nature of these instruments.

As of September 30, 2010, the fair value of our consolidated mortgage and other secured and unsecured loans aggregates $408,800,880, compared to the aggregate carrying value of $422,197,844 on our condensed consolidated balance sheet. The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of the debt obligation with similar terms.

Long-Lived Assets and Impairment

The Company applies the provisions of FASB ASC 360, Property Plant and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FASB ASC 360 requires a long-lived asset to be sold to be classified as “held for sale” in the period in which certain criteria are met, including that the sale of the asset within one year is probable and is recorded at the lower of its carrying amount or fair value less cost to sell. FASB ASC 360 also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held for sale be reported in discontinued operations if the operations and cash flows of the component have been or will be eliminated from the Company’s ongoing operations.

The Company periodically reviews the carrying value of its long-term assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company would estimate the undiscounted sum of the expected cash flows of such assets to determine if such sum is less than the carrying value of such assets to ascertain if an impairment exists. If an impairment exists, the Company would determine the fair value by using quoted market prices, if available for such assets, or if quoted market prices are not available, the Company would discount the expected future cash flows of such assets and adjust the carrying amount to fair value.

SUMMIT HOTEL PROPERTIES, LLC

NOTE TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

Assets Held for Sale

As a part of regular policy, the Company periodically reviews hotels based on established criteria such as age of hotel property, type of franchise associated with hotel property, and adverse economic and competitive conditions in the region surrounding the property to determine if any hotels should be classified as held for sale.

The Company performs a comprehensive review of its investment strategy and of its existing hotel portfolio to identify properties which the Company believes is either non-core or no longer complement the business as required by FASB ASC 360. The Company has committed to sell nine parcels of land that were originally purchased for development and thus, those parcels of land are recorded as assets held for sale as of September 30, 2010.

Assets held for sale at September 30, 2010 and December 31, 2009 are comprised of the following:

	2010		2009

Land	$	23,242,004	$	12,226,320

Discontinued Operations

The Company has reclassified its condensed consolidated financial statements of operations for the three and nine month periods ended September 30, 2009, as a result of implementing FASB ASC 360, to reflect discontinued operations of two consolidated hotel properties sold during the period, or to be sold pursuant to the plan for hotel dispositions. This classification has no impact on the Company’s net income or the net income per capital unit. The two hotel properties are located in St. Joseph, MO and Ellensburg, WA. These hotels were sold during 2009 for approximately $6,810,000.

Condensed financial information of the results of operations for these hotel properties included in discontinued operations for the three and nine month periods ended September 30, 2009 are as follows:

SUMMIT HOTEL PROPERTIES, LLC

NOTE TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

	Three Months Ended			Nine Months Ended
	September 30, 2009			September 30, 2009

REVENUES	$	166,648		$	1,133,690

COSTS AND EXPENSES
Direct hotel operations		50,254			348,065
Other hotel operating expenses		21,454			135,122
General, selling and administrative		69,093			258,495
Repairs and maintenance		3,143			36,091
Depreciation and amortization		61,442			153,948
		205,386			931,721

INCOME FROM OPERATIONS		(38,738	)		201,969

OTHER INCOME (EXPENSE)
Interest income		-			116
Interest expense		(3,935	)		(39,100	)
Gain (loss) on disposal of assets		(293,063	)		1,301,823
		(296,998	)		1,262,839

INCOME (LOSS) FROM DISCONTINUED OPERATIONS	$	(335,736	)	$	1,464,808

Acquisitions

The Company accounts for its acquisitions of hotels as a business combination under the acquisition method of accounting. Acquisition costs are expensed as incurred. The Company allocates the cost of the acquired entity to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To determine fair value of the various components acquired, the Company engages independent valuation consultants and other third-party real-estate appraisals as necessary. The Company allocates the cost of the acquired property based upon the relative fair values of the various components contained in the appraisals. The excess of the cost of the acquisition over the fair value will be assigned to intangible assets if the intangible asset is separable and if it arises from a contractual or other legal right. Any remaining excess of the cost of acquisition over fair values assigned to separable assets is recognized as goodwill.

Accrued Expenses

Accrued expenses at September 30, 2010 and December 31, 2009 are as follows:

	2010		2009

Accrued taxes	$	6,747,664	$	5,238,690
Accrued salaries and benefits		2,051,301		1,400,729
Accrued interest		1,753,715		1,303,999
Other accrued expenses		1,651,678		1,238,595

	$	12,204,358	$	9,182,013

SUMMIT HOTEL PROPERTIES, LLC

NOTE TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

SEPTEMBER 30, 2010

Note Obligations

The Fortress Credit Corp. note with a current balance of $86,075,691 has a scheduled maturity date of March 5, 2011, so it has been included in the current maturities section of the condensed consolidated balance sheet. The renewed note has an interest rate of 30 day LIBOR plus 575 bps, plus a 3% capitalized spread. The interest rate at September 30, 2010 was 10.75%.

As of September 30, 2010, the Company has $166,371,585 of debt due in the next twelve months, of which $159,014,760 represents maturing debt and $7,356,825 represents other scheduled principal payments. We intend to pay scheduled principal payments with available cash flow from operations. In addition, we intend to either refinance or extend the terms of those debt instruments maturing in the next twelve months.

Related Parties

Pursuant to a management agreement, The Summit Group, Inc. (a related party through common ownership and management control) provides management and accounting services for the Company. The agreement provides for the Company to reimburse The Summit Group, Inc. for its actual overhead costs and expenses relating to the managing of the hotel properties. At no time are the reimbursed management expenses to exceed 4.5% of annual gross revenues. For the nine months ended September 30, 2010 and 2009, the Company reimbursed management expenses of $2,400,136 and $2,269,076, respectively. These expenses are located in the general, selling and administrative section of the condensed consolidated statement of operations.

The Company reimbursed accounting services of $479,748 and $443,125 for the nine months ended September 30, 2010 and 2009, respectively. The Company also reimbursed for maintenance and purchases services of $145,815 and $380,396 for the nine months ended September 30, 2010 and 2009, respectively. These expenses are located in the general, selling and administrative section of the condensed consolidated statements of operations.

As of September 30, 2010 and December 31, 2009, the Company had accounts payable to The Summit Group, Inc. for $436,953 and $494,248 relating to reimbursement of management and development expenses.

Recent Developments

On August 9, 2010, Summit Hotel OP, LP filed with the Securities and Exchange Commission (SEC) a Form S-4 seeking to register its securities and Summit Hotel Properties, Inc. filed with the SEC a Form S-11 seeking to register its securities. As described in these registration statements, upon receipt of proper approval from our members, and third parties whose approval may be required, we plan to merge with and into Summit Hotel OP, LP. Summit Hotel OP, LP will be the operating partnership for Summit Hotel Properties, Inc., a hotel real estate investment trust (REIT). Summit Hotel Properties, Inc. intends to list its stock with the New York Stock Exchange. If these transactions are approved and completed as described in the registration statements, the successor company will have improved access to capital through the public trading markets.

On October 22, 2010, the SEC declared effective the OP’s registration statement filed on Form S-4 which registers the securities that the OP will issue in the merger in exchange for the Company’s membership interests.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report includes “forward-looking” statements, as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules, regulations and releases. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding future operations as well as the Merger (as defined below). In some cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “expects,” “intends,” “should,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,” “potential,” “continue,” or other words of similar meaning. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, general economic conditions, our financial and business prospects, our capital requirements, our financing prospects, failure of closing conditions and those disclosed as risks in other reports filed by us with the Securities and Exchange Commission, including those described in Item 1A. of our annual report filed on Form 10-K. We caution readers that any such statements are based on currently available operational, financial and competitive information, and they should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur.

Recent Developments

As described in our quarterly report on Form 10-Q filed on August 16, 2010, on August 5, 2010, Summit Hotel Properties, LLC (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Summit Hotel OP, LP, a newly-formed Delaware limited partnership (the “OP”). The sole general partner of the OP is a wholly-owned subsidiary of Summit Hotel Properties, Inc. (“Summit REIT”), a newly formed Maryland corporation that will elect to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Summit REIT intends to undertake an underwritten initial public offering (“IPO”) of its common stock and will apply to list its common stock on the New York Stock Exchange.

The OP will be the operating partnership of Summit REIT, in a structure utilized by many other publicly traded REITs, and will continue the Company’s hotel ownership business. Each of the OP and Summit REIT are affiliates of the Company and were organized to effect the reorganization of the Company contemplated by the Merger Agreement and related transactions.

Pursuant to the Merger Agreement, assuming the conditions to closing are satisfied or waived, at closing:

the Company will merge with and into the OP with the OP as the surviving entity (the “Merger”);

the OP will be the successor to the assets and liabilities of the Company;

the current members of the Company will receive an aggregate of 9,993,992 common units of a single class of limited partnership interests in the OP (“OP units”);

Class A and Class A-1 members of the Company will receive accrued and unpaid priority returns on their membership interests through August 31, 2010;

accrued and unpaid returns priority returns on Class A and Class A-1 membership interests of the Company for the period of September 1, 2010 through the closing of the Merger may be paid with any available cash after satisfying working capital requirements, reserve requirements and payments to lenders in the discretion of management of the Company; and

the Company will cease to exist, the membership interests of the Company will become null and void and the former members of the Company will become limited partners of the OP.

The members of the Company will receive a fixed number of OP units in the Merger based on the number of OP units allocated to each class of membership interest in the Company owned by the member and the ratio of that member’s adjusted capital contribution to the class to the total adjusted capital contributions to the class. The following table describes the total number of OP units to be received in the Merger by each class of membership interests in the Company:

	Aggregate Adjusted Capital Contributions as of September 30, 2010		Total OP units to be issued in the Merger
Class A	$	119,138,717		6,283,197
Class A-1		44,237,893		2,433,040
Class B		6,687,944		352,712
Class C		17,540,183		925,043
Total	$	187,604,737		9,993,992

Beginning 12 months after completion of the Merger, OP units will be redeemable by the holder, on the first day of each calendar quarter after 60 days’ advance written notice, for cash based on an average of the then-current market prices of Summit REIT common stock or, at the election of the OP, shares of Summit REIT common stock, on a one-for-one basis.

Completion of the Merger is subject to satisfaction of a number of conditions, including (i) approval by the required percentage of membership interests of the Company of (a) an amendment to the Third Amended and Restated Operating Agreement of the Company (“Operating Agreement”) to permit the Merger upon approval of the Class C member of the Company and holders of 51% or more of the voting interests of the Class A and Class A-1 members of the Company, voting as a group (the “Amendment”) and (b) the Merger Agreement and (ii) completion of the IPO. On October 22, 2010, the Securities and Exchange Commission declared effective the OP’s registration statement filed on Form S-4 which registers the securities the OP will issue in the Merger in exchange for the Company’s membership interests. This registration statement includes a proxy statement relating to a special meeting of the Class A, Class A-1 and Class C members of the Company to consider and vote on the proposals described in the registration statement and above.

The Company will hold a special meeting of the Class A, Class A-1 and Class C members of the Company at 11:00 a.m. Central time, November 30, 2010. The special meeting was called at the direction of the Company’s manager, The Summit Group, Inc. (“The Summit Group”). The board of managers of the Company, following the unanimous approval and recommendation of a special committee of the board of managers appointed to review the proposed merger, unanimously approved the Company’s entry into the Merger Agreement. Upon completion of the Merger, all Class A, Class A-1, Class B and Class C membership interests in the Company will be exchanged for limited partnership interests in the OP, as described in the proxy statement/prospectus filed by the Company on Form S-4.

The Company’s members are being asked to approve at the special meeting (1) an amendment to the Operating Agreement to permit the Merger, (2) the Merger Agreement, and (3) adjournment of the meeting to a later date, if necessary or appropriate. The Company’s board of managers recommends a vote “FOR” the amendment to the Operating Agreement, “FOR” approval of the Merger Agreement and “FOR” the adjournment proposal.

The foregoing description of the Merger, Merger Agreement and special meeting of the members does not purport to be complete and is qualified in its entirety by reference to the full text of the registration statement on Form S-4 filed by Summit Hotel OP, LP, and the proxy statement/prospectus therein and the exhibits attached thereto, including the Merger Agreement which is incorporated by reference to Exhibit 2.1 to the Company’s quarterly report for the period ended June 30, 2010.

Where the following Management’s Discussion and Analysis discusses the Company’s future plans, strategies and activities, the discussion assumes that the Merger is not, and will not be, completed.

Overview

Management’s discussion and analysis of financial conditions and results of operations (“MD&A”) discusses our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and costs and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, bad debts, investments, plant, property and equipment and intangible assets, income taxes, financing operations, self-insurance claims payable, contingencies, and litigation.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of the assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.

Critical Accounting Policies

Capitalized Development and Interest Costs

The Company capitalizes all hotel development costs and other direct overhead costs related to the construction of hotels. Additionally, the Company capitalizes the interest costs associated with constructing new hotels. Capitalized development, direct overhead and interest are depreciated over the estimated lives of the respective assets once the assets are placed in service. Organization and start-up costs are expensed as incurred. For the nine month periods ended September 30, 2010 and 2009, the Company capitalized interest of $0 and $2,786,468, respectively.

Assets Held For Sale

We consider each individual hotel to be an identifiable component of our business. In accordance with FASB ASC 360 “Property, Plant and Equipment” we do not consider a hotel as “held for sale” until the potential transaction has been approved by our Board, as may be required, and it is probable that the sale will be completed within one year. We do not consider a sale to be probable until a buyer’s due diligence review is completed and all substantive conditions to the buyer’s performance have been satisfied. Once a hotel is “held for sale,” the operations related to the hotel will be included in discontinued operations.

We do not depreciate hotel assets while they are classified as “held for sale.” Upon designation of a hotel as being “held for sale,” and quarterly thereafter, we review the carrying value of the hotel and, as appropriate, adjust its carrying value to the lesser of depreciated cost or fair value less cost to sell, in accordance with ASC 360. Any such adjustment in the carrying value of a hotel classified as “held for sale” will be reflected in discontinued operations. We will include in discontinued operations the operating results of hotels classified as “held for sale” or that have been sold.

Impairment of Long-Lived Assets

We periodically review the carrying value of certain long-lived assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, we estimate the undiscounted sum of the expected cash flows of such assets to determine if such sum is less than the carrying value of such assets to ascertain if an impairment exists. If an impairment exists, we determine the fair value by using quoted market prices, if available for such assets, or if quoted market prices are not available, we would discount the expected future cash flows of such assets and adjust the carrying amount to fair value.

Consolidation Policy

The consolidated financial statements include the accounts of the Company and its controlled variable interest entity (VIE), Summit Group of Scottsdale, Arizona, LLC. All significant intercompany accounts and transactions have been eliminated.

The Company’s condensed consolidated financial statements are prepared on the accrual basis of accounting. The financial statements reflect the accounts of the Company and its consolidated subsidiaries.

The Company implemented new accounting guidance effective January 1, 2010 regarding variable interest entities (VIEs). In accordance with the guidance, the Company re-evaluated equity investments and all other potential variable interests to determine if they are VIEs. For each of these investments, the Company has evaluated (1) the sufficiency of the entities’ equity investments at risk to permit the entity to finance its activities without additional subordinated financial support; (2) that as a group the holders of the equity investments at risk have (a) the power through voting rights or similar rights to direct the entities’ activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity and their obligations are not protected directly or indirectly and (c) the right to receive the expected residual return of the entity and their rights are not capped and (3) the voting rights of these investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of the entity, or both, and that substantially all of the entities’ activities do not involve or are not conducted on behalf of an investor that has disproportionately few voting rights.

If an investment is determined to be a VIE, the Company then performs an analysis to determine if the Company is the primary beneficiary of the VIE. Generally Accepted Accounting Principles require a VIE to be consolidated by its primary beneficiary. The primary beneficiary is the party that has a controlling financial interest in an entity. In order for a party to have a controlling financial interest in an entity it must have (1) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (2) the obligation to absorb losses of an entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

The Company’s consolidated VIE was determined to be a VIE primarily because the entity’s equity holders’ obligation to absorb losses is protected and their equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support. The Company determined that it was the primary beneficiary of this VIE as it has a controlling financial interest in the entity.

Revenue Recognition

The revenue from the operation of a hotel is recognized as part of the hotel operations segment when earned. Typically, cash is collected from the guest at the time of check-in or checkout or the guest pays by credit card which is typically reimbursed within 2-3 days; however, we also extend credit to selected corporate customers.

All of our revenues are derived from guestroom rentals at our hotels, and revenues from services related to guestroom rentals. In addition to guestroom rental revenue, our hotels derived revenues from fees to guests for telephone usage, hotel meeting room rentals, restaurant and lounge receipts, hotel laundry and valet services, revenues from concessions and other fees charged to hotel users for similar services. All revenues were generated from hotels located in the United States.

Industry Trends and Outlook

In mid-2008, U.S. lodging demand started to decline as a result of the economic recession which caused industry-wide RevPAR to decline for the year, as reported by Smith Travel Research. Throughout 2009, the decrease in lodging demand accelerated, with RevPAR down 16.7% for the year according to Smith Travel Research. In the first half of 2010, we saw trends of improved fundamentals in the U.S. lodging industry with demand for rooms showing signs of stabilization, and even growth in many of the major markets, as general economic indicators have begun to experience positive improvement. With supply of available rooms expected to rise at a significantly slower pace over the next several years than during 2006-2008 and demand for rooms expected to increase as the U.S. economy rebounds, we expect meaningful growth in RevPAR to start in 2011 and to continue for several years thereafter.

While we believe the trends in room demand and supply growth will result in improvement in lodging industry fundamentals, we can provide no assurances that the U.S. economy will strengthen at projected levels and within the expected time periods. If the economy does not improve or if any improvements do not continue for any number of reasons, including, among others, an economic slowdown and other events outside of our control, such as terrorism, lodging industry fundamentals may not improve as expected. In the past, similar events have adversely affected the lodging industry and if these events recur, they may adversely affect the lodging industry in the future.

Results of Operations

We use a variety of operating and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP, as well as other financial information that is not prepared in accordance with GAAP. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotels, groups of hotels and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include occupancy rate (or Occupancy); Average Daily Rate (or ADR); and room Revenue per Available Room (or RevPAR).

Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy percentage, is an important statistic for monitoring operating performance at the individual hotel level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and regional basis. ADR and RevPAR include only room revenue. Room revenue is dictated by demand, as measured by Occupancy, pricing, as measured by ADR, and our available supply of hotel rooms. Our ADR, Occupancy and RevPAR performance may be impacted by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, new hotel construction and the pricing strategies of competitors. In addition, our ADR, Occupancy and RevPAR performance is dependent on the continued success of our franchisors and their brands.

Three Months Ended September 30, 2010 Compared with Three Months Ended September 30, 2009

Loss from Continuing Operations.

Loss from continuing operations decreased by $5.6 million, or 81.8%, to ($1.3) million for the three months ended September 30, 2010 from ($6.9) million for the three months ended September 30, 2009. This decrease in loss was primarily due to the $6.5 million impairment loss recognized in 2009 with no corresponding expense in the first three quarters of 2010.

Revenues.

The key indicators for the Company’s hotel performance for the three months ended September 30, 2010 and 2009 are set forth in the following table.

	Three Months Ended			Three Months Ended
	September 30, 2010			September 30, 2009			Increase
All Company Hotels
RevPAR	$	61.46		$	56.89		$	4.57
Average Daily Rate	$	88.99		$	87.21		$	1.78
Occupancy Rate		69.06	%		65.23	%		3.83	%

Revenues increased by $5.4 million, or 16.7%, from $32.2 million for the three months ended September 30, 2009 to $37.6 million for the three months ended September 30, 2010. The increase was primarily due to the opening of six new hotels during the third and fourth quarters of 2009 and further impacted by increases in Occupancy and ADR in our existing hotels, resulting in an overall 8.0% increase in RevPAR.

Due to the ongoing recovery of the national economy and the improvement in the U.S. hotel industry fundamentals experienced during the past seven months, we anticipate that RevPAR at our hotels will continue to improve. In addition, as our 19 unseasoned hotels continue to stabilize, we anticipate they will generate revenue growth for the Company.

Operating Expenses.

Total operating expenses from continuing operations decreased by $2.7 million, or 7.8%, to $32.0 million for the three months ended September 30, 2010 from $34.8 million for the three months ended September 30, 2009 because of a $6.5 million loss on impairment of assets incurred in the three months ended September 30, 2009 with no similar impairment in the three months ended September 30, 2010. Direct hotel operations expense increased by 12.6% to $12.3 million for the three months ended September 30, 2010 from $10.9 million for the three months ended September 30, 2009. The increased operating expenses were in direct relationship to the increase in revenues from the six new hotels opened during the third and fourth quarter of 2009. General, selling and administrative expenses increased 14.0% to $6.7 million for the three months ended September 30, 2010 from $5.9 million for the three months ended September 30, 2009. The increase was directly related to the increase in revenues from the six new hotels opened in late 2009.

Hotel operating expenses consist primarily of expenses incurred in the day-to-day operation of our hotels such as hotel staff salaries and wages, hotel utility expenses, hotel real estate taxes, and royalty and other fees charged by our franchisors. Many of our expenses are fixed, such as essential hotel staff, real estate taxes, insurance, depreciation, and certain types of franchise fees, and these expenses do not decrease even if the revenues at our hotels decrease.

Depreciation and Amortization.

Total depreciation and amortization expense from continuing operations increased by $1.2 million, or 21.5%, from $5.6 million for the three months ended September 30, 2009 to $6.8 million for the three months ended September 30, 2010. This increase was primarily due to the six additional hotels opened during the third and fourth quarter of 2009.

Management Expense

We reimburse The Summit Group, Inc. for the expenses it incurs in the management of our hotels and as Company Manager. During the three months ended September 30, 2010, we reimbursed The Summit Group $789,156 in hotel management and Company Manager expenses, which was 2.1% of our total revenues from continuing operations. In the three months ended September 30, 2009, we reimbursed The Summit Group $575,176 in hotel management and Company Manager expenses, which was 1.8% of our total revenues from continuing operations. The increase in management expense as a percentage of revenues is due to additional travel and allocation of wages related to oversight of the hotels and the merger and IPO. Management expense is contained within the general, selling and administrative section of the condensed consolidated statement of operations.

Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009

Loss from Continuing Operations.

Loss from continuing operations decreased by $3.5 million, or 34.7%, to ($6.7) million for the nine months ended September 30, 2010 from ($10.2) million for the nine months ended September 30, 2009. This decrease was due in part to a $6.5 million loss on impairment of assets incurred in the third quarter of 2009, with no similar impairment losses during the first three quarters of 2010. Additional factors affecting the loss from continuing operations include an increase in income from operations, net of the impairment loss, of $3.9 million, as well as an increase in interest expense of $6.9 million.

Revenues.

The key indicators for the Company’s hotel performance for the nine months ended September 30, 2010 and 2009 are set forth in the following table.

	Nine Months Ended			Nine Months Ended
	September 30, 2010			September 30, 2009			Increase/(Decrease)
All Company Hotels
RevPAR	$	57.68		$	56.71		$	0.97
Average Daily Rate	$	87.88		$	88.42		$	(0.54	)
Occupancy Rate		65.64	%		64.14	%		1.5	%

Revenues increased by $12.0 million, or 12.9%, from $92.8 million for the nine months ended September 30, 2009 to $104.8 million for the nine months ended September 30, 2010. The increase was primarily due to the opening of six new hotels during the third and fourth quarters of 2009.

Operating Expenses.

Total operating expenses from continuing operations increased by $1.6 million, or 1.7%, to $91.9 million for the nine months ended September 30, 2010 from $90.4 million for the prior period despite the $6.5 million loss on impairment taken in 2009. Operating expenses increased due to the six new hotels opened in the third and fourth quarter of 2009. Of this increase, direct hotel operations expense increased by 12.5% to $35.4 million for the nine months ended September 30, 2010 from $31.4 million for the prior period. The increased operating expenses were in direct relationship to the increase in revenues from the six new hotels opened during the third and fourth quarter of 2009. Non-capitalizable hotel renovation costs during early 2009 caused repairs and maintenance for the nine month period ended September 30, 2009 to be $1.7 million higher than repairs and maintenance in the nine month period ended September 30, 2010.

Depreciation and Amortization.

Total depreciation and amortization expense from continuing operations increased by $3.3 million, or 19.7%, from $17.0 million for the nine months ended September 30, 2009 to $20.3 million for the nine months ended September 30, 2010. This increase was primarily due to the six additional hotels opened during the third and fourth quarter of 2009.

Management Expense

We reimburse The Summit Group, Inc. for the expenses it incurs in the management of our hotels and as Company Manager. During the nine months ended September 30, 2010, we reimbursed The Summit Group $2,400,136 in hotel management and Company Manager expenses, which was 2.3% of our total revenues from continuing operations. In the nine months ended September 30, 2009, we reimbursed The Summit Group $2,269,076 in hotel management and Company Manager expenses, which was 2.4% of our total revenues from continuing operations. The reduction in management expense is due to the Company’s efforts to reduce expenses during the economic downturn. Management expense is contained within the general, selling and administrative section of the condensed consolidated statement of operations.

Seasonality and Diversification

Certain segments of the hotel industry are very seasonal. Leisure travelers tend to travel more during the summer. Business travelers occupy hotels relatively consistently throughout the year, but decreases in business travel occur during summer and the winter holidays.

The hotel industry is also seasonal based upon geography. Hotels in the south tend to have high occupancy rates during the winter months. Hotels in the north have higher occupancy rates during the summer months. On balance, the hotel industry experiences its highest occupancies during summer, and its lowest occupancy rates from December through February. To provide for more stable revenues throughout the year, we strive to maintain geographic diversity of our hotels. As a result, our revenues do not vary significantly from quarter to quarter.

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our hotel properties, including recurring maintenance and capital expenditures necessary to maintain our hotel properties in accordance with franchise brand standards, capital expenditures to improve our hotel properties, interest expense and scheduled principal payments on outstanding indebtedness.

We expect to satisfy these short-term liquidity requirements through working capital and cash provided by operations. Based upon the improving U.S. lodging industry fundamentals, and our hotel portfolio’s improving performance as hotel demand recovers and our unseasoned properties continue to stabilize, we believe that our working capital and cash provided by operations will be sufficient to meet our ongoing short-term liquidity requirements for at least the next 12 months.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring or developing additional hotel properties, major hotel renovations, loan maturities and other non-recurring capital expenditures that need to be made periodically with respect to our hotel properties and scheduled debt payments. We anticipate satisfying these long-term liquidity requirements through various sources of capital, including existing working capital, cash provided by operations, equity contributions and long-term hotel mortgage indebtedness and other borrowings. However, certain factors may have a material adverse effect on our ability to access these capital sources, including the current difficulty obtaining mortgage financing, our degree of leverage, the value of our unencumbered hotel properties and borrowing restrictions imposed by lenders. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but the capital markets may not be consistently available to us on terms that are attractive, or at all.

Due to the economic recession and decline in the hotel industry that occurred during 2008 and 2009, as well as the increasing difficulty in obtaining financing for hotel projects, the Company has sought to reduce its exposure to costs, expenses and financing requirements related to construction and development activities. Thus, the Company did not acquire any hotels and did not start any new hotel construction projects during 2009 or the nine months ended September 30, 2010. As of November 12, 2010, the Company has entered into a letter of intent to purchase one hotel and no new hotel construction is yet scheduled for 2010.

Additional Information Concerning Sources and Uses of Cash

Major capital improvements on existing hotels and the acquisition or construction of new hotels is funded primarily through financing with commercial lenders and equity contributions. At this time, the Company does not anticipate acquiring, or starting construction on any new hotels until such time as the United States economy strengthens and debt and equity financing are in place.

First mortgage financing with commercial lenders provides the primary source of liquidity for financing the acquisition and construction of hotels. As of September 30, 2010, our mortgage debt consisted of the following:

Lender	Outstanding Principal Balance as of September 30, 2010 (dollars in thousands)		Interest Rate as of September 30, 2010(1)	Amortization (years)	Maturity Date

Bank of the Cascades(2)	$	12,623	Prime rate, subject to a floor of 6.00%	25	09/30/11

ING Investment Management(3)(12)		29,204	5.60%	20	07/01/25

MetaBank		7,340	Prime rate, subject to a floor of 5.00%	20	03/01/12

Chambers Bank		1,615	6.50%	20	06/24/12

Bank of the Ozarks(4)		6,444	90-day LIBOR + 4.00%, subject to a floor of 6.75%	25	06/29/12

ING Investment Management(5)(11)		7,954	6.34%	20	07/01/12

ING Investment Management(5)(11)		29,602	6.10%	20	07/01/12

BNC National Bank(13)		5,769	5.01%	20	11/01/13

First National Bank of Omaha(6)		24,368	90-day LIBOR + 4.00%, subject to a floor of 5.25%	20	07/01/13

ING Investment Management(7)(12)		6,281	6.61%	20	11/01/28

General Electric Capital Corp.(8)(14)		11,262	90-day LIBOR + 2.55%	25	04/01/14

National Western Life Insurance(9)		13,734	8.00%	17	01/01/15

BNC National Bank(13)		5,814	Prime rate – 0.25%	20	04/01/16

Compass Bank		16,492	Prime rate – 0.25%, subject to a floor of 4.50%	20	05/17/18

General Electric Capital Corp.(14)		8,803	90-day LIBOR + 1.75%	20	04/01/18

General Electric Capital Corp.(10)(14)		11,119	90-day LIBOR + 1.80%	25	03/01/19

Fortress Credit Corp. (15)		86,076	30-day LIBOR + 8.75%	N/A	03/05/11

Lehman Brothers Bank		77,381	5.40%	25	01/01/12

Marshall & Illsley Bank		21,420	30-day LIBOR + 3.90%	N/A	12/31/10

First National Bank of Omaha (16)		19,993	90-day LIBOR + 4.00%, subject to a 5.50% floor	N/A	07/31/11

First National Bank of Omaha		18,903	90-day LIBOR + 4.00%, subject to a 5.50% floor	N/A	07/31/11

Total	$	422,198

(1)	As of September 30, 2010, the Prime rate was 3.25% and the 90-day LIBOR rate was 0.29%.

(2)	The maturity date may be extended to September 30, 2012, subject to the Company achieving a debt service coverage ratio of 1.25:1.00 on the property secured.

(3)

The lender has the right to call the loan, which is secured by multiple properties, at January 1, 2012, January 1, 2017 and January 1, 2022. At January 1, 2012, the loan begins to amortize according to a 19.5 year amortization schedule. If this loan is repaid prior to maturity, there is a prepayment penalty equal to the greater of (i) 1% of the principal being repaid and the (ii) the yield maintenance premium. There is no prepayment penalty if the loan is prepaid 60 days prior to any call date.

(4)	The maturity date may be extended to June 20, 2014 based on the exercise of two, one-year extension options, subject to the satisfaction of certain conditions. If this loan is repaid prior to June 29, 2011, there is a prepayment penalty equal to 1% of the principal being repaid.

(5)	If this loan is repaid prior to maturity, there is a prepayment penalty equal to the greater of (i) 1% of the principal being repaid and the (ii) the yield maintenance premium.

(6)

Consists of three loans with cross-collateralization and cross-default provisions secured by three hotel properties: the Hyatt Place, Atlanta, Georgia; the Courtyard by Marriott, Germantown, Tennessee; and the Courtyard by Marriott, Jackson, Mississippi. The maturity date of the loan secured by the Hyatt Place located in Atlanta, Georgia is February 1, 2014.

(7)

The lender has the right to call the loan at November 1, 2013, 2018 and 2023. If this loan is repaid prior to maturity, there is a prepayment penalty equal to the greater of (i) 1% of the principal being repaid and the (ii) the yield maintenance premium. There is no prepayment penalty if the loan is prepaid 60 days prior to any call date.

(8)	If this loan is repaid prior to April 1, 2011, there is a prepayment penalty equal to 0.75% of the principal being repaid. After this date, there is no prepayment penalty. A portion of the loan can be prepaid without penalty at any time to bring the loan-to-value ratio to no less than 65%.

(9)

Consists of two mortgage loans with cross-collateralization and cross-default provisions. Prior to February 1, 2011, these loans cannot be prepaid. If these loans are prepaid after February 1, 2011, there is a prepayment penalty ranging from 5% to 1% of the principal being prepaid. A one-time, ten-year extension of the maturity date is permitted, subject to the satisfaction of certain conditions.

(10)	If this loan is repaid prior to February 27, 2011, there is a prepayment penalty equal to 0.75% of the principal being repaid. After this date, there is no prepayment penalty. A portion of the loan can be prepaid without penalty at any time to bring the loan-to-value ratio to no less than 65%.

(11)	The two ING Investment Management loans with the July 1, 2012 maturity dates are cross-collateralized.

(12)	The ING Investment Management loans with the July 1, 2015 and November 1, 2028 maturity dates are cross-collateralized.

(13)	The two BNC loans have cross-default provisions.

(14)	The three General Electric Capital Corp. loans are cross-defaulted.

(15)

Interest is paid monthly at the 30-day LIBOR rate plus 5.75%, and additional interest accrues at the annual rate of 30-day LIBOR plus 3.00% and is deferred until the maturity date. As a result, the outstanding principal balance will increase prior to the date of repayment. The loan was extended for a period of one (1) year, to March 5, 2011, with an option for an additional six (6) month extension contingent on meeting certain requirements. As a condition of the Fortress Loan extension, the Company agreed that all cash generated by the Company and not required for payment of hotel operational expenses, principal and interest payments on the Company’s loans, capital expenditures, and other expenses related to owning and operating the Company, will be reserved and used to pay down Company debts. Additional covenants include, but are not limited to: covenants limiting the Company’s ability to sell or refinance assets, incur debt or obtain equity without Fortress’s prior approval; and restrictions on distributions to members.

(16)	This is comprised of three cross-collateralized, cross-defaulted notes.

As of September 30, 2010, the Company has $166,371,585 of debt due in the next twelve months, of which $159,014,760 represents maturing debt and $7,356,825 represents other scheduled principal payments. We intend to pay regularly scheduled principal payments with available cash flow from operations. For maturing debts, we intend either to refinance or extend the terms of those debt instruments maturing in the next twelve months.

We believe that we will have adequate liquidity to meet requirements for scheduled maturities. However, we can provide no assurances that we will be able to refinance our indebtedness as it becomes due and, if refinanced, whether such refinancing will be available on favorable terms.

We cannot provide assurance that our business will continue to generate cash flow sufficient to service our debt payments. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to sell assets at below-market values, reduce capital expenditures, or seek to obtain additional financing. Our ability to make scheduled principal payments, and to pay interest on or to refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions affecting the hotel industry and to general economic, financial, competitive, and other factors beyond our control.

Due to our significant reliance on financing for the acquisition and construction of hotels, changes in interest rates and underwriting parameters may affect our ability to acquire or build hotels which meet our investment objectives. As a result of the current conditions in the banking industry and general economy, many lenders are not offering new commercial loans, or if they do offer such loans, the terms and conditions are restrictive. We have experienced increasing difficulties obtaining financing for our hotels, particularly construction financing, on reasonable terms and conditions. Furthermore, upon the scheduled maturity of existing indebtedness we may be unable to obtain financing at terms similar to those on credit facilities currently financing our hotels. As of September 30, 2010, approximately 59.4% of our long-term indebtedness carried variable interest rates which increase or decrease with general interest rates changes.

Construction and Development Requirements

Properties Under Construction or Held for Development

The table below describes our properties held for possible future development. At this time, we have no intention of developing new hotels or restaurants or expanding any of our existing hotels at these parcels. As of November 12, 2010, we have nine parcels of land which we believe no longer complement our business, and thus they are held for sale. We may in the future sell the other parcels described below when market conditions warrant. If we do develop these parcels, construction will not begin on any hotel until debt and equity financing are in place and management has determined that market conditions are appropriate.

Location	Potential Use	Acres
Flagstaff, Arizona	Development of one restaurant pad	2.0
Jacksonville, Florida	Development of one hotel	3.3
Ft. Myers, Florida	Development of one or two restaurant pads	3.1
Boise, Idaho	Development of one hotel	3.1
Boise, Idaho	Possible expansion of existing hotel	2.3
Boise, Idaho	Possible expansion of existing hotel	1.0
Twin Falls, Idaho	Development of one hotel	2.5
Missoula, Montana.	Development of one hotel	2.2
El Paso, Texas	Development of two hotels	5.0
Houston, Texas	Development of one hotel	2.8
San Antonio, Texas	Development of one hotel	2.6
San Antonio, Texas	Development of two hotels	6.0
San Antonio, Texas	Development of two restaurant pads	3.0
Spokane, Washington	Development of two hotels	4.6

We have no current intention of developing new hotels or restaurants or expanding any of our existing hotels at these parcels. We intend to sell the parcels that are held for sale, and we may in the future sell the remaining parcels when market conditions warrant.

Acquisitions and Dispositions

From January 1, 2010 through November 12, 2010 we have not acquired or disposed of any properties. We have entered into a letter of intent to acquire a 216-room hotel located in downtown Minneapolis, Minnesota. The letter of intent is non-binding and we cannot assure you that we will be able to enter into a definitive purchase agreement on favorable terms, or at all, or, if we enter into a definitive agreement, that we will complete this acquisition. Any definitive purchase agreement would be subject to a number of conditions to completion.

As reported in the Company’s quarterly report on Form 10-Q filed with the SEC on August 16, 2010, we entered into a contract to sell several parcels of vacant land to an unaffiliated hotel developer for an aggregate purchase price of $30.4 million. During October 2010, the developer terminated the contract; however, as of November 12, 2010, these parcels of land continue to be classified as held for sale as they no longer complement our business and we believe they will be sold within the next twelve months.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that are likely to have a material impact on our assets, liabilities, revenues or operating expenses.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business strategies, the primary market risk to which we are currently exposed, and to which we expect to be exposed in the future, is interest rate risk. Our primary interest rate exposure is to the 30-day LIBOR rate, the 90-day LIBOR rate and the Prime rate. We primarily use fixed interest rate financing to manage our exposure to fluctuations in interest rates. We do not use any hedge or other instruments to manage interest rate risk.

As of September 30, 2010, 40.6% of our debt carried fixed interest rates, and 59.4% carried variable interest rates. As of September 30, 2010, our fixed interest rate debt totaled $171.5 million. Our variable interest rate debt totaled $250.7 million as of September 30, 2010, which included amounts outstanding under our lines of credit, and not the total available under the lines of credit. Assuming no increase in the amount of our variable rate debt, if the interest rates on our variable rate long-term debt were to increase by 1.0%, our cash flow would decrease by approximately $2,506,573 per year.

As our debts mature, the financing arrangements which carry fixed interest rates will become subject to interest rate risk. None of our fixed interest rate debt matures during 2010.

Item 4. Controls and Procedures

Our management conducted an evaluation, under the supervision and with the participation of our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in enabling us to record, process, summarize and report in a timely manner the information required to be disclosed in reports we file under the Exchange Act.

There were no changes in our internal control over financial reporting or in other factors that occurred during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Peter J. Poulos, a former employee of the Company, filed a complaint against us, Mr. Boekelheide and others with the U.S. Department of Labor/Occupational Safety and Health Administration, or OSHA. The administrative file was opened on April 6, 2009. The complaint alleges that, as a result of one circumstance of a payment being applied to incorrect accounts, we engaged in a scheme to perpetuate fraud and that the employee’s subsequent termination was retaliatory and in violation of the Corporate and Criminal Fraud Accountability Act of 2002, or CCFA. The only relief sought under the complaint is an administrative finding that we violated the CCFA. We vehemently deny these allegations and are vigorously defending the claim. On August 24, 2010, OSHA determined that there was no reasonable cause to believe that the Company violated the CCFA and the complaint was dismissed. On August 30, 2010, Mr. Poulos objected to the findings and requested a formal hearing in the matter. A scheduling conference with the Administrative Law Judge was held on October 6, 2010. The administrative hearing is being held in abeyance until the federal lawsuit is adjudicated. The parties are to file a Status Report on or before December 7, 2010.

On May 12, 2009, Mr. Poulos filed a complaint in the United States District Court, Southern District of South Dakota against the Company, Mr. Boekelheide and Trent Peterson, our Director of Operations—Eastern United States. The complaint is based upon the same set of circumstances as in the OSHA complaint described above. The relief sought includes damages, including front and back pay, compensatory damages, punitive damages and other relief, in excess of $10.0 million. We vehemently deny these allegations and are vigorously defending the claim. On July 10, 2009, Mr. Boekelheide was dismissed from the lawsuit. Discovery is proceeding in this case. A pre-trial conference and motions hearing was held on August 6, 2010. On September 10, 2010, the Court granted summary judgment in our favor and dismissed five of the six claims asserted by Mr. Poulos. The Court denied summary judgment on the claim asserting wrongful termination for whistleblowing. A trial date has not been scheduled.

Although we cannot be certain of the outcome of the above actions, at this time we do not believe the above actions against us will have a material adverse affect on our business, financial conditions or results of operations.

We are involved from time to time in litigation arising in the ordinary course of business, however, we are not currently aware of any actions against us that we believe would materially adversely affect our business, financial condition or results of operations. We may be subject to future claims which could cause us to incur significant expenses or damages. We have assumed liability for past events at the hotels and for entities previously acquired by the Company, including lawsuits that have not yet materialized. If we acquire or consolidate additional entities in the future, we may assume obligations and liabilities of such entities. We operate in an industry susceptible to personal injury claims and significant personal injury claims could be asserted against us in the future arising out of events not known to us at this time.

Item 1A.

Risk Factors

The Company’s annual report on Form 10-K filed on March 31, 2010 (the “annual report”) and the Company’s quarterly reports on Form 10-Q filed on May 14, 2010, and August 16, 2010 (the “quarterly reports”) set forth a number of risk factors and other information which should be carefully considered. In addition to the risks described in the annual report and quarterly reports, we are subject to a number of other risks and uncertainties which we may not be aware of or which we currently deem to be immaterial to our business operations. If any of such risks or other risks occur, our business, financial condition, operating results and cash flows could be adversely affected. Management does not believe that there are new material risk factors in addition to those set forth in the annual report and quarterly reports.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

Not Applicable.

Item 4.

Removed and Reserved

Item 5.

Other Information

None.

Item 6. Exhibits

The following Exhibits are filed as part of this Form 10-Q:

Exhibit
Number		Description of Exhibit

31.1		Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 – Chief Executive Officer.
31.2		Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 - Chief Financial Officer.
32.1		Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code – Chief Executive Officer.
32.2		Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code - Chief Financial Officer.

SIGNATURES

Pursuant to the requirements 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.

		SUMMIT HOTEL PROPERTIES, LLC

Date: November 15, 2010	By:	/s/ Kerry W. Boekelheide
		Kerry W. Boekelheide
		Chief Executive Officer

Date: November 15, 2010	By:	/s/ Daniel P. Hansen
		Daniel P. Hansen
		Chief Financial Officer

EXHIBIT INDEX

31.1	Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 – Chief Executive Officer.
31.2	Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 - Chief Financial Officer.
32.1	Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code – Chief Executive Officer.
32.2	Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code - Chief Financial Officer.

SUMMIT HOTEL PROPERTIES LLC - FORM 10-Q - November 15, 2010

Attached files

SUMMIT HOTEL PROPERTIES LLC Reports