UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: INNKEEPERS USA TRUST, et al.,1 Debtors.

) ) ) ) ) ) ) Chapter 11 Case No. 10-13800 (SCC) Jointly Administered

DECLARATION OF WILLIAM Q. DERROUGH IN SUPPORT OF DEBTORS MOTION FOR ENTRY OF AN ORDER APPROVING (I) STIPULATION BY AND BETWEEN DEBTORS, LNR PARTNERS LLC, AND AD HOC COMMITTEE OF PREFERRED SHAREHOLDERS AND (II) BREAK-UP FEE AND EXPENSE REIMBURSEMENT FOR CHATHAM LODGING L.P.1 I, William Q. Derrough, declare as follows: 1. I am over the age of 18 and competent to testify. I am a Managing Director of

Moelis & Company LLC (Moelis), resident in Moeliss New York office, located at 399 Park Avenue, 5th Floor, New York, New York 10022. I have over 20 years of investment banking experience, having begun my career in 1988 at Salomon Brothers. During my career, I have worked on a number of transactions in the hotel, leisure, and real estate industries, ranging from debt and equity financings, to mergers, acquisitions, and restructurings. In the past 15 months, my current employer, Moelis & Company has completed or is engaged in a number of large real estate transactions (financings, restructurings, and mergers and acquisitions) representing approximately $100 billion in value. These include transactions involving Fleet Street (CMBS vehicle restructuring), GGP (chapter 11), Chrysler Corp HQ building (mortgage financing), Centro Properties Group (corporate restructuring), Stuyvesant Town / Peter Cooper Village
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The list of Debtors in these Chapter 11 Cases along with the last four digits of each Debtors federal tax identification number can be found by visiting the Debtors restructuring website at www.omnimgt.com/innkeepers or by contacting Omni Management Group, LLC at Innkeepers USA Trust c/o Omni Management Group, LLC, 16161 Ventura Boulevard, Suite C, PMB 606, Encino, California 91436. The location of the Debtors corporate headquarters and the service address for their affiliates is: c/o Innkeepers USA, 340 Royal Poinciana Way, Suite 306, Palm Beach, Florida 33480.

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(CMBS restructuring), Xanadu (restructuring, equity financing), Fiddlers Creek (chapter 11 debtor advisory), LNR Partners (corporate restructuring), Dubai World Holdings (advisor to government of Dubai), and Fontainebleau Resorts (restructuring, sale). Moelis was the advisor to Hilton Hotels in its $26.5 billion sale to Blackstone Group in 2007. Our real estate group has completed numerous transactions for REITs, including for Simon Properties, Diamond Rock Hospitality Company, Starwood Financial Group, and iStar Financial. 2. I submit this declaration (this Declaration) in accordance with Rule 1007-2 of

the Local Bankruptcy Rules for the Southern District of New York (the Local Bankruptcy Rules) in support of the Debtors Motion for Entry of an Order Approving (I) Break-Up Fee and Expense Reimbursement for Chatham Lodging L.P. and (II) Certain Stipulation by and Between Debtors, LNR Partners LLC, as Special Servicer for the Trusts, and Ad Hoc Committee of Preferred Shareholders, filed contemporaneously herewith (the Motion).2 3. The facts set forth in this Declaration are based upon my personal knowledge,

upon information and belief (where indicated), or upon client matter records kept in the ordinary course of business that were reviewed by me or other employees of Moelis under my supervision and direction. If called and sworn as a witness, I could and would testify competently to the matters set forth herein. 4. On or around March 24, 2010, the Debtors engaged Moelis to provide general

investment banking and financial advice in connection with the Debtors attempts to complete a strategic restructuring, reorganization, and/or recapitalization of all or a significant portion of the Debtors outstanding indebtedness, as well as to prepare for the potential commencement of chapter 11 cases.

Capitalized terms used but not defined herein are as defined in the Motion.

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Marketing and Bidding Process 5. Since the Petition Date, the Debtors have pursued an extensive marketing process

for all of their assets, on both enterprise level and non-enterprise level bases. Over the course of an eight-month process, the Debtors contacted more than 200 potential investors and plan sponsors. As a result of their robust marketing process, the Debtors received the following bids before the April 25, 2011 bid deadline (the Bid Deadline) established by the Bidding Procedures Order: A bid for the 45 hotels that serve as collateral for the Debtors fixed rate mortgage loan and six of the seven hotels commonly referred to as the Seven Sisters; Two bids for the LNR Properties; Six bids on multiple assets; Six bids on individual assets; and A bid for the 45 hotels that serve as collateral for the Fixed Rate Mortgage Loan and the 19 hotels that serve as collateral for the Floating Rate Mortgage Loan (collectively, the Fixed/Floating Properties).

6.

After the Bid Deadline, the Debtors reviewed all timely submitted bids and

engaged in negotiations with entities that submitted bids satisfying the bid conditions established by the Bidding Procedures Order. After a formal auction at which the Debtors accepted the highest or otherwise best bids for the applicable assets, the Debtors reached agreement with two plan sponsorsCerberus Capital Management, LP (Cerberus) and Chatham Lodging Trust (together with Cerberus, Cerberus/Chatham) for the Fixed/Floating Properties and Chatham L.P. for the LNR Properties. A. Fixed/Floating Auction Process 7. On March 9, 2011, the Fixed/Floating Debtors initially entered into a commitment

letter (the Five Mile/Lehman Commitment Letter) with Five Mile/Lehman and Midland for 3
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a stalking horse bid (the Five Mile/Lehman Bid) for the Fixed/Floating Properties, which the Bankruptcy Court approved, in the Bidding Procedures Order, as the stalking horse bid for the Fixed/Floating Properties. 8. On April 8, 2011, per the agreement embodied in the Five Mile/Lehman

Commitment Letter, the Debtors filed the Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 1094] and the Disclosure Statement for Debtors Plans of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 1093]. 9. On April 25, 2011, Cerberus/Chatham submitted an overbid that the Debtors

deemed a qualified overbid in accordance with the requirements set forth in the Bidding Procedures. Properties. 10. On April 29, 2011, the Debtors named the Cerberus/Chatham overbid the baseline Cerberus/Chatham submitted the only qualified overbid on the Fixed/Floating

bid for the auction in accordance with the Bidding Procedures (the Cerberus/Chatham Baseline Bid). 11. Consistent with the Fixed/Floating Bidding Procedures, the Cerberus/Chatham

Baseline Bid included only the Fixed/Floating Properties (and none of the Seven Sisters). The Cerberus/Chatham Baseline Bid was worth $978.7 million (including approximately $622.5 million of debt financing and approximately $356.2 million of equity investment by Cerberus/Chatham). Under the Cerberus/Chatham Baseline Bid, holders of Fixed Rate Pool Mortgage Loan Claims would have received consideration of $622.5 million in the form of a restructured Fixed Rate Note and holders of Floating Rate Mortgage Loan Claims would receive consideration of $201.5 million in cash. The Cerberus/Chatham Baseline Bid utilized Midlands stapled financing.

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12.

With the receipt of the Cerberus/Chatham Baseline Bid, the Debtors proceeded

with an auction for the Fixed/Floating Properties on May 2, 2011, in accordance with the Bidding Procedures Order. After twelve rounds of competitive bidding between Five

Mile/Lehman and Cerberus/Chatham, the Debtors closed the auction for the Fixed/Floating Properties after an unchallenged bid from Cerberus/Chatham valued at over $1.2 billion (the Cerberus/Chatham Successful Bid). The auction process thus yielded $146 million in value over and above the Five Mile/Lehman stalking horse bid. B. LNR Properties Auction Process 13. In the days immediately following the Courts entry of the Bidding Procedures

Order, the Debtors continued their efforts to market all of their assets, including the LNR Properties, on both an enterprise level and on an individual property basis, to achieve the most value-maximizing outcome for stakeholders. I, along with my colleagues at Moelis, sent to over 125 potential investors a letter summarizing the process by which the Debtors would solicit and evaluate restructuring proposals, both with respect to overbids to the Five Mile/Lehman Bid and additional bids.3 14. As a result of the Debtors marketing efforts, the Debtors anticipated they might

receive bids for the LNR Properties in connection with bids for the Fixed/Floating Properties and that the winning bid at the auction for the Fixed/Floating Properties could encapsulate the LNR Properties. On April 12, 2011, by way of an updated process letter,4 the Debtors informed all potential bidders of the possibility the Debtors could hold a concurrent auction for the LNR Properties, to the extent the Debtors determined such an auction would be value-maximizing, on May 2, 2011.
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The Debtors encouraged potential bidders to submit formal bids on or before

See Notice of Process Update Letter [Docket No. 1027]. See Notice of Process Update Letter [Docket No. 1102].

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April 25 (the bid deadline approved in the Bidding Procedures Order with respect to overbids on the Five Mile/Lehman Bid). 15. Moeliss marketing effort generated several indications of interest for one or more

of the LNR Properties. The Debtors next sent ten potential bidders a form asset purchase agreement and requested preliminary mark-ups by April 18, 2011. 16. On or before April 18, 2011, the Debtors received initial mark-ups of the form

asset purchase agreement from eight bidders for the LNR Properties or a subset thereof. Over the next several days, the Debtors reviewed and analyzed the mark-ups and conducted calls with each bidder to discuss their proposed bids, reiterating their request for final, irrevocable bids by April 25. 17. On or before April 25, 2011, the Debtors received 17 bids (exclusive of the Five

Mile/Lehman stalking horse bid) in total, including Cerberus/Chathams Baseline Bid for the Fixed/Floating Properties and bids for a combination of assets different from those contained in the Five Mile/Lehman Bid and for individual hotels. From April 25, 2011 through May 2, 2011, the Debtors and their advisors analyzed each bid, shared each bid with the Creditors Committee, and communicated regularly with bidders to negotiate and resolve open issues. 18. On May 3, 2011, after concluding the auction for the Fixed/Floating Properties,

the Debtors commenced the LNR Auction. Of the bids received for the LNR Properties, the highest and best offer for the LNR Properties came from Chatham L.P. With a purchase price of $195 million, the Chatham Bid provided baseline recoveries for all constituents holding claims against or interests in the Debtors that currently own the LNR Properties. 19. The Debtors received a competing bid for two of the LNR Properties: the The

Doubletree in Washington, D.C. and the Residence Inn in Tysons Corner, Virginia.

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Debtors determined, in their reasonable business judgment, the Chatham Bid was a higher or otherwise better bid, and closed the auction on the afternoon of May 3, 2011 after no other bids were received. C. The Stipulation 20. On May 3, 2011, in connection with the auction for the LNR Properties, the

Debtors, LNR, and the Ad Hoc Committee entered into a Stipulation resolving a number of issues between the parties and memorializing LNRs agreement to provide Chatham L.P. with financing to utilize in its bid. D. The Chatham Bid and Stipulation Maximize the Value of the Estates 21. I believe the Chatham Bid Protections are a material inducement for, and Without the

condition of, Chatham L.P.s commitment to purchase the LNR Properties.

Chatham Bid Protections, the consideration offered under the Chatham Bid likely would have been significantly less. The benefits provided by the Chatham Bid far outweigh the potential costs associated with the Chatham Bid Protections, especially because the break-up fee and the expense reimbursement will be paid only in the event the Debtors consummate an alternative restructuring transaction for the Debtors assets. Therefore, the Chatham Bid Protections will only become payable in the event that a transaction arises that is even more favorable to the Debtors constituents. 22. The Chatham Bid is supported by the Debtors secured creditors and lays the

groundwork for a confirmation process with a significant degree of consensus. The Debtors expect to build on this support and believe the Chatham Bid provides the greatest momentum for that. Chatham has already completed its due diligence, and the Chatham Bid offers beneficial features for both the Debtors and their constituents. The Chatham Bid also offers the prospect of

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a reorganized enterprise with a reasonable capital structure, significantly improved liquidity, and controlling equity holders with familiarity to the Debtors business. 23. The Chatham Bid Protections are both reasonable and appropriate relative to the

size, nature, and complexity of the proposed transaction. The potential $2.5 million obligation of the Debtors to pay a break-up fee and expense reimbursement under the Chatham Bid represents approximately 1.25% of Chatham L.P.s $195 million offer. 24. Similarly, I submit that entry into the Stipulation is appropriate under the

circumstances. The consideration given by each of the parties pursuant to the Stipulation is critical to achieve global consensus in these Chapter 11 Cases. The Stipulation permits the Debtors to avoid the uncertainty and expense of litigation and preserves the time and resources of the Debtors management. The Stipulation facilitated the financing necessary to fund

Chathams successful, value-maximizing bid for the LNR Properties.

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Pursuant to 28 U.S.C. 1746, I declare under penalty of perjury that the foregoing is true and correct.

Dated: May 6, 2011

oelis & Company LLC