Exhibit 10.4

APPLE REIT SEVEN, INC.

2005 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN

EFFECTIVE MARCH 2, 2006

--------------------------------------------------------------------------------

APPLE REIT SEVEN, INC.

2005 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN

EFFECTIVE MARCH 2, 2006

1. Purpose. The purpose of this Apple REIT Seven, Inc. 2005 Non-Employee
Directors Stock Option Plan (the “Plan”) is to encourage ownership in Apple REIT
Seven, Inc. (the “Company) by non-employee members of the Board, in order to
promote long-term stockholder value and to provide non-employee members of the
Board with an incentive to continue as directors of the Company.

2. Definitions. As used in the Plan, the following terms have the meanings
indicated:

(a) “Act” means the Securities Exchange Act of 1934, as amended.

(b) “Board” means the board of directors of the Company.

(c) “Code” means the Internal Revenue Code of 1986, as amended.

(d) “Company” means Apple REIT Seven, Inc., a Virginia corporation.

(e) “Date of Grant” means the date as of which an Eligible Director is
automatically awarded an Option pursuant to Section 7.

(f) “Disability” or “Disabled” means that the participant (i) is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or can be expected to last for a continuous period of not less than 12
months, or (ii) is, by reason of any medically determinable physical or mental
impairment which can be expected to result in death or can be expected to last
for a continuous period of not less than 12

--------------------------------------------------------------------------------

months, receiving income replacement benefits for a period of not less than 3
months under an accident and health plan covering employees of the Employer.

(g) “Eligible Director” means a director described in Section 4.

(h) “Employer” means the Company.

(i) “Fair Market Value” means, on any given date, (i) if the Units are traded on
an exchange, the closing registered sales prices of the Company Stock on such
day on the exchange on which it generally has the greatest trading volume,
(ii) if the Units are traded on the over-the-counter market, the average between
the closing bid and asked prices on such day as reported by NASDAQ, or (iii) if
the Units are not traded on any exchange or over-the-counter market, the fair
market value shall be determined by the Board using any reasonable method in
good faith.

(j) “Initial Closing” means the first closing of the Offering that will occur
after the Minimum Offering is achieved.

(k) “Insider” means a person subject to Section 16(b) of the Act.

(l) “Minimum Offering” means the sale of 4,761,905 Units pursuant to the
Offering.

(m) “Offering” means, collectively, (1) the sale of up to $1,000,000,000 in
Units to the public and the registration of such shares with the Securities and
Exchange Commission, as authorized by resolutions of the Board dated May 20,
2005 (the “Initial Offering”), and (2) the issuance of any additional Units as
authorized by resolutions of the Board from time to time, which issuance occurs
before the termination of this Plan (the “Additional Offerings”).

 

2

--------------------------------------------------------------------------------

(n) “Option” means a right to acquire Units granted under the Plan, at a price
determined in accordance with the Plan.

(o) “Unit” means one common share and one Series A preferred share, no par
value, of the Company. If the par value of the common shares or Series A
preferred shares is changed, or in the event of a change in the capital
structure of the Company (as provided in Section 12), the Units resulting from
such a change shall be deemed to be Units within the meaning of the Plan.

3. Administration. The Plan shall be administered by the Board. Options shall be
granted as described in Section 7. However, the Board shall have all powers
vested in it by the terms of the Plan, including, without limitation, the
authority (within the limitations described herein) to prescribe the form of the
agreement embodying the grant of Options, to construe the Plan, to determine all
questions arising under the Plan, and to adopt and amend rules and regulations
for the administration of the Plan as it may deem desirable. Any decision of the
Board in the administration of the Plan, as described herein, shall be final and
conclusive. The Board may act only by a majority of its members in office,
except that members thereof may authorize any one or more of their number or any
officer of the Company to execute and deliver documents on behalf of the Board.
No member of the Board shall be liable for anything done or omitted to be done
by him or any other member of the Board in connection with the Plan, except for
his own willful misconduct or as expressly provided by statue.

4. Participation in the Plan. Each director of the Company who is not otherwise
an employee of the Employer or any subsidiary of the Company and was not an
employee of the Employer or subsidiary for a period of at least one year before
the Date of Grant shall be eligible to participate in the Plan.

 

3

--------------------------------------------------------------------------------

5. Securities Subject to the Plan. Subject to Section 12 of the Plan, there
shall be reserved for issuance under the Plan an aggregate of 45,000 Units plus
1.8% of the total number of Units issued in the Offering in excess of the
Minimum Offering, which shall be authorized, but unissued Units. Units allocable
to Options or portions thereof granted under the Plan that expire or otherwise
terminate unexercised may again be subjected to an Option under the Plan.

6. Non-Statutory Stock Options. All options granted under the Plan shall be
non-statutory in nature and shall not be entitled to special tax treatment under
Code section 422.

7. Award, Terms, Conditions and Form of Options. Each Option shall be evidenced
by a written agreement in such form as the Board shall from time to time
approve, which agreement shall comply with and be subject to the following terms
and conditions:

(a) Automatic Award of Option.

(i) As of the Initial Closing, each Eligible Director shall automatically
receive an Option to purchase 5,500 Units plus 0.0125% of the number of Units in
excess of the Minimum Offering sold by the Initial Closing.

(ii) As of each June 1 during the years 2006 and ending upon the termination of
the Plan, each Eligible Director shall automatically receive an Option to
purchase 0.02% of the total number of Units issued and outstanding on that date.

(iii) As of the election as a director of any new person who qualifies as an
Eligible Director, such Eligible Director shall automatically receive an Option
to purchase 5,500 Units.

(iv) If at any time under the Plan there are not sufficient Units available to
fully permit the automatic Option grants described in this paragraph, the Option

 

4

--------------------------------------------------------------------------------

grants shall be reduced pro rata (to zero if necessary) so as not to exceed the
number of Units available.

(b) Option Exercise Price. The Option exercise price shall be the Fair Market
Value of the Units subject to the Option on the Date of Grant.

(c) Options Not Transferable. An Option shall not be transferable by the
optionee otherwise than by will, or by the laws of descent and distribution, and
shall be exercised during the lifetime of the optionee only by him. An Option
transferred by will or by the laws of descent and distribution may be exercised
by the optionee’s personal representative within one year of the date of the
optionee’s death to the extent the optionee could have exercised the Option on
the date of his death. No Option or interest therein may be transferred,
assigned, pledged or hypothecated by the optionee during his lifetime, whether
by operation of law or otherwise, or be made subject to execution, attachment or
similar process.

(d) Exercise of Options. In no event shall an Option be exercisable earlier than
six months from the later of the Date of Grant or the date of approval of the
Plan by shareholders of the Company. Furthermore, no Option may be exercised:

(i) Before any amendment or restatement that requires shareholder approval
pursuant to Section 13 of the Plan, is approved by shareholders of the Company;

(ii) Unless at such time the optionee is a director of the Company, except that
he may exercise the Option within three years of the date he ceases to be a
director of the Company if he ceased to be a director more than six months after
the Date of Grant of the Option;

 

5

--------------------------------------------------------------------------------

(iii) After the expiration of ten years from the Date of Grant; and

(iv) Except by written notice to the Company at its principal office, stating
the number of Units the optionee has elected to purchase, accompanied by payment
in cash and/or by delivery to the Company of the Units (valued at Fair Market
Value on the date of exercise) in the amount of the full Option exercise price
for the shares of Units being acquired thereunder.

8. Withholding. If the Company is required by law to withhold federal or state
income taxes when an Option is exercised, the Company shall have the right to
retain or sell without notice Units having a Fair Market Value sufficient on
such date or dates as may be determined by the Board (but not more than five
business days prior to the date on which such Units would otherwise have been
delivered) to cover the amount of any federal or state income tax required to be
withheld or otherwise deducted and paid with respect to such payment and the
exercise of the Option, remitting any balance to the optionee; provided,
however, that the optionee shall have the right to make other arrangements
satisfactory to the Company or to provide the Company with the funds to enable
it to pay such tax. Notwithstanding the foregoing, the Company shall not sell
Units if the Optionee is an Insider and such sale will cause the Optionee to
incur a liability under Section 16(b) of the Act.

9. Modification, Extension and Renewal of Options. To the extent permitted under
Code section 409A, the Board shall have the power to modify, extend or renew
outstanding Options and to authorize the grant of new options in substitution
therefor, provided that any such action may not enhance the rights of the
optionee without shareholder approval or have the effect of altering, enhancing
or impairing any rights or obligations of any person under any Option previously
granted without the consent of the optionee.

 

6

--------------------------------------------------------------------------------

10. Termination. The Plan shall terminate upon the earlier of:

(a) The adoption of a resolution of the Board terminating the Plan; or

(b) The date on which the Company’s existence terminates (provided, however,
that if the existence of the Company is reinstated as permitted by law, the Plan
shall continue during the effective period of any reinstatement, subject to
earlier termination pursuant to Section 10(a) above).

No termination of the Plan shall without his consent materially and adversely
affect any of the rights or obligations of any person under any Option
previously granted under the Plan.

11. Limitation of Rights.

(a) No Right to Continue as a Director. Neither the Plan nor any action taken
pursuant to the Plan shall constitute or be evidence of any agreement or
understanding, express or implied, that the Company will retain any person as a
director for any period of time.

(b) No Shareholders Rights Under Options. An optionee shall have no rights as a
shareholder with respect to Units covered by his Option until the date of
exercise of the Option, and, except as provided in Section 12, no adjustment
will be made for dividends or other rights for which the record date is prior to
the date of such exercise.

12. Changes in Capital Structure.

(a) In the event of a stock dividend, stock split or combination of stock,
recapitalization or merger in which the Company is the surviving corporation or
other change in the Company’s capital stock (including, but not limited to, the
creation or issuance to shareholders generally of rights, options or warrants
for the purchase of common shares or preferred shares of the Company), the
number of units to be subject to

 

7

--------------------------------------------------------------------------------

the Plan and to Options then outstanding or to be granted thereunder, the
maximum number of units or securities which may be delivered under the Plan, the
exercise price and other relevant provisions shall be appropriately adjusted by
the Board, whose determination shall be binding on all persons. If the
adjustment would produce fractional units with respect to any unexercised
Option, the Board may adjust appropriately the number of units covered by the
Option so as to eliminate the fractional units.

(b) If the Company is a party to a consolidation or a merger in which the
Company is not the surviving corporation, a transaction that results in the
acquisition of substantially all of the Company’s outstanding stock by a single
person or entity, or a sale or transfer of substantially all of the Company’s
assets, the Board may take such actions with respect to outstanding Options as
the Board deems appropriate; provided, however, that any such action must comply
with Code section 409A.

(c) Notwithstanding anything in the Plan to the contrary, the Board may take the
foregoing actions without the consent of any optionee and the Board’s
determination shall be conclusive and binding on all persons for all purposes.

13. Amendment of the Plan. The Board (except as provided below) may suspend or
discontinue the Plan or revise or amend the Plan in any respect; provided,
however, that without approval of the shareholders of the Company no revision or
amendment shall increase the number of shares subject to the Plan (except as
provided in Section 12) or materially increase the benefits accruing to
participants under the Plan. The Plan shall not be amended more than once every
six months other than an amendment required to comply with changes in the
Internal Revenue Code or regulations thereunder. Notwithstanding the foregoing,
the Board may unilaterally amend the Plan and the terms of Options granted
hereunder to ensure compliance

 

8

--------------------------------------------------------------------------------

with Rule 16b-3 of the Securities and Exchange Commission promulgated under the
Act or Code section 409A.

14. Notice. All notices and other communications required or permitted to be
given under this Plan shall be in writing and shall be deemed to have been duly
given if delivered personally or mailed first class, postage prepaid, as
follows: (a) if the Company – at its principal business address to the attention
of the President; (b) if to any participant – at the last address of the
participant know to the sender at the time the notice or other communication is
sent.

15. Governing Law. The terms of this Plan shall be governed by the laws of the
Commonwealth of Virginia without regard to conflicts of law. Anything in this
Plan to the contrary notwithstanding, the Plan shall be interpreted and
administered at all times to comply with the applicable requirements of Code
section 409A and any guidance promulgated thereunder.

IN WITNESS WHEREOF, the Company has caused this Plan to be executed this 2nd day
of March, 2006.

 

APPLE REIT SEVEN, INC. By:  

/s/ Glade M. Knight

 

Glade M. Knight,

 

Chairman of the Board

 

9