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                                                                    EXHIBIT 99.1

WINSTON HOTELS, INC.  RISK FACTORS

In addition to the other information contained in, or incorporated by reference
into, this Form 10-K, you should consider the following factors carefully in
evaluating us and our business before making an investment decision. If any of
the following risks occur, our business, financial condition or results of
operations could be materially adversely affected. In that event, the trading
price of our common stock or preferred stock could decline, in which case the
value of your investment may decline as well.

We May Not Have Access to Financing for Acquiring or Developing Additional
Hotels

Our ability to pursue our growth strategy depends, in part, on our ability to
finance additional hotel acquisitions and development. We are subject to
restrictions that may limit our ability to take advantage of expansion
opportunities that we believe are attractive. While our articles of
incorporation permit us to incur indebtedness up to 60% of our investments in
hotel properties, at cost, we cannot assure you that we will be able to borrow
funds to the extent of this limitation. We have approximately $27 million
available under our $140 million line of credit. Through a subsidiary of the
partnership, we also have a $71 million fixed-rate loan outstanding. Our line of
credit currently limits the amount of debt we can take on. In addition, our
ability to raise equity capital will depend on market conditions. We cannot
assure you that we will be able to raise funds through a public or private
offering at a time when we need access to funds. We may seek alternative methods
of funding expansion, such as joint venture development, however, we cannot
assure you that such opportunities will be available when we need them or on
acceptable terms.

Our Ability to Make Distributions to Our Shareholders Depends Upon the Ability
of Our Lessees to Make Rent Payments Under Our Leases

Our income is dependent upon rental payments from lessees of our hotels. Any
failure or delay by the lessees in making rent payments would adversely affect
our ability to make distributions to our shareholders. Our lessees' ability to
make rental payments depends on their ability to generate sufficient revenues
from our hotels in excess of operating expenses. Our leases require the lessees
to pay us (1) the greater of a base rent or percentage rent and (2) other
additional charges. As a result, we participate in the economic operations of
our hotels through our share of room revenues which exceed threshold amounts
specific to each hotel. The lessees' ability to pay on time or at all could be
negatively affected by reductions in revenue from the hotels or in the net
operating income of the lessees or otherwise. Our lessees also will be affected
by factors beyond their control, such as changes in the level of demand for
rooms and related services of our hotels, their ability to maintain and increase
gross revenues at our hotels and other factors.

Our Returns Depend on Management of Our Hotels by Third Parties

In order to qualify as a REIT, we cannot operate any hotel or participate in the
decisions affecting the daily operations of any hotel. Either our lessees, or an
operator under a management agreement with a lessee, will control the daily
operations of our hotels. Under the REIT Modernization Act of 1999 (the "RMA"),
which became effective January 1, 2001, REITs are permitted to lease their
hotels to wholly owned taxable REIT subsidiaries of the REITs ("TRS Lessees").
Even under the RMA, TRS Lessees may not operate the leased hotels and must enter
into management agreements with eligible independent contractors which will
manage the hotels. We do not have the authority to require any hotel to be
operated in a particular manner or to govern any particular aspect of the daily
operations of any hotel (e.g., setting room rates). Thus, even if we believe our
hotels are being operated inefficiently or in a manner that does not result in
anticipated rent payments under existing leases, we cannot require a change to
the method of operation. We can only seek redress if the lessee violates terms
of the lease, and then only to the extent of the remedies provided for under the
terms of the lease.


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In addition, our growth strategy contemplates additional hotel acquisitions that
meet our investment criteria and selective development of hotels as market
conditions warrant. Our ability to grow depends, in part, upon the ability of
our lessees and any third-party managers to manage our current and future hotels
effectively. If the lessees or the third-party managers are not able to operate
additional hotels, at current staffing levels and office locations, they may
need to hire additional personnel, engage additional third-party managers and/or
operate in new geographic locations. If the lessees or the managers fail to
operate the hotels effectively, our ability to generate revenues from the hotel
leases could be diminished.

We Must be Able to Repay, Extend or Refinance Our Existing Debt

We and a special purpose finance subsidiary of the partnership, Winston SPE LLC,
each currently have significant amounts of debt outstanding. Thus, we are
subject to the risks normally associated with debt financing, including the
risks that:

         -        our cash flow from operations will be insufficient to make
                  required payments of principal and interest;
         -        existing debt, including secured debt, may not be refinanced;
                  or
         -        the terms of any refinancing will not be as favorable as the
                  terms of our current debt.

If we or the finance subsidiary do not have sufficient funds to repay our debt
at maturity, it may be necessary to refinance it through additional debt
financing, private or public offerings of debt securities or additional equity
offerings. If, at the time of any refinancing, prevailing interest rates or
other factors result in higher interest rates on refinancings, increases in
interest expense could adversely affect our cash flow, and, consequently, cash
available for distribution to shareholders. If we are unable to refinance our
debt on acceptable terms, we or the finance subsidiary may be forced to dispose
of hotels or other assets on disadvantageous terms, potentially resulting in
losses and adverse effects on cash flow from operating activities. If we are
unable to make required payments of principal and interest on debt secured by
our hotels, one or more of those properties could be foreclosed upon by the
lender with a consequent loss of income and asset value.

Likewise, requirements under our credit facilities could affect our financial
condition and our ability to make distributions. Our articles of incorporation
limit our ability to incur debt to 60% of the value of our investment in hotel
properties, at cost. This limit is currently approximately $267 million.

Our current credit facilities, consisting of our syndicated credit agreement
providing for a $140 million line of credit and a fixed-rate loan to the finance
subsidiary in the amount of $71 million, allow us to borrow up to a total of
$211 million. We have pledged 28 hotel properties as collateral securing the
line of credit and the finance subsidiary has pledged 14 hotel properties
securing the $71 million note with respect to its fixed-rate loan. Both credit
facilities prohibit additional debt secured by any hotel pledged as collateral
for obligations under that facility.

Under the terms of our $140 million line of credit, our borrowing availability
is limited to a percentage of value of the hotels provided as collateral, with
such value determined in part by the cash flow generated by those hotels. Our
current cash flow from the hotels securing the line of credit limits our
borrowing availability under the line of credit to less than $140 million. If we
need to borrow funds under the line of credit above our borrowing availability,
we must provide additional collateral to increase our borrowing availability to
the total amount of debt we need, but not to exceed $140 million. If our cash
flow decreases to such a level that our borrowing availability is less than the
amount outstanding under the line of credit, we must either (1) repay the excess
of the amounts outstanding over our borrowing availability or (2) if the lenders
give their unanimous consent, provide additional collateral to increase our
borrowing availability.

Our ability to borrow and to maintain loans under the line of credit is subject
to financial covenants, including leverage ratios, maximum unsecured and secured
debt ratios, interest and fixed charge coverage ratios and minimum tangible net
worth requirements. The terms of the line of credit also limit our ability to
effect mergers or asset sales, to


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make investments in other entities, or to pay dividends in excess of 90% of our
funds from operations over the most recent four fiscal quarters. The line of
credit provides that any default under, or acceleration of, any of our other
debt, any debt of the partnership or any debt of our subsidiaries, including any
default by the finance subsidiary under the $71 million fixed-rate loan or
otherwise, will constitute a default under the line of credit and could lead to
the acceleration of our obligations under the line of credit. Although we and
the finance subsidiary presently are in compliance with our covenants and other
material obligations under the line of credit and the fixed-rate loan,
respectively, we cannot assure you that we or our finance subsidiary will
continue to be in compliance, or that we or they will be able to service our
respective indebtedness or pay distributions to our shareholders.

Rising Interest Rates Could Adversely Affect Our Cash Flow

Our borrowings under the $140 million line of credit bear interest at a variable
rate. Our line of credit requires that we maintain at least 50% of our total
debt subject to a fixed rate of debt. We have entered into an interest rate cap
agreement which eliminates exposure to increases in 30-day LIBOR rates exceeding
7.5% on $25 million of the outstanding balance under our line of credit until
March 25, 2002, and, an interest rate swap on $50 million of our outstanding
debt under our line of credit as of December 31, 2000, which effectively
replaces the variable interest rate with a fixed interest rate of 5.915% for two
years. However, outstanding debt of up to $53.8 million under our line of credit
remained subject to variable interest rates. We may incur debt in the future
that bears interest at a variable rate or we may be required to retain our
existing debt at higher interest rates. Accordingly, increases in interest rates
could increase our interest expense and adversely affect our cash flow.

We May Not be Able to Complete Development of New Hotels on Time or Within
Budget

We are currently developing one hotel property through a joint venture, and we
intend to develop additional hotel properties as suitable opportunities arise.
New project development is subject to a number of risks that could cause
increased costs or delays in our ability to generate revenue from the
development hotel, resulting in a negative effect on our cash available for
distribution. These risks include:

         -        construction delays or cost overruns that may increase project
                  costs;
         -        competition for suitable development sites;
         -        receipt of zoning, occupancy and other required governmental
                  permits and authorizations; and
         -        substantial development costs in connection with projects that
                  are not pursued to completion.

We cannot assure you that we will complete the development of any projects we
begin or that our development and construction activities will be completed in a
timely manner or within budget.

We also intend to rehabilitate hotels that we believe are underperforming. These
rehabilitation projects will be subject to the same risks as development
projects.

Hotels We Develop Have No Operating History

The hotel we are currently developing under our joint venture has no operating
history. We will negotiate the percentage rent formula for this hotel, and other
hotels we develop, based on projections of occupancy and average daily room
rates for the area in which the hotel is or will be located and the type of
hotel under development. We cannot assure you that these hotels will achieve
anticipated levels of occupancy or average daily room rate. Similarly, during
the start-up period, room revenues may be less than required to result in the
payment of rent at levels that provide us with an attractive return on our
investments.


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Property Ownership through Joint Ventures and Partnerships Could Limit Our
Control of Those Investments

Joint ventures or partnerships (other than Winn Limited Partnership) may involve
risks not otherwise present for investments we make on our own. It is possible
that our co-venturers or partners may have different interests or goals than we
do at any time and that they may take action contrary to our requests, policies
or objectives, including our policy with respect to maintaining our
qualification as a REIT. Other risks of joint venture investment include impasse
on decisions, because no single co-venturer or partner would have full control
over the joint venture or partnership. Regent Partners, Inc., one of our current
joint venture partners, has the right, after one year, to sell the hotels
developed by the joint venture to us, or, if we refuse, to sell such hotels to a
third party. Marsh Landing Investment, LLC, our other current joint venture
partner, also has the right, after one year, to sell the hotel developed by the
joint venture to us, or, if we refuse, to sell such hotel to a third party.

Our Business Could Be Disrupted if We Need to Find a New Lessee upon Termination
of an Existing Lease

If our lessees fail to materially comply with the terms of a hotel lease
(including failure to pay rent when due), we have the right to terminate the
lease, repossess the applicable hotel and enforce payment obligations under the
lease. If CapStar Winston Company, L.L.C. ("CapStar Winston") defaults under any
lease, the default will constitute a default under all of our leases with
CapStar Winston and its affiliates. Thus, we will have the right to terminate
all of those leases. Upon termination, we would have to find another lessee or
establish or identify a TRS Lessee to lease the property. In either case, we
cannot operate the hotels directly due to federal income tax restrictions. We
cannot assure you that we would be able to find another lessee or operator or
that, if another lessee or operator were found, we would be able to enter into
new leases or management contracts favorable to us. There would possibly be
disruption during any change of hotel management which could adversely affect
our operating results. In addition, it is possible that we would not be able to
enforce the payment obligations under the leases following termination.

We May Not be Able to Sell Hotels on Favorable Terms

Although no hotels are currently under contract to sell, we may decide to sell
hotels in the future. We cannot assure you that we will be able to sell such
hotels on favorable terms, or that such hotels will not be sold at a loss.

Furthermore, under our leases, upon the sale of a hotel, we must either pay a
termination fee to our lessee or offer to lease another suitable property to the
lessee. The amount of the termination fee would depend on the revenue from the
hotel and the remaining term of the lease. Alternatively, we may negotiate with
our lessee to waive the lease provision and arrange for the lessee to continue
to lease the property from the buyer. We cannot assure you that we will be able
to successfully negotiate with our lessee or be able to offer a suitable
substitute lease. Consequently, we may have to pay a termination fee, lease
another suitable property or abandon the sale transaction.

Our Performance and the Value of Our Stock Are Subject to Risks Associated with
the Hotel Industry

(a) Our Hotels Are Subject to Operating Risks Common to the Hotel Industry.

Our hotels are subject to all operating risks common to the hotel industry.
These factors could adversely affect the ability of our lessees to generate
revenues and to make payments to us and therefore affect our ability to make
distributions to our shareholders. These risks include:

         -        competition for guests from other hotels;
         -        faster growth in room supply in the segments in which we
                  operate than in other industry segments, which may exceed
                  demand growth in certain regions;
         -        increases in operating costs due to inflation and other
                  factors which may not be offset in the future by increased
                  room rates;
         -        seasonality, with higher hotel revenues occurring in the
                  second and third calendar quarters;
         -        increases in energy costs, airline fares and other expenses
                  related to travel, which may deter traveling; and
         -        adverse effects of general and local economic conditions.


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(b) We May Incur Higher Costs as a Result of the Proximity of Our Hotels to the
Coast.

Several of our hotels are located near the Atlantic Ocean and are exposed to
more severe weather than hotels located inland. These hotels are also exposed to
salt water and humidity, which can increase or accelerate wear on the hotels'
weatherproofing and mechanical, electrical and other systems. As a result, we
may incur additional expenditures for capital improvements.

(c) Conditions of Franchise Agreements Could Adversely Affect Us.

All of our hotels are operated pursuant to franchise agreements with
nationally-recognized hotel brands. In addition, hotels in which we subsequently
invest may be operated pursuant to franchise agreements. A hotel's failure to
adhere to the terms and conditions of the franchise agreement could result in
the loss or cancellation of its franchise license. The franchise agreements
generally contain specific standards for, and restrictions and limitations on,
the operation and maintenance of a hotel in order to maintain uniformity within
the franchisor's system. These standards are subject to change over time, in
some cases at the discretion of the franchisor, and may restrict a franchisee's
ability to make improvements or modifications to a hotel without the consent of
the franchisor. In addition, compliance with these standards could require a
franchisee to incur significant expenses or capital expenditures. Our cash
available for distribution could be adversely affected if we or our lessees must
incur substantial costs to maintain a franchise license.

In connection with termination of a franchise license or changing the franchise
affiliation of a hotel, we may have to incur significant expenses or capital
expenditures. Moreover, the loss of a franchise license could have a material
adverse effect on the operations or the underlying value of the hotel covered by
the franchise because of the loss of association, name recognition, marketing
support and centralized reservation system provided by the franchisor. Any of
these events could have a negative effect on our distributions to shareholders.
The franchise agreements covering the hotels expire or terminate, without
special renewal rights, at various times and have different remaining terms.

(d) Operating Costs and Capital Expenditures Could Adversely Affect Our Cash
Flow.

Hotels have an ongoing need for renovations and other capital improvements,
particularly in older structures, including periodic replacement of furniture,
fixtures and equipment. Under the terms of our leases, we are obligated to pay
the cost of certain capital expenditures at the hotels and to pay for furniture,
fixtures and equipment. Franchisors also may require periodic capital
improvements to the hotels as a condition of retaining the franchise licenses.
In addition, we intend to invest selectively in hotels that require significant
renovation. Renovation of hotels involves certain risks, including:

         -        the possibility of environmental problems;
         -        construction cost overruns and delays;
         -        uncertainties as to market demand or deterioration in market
                  demand after commencement of renovation; and
         -        the emergence of unanticipated competition from other hotels.

If any of these costs exceed our estimates, the additional cost could have an
adverse effect on our cash available for distribution.

We Must Compete with Larger Entities for Acquisition Opportunities

We compete for acquisition opportunities with entities that have substantially
greater financial resources than we do. These entities generally may be able to
accept more risk than we can prudently manage, including risks with respect to
the creditworthiness of a hotel operator or the geographic proximity of its
investments. Competition may reduce the


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number of suitable investment opportunities available to us and increase the
bargaining power of sellers. In addition, other potential buyers who do not need
to use a lessee or a third party operator to operate the hotel may be able to
offer a higher price for a property than we are able to pay.

We May Face Conflicts of Interest Relating to Sale of Hotels Acquired from
Affiliates

We have acquired 14 hotels in the past from related parties of our affiliates,
which include Robert Winston (our Chief Executive Officer) and Charles Winston
(our Chairman of the Board). The limited partners of the partnership, including
Robert Winston and Charles Winston, may have unrealized gain associated with
their interests in these hotels. Our sale of any of those hotels may cause
adverse tax consequences to the limited partners. Therefore, our interests could
conflict with the interests of the limited partners in connection with the
disposition of one or more of those 14 hotels. However, decisions with respect
to the disposition of any of our hotel properties must be made by a majority of
the board of directors. When the disposition involves a hotel that was initially
acquired from an affiliate, the majority required to approve the sale must
include a majority of our independent directors.

We Depend on Key Personnel

We depend on the efforts and expertise of our President, Chief Executive
Officer, Chief Financial Officer, Controller and Executive Vice President of
Development to drive our day to day operations and strategic business direction.
The loss of their services could have an adverse effect on our operations.

Our Performance and Value Are Subject to the Condition of the Real Estate
Industry

(a) Since Real Estate Investments Are Illiquid, We May Not be Able to Sell
Hotels when Appropriate.

Real estate investments generally cannot be sold quickly. We may not be able to
vary our portfolio promptly in response to changes in economic and other
conditions. Because we are a REIT, federal income tax laws limit our ability to
sell properties in some situations when it may be economically advantageous to
do so. As a result, returns to our shareholders could be adversely affected. In
addition, we cannot assure you that the market value of any of our hotels will
not decrease in the future.

(b) Liability for Environmental Matters Could Adversely Affect Our Financial
Condition.

Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of investigation and removal or remediation of hazardous or
toxic substances on, under or in the property, including fixtures, structures
and other improvements located on the property. These laws often impose
liability whether or not the owner or operator knew of (or should have known
of), or caused, the presence of contaminants. Clean-up costs and the owner's or
operator's liability generally are not limited under these laws and could exceed
the value of the property and/or the aggregate assets of the owner or operator.
In addition, the presence of, or failure to properly remediate, contaminants may
adversely affect the owner's ability to sell or rent the property or borrow
using the real property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances may also be liable for the clean-up
costs of the substances at the disposal or treatment facility, whether or not
the facility is or ever was owned or operated by that person.

Environmental, health and safety laws and common law principles also govern the
presence, maintenance and removal of hazardous substances, including
asbestos-containing materials, or ACMs, into the air. Many such laws permit
third parties, including employees and independent contractors, to seek recovery
from owners or operators of real properties for personal injury or property
damage associated with exposure to released hazardous substances, including
ACMs. In connection with the ownership of the hotels, we may be considered an
owner or operator and therefore may be potentially liable for any such costs. We
obtained Phase I environmental site assessments prior to the acquisition of each
hotel. The purpose of these Phase I reports is to identify potential sources of
contamination for


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which a hotel may be responsible and to assess the status of environmental
regulatory compliance. However, Phase I reports do not address the presence of
asbestos, lead paint, radon or other indoor air pollution. The Phase I reports
have not revealed any environmental condition, liability or compliance concern
that we believe would have a material adverse effect on our business, assets or
results of operations, nor are we aware of any such condition, liability or
concern. However, these reports may not reveal all environmental conditions,
liabilities or compliance concerns. For example, asbestos has been found at two
of our hotels, but we do not believe that this finding has any material adverse
effect on our business, assets or our results of operations. Further, there may
be material environmental conditions, liabilities or compliance concerns that
arose at a hotel after the related Phase I report was completed of which we are
otherwise unaware.

(c) Liability for Uninsured and Underinsured Losses Could Adversely Affect Our
Financial Condition.

In the event of a substantial loss, our insurance coverage may not be sufficient
to pay the full current market value or current replacement cost of our lost
investment. Each lease specifies comprehensive insurance to be maintained on the
subject hotel, which we believe is comparable to that customarily obtained for
or by an owner on real property assets. Leases for subsequently acquired hotels
will contain similar provisions. Our board of directors will use its discretion
in determining amounts, coverage limits and deductibility provisions of
insurance, with a view to maintaining appropriate insurance coverage on our
investments at a reasonable cost and on suitable terms. Certain types of losses,
generally of a catastrophic nature, such as earthquakes, floods, hurricanes, and
other acts of God, may be uninsurable or not economically insurable. In
addition, we may not be able to use insurance proceeds to replace a damaged or
destroyed property as a result of changes in building codes and ordinances,
environmental considerations or other factors. In these circumstances, any
insurance proceeds we receive might not be adequate to restore our economic
position with respect to the damaged or destroyed property.

(d) The Cost of Compliance with the Americans with Disabilities Act and Other
Changes in Governmental Rules and Regulations Could Adversely Affect Our Cash
Flow.

Under the Americans with Disabilities Act of 1990, or the ADA, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While we believe that our hotels
substantially comply with these requirements, a determination that we are not in
compliance with the ADA could result in imposition of fines or an award of
damages to private litigants. In addition, other governmental rules and
regulations or enforcement policies affecting the use and operation of the
hotels could change, including changes to building codes and fire and life
safety codes. If we are required to spend money to comply with the ADA or other
changes in governmental rules and regulations, our ability to make distributions
to shareholders could be adversely affected.

(e) Fluctuations in Property Taxes Could Adversely Affect Our Cash Flow.

Real and personal property taxes on our current (and future) hotel properties
may increase or decrease as property tax rates change and as the properties are
assessed or reassessed by taxing authorities. An increase in property taxes
could have an adverse effect on our ability to make distributions to
shareholders.

Our Mezzanine Financing Loans to Third Parties and Development Services Involve
Risk of Losses

We face special risks in connection with our mezzanine loans to borrowers for
the purpose of building and owning hotels. We are subject to risks of borrower
defaults, bankruptcies, fraud and losses and special hazard losses that are not
covered by standard hazard insurance. We expect that each mezzanine loan will be
made to a single purpose entity whose sole asset would be a hotel being built.
Our present mezzanine loans are not, and we do not expect that our future
mezzanine loans will be, collateralized by the hotel being built by the single
purpose entity. Mezzanine loans will be subordinate to any debt collateralized
by the hotel being built or any other debt of the single purpose entity.
Mezzanine loans are considered to involve a higher degree of risk than long-term
senior mortgage lending that


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is secured by income-producing real property for a variety of reasons including,
among other things, dependency on the success of a project which a third party
controls and that a foreclosure by the holder of the senior loan could result in
a mezzanine loan becoming uncollectible. Additionally, mezzanine loans may have
higher loan to value ratios than conventional term loans. There can be no
assurances that the borrower will be able to repay its obligations under the
mezzanine loans or the senior loans and the Company could suffer a total loss of
its mezzanine loan.

In certain cases where the Company is offering its third party hotel development
services in exchange for fees, the Company may elect to provide the hotel
owner/developer with a construction completion guaranty on the particular hotel
under development. In those cases, if the owner/developer were in default under
the terms and conditions of its senior loans, there can be no assurances that
the holders of the senior loans would not seek to compel the Company to complete
the development of the particular hotel with the Company's own funds, which
could materially adversely affect our business, financial condition and results
of operations.

The Price of Our Securities May be Affected by Changes in Market Interest Rates

One of the factors that may influence the price of our common stock or preferred
stock in public trading markets is the annual yield from distributions on our
common stock or preferred stock as compared to yields on other financial
instruments. Thus, an increase in market interest rates will result in higher
yields on other financial instruments, which could adversely affect the market
price of our common stock or preferred stock.

Our Board of Directors has Limited Ability to Change Certain Policies

Our major policies, including our acquisition, development, financing, growth,
operations, debt capitalization and distribution policies, are determined by our
board of directors. We cannot change our policy of limiting consolidated debt to
60% of our investment in hotel properties, at cost, without shareholder
approval. In addition, the approval of two-thirds of the number of shares of
common stock entitled to vote is necessary to change our policy of seeking to
maintain qualification as a REIT.

The Ability of Our Shareholders to Effect a Change in Control is Limited

(a) Stock Ownership Limitations Could Inhibit Changes in Control.

Our articles of incorporation provide that no shareholder may own, directly or
indirectly, more than 9.9% of any class of our outstanding stock. This
limitation may have the effect of precluding acquisition of control by a third
party without the approval of our board of directors.

(b) Our Ability to Issue Preferred Stock Could Inhibit Changes In Control.

Our articles of incorporation authorize the board of directors to issue up to
10,000,000 shares of preferred stock and to establish the preferences and rights
of any shares of preferred stock issued. Currently, there are 3,000,000 shares
of preferred stock outstanding. Issuing additional preferred stock could have
the effect of delaying or preventing a change in control even if a change in
control were in our shareholders' interest.

We Are Subject to Tax Risks as a Result of Our REIT Status

We have operated and intend to continue to operate so as to qualify as a REIT
for federal income tax purposes. Our continued qualification as a REIT will
depend on our continuing ability to meet various requirements concerning the
ownership of our outstanding stock, the nature of our assets, the sources of our
income, and the amount of distributions to our shareholders. In order to qualify
as a REIT, we generally are required each year to distribute to our shareholders
at least 90% of our taxable income, other than any net capital gain. to the
extent that we meet the 90% distribution requirement, but distribute less than
100% of our taxable income, we will be required to pay income


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tax on our undistributed income. In addition, we will be subject to a 4%
nondeductible excise tax if the actual amount we pay out to our shareholders in
a calendar year is less than a minimum amount specified under the federal tax
laws. The requirement to distribute a substantial portion of our net taxable
income could cause us to distribute amounts that otherwise would be spent on
future acquisitions, unanticipated capital expenditures or repayment of debt,
which would require us to borrow funds or to sell assets to fund the costs of
such items.

We have made, and intend to continue to make, distributions to our shareholders
to comply with the current 90% distribution requirement and to avoid corporate
income tax and the nondeductible excise tax. Our income consists of our share of
the income of the partnership, and our cash available for distribution consists
of our share of cash distributions from the partnership, less capital
expenditures and principal debt payments. Differences in timing between the
recognition of taxable income and the receipt of cash available for distribution
due to the seasonality of the hotel industry could require us to borrow funds on
a short-term basis to meet the current 90% distribution requirement and to avoid
the nondeductible excise tax.

If we were to fail to qualify as a REIT for any taxable year, we would not be
allowed to deduct our distributions to our shareholders in computing our taxable
income. Furthermore, we would be subject to federal income tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. Unless we are entitled to relief under the federal income tax laws, we
also would be disqualified from treatment as a REIT for the four taxable years
following the year during which we lost our qualification. As a result, our cash
available for distribution would be reduced for each of the years involved.
Although we currently operate and intend to continue to operate in a manner
designed to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause our board of directors, with the
consent of shareholders holding at least two-thirds of the common stock entitled
to vote, to revoke the REIT election.



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