UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 
 FORM
10-Q
 
 (Mark
One)
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2010OR ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from __________to
      __________
  Commission
file number 333-150612
  
 MOODY
NATIONAL REIT I, INC.
 (Exact
Name of Registrant as Specified in Its Charter)
 
 
 Maryland
              26-1812865(State
      or Other Jurisdiction ofIncorporation
      or Organization)
              (I.R.S.
      EmployerIdentification
      No.)6363
      Woodway Drive, Suite 110
                Houston,
      Texas
              77057(Address
      of Principal Executive Offices)
              (Zip
      Code)
 
  (713)
977-7500
 (Registrant’s
Telephone Number, Including Area Code)
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No  
 ̈
  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 filed, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):
 
 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   ̈No  x
  As of May
17, 2010, there were 22,222shares of the
Registrant’s common stock issued and outstanding, all of which were held by an
affiliate of the Registrant.





MOODY NATIONAL REIT I, INC.


INDEX





PART I.  FINANCIAL
INFORMATION
            PageItem 1.
            Financial Statements
            2Consolidated Balance Sheets as of March 31, 2010 and December
      31, 2009 (unaudited)
            2Consolidated Statements of Equity for the three months ended
      March 31, 2010 and 2009 (unaudited)
            3Consolidated Statements of Cash Flows for the three months
      ended March 31, 2010 and 2009 (unaudited)
            4Notes to Consolidated Financial Statements
      (unaudited)
            5Item 2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            15Item 3.
            Quantitative and Qualitative Disclosures about Market
      Risk
            24Item 4T.
            Controls and Procedures
            25PART II.  OTHER INFORMATION
            26Item 1.
            Legal Proceedings
            26Item 1A.
            Risk Factors
            26Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            26Item 3.
            Defaults Upon Senior Securities
            26Item 4.
            Reserved
            26Item 5.
            Other Information
            26Item 6.
            Exhibits
            26














1
 Index





PART I — FINANCIAL INFORMATION





ITEM 1.
            FINANCIAL
      STATEMENTS.





MOODY NATIONAL REIT I, INC.


CONSOLIDATED
BALANCE SHEETS


(Unaudited)











March
      31, 2010
            
            
            December
      31, 2009ASSETSCash
            
            $
            202,000
            
            
            $
            202,000Escrowed
      investor proceeds
            
            
            76,507
            
            
            
            111,509Total
      Assets
            
            $
            278,507
            
            
            $
            313,509LIABILITIES
      AND EQUITYLiabilities:Subscriptions for common
      stock
            
            $
            76,507
            
            
            $
            111,509Total
      Liabilities
            
            
            76,507
            
            
            
            111,509Special
      Partnership Units3⁄4 100 Special
      Units of the Operating Partnership
            
            
            1,000
            
            
            
            1,000Equity:Stockholders’
      equity:Common stock, $0.01 par value per
      share; 400,000,000 shares authorized, 22,222 issued and
      outstanding
            
            
            222
            
            
            
            222Preferred stock, $0.01 par value
      per share; 50,000,000 shares authorized, none issued and
      outstanding
            
            
            3⁄4
            
            
            
            3⁄4Additional paid-in
      capital
            
            
            199,778
            
            
            
            199,778Total
      stockholders’ equity
            
            
            200,000
            
            
            
            200,000Noncontrolling
      interest- 100 common units of the Operating Partnership
            
            
            1,000
            
            
            
            1,000Total
      Equity
            
            
            201,000
            
            
            
            201,000TOTAL LIABILITIES AND EQUITY
            
            $
            278,507
            
            
            $
            313,509





See
accompanying notes to consolidated financial statements.








2
 Index





MOODY NATIONAL REIT I, INC.


CONSOLIDATED
STATEMENTS OF EQUITY


Three
months ended March 31, 2010 and 2009


(Unaudited)








Common
      Stock
            
            
            Preferred
      Stock
            
            
            
            
            
            Noncontrolling
      InterestNumber
      of Shares
            
            
            Par
      Value
            
            
            Number
      of Shares
            
            
            Par
      Value
            
            
            Additional
      Paid-In Capital
            
            
            Number
      of Units
            
            
            Par
      Value
            
            
            Total
      EquityBalance
      at January 1, 2010
            
            
            22,222
            
            
            $
            222
            
            
            
            3⁄4
            
            
            $
            3⁄4
            
            
            $
            199,778
            
            
            
            100
            
            
            $
            1,000
            
            
            $
            201,000Issuance
      of common stock and operating partnership units, net
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4Balance
      at March 31, 2010
            
            
            22,222
            
            
            $
            222
            
            
            
            3⁄4
            
            
            $
            3⁄4
            
            
            $
            199,778
            
            
            
            100
            
            
            $
            1,000
            
            
            $
            201,000Balance
      at January 1, 2009
            
            
            22,222
            
            
            $
            222
            
            
            
            3⁄4
            
            
            $
            3⁄4
            
            
            $
            199,778
            
            
            
            100
            
            
            $
            1,000
            
            
            $
            201,000Issuance
      of common stock and operating partnership units, net
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4Balance
      at March 31, 2009
            
            
            22,222
            
            
            $
            222
            
            
            
            3⁄4
            
            
            $
            3⁄4
            
            
            $
            199,778
            
            
            
            100
            
            
            $
            1,000
            
            
            $
            201,000





See
accompanying notes to consolidated financial statements.








3
 Index





MOODY NATIONAL REIT I, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)








Three
      months ended
              March
      31, 2010
            
            
            Three
      months ended
              March
      31, 2009Cash
      flows from financing activitiesChange in subscriptions for
      common stock
            
            $
            (35,002
            )
            
            $
            3⁄4Escrowed investor
      proceeds
            
            
            35,002
            
            
            
            3⁄4Cash
      provided by financing activities
            
            
            3⁄4
            
            
            
            3⁄4Net
      change in cash and cash equivalents
            
            
            3⁄4
            
            
            
            3⁄4Cash
      and cash equivalents at beginning of period
            
            
            202,000
            
            
            
            202,000Cash
      and cash equivalents at end of period
            
            $
            202,000
            
            
            $
            202,000





See
accompanying notes to consolidated financial statements.








4
 Index
 Moody
National REIT I, Inc.
 
 Notes
to Consolidated Financial Statements
 Three
months ended March 31, 2010 and 2009
 
 (unaudited)








1. Organization





Moody
National REIT I, Inc. (the “Company”) was formed on January 15, 2008 as a
Maryland corporation and intends to qualify as a real estate investment trust
(“REIT”). The Company was organized primarily to acquire a diverse portfolio of
real estate investments including direct real properties, real estate securities
and debt-related investments. As discussed in Note 4, the Company sold shares of
its common stock to Moody National REIT Sponsor, LLC (“Sponsor”) on
February 19, 2008. The Company’s fiscal year end is December 31. The
Company had not begun operations as of March 31, 2010.





On
May 2, 2008, the Company filed a registration statement on Form S-11 with
the Securities and Exchange Commission (the “SEC”) to offer a maximum of
100,000,000 shares of its common stock to the public in its primary offering and
10,526,316 shares of its common stock to its stockholders pursuant to its
distribution reinvestment plan. On April 15, 2009, the SEC declared the
Company’s registration statement effective and the Company commenced its initial
public offering. Pursuant to the terms of the Company’s public offering,
subscription proceeds are placed in escrow until the Company has received
subscriptions aggregating at least $2,000,000.  If the Company does
not raise the minimum offering amount of $2,000,000 by June 14, 2010, as
extended (See Note 9), the Company will terminate its offering
and refund all subscription proceeds held in the escrow account. The
Company is initially offering shares to the public in its primary offering
at a price of $10.00 per share, with discounts available for certain purchasers,
and to its stockholders pursuant to its distribution reinvestment plan at a
price of $9.50 per share. The Company’s board of directors may change the price
at which the Company offers shares to the public in its primary offering from
time to time during the offering, but not more frequently than quarterly, to
reflect changes in the Company’s estimated per-share net asset value and other
factors the Company’s board of directors deems relevant. The Company intends to
use substantially all of the net proceeds from its public offering to invest in
a diverse portfolio of real estate assets as described below.





As of
March 31, 2010, the Company had not received subscriptions for the minimum
offering amount of $2,000,000 and therefore had not yet commenced
operations.





The
Company’s ability to continue as a going concern is dependent on raising the
minimum offering amount and additional funds to enable the Company to pursue its
acquisition strategy. Due to the uncertainties described above, there is
substantial doubt about whether the Company will be able to continue as a going
concern. The Company’s financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business.  The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to the amounts
and classification of liability amounts that may be necessary if the Company is
unable to continue as a going concern.





The
Company intends to use the net proceeds from its public offering to acquire a
diversified portfolio of direct real properties, real estate securities and
debt-related investments. The Company’s direct real property will consist
primarily of hotel, multifamily, office, retail and industrial real properties.
During the initial stages of the Company’s public offering, the Company
anticipates investing primarily in hotel properties. The Company’s portfolio
will also include investments in real estate securities and debt-related
investments, focusing primarily on (1) mortgage and mezzanine loans,
(2) debt and derivative securities related to real estate, including
mortgage-backed securities, and (3) the equity securities of other REITs
and real estate companies.





The
Company’s advisor is Moody National Advisor I, LLC (“Advisor”), a Delaware
limited liability company. Advisor is an affiliate of Sponsor, the Company’s
sole stockholder. Subject to certain restrictions and limitations, Advisor is
responsible for managing the Company’s affairs on a day-to-day basis and for
identifying and making acquisitions and investments on behalf of the
Company.





Substantially
all of the Company’s business will be conducted through Moody National Operating
Partnership I, L.P., the Company’s operating partnership (the “OP”). The Company
is the sole general partner of the OP. The initial limited partners of the OP
are Moody National LPOP I, LLC (“Moody LPOP”) and Moody OP Holdings
I,





5
 Index
 Moody
National REIT I, Inc.
 
 Notes
to Consolidated Financial Statements
 Three
months ended March 31, 2010 and 2009
 
 (unaudited)





LLC,
(“Moody Holdings”), affiliates of the Sponsor. Moody LPOP invested $1,000 in the
OP in exchange for common units and Moody Holdings invested $1,000 in the OP
and, in exchange for such investment, was issued a separate class of limited
partnership units (the “Special Units”). As the Company accepts subscriptions
for shares of its common stock, it will transfer substantially all of the net
proceeds of its public offering to the OP as a capital contribution. The OP’s
partnership agreement provides that the OP will be operated in a manner that
will enable the Company to (1) satisfy the requirements for being
classified as a REIT for tax purposes, (2) avoid any federal income or
excise tax liability and (3) ensure that the OP will not be classified as a
“publicly traded partnership” for purposes of Section 7704 of the Internal
Revenue Code of 1986, as amended (the “Internal Revenue Code”), which
classification could result in the OP being taxed as a corporation rather than
as a partnership. In addition to the administrative and operating costs and
expenses incurred by the OP in acquiring and operating real properties, the OP
will pay all of the Company’s administrative costs and expenses, and such
expenses will be treated as expenses of the OP. The common units of the OP may
be tendered for redemption once they have been outstanding for at least one
year. At such time, the Company has the option to redeem the common units for
shares of the Company’s common stock, cash or a combination thereof at the
Company’s sole discretion. The Special Units will be redeemed pursuant to the
OP’s partnership agreement upon the termination or nonrenewal of the advisory
agreement between the Company and the Advisor or upon certain other events
outside of the control of the Special Unit holder. Upon the termination or
nonrenewal of the advisory agreement by the Company for “cause” (as defined in
the advisory agreement) all of the Special Units will be redeemed for $1.00.
Upon the occurrence of any of the events outside of the control of the Special
Unit holder which trigger redemption of the Special Units, the Special Units
will be redeemed, at the Advisor’s option, for shares of the Company’s common
stock, a non-interest bearing promissory note payable solely from the proceeds
of assets sales, or a combination thereof.





2. Summary of Significant Accounting
Policies





Principles of
Consolidation and Basis of
Presentation





The
Company’s consolidated financial statements include its accounts and the
accounts of its subsidiary, the OP. All intercompany profits, balances and
transactions are eliminated in consolidation.





The
Company’s consolidated financial statements will also include the accounts of
its consolidated subsidiaries and joint ventures through which the Company is
the primary beneficiary for entities deemed to be variable interest entities
(“VIEs”) through which the Company has a controlling interest. Interests in
entities acquired are evaluated based on applicable generally accepted
accounting principles, or GAAP, which requires the consolidation of VIEs in
which the Company is deemed to have the controlling financial
interest.  The Company will have the controlling financial interest if
the Company has the power to direct the activities of the VIE that most
significantly impact its economic performance and the obligation to absorb
losses or receive benefits from the VIE that could potentially be significant to
it.  If the interest in the entity is determined not to be a VIE, then
the entity is evaluated for consolidation based on legal form, economic
substance, and the extent to which the Company has control and/or substantive
participating rights under the respective ownership agreement.





There are
judgments and estimates involved in determining if an entity in which the
Company has an investment is a VIE.  The entity is evaluated to
determine if it is a VIE by, among other things, determining if the equity
investors as a group have a controlling financial interest in the entity and if
the entity has sufficient equity at risk to finance its activities without
additional subordinated financial support.





The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with GAAP for interim financial statements and the
rules and regulations of the SEC. Accordingly, the unaudited consolidated
financial statements do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2010 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2010. For further
information, readers should refer to the audited consolidated financial
statements





6
 Index
 Moody
National REIT I, Inc.
 
 Notes
to Consolidated Financial Statements
 Three
months ended March 31, 2010 and 2009
 
 (unaudited)





and notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009, which was filed with the SEC on March 31, 2010.





Organization and
Offering Costs





Organization
and offering costs of the Company will be incurred by Advisor on behalf of the
Company and, accordingly, are not a direct liability of the Company. Under the
terms of the advisory agreement with Advisor, the Company and the OP will be
obligated to reimburse Advisor for organization and offering costs once the
minimum offering of $2,000,000 is achieved. In the event the minimum offering
amount is not sold to the public by June 14, 2010, as extended (See Note 9), the
Company will terminate the initial public offering and have no obligation
to reimburse Advisor for any organizational and offering costs. The amount of
the reimbursement to Advisor for cumulative organization and offering costs is
limited to a maximum amount of up to 15% of the aggregate gross proceeds from
the sale of the Company’s shares of common stock in the Company’s public
offering. Such costs shall include legal, accounting, printing and other
offering expenses, including marketing, salaries and direct expenses of
Advisor’s employees and employees of Advisor’s affiliates and others. Any such
reimbursement will not exceed actual expenses incurred by Advisor.





All
offering costs, including selling commissions and dealer manager fees, will be
recorded as an offset to additional paid-in-capital, and all organization costs
will be recorded as an expense when the Company has an obligation to reimburse
the Advisor.





As of
March 31, 2010, organization costs of approximately $1,905,000 and offering
costs of approximately $932,000
were incurred by Advisor on the Company’s behalf. The Company will begin to
accrue for organization and offering costs once the minimum offering of
$2,000,000 has been sold under the Company’s public offering.





Income
Taxes





The
Company intends to make an election to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code commencing in the
taxable year in which the Company raises the minimum offering amount. If the
Company qualifies for taxation as a REIT, the Company generally will not be
subject to federal corporate income tax to the extent it distributes its REIT
taxable income to its stockholders, so long as it distributes at least 90% of
its REIT taxable income (which is computed without regard to the dividends paid
deduction or net capital gain and which does not necessarily equal net income as
calculated in accordance with GAAP). REITs are subject to a number of other
organizational and operations requirements. Even if the Company qualifies for
taxation as a REIT, it may be subject to certain state and local taxes on its
income and property, and federal income and excise taxes on its undistributed
income.





The
Company plans to lease any hotels it may acquire to wholly-owned taxable REIT
subsidiaries that are subject to federal, state and local income taxes. The
Company will account for income taxes using the asset and liability method under
which deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. A valuation allowance will be recorded for net deferred tax assets that
are not expected to be realized.





The
Company has reviewed tax positions under GAAP guidance that clarifies the
relevant criteria and approach for the recognition and measurement of uncertain
tax positions. The guidance prescribes a recognition threshold and measurement
attribute for the financial statement recognition of a tax position taken, or
expected to be taken, in a tax return. A tax position may only be recognized in
the financial statements if it is more likely than not that the tax position
will be sustained upon examination.














7
 Index
 Moody
National REIT I, Inc.
 
 Notes
to Consolidated Financial Statements
 Three
months ended March 31, 2010 and 2009
 
 (unaudited)





Concentration of
Credit Risk





As of
March 31, 2010, the Company did not have cash on deposit in excess of federally
insured levels and the Company has not experienced any losses in its account.
The Company limits cash investments to financial institutions with high credit
standing; therefore, the Company believes it is not exposed to any significant
credit risk in cash and cash equivalents.





Valuation and
Allocation of Real Property — Acquisition





Upon
acquisition, the purchase price of real property will be allocated to the
tangible assets acquired, consisting of land, buildings and tenant improvements,
any assumed debt, identified intangible assets and asset retirement obligations
based on their fair values. Identified intangible assets consist of the fair
value of above-market and below-market leases, in-place leases, in-place
contracts, tenant relationships and any goodwill or gain on purchase.
Acquisition costs will be charged to expense as incurred. Initial valuations are
subject to change until the information is finalized, which will be no later
than twelve months from the acquisition date.





The fair
value of the tangible assets acquired, consisting of land, buildings and tenant
improvements, will be determined by valuing the property as if it were vacant,
and the “as-if-vacant” value will then be allocated to land and buildings. Land
values will be derived from appraisals, and building values will be calculated
as replacement cost less depreciation or Advisor’s estimates of the relative
fair value of these assets using discounted cash flow analyses or similar
methods. The value of tenant improvements will be based on estimates of those
costs incurred at inception of the related acquired leases, depreciated through
the date of acquisition. The value of the building will be depreciated over the
estimated useful life of twenty-seven to forty-five years using the
straight-line method and the value of tenant improvements will be depreciated
over the remaining lease terms of the respective leases, which include periods
covered by bargain renewal options.





The
Company will determine the fair value of assumed debt by calculating the net
present value of the scheduled mortgage payments using interest rates for debt
with similar terms and remaining maturities that Advisor believes the Company
could obtain. Any difference between the fair value and stated value of the
assumed debt will be recorded as a discount or premium and amortized over the
remaining life of the loan as interest expense.





The
Company will determine the value of above-market and below-market leases for
acquired properties based on the present value (using an interest rate that
reflects the risks associated with the leases acquired) of the difference
between (1) the contractual amounts to be paid pursuant to the in-place
leases and (2) Advisor’s estimate of current market lease rates for the
corresponding in-place leases, measured over a period equal to the remaining
terms of the respective leases, which include periods covered by bargain renewal
options. The Company will record the fair value of above-market and below-market
leases as intangible assets or intangible liabilities, respectively, and
amortize them as an adjustment to rental revenue over the remaining terms of the
respective leases, which include periods covered by bargain renewal options.
Should a tenant terminate its lease, the unamortized portion of the
out-of-market lease value will be recognized in rental revenue.





The total
value of identified real estate intangible assets acquired will be further
allocated to in-place lease values, in-place contracts, in-place leasing
commissions and tenant relationships based on the Company’s evaluation of the
specific characteristics of each contract or tenant’s lease and the Company’s
overall relationship with that respective tenant or contracting party. The
aggregate value for leasing commissions will be based on estimates of these
costs incurred at inception of the acquired leases, amortized through the date
of acquisition. The aggregate value of in-place leases acquired and tenant
relationships will be determined by applying a fair value model. The estimates
of fair value of in-place leases will include an estimate of carrying costs
during the expected lease-up periods for the respective spaces considering then
current market conditions. In estimating the carrying costs that would have
otherwise been incurred had the leases not been in place, the Company will
include such items as real estate taxes, insurance and other operating expenses
as well as lost rental revenue during the expected lease-up period based on then
current market conditions. The estimates of the fair value of tenant
relationships will





8
 Index
 Moody
National REIT I, Inc.
 
 Notes
to Consolidated Financial Statements
 Three
months ended March 31, 2010 and 2009
 
 (unaudited)





also
include costs to execute similar leases including leasing commissions, legal and
tenant improvements as well as an estimate of the likelihood of renewal as
determined by Advisor on a tenant-by-tenant basis.





The
Company will amortize the value of in-place leases and in-place leasing
commissions over the remaining term of the respective leases, which include
periods covered by bargain renewal options, and the value of in-place contracts
will be amortized over the remaining term of the respective contracts. The value
of tenant relationship intangibles will be amortized over the initial term and
any anticipated renewal periods, but in no event exceeding the remaining
depreciable life of the building. If a tenant terminates its lease prior to
expiration of the initial terms, the unamortized portion of the in-place lease
value and tenant relationship intangibles will be charged to
expense.





In
allocating the purchase price of each of the Company’s properties, Advisor will
make assumptions and use various estimates, including, but not limited to, the
estimated useful lives of the assets, the cost of replacing certain assets,
discount rates used to determine present values, market rental rates per square
foot and the period required to lease the property up to its occupancy at
acquisition as if it were vacant. Many of these estimates will be obtained from
independent third party appraisals. However, Advisor will be responsible for the
source and use of these estimates. A change in these estimates and assumptions
could result in a change in the valuation of the various categories of the
Company’s real estate assets or related intangibles, which could in turn result
in a change in the depreciation or amortization expense recorded in the
Company’s consolidated financial statements. These variances could be material
to the Company’s results of operations and financial condition.





Valuation and
Allocation of Real Property — Ownership





Real
estate property in the Company’s portfolio will be stated at cost. Construction
and improvement costs incurred in connection with the development of new
properties or the redevelopment of existing properties will be capitalized. Real
estate taxes and interest costs incurred during construction periods will be
capitalized. Capitalized interest costs will be based on qualified expenditures
and interest rates in place during the construction period. Capitalized real
estate taxes and interest costs will be amortized over lives which are
consistent with the constructed assets.





Pre-development
costs, which generally include legal and professional fees and other
directly-related third-party costs that are not part of the exchange, will be
expensed as incurred.





The
Company intends to conduct its operations so that tenant improvements, either
paid directly or in the form of construction allowances paid to tenants, will be
capitalized and depreciated over the applicable lease term. Maintenance and
repairs will be charged to expense when incurred. Expenditures for significant
betterments and improvements will be capitalized.





Depreciation
or amortization expense will be computed using the straight-line method based
upon the following estimated useful lives:





YearsBuildings
      and improvements
              
              
              27-45Exterior
      improvements
              
              
              10-20Equipment
      and fixtures
              
              
              5-10


Investments in
Real Estate Securities





Investments
in real estate securities are required to be classified as either trading
investments, available-for-sale investments or held-to-maturity investments.
Although the Company generally intends to hold most of its investments in real
estate securities until maturity, the Company may, from time to time, sell any
of these assets as part of the overall management of its portfolio. Accordingly,
all of the Company’s real estate securities assets will be classified as
available-for-sale. All assets classified as available-for-sale will be reported
at estimated fair value,





9
 Index
 Moody
National REIT I, Inc.
 
 Notes
to Consolidated Financial Statements
 Three
months ended March 31, 2010 and 2009
 
 (unaudited)





based on market
prices from independent sources, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders’ equity. As a
result, changes in fair value will be recorded to accumulated other
comprehensive income, which is a component of stockholders’ equity, rather than
through the Company’s consolidated statements of operations. To the extent that
volatile market conditions persist or deteriorate, they may negatively impact
the Company’s ability to both acquire and sell any real estate-related
securities holdings at a price and with terms acceptable to the Company, and the
Company could be required to recognize impairment charges in its consolidated
statement of operations. If real estate securities were classified as trading
securities, there could be substantially greater volatility in earnings from
period to period as these investments would be marked to market and any
reduction in the value of the securities versus the previous carrying value
would be considered an expense in the Company’s consolidated statements of
operations.





Debt-Related
Investments





The
Company intends to hold debt-related investments to maturity and, accordingly,
such assets will be carried at cost, net of unamortized loan origination costs
and fees, discounts, repayments, sales of partial interests in loans, and
unfunded commitments.





Investment
Impairments





For real
estate the Company may wholly own, the Company will monitor events and changes
in circumstances indicating that the carrying amounts of the real estate assets
may not be recoverable. When such events or changes in circumstances are
present, the Company will assess potential impairment by comparing estimated
future undiscounted operating cash flows expected to be generated over the life
of the asset and from its eventual disposition, to the carrying amount of the
asset. In the event that the carrying amount exceeds the estimated future
undiscounted operating cash flows, the Company will recognize an impairment loss
to adjust the carrying amount of the asset to estimated fair value for assets
held for use and fair value less costs to sell for assets held for
sale.





For real
estate the Company may own through an investment in a joint venture or other
similar investment structure, at each reporting date the Company will compare
the estimated fair value of the Company’s investment to the carrying value. An
impairment charge will be recorded to the extent the fair value of the Company’s
investment is less than the carrying amount and the decline in value is
determined to be other than a temporary decline.





In
evaluating the Company’s investments for impairment, Advisor will make several
estimates and assumptions, including, but not limited to, the projected date of
disposition of the properties, the estimated future cash flows of the properties
during the Company’s ownership and the projected sales price of each of the
properties. A change in these estimates and assumptions could result in a change
in the carrying amount of the Company’s investments which could then result in a
material change to the Company’s financial statements.





Revenue
Recognition





Hotel
revenues, including room, food, beverage, and other hotel revenues, will be
recognized as the related services are delivered. Ongoing credit evaluations
will be performed and an allowance for potential credit losses will be provided
against the portion of accounts receivable that is estimated to be
uncollectible.





The
Company will recognize rental income on a straight-line basis over the term of
each lease. The difference between rental income earned on a straight-line basis
and the cash rent due under the provisions of the lease agreements will be
recorded as deferred rent receivable and will be included as a component of
accounts and rents receivable in the accompanying consolidated balance sheets.
The Company anticipates collecting these amounts over the terms of the leases as
scheduled rent payments are made. Reimbursements from tenants for recoverable
real estate tax and operating expenses will be accrued as revenue in the period
the applicable expenditures are incurred. In conjunction with certain
acquisitions, the Company may receive payments under master lease agreements
pertaining to certain non-revenue producing spaces either at the time of, or
subsequent to, the purchase of some of its properties. Upon receipt of the
payments, the receipts will be recorded as a reduction in the purchase price of
the





10
 Index
 Moody
National REIT I, Inc.
 
 Notes
to Consolidated Financial Statements
 Three
months ended March 31, 2010 and 2009
 
 (unaudited)





related
properties rather than as rental income. These master leases may be established
at the time of purchase to mitigate the potential negative effects of loss of
rent and expense reimbursements. Master lease payments will be received through
a draw of funds escrowed at the time of purchase and may cover a period from one
to three years. These funds may be released to either the Company or the seller
when certain leasing conditions are met. Restricted cash will include funds
received by third party escrow agents, from sellers, pertaining to master lease
agreements. The Company will record such escrows as both an asset and a
corresponding liability, until certain leasing conditions are met. The Company
will accrue lease termination income if there is a signed termination letter
agreement, all of the conditions of the agreement have been met, and the tenant
is no longer occupying the property.





Valuation of
Accounts and Rents Receivable





The
Company will take into consideration certain factors that require judgments to
be made as to the collectibility of receivables. Collectibility factors taken
into consideration are the amounts outstanding, payment history and financial
strength of the tenant, which taken as a whole determines the
valuation.





Recent Accounting
Pronouncements





In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
authoritative guidance on the consolidation of a VIE.  The new guidance
requires revised evaluations of whether entities represent variable interest
entities, ongoing assessments of control over such entities, and additional
disclosures for variable interests. The Company adopted this guidance effective
January 1, 2010.  The adoption of this new guidance did not have a material
impact on the Company’s financial statements, but will result in additional
disclosures when the Company acquires an interest in a VIE.





In
January 2010, the FASB issued “Improving Disclosures about Fair Value
Measurements.”  The standard requires additional disclosures about
fair value measurements including transfers in and out of Levels 1 and 2 and a
higher level of disaggregation for the different types of financial instruments.
For the reconciliation of Level 3 fair value measurements, information about
purchases, sales, issuances and settlements are presented separately. This
standard is effective for interim and annual reporting periods beginning after
December 15, 2009 with the exception of revised Level 3 disclosure requirements
which are effective for interim and annual reporting periods beginning after
December 15, 2010. Comparative disclosures are not required in the year of
adoption. The Company adopted the provisions of the standard on January 1, 2010,
which did not have an impact on the Company’s financial position, results of
operations or cash flows.





3. Investments





As of
March 31, 2010, the Company had not commenced operations. Subscription proceeds
collected from investors were deposited in escrow in an interest bearing bank
account.





As of
March 31, 2010, neither the Company nor the OP had purchased or contracted to
purchase any properties or other investments.





4. Capitalization





Under the
Company’s Articles of Amendment and Restatement (“the Charter” ), the
Company has the authority to issue 400,000,000 shares of common stock and
50,000,000 shares of preferred stock. All shares of such stock have a par value
of $0.01 per share. On February 19, 2008, the Company sold 22,222 shares of
common stock to the Sponsor for $200,000 in cash.





Subscription
proceeds are placed in an escrow account until such time as subscriptions to
purchase at least $2.0 million of shares of common stock have been received
and accepted by the Company. During the period from December 31, 2009 to March
31, 2010, the Company received subscriptions to purchase $20,000 in shares, or
2,000 shares, of common stock, and refunded $55,000 in subscription proceeds to
investors which had previously subscribed for shares of common stock. As of
March 31, 2010, the Company’s escrow agent was holding in escrow





11
 Index
 Moody
National REIT I, Inc.
 
 Notes
to Consolidated Financial Statements
 Three
months ended March 31, 2010 and 2009
 
 (unaudited)





subscriptions
for $76,500 in shares, or 7,650 shares, of the Company’s common stock. The
subscription proceeds held in escrow as of March 31, 2010, plus interest accrued
thereon, have been recorded as a liability in the consolidated balance sheets
because such shares are refunded if the subscription minimum is not
met.





The
Company’s board of directors is authorized to amend the Charter, without
the approval of the stockholders, to increase the aggregate number of authorized
shares of capital stock or the number of shares of any class or series that the
Company has authority to issue.





5. Distributions





The
Company intends to make regular cash distributions to its stockholders,
typically on a monthly basis. The actual amount and timing of distributions will
be determined by the Company’s board of directors in its discretion and
typically will depend on the amount of funds available for distribution, which
is impacted by current and projected cash requirements, tax considerations and
other factors. During the early stages of the Company’s operations, the Company
may declare distributions in excess of funds from operations. As a result, the
Company’s distribution rate and payment frequency may vary from time to time.
However, to qualify as a REIT for tax purposes, the Company must make
distributions equal to at least 90% of the Company’s “REIT taxable income” each
year.  The Company’s stockholders may choose whether to have
distributions paid in cash or to have distributions otherwise payable to them in
cash invested in additional shares of the Company’s common stock pursuant to the
terms and conditions of the Company’s distribution reinvestment plan. As of
March 31, 2010, the Company had not paid or declared any
distributions.





6. Related Party
Arrangements





Advisor
and certain affiliates of Advisor will receive fees and compensation in
connection with the Company’s public offering, and the acquisition, management
and sale of the Company’s real estate investments.





Moody
Securities, LLC (“Moody Securities”), the dealer manager of the Company’s public
offering, will receive a commission of up to 6.5% of gross offering proceeds.
Moody Securities may reallow all or a portion of such sales commissions earned
to participating broker-dealers. In addition, the Company will pay Moody
Securities a dealer manager fee of up to 3.5% of gross offering proceeds, a
portion of which may be reallowed to participating broker-dealers. No selling
commissions or dealer manager fee will be paid for sales under the Company’s
distribution reinvestment plan.





The
Company will reimburse Advisor for organizational and offering expenses incurred
on the Company's behalf, but only to the extent that such reimbursements do not
exceed actual expenses incurred, and provided that Advisor is obligated to
reimburse the Company to the extent selling commissions, the dealer manager fee
and other organizational and offering expenses incurred by the Company exceed
15.09% of gross offering proceeds.





Advisor,
or its affiliates, will also receive an acquisition fee equal to 1.5% of (1) the
cost of investments the Company acquires or (2) the Company’s allocable
cost of investments acquired in a joint venture. With respect to investments in
and originations of loans, Advisor will receive an origination fee in lieu of an
acquisition fee. The origination fee will equal 1.5% of the amount funded by the
Company to invest in or originate such loan.





Advisor
will also receive debt financing fees of 1.0% of the amount available under any
loan or line of credit made available to the Company. It is anticipated that
Advisor will pay some or all of these fees to third parties with whom it
subcontracts to coordinate financing for the Company.





The
Company expects to pay Moody National Management, L.P. (“Moody Management”), its
property manager, a market-based property management fee in connection with the
operation and management of properties. In the event that the Company contracts
directly with a non-affiliated third-party property manager, the Company will
pay Moody Management a market-based oversight fee.





12
 Index
 Moody
National REIT I, Inc.
 
 Notes
to Consolidated Financial Statements
 Three
months ended March 31, 2010 and 2009
 
 (unaudited)








The
Company will pay Advisor a monthly asset management fee of one-twelfth of 1.0%
of the aggregate cost (before non-cash reserves and depreciation) of all real
estate investments held by the Company at month-end.





If
Advisor provides a substantial amount of services in connection with the sale of
a property or other investment, Advisor or its affiliates also will be paid a
disposition fee equal to 3.0% of the contract sales price of each property or
other investment sold.





The
Company will reimburse Advisor for all expenses paid or incurred by Advisor in
connection with the services provided to the Company, subject to the limitation
that the Company will not reimburse Advisor for any amount by which its
operating expenses (including the asset management fee) at the end of the four
preceding fiscal quarters exceeds the greater of: (1) 2% of its average
invested assets, or (2) 25% of its net income determined without reduction
for any additions to reserves for depreciation, bad debts or other similar
non-cash reserves and excluding any gain from the sale of the Company’s assets
for that period. Notwithstanding the above, the Company may reimburse Advisor
for expenses in excess of this limitation if a majority of the independent
directors determines that such excess expenses are justified based on unusual
and non-recurring factors.





7. Incentive Awards
Plan





The
Company has adopted an incentive plan (the “Incentive Award Plan”) that provides
for the grant of equity awards to its employees, directors and consultants and
those of the Company’s affiliates. The Incentive Award Plan authorizes the grant
of non-qualified and incentive stock options, restricted stock awards,
restricted stock units, stock appreciation rights, dividend equivalents and
other stock-based awards or cash-based awards. Shares will be authorized and
reserved for issuance under the Incentive Award Plan. No awards have been
granted as of March 31, 2010. The Company has also adopted an independent
directors compensation plan (the “Independent Directors Compensation Plan”)
pursuant to which each of the Company’s current independent directors will
receive 5,000 shares of restricted stock when and if the Company raises the
minimum offering amount of $2,000,000. Each new independent director that
subsequently joins the Company’s board of directors will receive 5,000 shares of
restricted stock on the date he or she joins the Company’s board of directors.
In addition, on the date of each of the first four annual meetings of the
Company’s stockholders at which an independent director is re-elected to the
Company’s board of directors, he or she will receive 2,500 restricted shares.
Subject to certain conditions, the restricted stock granted pursuant to the
Independent Directors Compensation Plan will vest and become non-forfeitable in
equal quarterly installments beginning on the first day of the first quarter
following the date of grant.





8. Subordinated Participation
Interest





Pursuant
to the Limited Partnership Agreement of the OP, the holders of the Special Units
will be entitled to distributions from the OP in an amount equal to 15.0% of net
sales proceeds received by the OP on dispositions of its assets and dispositions
of real properties by joint ventures or partnerships in which the OP owns a
partnership interest, after the other holders of common units, including the
Company, have received, in the aggregate cumulative distributions from operating
income, sales proceeds or other sources, equal to their capital contributions
plus an 8.0% cumulative non-compounded annual pre-tax return thereon. The
Special Units will be redeemed for the above amount upon the earliest of:
(1) the occurrence of certain events that result in the termination or
non-renewal of the advisory agreement or (2) a listing of the Company’s
common stock on a national securities exchange.





9.
Subsequent Events





The
Company has evaluated subsequent events, and the impact on the reported results
and disclosures, through the date the accompanying consolidated financial
statements of the Company were filed with the SEC.




Extension of the
Minimum Offering Period





Pursuant
to the terms of the Company’s public offering, if the Company does not raise at
least $2,000,000 in subscription proceeds by April 15, 2010, the escrow agent is
required to return all funds in the escrow account to





13
 Index
 Moody
National REIT I, Inc.
 
 Notes
to Consolidated Financial Statements
 Three
months ended March 31, 2010 and 2009
 
 (unaudited)





subscribers
and the Company will stop selling its shares unless the Company elects to extend
the date by which the Company is required to raise the minimum offering amount
by written notice to the escrow agent. On April 2, 2010, the Company delivered
written notice to the Company’s escrow agent of the Company’s election to extend
the date by which the Company is required to raise the minimum offering amount
by 60 days to June 14, 2010. Following this extension, if the Company does not
raise at least $2,000,000 in subscription proceeds by June 14, 2010, the escrow
agent is required to return all funds in the escrow account to subscribers and
the Company will stop selling its shares in the public offering.





In
connection with the Company’s election to extend the minimum offering period to
June 14, 2010, the Company mailed a letter to each person who subscribed for
shares pursuant to which each subscriber was granted the option to elect to
maintain the subscriber’s subscription proceeds in the escrow account until the
earlier to occur of (1) the date the Company raised the minimum offering amount
(in which case the subscription proceeds will be released to the Company) and
(2) June 14, 2010 (in which case the Company’s public offering will terminate
and the subscription proceeds will be released to the subscriber).  If
a subscriber elected not to maintain subscription proceeds in the escrow
account, the subscriber’s escrowed subscription proceeds, plus the subscriber’s
pro rata portion of any interest earned on the aggregate subscription proceeds
held in escrow, would be returned to the subscriber promptly following April 15,
2010, the date that the minimum offering period was originally scheduled to end.
During the period from March 31, 2010 to May 17, 2010, in connection with the
Company’s extension of the minimum offering period, the Company refunded $55,000
in subscription proceeds to investors which had previously subscribed for shares
of the Company’s common stock. As of May
14, 2010, the Company had accepted in escrow subscriptions for an
aggregate of 5,650 shares of the Company’s common stock, or $56,500. The Company
continues to accept and process subscriptions on an ongoing
basis.




Potential
Acquisition of a Hotel Properly Pursuant to a Joint Venture




On April
30, 2010, in connection with the Company’s proposed acquisition of an indirect
interest in a hotel property located in Atlanta, Georgia (the “Residence Inn
Property”), the Company, through a wholly-owned subsidiary of the OP (the
“Company Member”), entered into a joint venture (the “Joint Venture”) with an
entity owned by Brett C. Moody, the Company’s chairman and chief executive
officer (the “Moody Member”).  As of April 30, 2010, the Company
Member had made initial capital contributions to the Joint Venture in the amount
of $461,250, representing a 75% membership interest in the Joint
Venture.





The
Company Member’s initial capital contribution to the Joint Venture was funded
pursuant to a promissory note in favor of Moody Member in the aggregate
principal amount of $461,250 (the “Promissory Note”). The entire principal
amount of the Promissory Note and all accrued and unpaid interest thereon is due
and payable in full on the date of the closing of the acquisition of the
Residence Inn Property, which closing will take place no later than May 31, 2010
(the “Closing Date”).  In the event that the entire principal amount
of the Promissory Note and all accrued and unpaid interest thereon is not paid
in full by the Closing Date, the Company Member will transfer all of its
membership interest in the Joint Venture to the Moody Member in exchange for the
cancellation of the Promissory Note.





The Joint
Venture will acquire the Residence Inn Property through a wholly-owned
subsidiary on or before the Closing Date for an aggregate purchase price of
$7,350,000, including the assumption of $5,000,000 of existing indebtedness on
the Residence Inn Property, plus closing costs and transfer taxes. The cash
purchase price and other fees and expenses incurred in connection with the
acquisition of the Residence Inn Property will be funded by additional capital
contributions to the Joint Venture from the Company Member and the Moody Member
on or before the Closing Date. The Company Member’s payment of its additional
capital contribution is contingent upon a number of factors, including (1) the
sale of the minimum amount of $2,000,000 in shares required to release offering
proceeds from escrow in accordance with the terms of the Company’s initial
public offering; (2) the sale of a sufficient number of shares in the Company’s
initial public offering to fund the Company Member’s additional capital
contribution; and (3) the satisfaction of all conditions and consents relating
to the acquisition of the Residence Inn Property.








14
 Index







ITEM 2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.





The
following discussion and analysis should be read in conjunction with the
accompanying financial statements of Moody National REIT I, Inc. and the notes
thereto. As used herein, the terms “we,” “our” and “us” refer to Moody National
REIT, I Inc., a Maryland corporation, and, as required by context, Moody
National Operating Partnership I, L.P., a Delaware limited partnership, which we
refer to as our “operating partnership,” and to their subsidiaries.





Forward-Looking
Statements





Certain
statements included in this Quarterly Report on Form 10-Q that are not
historical facts (including any statements concerning investment objectives,
other plans and objectives of management for future operations or economic
performance, or assumptions or forecasts related thereto) are forward-looking
statements. These statements are only predictions. We caution that
forward-looking statements are not guarantees. Actual events or our investments
and results of operations could differ materially from those expressed or
implied in any forward-looking statements. Forward-looking statements are
typically identified by the use of terms such as “may,” “should,” “expect,”
“could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,”
“predict,” “potential” or the negative of such terms and other comparable
terminology.





The
forward-looking statements included herein are based upon our current
expectations, plans, estimates, assumptions and beliefs, which involve numerous
risks and uncertainties. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, our actual results and
performance could differ materially from those set forth in the forward-looking
statements. Factors which could have a material adverse effect on our operations
and future prospects include, but are not limited to:





•
            the
      fact thatwe
      have no operating history and, as of March 31, 2010, our assets total
      $278,507;





•
            our
      ability to raise the minimum offering amount of $2,000,000 in our initial
      public offering by June 14, 2010;





•
            our
      ability to effectively deploy the proceeds raised in our initial public
      offering;





•
            changes
      in economic conditions generally and the real estate and debt markets
      specifically;





•
            legislative or regulatory changes
      (including changes to the laws governing the taxation of
      REITs);





•
            the
      availability of capital;





•
            interest
      rates; and





•
            changes
      to generally accepted accounting principles, or
  GAAP.





Any of
the assumptions underlying the forward-looking statements included herein could
be inaccurate, and undue reliance should not be placed upon on any
forward-looking statements included herein. All forward-looking statements are
made as of the date this Quarterly Report on Form 10-Q is filed with the
Securities and Exchange Commission, or the SEC, and the risk that actual results
will differ materially from the expectations expressed herein will increase with
the passage of time. Except as otherwise required by the federal securities
laws, we undertake no obligation to publicly update or revise any
forward-looking statements made herein, whether as a result of new information,
future events, changed circumstances or any other reason.





15
 Index





All
forward-looking statements included herein should be read in light of the
factors identified in the “Risk Factors” section of our Registration Statement
on Form S-11 (File No. 333-150612) filed with the SEC, as the same may be
amended and supplemented from time to time.





Overview




We were
formed as a Maryland corporation on January 15, 2008 to invest in a diversified
portfolio of real estate investments. Our targeted investments include hotel,
multifamily, office, retail and industrial properties. We may also invest in
real estate securities and debt-related investments. As of March 31, 2010,
neither we nor our subsidiary have contracted to purchase any properties or
other investments. We are dependent upon proceeds received from the sale of
shares of our common stock in our initial public offering and any indebtedness
that we may incur in order to conduct our proposed real estate investment
activities. We have initially been capitalized with $200,000 from the sale of
22,222 shares of our common stock to our sponsor, Moody National REIT Sponsor,
LLC. Our sponsor, or any affiliate of our sponsor, must maintain this investment
while it remains our sponsor.




On May 2,
2008, we filed a registration statement on Form S-11 with the SEC to offer a
maximum of 100,000,000 shares of our common stock to the public in our primary
offering and 10,526,316 shares of our common stock to stockholders pursuant to
our distribution reinvestment plan. On April 15, 2009, the SEC declared our
registration statement effective and we commenced our initial public offering.
We are initially offering shares of our common stock to the public in the
primary offering at a price of $10.00 per share, with discounts available for
certain purchasers, and to our stockholders pursuant to our distribution
reinvestment plan at a price of $9.50 per share. Our board of directors may
change the price at which we offer shares to the public in our primary offering
from time to time during the offering, but not more frequently than quarterly,
to reflect changes in our estimated per-share net asset value and other factors
our board of directors deems relevant. We intend to use substantially all of the
net proceeds from the public offering to invest in a diverse portfolio of real
estate assets.


As of
March 31, 2010, we had received subscriptions to purchase approximately $76,500
in shares, or 7,650 shares, of our common stock. Subscription proceeds are
placed in an escrow account until such time as subscriptions to purchase at
least $2,000,000 of shares of common stock have been received and accepted by
us. On April 2, 2010, we delivered written notice to our escrow agent of our
election to extend the date by which we are required to raise the minimum
offering amount by 60 days from April 15, 2010 to June 14, 2010. Following this
extension, if we do not raise at least $2,000,000 in subscription proceeds by
June 14, 2010, the escrow agent is required to return all funds in the escrow
account to subscribers and we will stop selling our
shares.


Our
ability to continue as a going concern is dependent on raising the minimum
offering amount and additional funds to enable us to pursue our acquisition
strategy. Due to the uncertainties described above, there is substantial doubt
about whether we will be able to continue as a going concern. Our financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business.  The accompanying financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or to the amounts and classification of liability amounts
that may be necessary if we are unable to continue as a going
concern.




We are
externally managed by our advisor, Moody National Advisor I, LLC. Our advisor
may, but is not required to, establish working capital reserves from offering
proceeds, out of cash flow generated by our real estate assets or out of
proceeds from the sale of our real estate assets. We do not anticipate
establishing a general working capital reserve during the initial stages of our
initial public offering; however, we may establish working capital reserves with
respect to particular investments. We also may, but are not required to,
establish reserves out of cash flow generated by our real estate assets or out
of net sale proceeds in non-liquidating sale transactions. Working capital
reserves are typically utilized to fund tenant improvements, leasing commissions
and major capital expenditures. Our lenders also may require working capital
reserves.


16
 Index


To the
extent that the working capital reserve is insufficient to satisfy our cash
requirements, additional funds may be provided from cash generated from
operations or through short-term borrowing. In addition, subject to certain
limitations, we may incur indebtedness in connection with the acquisition of any
real estate asset, refinance the debt thereon, arrange for the leveraging of any
previously unfinanced property or reinvest the proceeds of financing or
refinancing in additional properties.




If we
qualify as a REIT for federal income tax purposes, we generally will not be
subject to federal income tax on income that we distribute to our stockholders.
If we fail to qualify as a REIT in any taxable year after the taxable year in
which we initially elect to be taxed as a REIT, we will be subject to federal
income tax on our taxable income at regular corporate rates and will not be
permitted to qualify for treatment as a REIT for federal income tax purposes for
four years following the year in which our qualification is denied. Failing to
qualify as a REIT could materially and adversely affect our net
income.


Market
Outlook




The
recent economic downturn in the United States has impacted the real estate and
credit markets, primarily in the form of escalating default rates on mortgages,
declining home values and increasing inventory nationwide. The constraints on
available credit has resulted in illiquidity and volatility in the markets for
corporate bonds, asset-backed securities and commercial real estate bonds and
loans.




These
disruptions in the financial markets have increased the cost of credit in the
commercial real estate sector. Due to the recent economic downturn, equity and
debt capital available for investment in commercial real estate is limited,
resulting in fewer real estate transactions, increased capitalization rates and
lower property values. Economic conditions have also negatively impacted the
commercial real estate sector resulting in lower occupancy, lower rental rates
and declining values. We believe that the current economic environment provides
unique investment opportunities; however, a renewed decline in the overall
economy and availability of credit could adversely impact our operations and
investments.


Liquidity
and Capital Resources




Our
principal demand for funds will be to acquire real estate assets, to pay
operating expenses and interest on our outstanding indebtedness and to make
distributions to our stockholders. Over time, we intend to generally fund our
cash needs from operations for items other than asset acquisitions. Our cash
needs for acquisitions and investments will be funded primarily from the sale of
shares of our common stock, including those offered for sale through our
distribution reinvestment plan, and through the assumption of debt. We will
experience a relative increase in liquidity as additional subscriptions for
shares of our common stock are received and a relative decrease in liquidity as
offering proceeds are used to acquire and operate real estate assets. As of
March 31, 2010, we had not made any acquisitions or investments in real estate
or otherwise.  There may be a delay between the sale of shares of our
common stock and our purchase of assets, which could result in a delay in the
benefits to our stockholders, if any, of returns generated from our investment
operations. Our advisor, subject to the oversight of our investment committee
and board of directors, will evaluate potential acquisitions and will engage in
negotiations with sellers and lenders on our behalf. If necessary, we may use
financings or other sources of capital in the event of unforeseen significant
capital expenditures. As of March 31, 2010, we had not identified any sources
for these types of financings.


Results
of Operations




During
the period from our inception (January 15, 2008) to December 31, 2009, we had
been formed but had not yet commenced real estate operations. As a result, we
had no material results of operations for that period. The SEC declared the
registration statement for our initial public offering effective on April 15,
2009. As of March 31, 2010, we had not raised the minimum offering amount of
$2,000,000 in our initial public offering and therefore had not yet commenced
operations.




Pursuant
to our advisory agreement with our advisor and the dealer manager agreement
with the dealer manager for our initial public offering, we are obligated to
reimburse our advisor, our dealer manager or their affiliates, as applicable,
for organization and offering costs associated with our initial public offering,
provided that our advisor is obligated to reimburse us to the extent selling
commissions, the dealer manager fee and other organization and offering costs
incurred by us exceed 15% of our gross offering proceeds. In the event we do not
raise the minimum offering amount of $2,000,000 by June 14, 2010, we
will





17
 Index





terminate
our initial public offering and return all subscription proceeds held in the
escrow account.  In the event that we do not raise the minimum
offering amount of $2,000,000 by June 14, 2010, we will have no obligation to
reimburse our advisor, our dealer manager or their affiliates for any
organization and offering costs.  As of March 31, 2010, our advisor
and its affiliates have incurred organization costs of approximately $932,000
and offering costs of approximately $1,905,000 on our behalf. These costs are
not recorded in our financial statements because such costs are not a liability
to us until we sell the minimum number of shares in our public offering, and
such costs will only become a liability to us to the extent selling commissions,
the dealer manager fee and other organization and offering costs do not exceed
15% of the gross proceeds of our initial public offering.




We also
pay our independent directors an annual retainer of $50,000 plus fees for
attendance at board and committee meetings. At March 31, 2010, independent
director fees of approximately $186,000 had been incurred by our advisor on our
behalf.





Critical
Accounting Policies





General





Our
accounting policies have been established to conform with generally accepted
accounting principles, or GAAP. The preparation of financial statements in
conformity with GAAP requires management to use judgment in the application of
accounting policies, including making estimates and assumptions. These judgments
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods. If
management’s judgment or interpretation of the facts and circumstances relating
to various transactions is different, it is possible that different accounting
policies will be applied or different amounts of assets, liabilities, revenues
and expenses will be recorded, resulting in a different presentation of the
financial statements or different amounts reported in the financial statements.
Additionally, other companies may utilize different estimates that may impact
comparability of our results of operations to those of companies in similar
businesses. Below is a discussion of the accounting policies that management
considers to be most critical once we commence significant operations. These
policies require complex judgment in their application or estimates about
matters that are inherently uncertain.





Principles
of Consolidation and Basis of Presentation





Our
consolidated financial statements include our accounts and the accounts of our
operating partnership. All intercompany profits, balances and transactions
are eliminated in consolidation.





Our
consolidated finiancial statements will also include the accounts of our
consolidated subsidiaries and joint ventures through which we are the primary
beneficiary for entities to be determined to be variable interest entities, or
VIEs, through which we have a controlling interest. Interests in entities
acquired are evaluated based on applicable GAAP which requires the consolidation
of VIEs, in which we are deemed to have the controlling financial
interest.  We will have the controlling financial interest if we have
the power to direct the activities of the VIE that most significantly impact its
economic performance and the obligation to absorb losses or receive benefits
from the VIE that could be significant to it.  If the interest in the
entity is determined not to be a VIE, then the entity is evaluated for
consolidation based on legal form, economic substance, and the extent to which
we have control and/or substantive participating rights under the respective
ownership agreement.





There are
judgments and estimates involved in determining if an entity in which we have an
investment is a VIE.  The entity is evaluated to determine if it is a
VIE by, among other things, determining if the equity investors as a group have
a controlling financial interest in the entity and if the entity has sufficient
equity at risk to finance its activities without additional subordinated
financial support.





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with GAAP for interim financial statements and the rules and
regulations of the SEC. Accordingly, the unaudited consolidated financial
statements do not include all of the information and footnotes required by GAAP
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2010 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2010. For further information, readers
should refer to the audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2009,
which was filed with the SEC on March 31, 2010.








18
 Index








Income
Taxes




We intend
to make an election to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code commencing in the taxable year in which we satisfy the
minimum offering requirements. If we qualify for taxation as a REIT, we
generally will not be subject to federal corporate income tax to the extent we
distribute our REIT taxable income to our stockholders, so long as we distribute
at least 90% of our REIT taxable income (which is computed without regard to the
dividends paid deduction or net capital gain and which does not necessarily
equal net income as calculated in accordance with GAAP). REITs are subject to a
number of other organizational and operations requirements. Even if we qualify
for taxation as a REIT, we may be subject to certain state and local taxes on
our income and property, and federal income and excise taxes on our
undistributed income.




We plan
to lease the hotels we acquire to wholly-owned taxable REIT subsidiaries that
are subject to federal, state and local income taxes. We will account for income
using the asset and liability method under which deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. A valuation allowance will be
recorded for net deferred tax assets that are not expected to be
realized.





We have
reviewed tax positions under GAAP guidance that clarifies the relevant criteria
and approach for the recognition and measurement of uncertain tax positions. The
guidance prescribes a recognition threshold and measurement attribute for the
financial statement recognition of a tax position taken, or expected to be
taken, in a tax return. A tax position may only be recognized in the financial
statements if it is more likely than not that the tax position will be sustained
upon examination.




Valuation
and Allocation of Real Property — Acquisition




Upon
acquisition, the purchase price of real property will be allocated to the
tangible assets acquired, consisting of land, buildings and tenant improvements,
any assumed debt, identified intangible assets and asset retirement obligations
based on their fair values. Identified intangible assets consist of the fair
value of above-market and below-market leases, in-place leases, in-place
contracts, tenant relationships and any goodwill or gain on purchase.
Acquisition costs will be charged to expense as incurred. Initial valuations are
subject to change until the information is finalized, which will be no later
than twelve months from the acquisition date.





The fair
value of the tangible assets acquired, consisting of land, buildings and tenant
improvements, will be determined by valuing the property as if it were vacant,
and the “as-if-vacant” value will then be allocated to land and buildings. Land
values will be derived from appraisals, and building values will be calculated
as replacement cost less depreciation or our advisor’s estimates of the relative
fair value of these assets using discounted cash flow analyses or similar
methods. The value of tenant improvements will be based on estimates of those
costs incurred at inception of the related acquired leases, depreciated through
the date of acquisition. The value of the building will be depreciated over the
estimated useful life of twenty-seven to forty-five years using the
straight-line method and the value of tenant improvements will be depreciated
over the remaining lease terms of the respective leases, which include periods
covered by bargain renewal options.




We will
determine the fair value of assumed debt by calculating the net present value of
the scheduled mortgage payments using interest rates for debt with similar terms
and remaining maturities that our advisor believes we could obtain. Any
difference between the fair value and stated value of the assumed debt will be
recorded as a discount or premium and amortized over the remaining life of the
loan.




We will
determine the value of above-market and below-market leases for acquired
properties based on the present value (using an interest rate that reflects the
risks associated with the leases acquired) of the difference between (1) the
contractual amounts to be paid pursuant to the in-place leases and (2) our
advisor’s estimate of current market lease rates for the corresponding in-place
leases, measured over a period equal to the estimated remaining terms of the
respective leases, which include periods covered by bargain renewal options. We
will record the fair value of above-market and below-market leases as intangible
assets or intangible liabilities, respectively, and amortize them as an
adjustment to rental revenue over the remaining terms of the respective leases,
which include





19
 Index





periods
covered by bargain renewal options. Should a tenant terminate its lease, the
unamortized portion of the out-of-market lease value will be charged to rental
revenue.




The total
value of identified real estate intangible assets acquired will be further
allocated to in-place lease values, in-place contracts, in-place leasing
commissions and tenant relationships based on our evaluation of the specific
characteristics of each contract or tenant’s lease and our overall relationship
with that respective tenant or contracting party. The aggregate value for
leasing commissions will be based on estimates of these costs incurred at
inception of the acquired leases, amortized through the date of acquisition. The
aggregate value of in-place leases acquired and tenant relationships will be
determined by applying a fair value model. The estimates of fair value of
in-place leases will include an estimate of carrying costs during the expected
lease-up periods for the respective spaces considering then current market
conditions. In estimating the carrying costs that would have otherwise been
incurred had the leases not been in place, we will include such items as real
estate taxes, insurance and other operating expenses as well as lost rental
revenue during the expected lease-up period based on then current market
conditions. The estimates of the fair value of tenant relationships will also
include costs to execute similar leases including leasing commissions, legal and
tenant improvements as well as an estimate of the likelihood of renewal as
determined by our advisor on a tenant-by-tenant basis.




We will
amortize the value of in-place leases and in-place leasing commissions over the
remaining term of the respective leases, which include periods covered by
bargain renewal options, and the value of in-place contracts will be amortized
over the remaining term of the respective contracts. The value of tenant
relationship intangibles will be amortized over the initial term and any
anticipated renewal periods, but in no event exceeding the remaining depreciable
life of the building. If a tenant terminates its lease prior to expiration of
the initial terms, the unamortized portion of the in-place lease value and
tenant relationship intangibles will be charged to expense.




In
allocating the purchase price of each of our properties, our advisor will make
assumptions and use various estimates, including, but not limited to, the
estimated useful lives of the assets, the cost of replacing certain assets,
discount rates used to determine present values, market rental rates per square
foot and the period required to lease the property up to its occupancy at
acquisition as if it were vacant. Many of these estimates will be obtained from
independent third party appraisals. However,
our advisor will be responsible for the source and use of these estimates. A
change in these estimates and assumptions could result in a change in the
valuation of the various categories of our real estate assets or related
intangibles, which could in turn result in a change in the depreciation or
amortization expense recorded in our consolidated financial statements. These
variances could be material to our results of operations and financial
condition.




Valuation
and Allocation of Real Property — Ownership




Real
estate property in our portfolio will be stated at cost. Construction and
improvement costs incurred in connection with the development of new properties
or the redevelopment of existing properties will be capitalized. Real estate
taxes and interest costs incurred during construction periods will be
capitalized. Capitalized interest costs will be based on qualified expenditures
and interest rates in place during the construction period. Capitalized real
estate taxes and interest costs will be amortized over lives which are
consistent with the constructed assets.




Pre-development
costs, which generally include legal and professional fees and other
directly-related third-party costs that are not part of the exchange, will be
expensed as incurred.




We intend
to conduct our operations so that tenant improvements, either paid directly or
in the form of construction allowances paid to tenants, will be capitalized and
depreciated over the applicable lease term. Maintenance and repairs will be
charged to expense when incurred. Expenditures for significant betterments and
improvements will be capitalized.


20
 Index


Depreciation
or amortization expense will be computed using the straight-line method based
upon the following estimated useful lives:




YearsBuildings
      and improvements
            
            
            27-45Exterior
      improvements
            
            
            10-20Equipment
      and fixtures
            
            
            5-10





Investments
in Real Estate Securities




Investments
in real estate securities are required to be classified as either trading
investments, available-for-sale investments or held-to-maturity investments.
Although management generally intends to hold most of our investments in real
estate securities until maturity, management may, from time to time, sell any of
these assets as part of the overall management of our portfolio. Accordingly,
all of our real estate securities will be classified as available-for-sale. All
assets classified as available-for-sale will be reported at fair value, based on
market prices from independent sources, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders’
equity. As a result, changes in fair value will be recorded to accumulated other
comprehensive income, which is a component of stockholders’ equity, rather than
through our consolidated statements of operations. To the extent that volatile
market conditions persist or deteriorate, they may negatively impact our ability
to both acquire and sell any real estate-related securities holdings at a price
and with terms acceptable to us, and we could be required to recognize
impairment charges in our consolidated statement of operations.  If
real estate securities were classified as trading securities, there could be
substantially greater volatility in earnings from period to period as these
investments would be marked to market and any reduction in the value of the
securities versus the previous carrying value would be considered an expense in
our consolidated statements of operations.




Debt-Related
Investments




Management
intends to hold debt-related investments to maturity and, accordingly, such
assets will be carried at cost, net of unamortized loan origination costs and
fees, discounts, repayments, sales of partial interests in loans, and unfunded
commitments.




Investment
Impairments




For real
estate we may wholly own, our management will monitor events and changes in
circumstances indicating that the carrying amounts of the real estate assets may
not be recoverable. When such events or changes in circumstances are present, we
will assess potential impairment by comparing estimated future undiscounted
operating cash flows expected to be generated over the life of the asset and
from its eventual disposition, to the carrying amount of the asset. In the event
that the carrying amount exceeds the estimated future undiscounted operating
cash flows, we will recognize an impairment loss to adjust the carrying amount
of the asset to estimated fair value for assets held for use and fair value less
costs to sell for assets held for sale.




For real
estate we may own through an investment in a joint venture or other similar
investment structure, at each reporting date we will compare the estimated fair
value of our investment to the carrying value. An impairment charge will be
recorded to the extent the fair value of our investment is less than the
carrying amount and the decline in value is determined to be other than a
temporary decline.




In
evaluating our investments for impairment, our advisor will make several
estimates and assumptions, including, but not limited to, the projected date of
disposition of the properties, the estimated future cash flows of the properties
during our ownership and the projected sales price of each of the properties. A
change in these estimates and assumptions could result in a change in the
carrying amount of our investments, which could be material to our financial
statements.







21
 Index





Revenue
Recognition




Hotel
revenues, including room, food, beverage, and other hotel revenues, will be
recognized as the related services are delivered. Ongoing credit evaluations
will be performed and an allowance for potential credit losses will be provided
against the portion of accounts receivable that is estimated to be
uncollectible.




We will
recognize rental income on a straight-line basis over the term of each lease.
The difference between rental income earned on a straight-line basis and the
cash rent due under the provisions of the lease agreements will be recorded as
deferred rent receivable and will be included as a component of accounts and
rents receivable in the accompanying consolidated balance sheets. We anticipate
collecting these amounts over the terms of the leases as scheduled rent payments
are made. Reimbursements from tenants for recoverable real estate tax and
operating expenses will be accrued as revenue in the period the applicable
expenditures are incurred. In conjunction with certain acquisitions, we may
receive payments under master lease agreements pertaining to certain non-revenue
producing spaces either at the time of, or subsequent to, the purchase of some
of our properties. Upon receipt of the payments, the receipts will be recorded
as a reduction in the purchase price of the related properties rather than as
rental income. These master leases may be established at the time of purchase to
mitigate the potential negative effects of loss of rent and expense
reimbursements. Master lease payments will be received through a draw of funds
escrowed at the time of purchase and may cover a period from one to three years.
These funds may be released to either us or the seller when certain leasing
conditions are met. Restricted cash will include funds received by third party
escrow agents, from sellers, pertaining to master lease agreements. We will
record such escrows as both an asset and a corresponding liability, until
certain leasing conditions are met. We will accrue lease termination income if
there is a signed termination letter agreement, all of the conditions of the
agreement have been met, and the tenant is no longer occupying the
property.




Valuation
of Accounts and Rents Receivable




We will
take into consideration certain factors that require judgments to be made as to
the collectability of receivables. Collectability factors taken into
consideration are the amounts outstanding, payment history and financial
strength of the tenant, which taken as a whole determines the
valuation.





Recent
Accounting Pronouncements





In June
2009, the Financial Accounting Standards Board, or FASB, issued authoritative
guidance on the consolidation of a VIE.  The new guidance requires
revised evaluations of whether entities represent variable interest entities,
ongoing assessments of control over such entities, and additional disclosures
for variable interests. We adopted this guidance effective January 1, 2010. The
adoption of this new guidance did not have a material impact on our financial
statements, but will result in additional disclosures when we acquire an
interest in a VIE.




In
January 2010, the FASB issued “Improving Disclosures about Fair Value
Measurements.”  The standard requires additional disclosures about
fair value measurements including transfers in and out of Levels 1 and 2 and a
higher level of disaggregation for the different types of financial instruments.
For the reconciliation of Level 3 fair value measurements, information about
purchases, sales, issuances and settlements are presented separately. This
standard is effective for interim and annual reporting periods beginning after
December 15, 2009 with the exception of revised Level 3 disclosure requirements
which are effective for interim and annual reporting periods beginning after
December 15, 2010. Comparative disclosures are not required in the year of
adoption. We adopted the provisions of the standard on January 1, 2010, which
did not have an impact on our financial position, results of operations or cash
flows.





Inflation




With the
exception of leases with tenants in multifamily properties, we expect to include
provisions in our tenant leases designed to protect us from the impact of
inflation. These provisions will include reimbursement billings for operating
expense pass-through charges, real estate tax and insurance reimbursements, or
in some cases annual reimbursement of operating expenses above a certain
allowance. Due to the generally long-term nature of these leases, annual rent
increases may not be sufficient to cover inflation and rent may be below market.
Leases in multifamily properties generally turn over on an annual basis and do
not typically present the same issue regarding inflation protection due to their
short-term nature. As of March 31, 2010, we had not entered into any
leases.





22
 Index





REIT
Compliance




To
qualify as a REIT for tax purposes, we will be required to distribute at least
90% of our REIT taxable income to our stockholders. We must also meet certain
asset and income tests, as well as other requirements. We will monitor the
business and transactions that may potentially impact our REIT status. If we
fail to qualify as a REIT in any taxable year, we will be subject to federal
income tax (including any applicable alternative minimum tax) on our taxable
income at regular corporate rates and generally will not be permitted to qualify
for treatment as a REIT for federal income tax purposes for the four taxable
years following the year during which our REIT qualification is lost unless the
Internal Revenue Service grants us relief under certain statutory provisions.
Such an event could materially adversely affect our net income and net cash
available for distribution to our stockholders.




Distributions




We intend
to make regular cash distributions to our stockholders, typically on a monthly
basis. The actual amount and timing of distributions will be determined by our
board of directors in its discretion and typically will depend on the amount of
funds available for distribution, which is impacted by current and projected
cash requirements, tax considerations and other factors. During the early stages
of our operations, we may declare distributions in excess of funds from
operations. As a result, our distribution rate and payment frequency may vary
from time to time. However, to qualify as a REIT for tax purposes, we must make
distributions equal to at least 90% of our “REIT taxable income” each
year.  Our stockholders may choose whether to have distributions paid
in cash or to have distributions otherwise payable to them in cash invested in
additional shares of our common stock pursuant to the terms and conditions of
our distribution reinvestment plan. As of March 31, 2010, we had not paid any
distributions.


Funds
from Operations




One of
our objectives is to provide cash distributions to our stockholders from cash
generated by our operations. Cash generated from operations is not equivalent to
net operating income as determined under GAAP. Due to certain unique operating
characteristics of real estate companies, the National Association of Real
Estate Investment Trusts, an industry trade group, or NAREIT, has promulgated a
standard known as Funds from Operations, or FFO for short, which it believes
more accurately reflects the operating performance of a REIT. As defined by
NAREIT, FFO means net income computed in accordance with GAAP, excluding gains
(or losses) from sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures in which
the REIT holds an interest. We will adopt the NAREIT definition for computing
FFO because, in our view, FFO is used as a supplemental measure in conjunction
with net income. FFO is not defined by GAAP and should not be considered as an
alternative to net income as an indication of our operating performance.
Additionally, FFO as disclosed by other REITs may not be comparable to our
calculation. As of March 31, 2010, we had not commenced real estate operations,
and so we had no calculation of FFO for the three months ended March 31,
2010.




Off-Balance
Sheet Arrangements




As of
March 31, 2010, we had no off-balance sheet arrangements other than the
potential reimbursement of our organizational and offering costs that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.


Subsequent
Events




Extension
of the Minimum Offering Period





Pursuant
to the terms of our public offering, if we do not raise at least $2,000,000 in
subscription proceeds by April 15, 2010, our escrow agent is required to return
all funds in the escrow account to subscribers and we are required to stop
selling our shares, unless we elect to extend the date by which we are required
to raise the minimum offering amount by written notice to the escrow agent. On
April 2, 2010, we delivered written notice to our escrow agent of our election
to extend the date by which we are required to raise the minimum offering amount
by 60 days from April 15, 2010 to June 14, 2010. Following this extension, if we
do not raise at least $2,000,000 in subscription proceeds by June 14, 2010, the
escrow agent is required to return all funds in the escrow account to
subscribers and we will stop selling our shares in the public
offering.





In
connection with our election to extend the minimum offering period to June 14,
2010, we mailed a letter to each person who subscribed for our shares pursuant
to which each subscriber was granted the option to elect to maintain the
subscriber’s subscription proceeds in the escrow account until the earlier to
occur of (1) the date we





23
 Index





raise the
minimum offering amount (in which case the subscription proceeds will be
released to us) and (2) June 14, 2010 (in which case our public offering will
terminate and the subscription proceeds will be released to the
subscriber).  If a subscriber elected not to maintain subscription
proceeds in the escrow account, the subscriber’s escrowed subscription proceeds,
plus the subscriber’s pro rata portion of any interest earned on the aggregate
subscription proceeds held in escrow, would be returned to the subscriber
promptly following April 15, 2010, the date that the minimum offering period was
originally scheduled to end. During the period from March 31, 2010 to May 17,
2010, in connection with our extension of the minimum offering period, we
refunded $55,000 in subscription proceeds to investors which had previously
subscribed for shares of our common stock. As of May
14, 2010, we had accepted in escrow subscriptions for an aggregate of
5,650 shares of our common stock, or $56,500. We continue to accept and process
subscriptions on an ongoing basis.





Potential
Acquisitioni of a Hotel Property Pursuant to a Joint Venture





On April
30, 2010, in connection with our proposed acquisition of an indirect interest in
a hotel property located in Atlanta, Georgia, or the Residence Inn property, we,
through a wholly-owned subsidiary of our operating partnership, or the Company
Member, entered into a joint venture with an entity owned by Brett C. Moody, our
chairman and chief executive officer, or the Moody Member.  As of
April 30, 2010, the Company Member had made initial capital contributions to the
joint venture in the amount of $461,250, representing a 75% membership interest
in the joint venture.





The
Company Member’s initial capital contribution to the joint venture was funded
pursuant to a promissory note in favor of Moody Member in the aggregate
principal amount of $461,250, or the promissory note. The entire principal
amount of the promissory note and all accrued and unpaid interest thereon is due
and payable in full on the date of the closing of the acquisition of the
Residence Inn property, which closing will take place no later than May 31,
2010, which we refer to as the “closing date.” In the event that the entire
principal amount of the promissory note and all accrued and unpaid interest
thereon is not paid in full by the closing date, the Company Member will
transfer all of its membership interest in the joint venture to the Moody Member
in exchange for the cancellation of the promissory note.





The joint
venture will acquire the Residence Inn property through a wholly-owned
subsidiary on or before the closing date for an aggregate purchase price of
$7,350,000, including the assumption of $5,000,000 of existing indebtedness on
the Residence Inn property, plus closing costs and transfer taxes. The cash
purchase price and other fees and expenses incurred in connection with the
acquisition of the Residence Inn property will be funded by additional capital
contributions to the joint venture from the Company Member and the Moody Member
on or before the closing date. The Company Member’s payment of its additional
capital contribution is contingent upon a number of factors, including (1) the
sale of the minimum amount of $2,000,000 in shares required to release offering
proceeds from escrow in accordance with the terms of our initial public
offering; (2) the sale of a sufficient number of shares in our initial public
offering to fund the Company Member’s additional capital contribution; and (3)
the satisfaction of all conditions and consents relating to the acquisition of
the Residence Inn property.


ITEM 3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.




Market
risk is the adverse effect on the value of a financial instrument that results
from a change in interest rates. We may be exposed to interest rate changes
primarily as a result of long-term debt used to maintain liquidity, fund capital
expenditures and expand our real estate investment portfolio and operations.
Market fluctuations in real estate financing may affect the availability and
cost of funds needed to expand our investment portfolio. In addition,
restrictions upon the availability of real estate financing or high interest
rates for real estate loans could adversely affect our ability to dispose of
real estate in the future. We will seek to limit the impact of interest rate
changes on earnings and cash flows and to lower our overall borrowing costs. We
may use derivative financial instruments to hedge exposures to changes in
interest rates on loans secured by our assets. The market risk associated with
interest-rate contracts is managed by establishing and monitoring parameters
that limit the types and degree of market risk that may be undertaken. With
regard to variable rate financing, our advisor will assess our interest rate
cash flow





24
 Index







risk by
continually identifying and monitoring changes in interest rate exposures that
may adversely impact expected future cash flows and by evaluating hedging
opportunities. Our advisor will maintain risk management control systems to
monitor interest rate cash flow risk attributable to both our outstanding and
forecasted debt obligations as well as our potential offsetting hedge positions.
While this hedging strategy will be designed to minimize the impact on our net
income and funds from operations from changes in interest rates, the overall
returns on your investment may be reduced. Because we have not commenced real
estate operations, we currently have limited exposure to financial market risks.
As of March 31, 2010 we had no outstanding debt.




We will
also be exposed to credit risk. Credit risk is the failure of the counterparty
to perform under the terms of the derivative contract. If the fair value of a
derivative contract is positive, the counterparty will owe us, which creates
credit risk for us. If the fair value of a derivative contract is negative, we
will owe the counterparty and, therefore, do not have credit risk. We will seek
to minimize the credit risk in derivative instruments by entering into
transactions with high-quality counterparties.


ITEM 4T.
            CONTROLS
      AND PROCEDURES.





Evaluation
of Disclosure Controls and Procedures





As of the
end of the period covered by this report, management, including our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 13d-15(e) under the Exchange Act). Based upon, and as of
the date of, the evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were
effective.





Changes
in Internal Control over Financial Reporting





There has
been no significant change in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





25
 Index





PART II—OTHER INFORMATION





ITEM 1.
            LEGAL
      PROCEEDINGS.




None.





ITEM 1A.
            RISK
      FACTORS.





The
following risk factor updates and should be read in conjunction with the risk
factors contained in the “Risk Factors” section set forth in our Annual Report
on Form 10-K for the year ended December 31, 2009.
 
 The
report of the independent registered public accounting firm which audited our
financial statements expresses substantial doubt as to our ability to continue
as a going concern.
 
 In its
report dated March 31, 2010, our independent registered public accounting firm
which audited our consolidated balance sheets as of December 31, 2009 and 2008,
and the related consolidated statements of equity and cash flows for the year
ended December 31, 2009 and for the period January 15, 2008 (the date of our
inception) through December 31, 2008, expressed substantial doubt as to our
ability to continue as a going concern. In rendering its opinion, our
independent registered public accounting firm noted that our ability to continue
as a going concern is dependent on our raising the minimum offering amount of
$2,000,000 and additional funds to enable us to pursue our acquisition strategy
and that as of the date of the report we had received subscriptions to purchase
approximately $76,500 in shares of our common stock. Because we have been issued
an opinion by our independent registered public accounting firm that substantial
doubt exists as to whether we can continue as a going concern, we may have
difficulty attracting investors, which could have an adverse effect on our
ability to achieve our investment objectives.


ITEM 2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.





During
the three months ended March 31, 2010, we did not sell any equity securities
that were not registered under the Securities Act and we did not repurchase any
of our securities.




On April
15, 2009, our Registration Statement on Form S-11 (File No. 333­150612),
registering a public offering of up to $1,100,000,000 in shares of our common
stock, was declared effective under the Securities Act and we commenced our
initial public offering. We are offering up to 100,000,000 shares of our common
stock to the public in our primary offering at $10.00 per share and up to
10,526,316 shares of our common stock pursuant to our dividend reinvestment plan
at $9.50 per share.
  We may
not sell any shares in the offering until we have raised gross offering proceeds
of $2,000,000 from persons who are not affiliated with us or our advisor.
Pending satisfaction of this condition, all subscription payments will be placed
in an account held by our escrow agent in trust for subscribers’ benefit. If we
do not raise $2,000,000 in the offering by June 14, 2010, we will promptly
return all funds in the escrow account (including interest) to subscribers and
we will stop selling our shares. As of March 31, 2010, we had not raised the
minim offering amount of $2,000,000 and therefore had not received any proceeds
from our public offering of shares. The offering will terminate no later than
April 15, 2011, unless extended.
  As of
March 31, 2010, our advisor and its affiliates had incurred organization costs
of approximately $932,000 and offering costs of approximately $1,905,000 on our
behalf. These costs are not recorded in our financial statements because such
costs are not a liability to us until we raise the minimum offering amount in
our public offering.
  Effective
February 19, 2008, we issued 22,222 shares of common stock at $9.00 per share to
Moody National REIT Sponsor, LLC, our sponsor, for $200,000 in cash, reflecting
that no sales commission or dealer manager fees were paid. We relied on Section
4(2) of the Securities Act for the exemption from the registration requirements
of the Securities Act. Moody National REIT Sponsor, LLC, by virtue of its
affiliation with us, had access to information concerning our proposed
operations and the terms and conditions of its investment.
  EffectiveApril25, 2008, our operating partnership
issued 100 common units at$10.00 per unit to Moody National LPOP I, LLC
for $1,000 and issued 100 special units at $10.00 per unit to Moody OP Holdings
I, LLC for $1,000. Our operating partnership relied on Section 4(2) of the
Securities Act for the exemption from the registration requirements of these
issuances. Each of Moody National LPOP I, LLC and Moody OP Holdings I, LLC, by
virtue of their affiliation with us, had access to information concerning our
operating partnership's proposed operations and the terms and conditions of its
investment.


ITEM 3.
            DEFAULTS
      UPON SENIOR SECURITIES.




None.




ITEM 4.
            RESERVED.




ITEM 5.
            OTHER
      INFORMATION.


On May
13, 2010, W. Kyle Bebee, the Company’s Executive Vice President and a member of
the Company’s board of directors, Adam S. Wilk, the Company’s Vice President and
Real Estate Counsel, and Mary E. Smith, the Company’s Vice President, Securities
Counsel and Secretary, resigned from their respective positions with the
Company, effective as of May 13, 2010. Additionally, on the same date, Messrs.
Bebee and Wilk and Ms. Smith resigned from their positions as the Executive Vice
President, Vice President and Real Estate Counsel and Vice President, Securities
Counsel and Secretary, respectively, of the Company’s advisor, effective as of
May 13, 2010.  Going forward, Mr. Bebee and Ms. Smith will continue to
be employed by affiliates of the Company and will continue to assist in the
Company’s management and day-to-day operations.





ITEM 6.
            EXHIBITS.





3.1
            
            Articles
      of Amendment and Restatement of Moody National REIT I, Inc. (filed as
      Exhibit 3.1 to Pre-Effective Amendment No. 5 to the Company’s Registration
      Statement on Form S-11 (No. 333-150612) and incorporated herein by
      reference).3.2
            
            Bylaws
      of Moody National REIT I, Inc. (filed as Exhibit 3.2 to the Company’s
      Registration Statement on Form S-11 (No. 333-150612) and incorporated
      herein by reference).3.3
            
            Amendment
      No. 1 to Bylaws of Moody National REIT I, Inc. (filed as Exhibit 3.3 to
      Pre-Effective Amendment No. 4 to the Company’s Registration Statement on
      Form S-11 (No. 333-150612) and incorporated herein by
      reference).4.1
            
            Form
      of Subscription Agreement (included as Appendix B to prospectus,
      incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 5
      to the Company’s Registration Statement on Form S-11 (No.
      333-150612)).4.2
            
            Moody
      National REIT I, Inc. Distribution Reinvestment Plan (included as Appendix
      C to prospectus, incorporated by reference to Exhibit 4.2 to Pre-Effective
      Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No.
      333-150612)).31.1
            
            Certification of Chief Executive Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200231.2
            
            Certification of Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1
            
            Certification of Chief Executive Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 200232.2
            
            Certification of Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002





26
 Index





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.





MOODY
      NATIONAL REIT I, INC.Date:
      May 17, 2010
            
            By:
            /s/
      Brett C. MoodyBrett
      C. MoodyChairman
      of the Board, Chief Executive Officer and President(Principal
      Executive Officer)





Date:
      May 17, 2010
            
            By:
            /s/
      Robert W. EngelRobert
      W. EngelChief
      Financial Officer and Treasurer(Principal
      Financial and Accounting Officer)














27
 Index





EXHIBIT
INDEX





3.1
            
            Articles
      of Amendment and Restatement of Moody National REIT I, Inc. (filed as
      Exhibit 3.1 to Pre-Effective Amendment No. 5 to the Company’s Registration
      Statement on Form S-11 (No. 333-150612) and incorporated herein by
      reference).3.2
            
            Bylaws
      of Moody National REIT I, Inc. (filed as Exhibit 3.2 to the Company’s
      Registration Statement on Form S-11 (No. 333-150612) and incorporated
      herein by reference).3.3
            
            Amendment
      No. 1 to Bylaws of Moody National REIT I, Inc. (filed as Exhibit 3.3 to
      Pre-Effective Amendment No. 4 to the Company’s Registration Statement on
      Form S-11 (No. 333-150612) and incorporated herein by
      reference).4.1
            
            Form
      of Subscription Agreement (included as Appendix B to prospectus,
      incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 5
      to the Company’s Registration Statement on Form S-11 (No.
      333-150612)).4.2
            
            Moody
      National REIT I, Inc. Distribution Reinvestment Plan (included as Appendix
      C to prospectus, incorporated by reference to Exhibit 4.2 to Pre-Effective
      Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No.
      333-150612)).31.1
            
            Certification of Chief Executive Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200231.2
            
            Certification of Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1
            
            Certification of Chief Executive Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 200232.2
            
            Certification of Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002