Hersha Hospitality Trust – ‘424B1’ on 1/22/99

As of:  Friday, 1/22/99   ·   Accession #:  916641-99-31   ·   File #:  333-56087

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Prospectus   —   Rule 424(b)(1)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B1       Hersha Hospitality Trust 424B1                       147    931K 

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                                                    FILED PURSUANT TO RULE 424B1
                                          FILE NO. 333-56087

PROSPECTUS                                                                      

2,000,000 Shares
Hersha Hospitality Trust
 Priority Class A Common Shares of Beneficial Interest
 ---------------
         Hersha Hospitality Trust, formed in May 1998 (the "Company"),  has been
established  to own initially ten hotels (the "Initial  Hotels") and to continue
the hotel  acquisition and development  strategies of Hasu P. Shah, the Chairman
of the Board of Trustees and Chief  Executive  Officer of the Company.  Mr. Shah
and certain of his affiliates (together,  the "Hersha Affiliates")  purchased or
developed all of the Initial Hotels,  which will be contributed to the principal
operating subsidiary of the Company, Hersha Hospitality Limited Partnership (the
"Partnership"),  by a  group  of  affiliated  partnerships,  a  corporation  and
individuals  (the  "Combined   Entities")  in  exchange  for  interests  in  the
Partnership  and  assumption of debt.  Following the completion of this offering
(the  "Offering")  and the use of Offering  proceeds as  described  herein,  the
Company  will  own  approximately  a 32%  general  partnership  interest  in the
Partnership. The Company is a self-advised Maryland real estate investment trust
that intends to qualify as a real estate  investment  trust ("REIT") for federal
income tax purposes.                                                            

         The  Initial  Hotels are  located in  Pennsylvania  and  include  three
Holiday Inn Express(R)  hotels,  two Hampton  Inn(R) hotels,  two Holiday Inn(R)
hotels,  two  Comfort  Inn(R)  hotels and one  Clarion  Suites(R)  hotel with an
aggregate of 989 rooms. The Partnership will own, directly or through subsidiary
partnerships,  100% of the equity interests in the Initial Hotels and will lease
them  to  Hersha  Hospitality   Management,   L.P.  (the  "Lessee"),  a  limited
partnership  wholly-owned  by  certain  of the  Hersha  Affiliates.  The  Hersha
Affiliates  have managed all of the Initial  Hotels since their  acquisition  or
construction. Upon the closing of the Offering of the Company's Priority Class A
common shares of beneficial  interest,  par value $.01 per share (the  "Priority
Common Shares"),  and the use of the Offering proceeds as set forth herein,  the
Partnership   will  have   approximately   $17.4  million  of  fixed-rate   debt
outstanding, which will be secured by some of the Initial Hotels.               

    See "Risk Factors" beginning on page 16 for a discussion of material risks
that should be considered by prospective purchasers of the Priority Common      
Shares offered hereby, including the following risks:                           

o   Conflicts  of  interest  between  the  Company  and the  Hersha  Affiliates,
    including  conflicts  regarding  the sale,  leasing  or  refinancing  of the
    Initial  Hotels,  may have  resulted,  or may in the future  result,  in the
    interests of the  shareholders  not being  reflected  fully in all decisions
made or actions taken by officers and Trustees of the Company.          
o    The purchase prices to be paid for the six Initial Hotels that             

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    have little  operating  history or have been newly  renovated are based upon
    projections  by  management  as to the  expected  operating  results of such
    hotels, subjecting the Company to the risk that these hotels may not achieve
    anticipated operating results and the rent received by the Company from such
    hotels after the First Adjustment Date or Second  Adjustment Date (as herein
    defined) could be less than  anticipated,  which could adversely  affect the
    amount  of  cash  available  for  distribution  to the  shareholders  of the
Company.                                                                
o   The holders of at least two-thirds of the interests in the                  
Partnership, including the Company, which initially will own            
approximately only a 32% interest in the Partnership, must              
approve, subject to certain conditions, a sale of all or                
substantially all of the assets of the Partnership or a merger          
or consolidation of the Partnership, which could result in the          
disapproval of a transaction that would be beneficial to the            
shareholders of the Company.                                            
o   Risks  associated  with  distributing  100% of forecasted cash available for
    distribution,  including the risk that, after the Priority Period (as herein
    defined),  actual cash available for  distribution  will be  insufficient to
allow the Company to maintain its proposed initial distribution rate.   

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o   The  Company's  lack of control  over the daily  operations  of the  Initial
    Hotels could, in the event that the Lessee fails to effectively  operate the
    Initial  Hotels,  make the Company's  business  strategy  more  difficult to
    achieve,  which  could  adversely  affect the amount of cash  available  for
distribution to the shareholders of the Company.                        

o   The dependence of the Company on the Lessee's ability to make payments under
    the Percentage  Leases in order to generate  revenues may, in the event that
    there is a reduction in revenues at the Initial Hotels, adversely affect the
    amount  of  cash  available  for  distribution  to the  shareholders  of the
Company.                                                                

o   The Company and the Partnership were recently formed, and the Company has no
experience operating as a REIT or a public company.                     

o   The Company will initially own only ten hotels, all located in Pennsylvania.
    Thus,  adverse  changes in the  operations  of any one  Initial  Hotel could
    adversely  affect  the  amount of cash  available  for  distribution  to the
shareholders of the Company.                                            

o   Mr. Shah, the partners of the Combined Entities and certain of              
the Combined Entities guarantee the indebtedness secured by             
the Initial Hotels, and the bankruptcy of any of the                    
guarantors would constitute a default under the related loan            
documents, which default would cause some or all of such                
indebtedness to become immediately due and payable and could            
adversely affect the Company's cash available for                       
distribution.                                                           

o   Purchasers of the Priority Common Shares sold in the Offering               
will experience immediate and substantial dilution of $2.14,            
or  35.7% of the Offering Price, in the net tangible book               
value per Priority Common Share.  In addition, in the event             
that any of the purchase prices of the Initial Hotels are               
increased pursuant to the repricing described herein, owners            
of the Priority Common Shares at such time will experience              
further dilution.                                                       

o   Risk of taxation of the Company as a regular corporation if it              
fails to qualify as a REIT, which would adversely affect the            
amount of cash available for distribution to the shareholders           
of the Company.                                                         
                                   ---------------
         All of the Priority  Common Shares offered hereby are being sold by the
Company.  The Company  proposes to sell  166,666 of the Priority  Common  Shares
offered  hereby  directly to certain  Hersha  Affiliates  at the initial  public
offering price,  with the remainder of the Priority Common Shares offered hereby
being sold through Anderson & Strudwick,  Incorporated (the "Underwriter").  The
Company  intends  to make  regular  quarterly  distributions  to  holders of the
Priority  Common  Shares  initially  equal  to  $0.18  per  share,  which  on an
annualized  basis  would be equal to $0.72  per  share or 12.0% of the  Offering
Price. The holders of the Priority Common Shares will be entitled to a priority,
as described  herein,  with respect to  distributions  and amounts  payable upon
liquidation  (the  "Priority  Rights")  for a  period  (the  "Priority  Period")
beginning on the date of the closing of                                         

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the  Offering and ending on the earlier of: (i) the date that is 15 trading days
after the Company  sends  notice to the record  holders of the  Priority  Common
Shares that their Priority  Rights will  terminate in 15 trading days,  provided
that the closing bid price of the  Priority  Common  Shares is at least $7.00 on
each trading day during such 15-day period, or (ii) the fifth anniversary of the
closing of the Offering.  Notwithstanding  the  foregoing,  the Priority  Period
shall not end until the holders of the Priority  Common Shares have received any
accrued,  but unpaid,  Priority  Distributions.  During the Priority Period, the
holders of the Priority Common Shares will be entitled to receive,  prior to any
distributions  either to the holders of units of limited partnership interest in
the  Partnership  ("Units")  that received Units (the  "Subordinated  Units") in
exchange  for the  Initial  Hotels or to the  holders of the  Company's  Class B
common  shares of  beneficial  interest,  $.01 par value per share (the "Class B
Common  Shares"),  cumulative  dividends in an amount per Priority  Common Share
equal to $0.18 per quarter (the "Priority  Distribution").  After the holders of
the Subordinated Units and the Class B Common Shares have received an amount per
Subordinated   Unit  or  per  Class  B  Common   Share  equal  to  the  Priority
Distribution,  the  holders of the  Priority  Common  Shares will be entitled to
receive  any further  distributions  on a pro rata basis with the holders of the
Subordinated  Units  and the Class B Common  Shares.  As of the  closing  of the
Offering,  no Class B Common  Shares will be  outstanding.  In the  future,  the
Company may issue  additional  Priority  Common Shares,  and the Partnership may
issue  Units  that are not  subordinated  to the  Priority  Common  Shares.  See
"Description of Shares of Beneficial Interest" and "Partnership Agreement."     

         The  Company's  Declaration  of Trust  generally  prohibits  direct  or
indirect  ownership of more than 9.9% of the outstanding  shares of any class of
the Company's  securities,  including the Priority Common Shares, by any person.
Prior to the Offering,  there has been no public market for the Priority  Common
Shares.  The Priority  Common Shares have been approved for listing,  subject to
final notice of issuance,  on the American Stock Exchange under the symbol "HT."
The initial public  offering  price of the Priority  Common Shares will be $6.00
per share (the "Offering Price"). See "Underwriting" for a discussion of factors
considered in determining the Offering Price.                                   

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
 REPRESENTATION TO THE CONTRARY IS A
 CRIMINAL OFFENSE.

                                                        [Enlarge/Download Table]


=================================================================================================================
                                  Price to Public            Selling Commission(1)         Proceeds to Company(2)
-----------------------------------------------------------------------------------------------------------------
                                                                                                                 

Per                                                                                                              
Priority Common Share........         $6.00                        $.48                        $5.52             
Total(3).....................       $12,000,000                 $880,000                    $11,120,000          

=================================================================================================================

(1) See "Underwriting" for information concerning indemnification               
of the Underwriter and other matters.  As stated above, the                     
Company proposes to sell 166,666 of the Priority Common Shares                  
offered hereby directly to certain Hersha Affiliates at the                     
Offering Price.  The Underwriter will not receive any selling                   
commission with respect to such shares.  Does not reflect the                   
Underwriter Warrants granted by the Company to the Underwriter to               
purchase 183,333 Priority Common Shares for a period of five                    
years at a price per share  of $9.90 (165% of the Offering                      
Price).  See "Underwriting."                                                    

(2) Before deducting expenses payable by the Company, estimated                 
at $650,000.                                                                    
(3) The Company has granted the Underwriter an option for 30 days               
to purchase an additional 275,000 shares at the public offering                 
price per share, less the underwriting discount, solely to cover                
over-allotments.  If such option is exercised in full, the total                
Price to Public, Selling Commission and Proceeds to Company will                
be $13,650,000, $1,012,000 and $12,638,000, respectively. See                   
"Underwriting."                                                                 
                                   -----------

         The Priority  Common  Shares,  other than the 166,666  Priority  Common
Shares offered directly by the Company to certain Hersha  Affiliates,  are being
offered by the Company to Anderson & Strudwick, Incorporated (the "Underwriter")
as  and if  delivered  to  and  accepted  by it,  subject  to the  right  of the
Underwriter  to reject any order in whole or in part.  It is  expected  that the
delivery of the Priority  Common Shares will be made in New York, New York on or
about January 26, 1999.                                                         

Anderson & Strudwick
Incorporated

The date of this Prospectus is January 20, 1999.

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[COLOR PHOTOS OF CERTAIN OF THE INITIAL HOTELS AND A COLOR
MAP DEPICTING THE LOCATION OF THE INITIAL HOTELS] 

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                                                                [Download Table]
                                                                                   

PROSPECTUS SUMMARY.............................................................  1 
  The Company..................................................................  1 
  Summary Risk Factors.........................................................  1 
  The Partnership..............................................................  3 
  The Lessee...................................................................  4 
  The Initial Hotels...........................................................  5 
  Growth Strategy..............................................................  6 
  Acquisition Strategy.........................................................  6 
  Internal Growth Strategy.....................................................  7 
  Formation Transactions.......................................................  7 
  Benefits to the Hersha Affiliates............................................ 10 
  Conflicts of Interest........................................................ 11 
  Forecasted Distributions..................................................... 11 
  Tax Status................................................................... 12 
  The Offering................................................................. 12 
  Summary Selected Financial Information....................................... 13 

RISK FACTORS................................................................... 16 
  Conflicts of Interest........................................................ 16 
         Conflicts Relating to Sales or Refinancing of Initial Hotels...........16 
         No Arm's-Length Bargaining on Percentage Leases, Contribution             
         Agreements, the Administrative Services Agreement and Option              
         Agreement............................................................. 16 
         Competing Hotels Owned or to be Acquired by the Hersha                    
         Affiliates............................................................ 16 
  Acquisition of Hotels with Limited Operating History......................... 17 
  Need for Certain Consents from the Limited Partners.......................... 17 
  Risks Related to the Company's Initial Forecasted Distributions...............17 
  Inability to Operate the Properties.......................................... 17 
  Dependence on the Lessee..................................................... 17 

Newly-Organized Entities....................................................... 18 
  Limited Numbers of Initial Hotels............................................ 18 
  Guarantors of Assumed Indebtedness........................................... 18 
  Substantial Dilution......................................................... 18 
  Tax Risks.................................................................... 18 
         Failure to Qualify as a REIT.......................................... 18 
         REIT Minimum Distribution Requirements................................ 19 
  Forecasted Statement of Operations........................................... 19 
  Potential Adverse Effects of Leverage and Lack of Limits on                      
     Indebtedness.............................................................. 19 
  The Price Being Paid for the Initial Hotels May Exceed Their                     
     Value..................................................................... 20 
  Emphasis on Franchise Hotels................................................. 20 
  Concentration of Investments in Pennsylvania................................. 20 
  Hotel Industry Risks......................................................... 20 
         Operating Risks....................................................... 20 
         Competition for Guests................................................ 20 
         Investment Concentration in Single Industry........................... 20 
         Seasonality of Hotel Business and the Initial Hotels.................. 20 
         Risks of Operating Hotels under Franchise Licenses.................... 21 
         Operating Costs and Capital Expenditures; Hotel Renovation............ 21 
  Real Estate Investment Risks................................................. 21 
         General Risks of Investing in Real Estate............................. 21 
         Illiquidity of Real Estate............................................ 22 
         Uninsured and Underinsured Losses..................................... 22 
         Property Taxes........................................................ 22 
         Environmental Matters................................................. 22 
         Compliance with Americans with Disabilities Act and other                 
         Changes in Governmental Rules and Regulations......................... 22 
     Market for Priority Common Shares......................................... 23 
  Effect of Market Interest Rates on Price of Priority Common                      
     Shares.................................................................... 23 
  Anti-takeover Effect of Ownership Limit, Limited Partner                         
     Consents, Staggered Board, Power to Issue Additional Shares and               
     Certain Provisions of Maryland Law........................................ 23 
         Ownership Limitation.................................................. 23 
         Limited Partner Consents.............................................. 23 
                  Staggered Board.............................................. 23 
         Issuance of Additional Shares......................................... 23 
         Maryland Business Combination Law..................................... 24 
  Dependence Upon External Financing........................................... 24 
  Assumption of Contingent Liabilities of Combined Entities.................... 24 
  Year 2000 Risks.............................................................. 24 
  Ability of Board of Trustees to Change Certain Policies...................... 25 
  Growth Strategy.............................................................. 25 
         Competition for Acquisitions.......................................... 25 
         Acquisition Risks..................................................... 25 
  Reliance on Trustees and Management.......................................... 25 
  Possible Adverse Effect of Shares Available for Future Sale on                   
     Price of Priority Common Shares........................................... 26 

THE COMPANY.................................................................... 26 

GROWTH STRATEGY................................................................ 28 
  Acquisition Strategy......................................................... 28 
  Internal Growth Strategy..................................................... 29 

USE OF PROCEEDS................................................................ 30 

FORECASTED DISTRIBUTIONS....................................................... 31 

PRO FORMA CAPITALIZATION....................................................... 34 

DILUTION....................................................................... 35 

SELECTED FINANCIAL INFORMATION................................................. 36 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION                        
 AND RESULTS OF OPERATIONS..................................................... 39 
  Overview..................................................................... 39 
  Results of Operations of the Initial Hotels.................................. 39 
  Liquidity and Capital Resources.............................................. 39 
  Inflation.................................................................... 40 
  Seasonality.................................................................. 40 
  Year 2000 Compliance......................................................... 41 

BUSINESS AND PROPERTIES........................................................ 42 
  The Initial Hotels........................................................... 42 
  The Percentage Leases........................................................ 45 
  Franchise Licenses........................................................... 49 
  Operating Practices.......................................................... 51 
  Employees.................................................................... 51 
  Environmental Matters........................................................ 51 
  Competition.................................................................. 51 
  Insurance.................................................................... 52 
  Depreciation................................................................. 52 
  Legal Proceedings............................................................ 52 
  Hersha Affiliates' Hotel Assets Not Acquired By The Company.................. 52 
  Ground Leases................................................................ 53 

POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES..................... 53 
  Investment Policies.......................................................... 53 
  Financing.................................................................... 53 
  Conflict of Interest Policies................................................ 54 
  Policies with Respect to Other Activities.................................... 55 
  Working Capital Reserves..................................................... 55 

FORMATION TRANSACTIONS........................................................  57 
  Benefits to the Hersha Affiliates...........................................  56 

MANAGEMENT....................................................................  58 
  Trustees and Executive Officers.............................................  58 
  Audit Committee.............................................................  59 
  Compensation Committee......................................................  60 
  Compensation................................................................  60 
  Exculpation and Indemnification.............................................  60 
  The Option Plan.............................................................  61 
  The Trustees' Plan..........................................................  63 

CERTAIN RELATIONSHIPS AND TRANSACTIONS........................................  64 

  Repayment of Indebtedness and Guarantees by Mr. Shah and                         
       the Hersha Affiliates..................................................  64 
  Hotel Ownership and Management..............................................  64 
  Option Agreement............................................................  64 
  Payment of Franchise Transfer Fees by the Company...........................  64 

THE LESSEE....................................................................  65 
  Management of the Lessee....................................................  65 

PRINCIPAL SHAREHOLDERS........................................................  67 

DESCRIPTION OF SHARES OF BENEFICIAL INTEREST..................................  68 
  General.....................................................................  68 
  The Priority Common Shares..................................................  68 
  The Class B Common Shares...................................................  70 

  Voting Rights of Priority Common Shares and Class B Common                       
     Shares...................................................................  71 
  Preferred Shares............................................................  72 

  Classification or Reclassification of Common Shares or                           
     Preferred Shares.........................................................  72 
  Restrictions on Ownership and Transfer......................................  72 
  Other Matters...............................................................  74 

CERTAIN PROVISIONS OF MARYLAND LAW                                                 
  AND OF THE COMPANY'S DECLARATION                                                 

  OF TRUST AND BYLAWS.........................................................  75 
  Classification of the Board of Trustees.....................................  75 
  Removal of Trustees.........................................................  75 
  Business Combinations.......................................................  75 
  Control Share Acquisitions..................................................  76 
  Amendment...................................................................  76 
  Limitation of Liability and Indemnification.................................  77 
  Operations..................................................................  77 
  Dissolution of the Company..................................................  78 
  Advance Notice of Trustees Nominations and  New Business....................  78 

  Possible Anti-takeover Effect of Certain Provisions of Maryland                  
     Law and of the Declaration of Trust and Bylaws...........................  78 
  Maryland Asset Requirements.................................................  78 

SHARES AVAILABLE FOR FUTURE SALE..............................................  79 

PARTNERSHIP AGREEMENT.........................................................  81 
  Management..................................................................  81 

Transferability of Interests..................................................  81 

Capital Contribution..........................................................  81 
  Redemption Rights...........................................................  82 
  Operations..................................................................  82 
  Distributions...............................................................  83 
  Allocations.................................................................  83 
  Term........................................................................  83 
  Tax Matters.................................................................  83 

FEDERAL INCOME TAX CONSEQUENCES...............................................  84 
  Taxation of the Company.....................................................  84 
  Requirements for Qualification..............................................  85 
  Failure to Qualify..........................................................  91 
  Taxation of Taxable U.S. Shareholders.......................................  92 

  Taxation of Shareholders on the Disposition of the Common                        
     Shares...................................................................  92 
  Capital Gains and Losses....................................................  93 
  Information Reporting Requirements and Backup Withholding...................  93 
  Taxation of Tax-Exempt Shareholders.........................................  93 
  Taxation of Non-U.S. Shareholders...........................................  94 
  Other Tax Consequences......................................................  95 
  Tax Aspects of the Partnership..............................................  95 
  Sale of the Company's or the Partnership's Property.........................  97 

UNDERWRITING..................................................................  99 

EXPERTS....................................................................... 100 

REPORTS TO SHAREHOLDERS....................................................... 100 

LEGAL MATTERS................................................................. 100 

ADDITIONAL INFORMATION........................................................ 100 

GLOSSARY...................................................................... 102 

INDEX TO FINANCIAL STATEMENTS..................................................F-1 

PROSPECTUS SUMMARY

         The following summary is qualified in its entirety by the more detailed
information and financial  statements and the notes thereto appearing  elsewhere
in this  Prospectus.  Unless the context  otherwise  indicates,  all  references
herein to the "Company" include Hersha  Hospitality Trust and Hersha Hospitality
Limited  Partnership  and its  subsidiaries.  The Company is offering  2,000,000
Priority Common Shares pursuant to this Prospectus, 1,833,334 of which are being
offered to the  Underwriter and 166,666 of which are being offered to the Hersha
Affiliates (as herein  defined).  Unless  otherwise  indicated,  the information
contained  herein  assumes that (i) only the  1,833,334  Priority  Common Shares
being  offered  to  the  Underwriter   are  sold  and  (ii)  the   Underwriter's
over-allotment  option is not  exercised.  The  offering of  1,833,334  Priority
Common Shares to the  Underwriter is referred to herein as the  "Offering."  See
"Glossary"  beginning on page  102 for the  definitions of certain  additional  
terms used in this Prospectus.                                                  

 The Company

         Hersha  Hospitality  Trust (the "Company") has been  established to own
initially  interests  in ten hotels (the  "Initial  Hotels") and to continue the
hotel  acquisition and development  strategies of Hasu P. Shah,  Chairman of the
Board of Trustees  and Chief  Executive  Officer of the  Company.  The  Company,
formed in May 1998, is a self-advised Maryland real estate investment trust that
intends to qualify as a real estate investment trust ("REIT") for federal income
tax purposes.  The Initial Hotels  include three Holiday Inn Express(R)  hotels,
two Hampton Inn(R) hotels,  two Holiday Inn(R) hotels, two Comfort Inn(R) hotels
and one Clarion  Suites(R) hotel. The Initial Hotels are located in Pennsylvania
and contain an  aggregate  of 989 rooms.  The Holiday Inn  Express(R)  hotels in
Hershey, Pennsylvania and New Columbia,  Pennsylvania,  the Hampton Inn(R) hotel
in  Carlisle,   Pennsylvania   and  the  Comfort  Inn(R)  hotel  in  Harrisburg,
Pennsylvania (the "Newly-Developed  Hotels") are newly constructed and therefore
have limited operating history.  The Holiday Inn Express(R) hotel in Harrisburg,
Pennsylvania,  the  Holiday  Inn(R)  hotel in  Milesburg,  Pennsylvania  and the
Comfort Inn(R) hotel in Denver, Pennsylvania (the "Newly-Renovated Hotels") have
been newly  renovated and, as a result,  the Company  believes that such hotels'
future performance will improve  significantly over such hotels' prior operating
histories.  The  remaining  hotels,  the Hampton  Inn(R)  hotel in  Selinsgrove,
Pennsylvania,  the Holiday  Inn(R) hotel and  conference  center in  Harrisburg,
Pennsylvania and the Clarion  Suites(R) hotel in Philadelphia,  Pennsylvania are
referred to herein as the "Stabilized Hotels."                                  

Summary Risk Factors      

         An investment in the Priority Common Shares involves various risks, and
investors should carefully  consider the matters discussed under "Risk Factors,"
including, among others, the                                                    
following:                                                                      

         o        Conflicts  of  interest   between  the  Company,   the  Hersha
                  Affiliates  and the Lessee that may have  resulted,  or may in
                  the future result,  in the interests of the  shareholders  not
                  being  reflected  fully in all decisions made or actions taken
       by officers and Trustees of the Company, including:

                 o        conflicts related to the adverse tax consequences to
                     the Hersha Affiliates upon a sale of any of the
                        Initial Hotels or the refinancing or prepayment of
                           principal on certain of the Assumed Indebtedness, and
                           the related risk that the Hersha Affiliates' personal
                          interests with regard to a sale or refinancing of an
                          Initial Hotel or repayment of certain of the Assumed
                   Indebtedness could be adverse to those of the
Company;                  

                  o        lack of arm's-length negotiations with respect to the
                           terms  of the  Percentage  Leases,  the  contribution
                           agreements  for  the  Initial   Hotels,   the  Option
                           Agreement  (as herein  defined),  the  Administrative
                           Services Agreement (as herein defined) and the Hersha
                           Affiliates'  conflicts  relating to  enforcing  those
agreements;               

             o        conflicts relating to ownership and operation of
                other hotels by the Hersha Affiliates; and

                  o        conflicts relating to competing demands on Mr. Shah's
time.                     

 o         The purchase prices for the Newly- Renovated Hotels and
          the Newly- Developed Hotels are based upon projections
              by management as to the expected operating results of such
             hotels, subjecting the Company to risks that those hotels
              may not achieve anticipated operating results and the rent
            received by the Company from such hotels after the First
             Adjustment Date or Second Adjustment Date, as applicable,
         could be less than anticipated, which could adversely
           affect the amount of cash available for distribution to
the shareholders of the Company.            

    o         The holders of at least two-thirds of the interests in the
            Partnership, including the Company, which initially will
             own approximately only a 32% interest in the Partnership,
              must approve, subject to certain conditions, a sale of all
              or substantially all of the assets of the Partnership or a
           merger or consolidation of the Partnership, which could
            result in the disapproval of a transaction that would be
  beneficial to the shareholders of the Company.

      o        Risks associated with  distributing 100% of forecasted cash
                  available for distribution, including the risk that, after the
                Priority Period, actual cash available for distribution will
                 be insufficient to allow the Company to maintain its proposed
initial distribution rate.                  

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     o        The Company's lack of control over the daily operations of
                  the Initial  Hotels could,  in the event that the Lessee fails
                  to effectively  operate the Initial Hotels, make the Company's
                  business  strategy  more  difficult  to  achieve,  which could
                  adversely affect the amount of cash available for distribution
to the shareholders of the Company.         

  o         The dependence of the Company on the Lessee's ability to
         make payments under the Percentage Leases in order to
       generate revenues may, in the event that there is a
          reduction in revenues at the Initial Hotels, adversely
           affect the amount of cash available for distribution to
            the shareholders of the Company.  The Lessee has nominal
           net worth and must generate sufficient operating income
    from the Initial Hotels to fund its rent payment
obligations under the Percentage Leases.    

    o        The Company and the Partnership were recently formed, and
          the Company has no experience operating as a REIT or a
public company.                             

         o        The Company initially will own only ten hotels.  Thus, adverse
                  changes in the  operations  of any of the ten  Initial  Hotels
                  could  adversely  affect  the  amount  of cash  available  for
    distribution to the shareholders of the Company.

o         Mr. Shah, the partners of the Combined Entities and   
          certain of the Combined Entities guarantee the Assumed
             Indebtedness, and the bankruptcy of any of the guarantors
     would constitute a default under the related loan
           documents, which default would cause some or all of the
      Assumed Indebtedness to become immediately due and
             payable.  This accelerated payment could adversely affect
          the Company's cash available for distribution.  If the
              Company is unable to make such payment, the Company may be
              forced to sell the Initial Hotels that serve as collateral
       for such Assumed Indebtedness in order to make such
payment.                                    

    o         The Offering Price exceeds the net tangible book value per
              share.  Therefore, purchasers of Priority Common Shares in
          the Offering will realize an immediate and substantial
          dilution of $2.14, or  35.7% of the Offering Price, in
              the net tangible book value of their shares.  In addition,
       in the event that any of the purchase prices of the
            Newly-Renovated Hotels or the Newly-Developed Hotels are
        increased on the First Adjustment Date or the Second
          Adjustment Date, as applicable, owners of the Priority
      Common Shares at such time will experience further
dilution.                                   

         o        Risk of taxation of the Company as a regular corporation if it
                  fails to qualify  as a REIT and the  Company's  liability  for
                  federal  and state  taxes on its income in such  event,  which
                  would  adversely  affect  the  amount  of cash  available  for
    distribution to the shareholders of the Company.

  o         The Company's Forecasted Statement of Operations for the
             twelve months ending January 31, 2000 (the "Forecast") is
             based on certain assumptions and estimates, some of which
           may not materialize, and unanticipated events may occur
             that could materially adversely affect the actual results
         achieved by the Company during the forecasted period.
            Consequently, the Company's actual results of operations
                during the forecasted period  may vary from the Forecast and
such variations may be material.            

   o         The Assumed Indebtedness will represent approximately 37%
            of the total purchase prices paid by the Company for the
              Initial Hotels.  Although the Company's policy is to limit
           consolidated indebtedness to less than 67% of the total
         purchase prices paid by the Company for the hotels in
             which it has invested, there is no limit on the Company's
         ability to incur debt contained in the Declaration of
          Trust or Bylaws.  If the Company is unable to meet its
             debt service obligations or repay (or refinance) its debt
              when due, one or more of the Initial Hotels may be lost to
foreclosure.                                

         o        The price to be paid by the Company for the Initial Hotels may
                  exceed the fair market value as  determined  by a  third-party
appraisal of the Initial Hotels.            

         o        Five of the Initial  Hotels are licensed  under one  franchise
                  brand,  Holiday  Inn/Holiday  Inn  Express,  and  any  adverse
                  developments to that franchise  brand could  adversely  affect
                  the  amount  of  cash  available  for   distribution   to  the
shareholders of the Company.                

         o        The geographic  concentration  in  Pennsylvania of the Initial
                  Hotels   may  expose  the   Company   to   regional   economic
                  fluctuations that could have a significant  negative effect on
                  the operation of the Initial  Hotels,  and  ultimately on cash
                  available for distribution to the shareholders of the Company.

   o         Risks affecting the real estate or hospitality industries
           generally, including economic and other conditions that
              may adversely affect the Company's real estate investments
              and the Lessee's ability to make lease payments, potential
            increases in assessed real estate values or property tax
   rates, the relative illiquidity of real estate,
          competition, uninsured or underinsured losses, and the
           potential liability for unknown or future environmental
        liabilities, any of which could adversely affect the
    amount of cash available for distribution to the
shareholders of the Company.                

         o        The absence of a prior market for the Priority  Common Shares,
                  the lack of  assurance  that an  active  trading  market  will
                  develop or that the  Priority  Common  Shares will trade at or
                  above the Offering Price, and the potential negative effect of
an increase in interest rates               

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      on the market price of the Priority Common Shares.

         o        The  restrictions  on ownership of Priority  Common Shares and
                  certain other provisions in the Company's declaration of trust
                  (the  "Declaration  of Trust") or the  Company's  Bylaws  (the
                  "Bylaws")  could  have the  effect of  inhibiting  a change of
                  control of the Company, even when a change of control would be
beneficial to the Company's shareholders.   

 The Partnership

         The Company will contribute  substantially all of the net proceeds from
the Offering to Hersha Hospitality  Limited  Partnership (the  "Partnership") in
exchange for  approximately a 32% partnership  interest in the Partnership.  The
Company will be the sole general partner of the  Partnership.  Shortly after the
closing of the  Offering,  the  Partnership  will  acquire,  directly or through
subsidiary partnerships, 100% of the equity interests in the Initial Hotels. Mr.
Shah and certain affiliates (the "Hersha  Affiliates") own the partnerships that
currently own all of the Initial Hotels (collectively, the "Combined Entities").
Ownership of the land  underlying  two of the Initial Hotels will be retained by
certain  Hersha  Affiliates  and will be leased to the  Partnership  pursuant to
separate ground leases, each with a 99-year term, and collectively providing for
rent of $21,000 per year. See "Certain Relationships and Transactions."         

         The  Partnership  will  acquire the Initial  Hotels in exchange for (i)
Subordinated Units that will be redeemable,  subject to certain limitations, for
an aggregate of  approximately 4 million Class B Common Shares,  with a value of
approximately $23.8 million based on the Offering Price, and (ii) the assumption
of  approximately  $23.8 million of indebtedness  related to the Initial Hotels,
approximately  $17.4 million of which (the "Assumed  Indebtedness")  will remain
outstanding and approximately  $6.4 million of which will be repaid  immediately
after the  acquisition  of the  Initial  Hotels  using the net  proceeds  of the
Offering.   See   "Formation   Transactions."   The   purchase   prices  of  the
Newly-Renovated  Hotels  will  be  adjusted  as soon  as the  Company's  and the
Lessee's audited financial  statements for the year ended December 31, 1999 (the
"First  Adjustment   Date")  become  available.   The  purchase  prices  of  the
Newly-Developed  Hotels  will  be  adjusted  as soon  as the  Company's  and the
Lessee's audited financial  statements for the year ended December 31, 2000 (the
"Second  Adjustment Date") become available.  The adjustments will be calculated
by applying the initial pricing  methodology to such hotels' cash flows as shown
on the  Company's and the Lessee's  audited  financial  statements  for the year
ended on the First Adjustment Date or the Second Adjustment Date, as applicable,
and the adjustments must be approved a majority of the Independent  Trustees (as
herein  defined).  If the repricing  produces a higher  aggregate value for such
hotels,  the Hersha Affiliates will receive an additional number of Subordinated
Units that, when multiplied by the Offering Price,  equals the increase in value
plus the value of any  distributions  that would have been made with  respect to
such Subordinated  Units if such Subordinated  Units had been issued at the time
of  acquisition  of such hotels.  If,  however,  the repricing  produces a lower
aggregate  value for such  hotels,  the Hersha  Affiliates  will  forfeit to the
Partnership  that number of  Subordinated  Units that,  when  multiplied  by the
Offering Price, equals the decrease in value plus the value of any distributions
made with respect to such Subordinated Units.                                   

The Lessee

         In order for the Company to qualify as a REIT,  neither the Company nor
the Partnership may operate hotels. Therefore, the Initial Hotels will be leased
to Hersha  Hospitality  Management,  L.P., a  Pennsylvania  limited  partnership
wholly-owned by certain of the Hersha  Affiliates  (the  "Lessee"),  pursuant to
leases  (the  "Percentage  Leases")  that are  designed  to allow the Company to
participate  in growth in  revenues  of the  Initial  Hotels by  providing  that
percentages  of such  revenues  be paid by the Lessee as rent.  Each  Percentage
Lease has been structured to provide  anticipated rents at least equal to 12% of
the  purchase  price  paid  for the  hotel,  net of (i)  property  and  casualty
insurance  premiums,  (ii) real estate and personal  property taxes, and (iii) a
reserve for  furniture,  fixtures and equipment  equal to 4% (6% for the Holiday
Inn Hotel and Conference Center,  Harrisburg, PA and the Holiday Inn, Milesburg,
PA) of gross  revenues per quarter at the hotel.  This pro forma return is based
on certain assumptions and historical revenues for the Initial Hotels (including
projected  revenues  for the  Newly-Developed  Hotels  and  the  Newly-Renovated
Hotels)  and no  assurance  can be given that  future  revenues  for the Initial
Hotels will be consistent  with prior  performance or the  estimates.  See "Risk
Factors--Acquisition  of Hotels with Limited Operating History." The rent on the
Newly-  Renovated  Hotels and the  Newly-  Developed  Hotels until the First    
Adjustment  Date or Second  Adjustment  Date, as applicable,  will be fixed (the
"Initial Fixed Rent").  After the First Adjustment Date or the Second Adjustment
Date,  as  applicable,  rent  will be  computed  with  respect  to the  Newly-  
Renovated Hotels and the Newly-  Developed Hotels based on the percentage rent  
formulas  described  herein.  The Initial Hotels will be operated by the Lessee.
The Percentage  Leases will have initial terms of five years and may be extended
for two additional  five-year  terms at the option of the Lessee.  See "Business
and Properties--The Percentage Leases."                                         

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The Initial Hotels

         The following table sets forth certain  information with respect to the
Initial Hotels:                                                                 

 Twelve Months Ended December 31, 1997

                                                        [Enlarge/Download Table]


                                                                                   Average           
                                    Number of  Room        Other                    Daily            
Initial Hotels                        Rooms   Revenue   Revenue(1)    Occupancy     Rate    REVPAR(2)
--------------                        -----   -------   ----------    ---------     ----    ---------
                                                                                                     

Newly-Developed                                                                                      
Holiday Inn Express                                                                                  

 Hershey, PA(3)....................    85    $210,612      $4,877       38.8%      $75.62    $29.35  
 New Columbia, PA(4)...............    81      13,369         253        9.0%      $59.68     $5.39  

Hampton Inn:                                                                                         
 Carlisle, PA(5)...................    95     659,861       8,421       53.5%      $65.33    $34.93  

Comfort Inn:                                                                                         
 Harrisburg, PA(6).................    81                                                            

Newly-Renovated                                                                                      
Holiday Inn Express:                                                                                 
 Harrisburg, PA(7).................   117   1,357,241     176,868       56.4%      $56.33    $31.78  

Holiday Inn:                                                                                         
 Milesburg, PA.....................   118   1,254,070     220,684       52.0%      $56.07    $29.13  
Comfort Inn:                                                                                         
 Denver, PA (8)....................    45     658,285           0       54.7%      $73.26    $40.08  

Stabilized                                                                                           
Holiday Inn Hotel and Conference                                                                     
  Center:                                                                                            
 Harrisburg, PA....................   196   3,103,820   1,787,958       63.3%      $68.22    $43.17  

Hampton Inn:                                                                                         
 Selinsgrove, PA (9)...............    75   1,271,943      46,148       71.9%      $65.29    $46.96  

Clarion Suites:                                                                                      
 Philadelphia, PA..................    96   2,350,702     319,950       73.7%      $91.02   $ 67.09  
                                       --   ---------    --------    --------   ---------   -------  

Total/weighted average.............   989 $10,879,903  $2,565,159       60.2%      $68.27   $41.09   
                                      === ===========  ==========   =========   =========   ======   

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

(1)      Represents restaurant revenue, telephone revenue and other             
revenue.                                                      
(2)      Revenue per  available  room  ("REVPAR") is determined by dividing room
revenue by available rooms for the applicable period.         
(3)      This hotel opened in October 1997 and, thus,  the data shown  represent
operations from the date of opening through December 31, 1997.
(4)      This hotel opened in December 1997 and, thus, the data shown  represent
operations from the date of opening through December 31, 1997.
(5)      This hotel  opened in June 1997 and,  thus,  the data  shown  represent
operations from the date of opening through December 31, 1997.
(6)      This hotel opened in May 1998.                                         
(7)      The land  underlying  this hotel will be leased to the  Partnership  by
      certain Hersha Affiliates for rent of $15,000 per year for 99 years.
(8)      The land  underlying  this hotel will be leased to the  Partnership  by
     certain Hersha Affiliates for rent of $6,000 per year for 99 years.
(9)      A portion of the land  adjacent to this hotel,  which is not  currently
         used for hotel operations,  will be leased to a Hersha Affiliate for $1
per year for 99 years.                                        

For  further  information  regarding  the  Initial  Hotels,  see  "Business  and
Properties - The Initial Hotels" and " - The                                    
Percentage Leases."                                                             

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 Growth Strategy

         The  Company  will  seek to  enhance  shareholder  value by  increasing
amounts  available for distribution to shareholders by (i) acquiring  additional
hotels that meet the Company's  investment  criteria as described below and (ii)
participating  in any  increased  revenue  from the Initial  Hotels  through the
Percentage Leases.                                                              

Acquisition Strategy                                                            

         The  Company  intends  to  acquire  additional  hotels  that  meet  its
investment    criteria   as   described   below.   See   "The    Company--Growth
Strategy--Acquisition  Strategy." The Company will emphasize limited service and
full  service  hotels  with  strong,  national  franchise  affiliations  in  the
upper-economy  and mid-scale  market  segments,  or hotels with the potential to
obtain such  franchises.  In  particular,  the Company will  consider  acquiring
limited service hotels such as Comfort  Inn(R),  Best  Western(R),  Days Inn(R),
Fairfield  Inn(R),  Hampton  Inn(R),  Holiday  Inn(R) and Holiday Inn Express(R)
hotels,  and  limited  service  extended-stay  hotels  such as  Hampton  Inn and
Suites(R),  Homewood  Suites(R),  Main  Stay  Suites(R)  and  Residence  Inn  by
Marriott(R) hotels.                                                             
 Under  the  Bylaws,  any  transaction  involving  the  Company,  including  the
purchase,  sale,  lease or mortgage of any real estate asset, in which a Trustee
or officer of the Company, or any Affiliate (as herein defined) thereof,  has an
interest  (other than solely as a result of his status as a Trustee,  officer or
shareholder of the Company) must be approved by a majority of the members of the
Company's  Board of  Trustees  (the  "Trustees"),  including  a majority  of the
members of the Board of Trustees who do not have an interest in such transaction
and who are not officers,  directors or employees of the Company,  any lessee of
the Company's or the  Partnership's  properties or any  underwriter or placement
agent of the shares of beneficial  interest of the Company that has been engaged
by the  Company  within the past three  years,  or any  Affiliate  thereof  (the
"Independent Trustees").                                                        

    The Company intends to focus predominately on investments in hotels in the
eastern United States. Such investments may include hotels newly developed by   
the Hersha Affiliates. Pursuant to an agreement among Hasu P. Shah, Jay H. Shah,
Neil H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P.     
Patel, David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, each a Hersha    
Affiliate, the Partnership will have an option to acquire any hotels owned or   
developed in the future by the Hersha Affiliates within 15 miles of any of the  
Initial Hotels or any hotel subsequently acquired by the Partnership for two    
years after acquisition or development (the "Option Agreement"). See "Certain   
Relationships and Transactions--Option Agreement." The Company's initial policy 
with respect to acquisitions of hotels (the "Acquisition Policy") is to acquire 
hotels for which it expects to receive rents at least equal to 12% of the       
purchase                                                                        

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price paid for each hotel, net of (i) property and casualty insurance  premiums,
(ii) real estate and personal property taxes, and (iii) a reserve for furniture,
fixtures and equipment  equal to 4% (6% in the case of a full-service  hotel) of
gross revenues per quarter at each hotel. The Trustees,  however, may change the
Acquisition   Policy  at  any  time  without  the  approval  of  the   Company's
shareholders.                                                                   

         The Company  intends to lease  hotels that it acquires in the future to
operators,  including  the  Lessee as well as  operators  unaffiliated  with the
Lessee.  Future  leases  with  the  Lessee  generally  will  be  similar  to the
Percentage Leases. See "Business and Properties--The  Percentage Leases." Future
leases with operators  unaffiliated with the Lessee may or may not be similar to
the Percentage  Leases.  The Trustees will negotiate the terms and provisions of
each future lease, depending on the purchase price paid, economic conditions and
other factors deemed relevant at the time.                                      

         The  Company's  additional  investments  in hotels may be financed,  in
whole or in part,  with  undistributed  cash,  subsequent  issuances of Priority
Common  Shares or other  securities,  or  borrowings.  The Company is  currently
pursuing with lenders a $10 million line of credit (the "Line of Credit").      
 A failure to obtain the Line of Credit  could  adversely  affect the  Company's
ability to finance its growth  strategy.  See "Risk  Factors  --Dependence  Upon
External  Financing."  The  Company's  initial  policy is to limit  consolidated
indebtedness to less than 67% of the aggregate purchase prices for the hotels in
which it has invested (the "Debt Policy"). The Trustees, however, may change the
Debt Policy  without the approval of the Company's  shareholders.  The aggregate
purchase  prices paid by the Company  for the  Initial  Hotels is  approximately
$47.3 million. After the Formation Transactions, the Company's indebtedness will
be approximately $17.4 million (consisting of the Assumed  Indebtedness),  which
represents  approximately 37% of the aggregate  purchase price to be paid by the
Company.  Because of the Debt Policy and the amount of the Assumed Indebtedness,
the success of the Company's  acquisition  strategy will depend in the future on
its ability to access additional capital through issuances of equity securities.
See "The  Company--Growth  Strategy--Investment  Criteria and Financing,"  "Risk
Factors--Risks  of  Leverage"  and  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

Internal Growth Strategy                                                        

         The Percentage  Leases are designed to allow the Company to participate
in growth in revenues at the Initial Hotels.  See "Business and  Properties--The
Percentage  Leases." The Percentage  Leases generally  provide for the Lessee to
pay in  each  calendar  quarter  the  greater  of base  rent  ("Base  Rent")  or
percentage rent ("Percentage  Rent"). The Percentage Rent for each Initial Hotel
is  comprised  of (i) a percentage  of room  revenues up to a certain  threshold
amount (the  "Threshold"),  (ii) a percentage  of room revenues in excess of the
Threshold  but not more  than an  incentive  threshold  amount  (the  "Incentive
Threshold"),  (iii) a  percentage  of room  revenues in excess of the  Incentive
Threshold  and (iv) a  percentage  of  revenues  other than room  revenues.  The
Incentive  Threshold is designed to provide  incentive to the Lessee to generate
higher  revenues at each hotel by lowering  the  percentage  of revenue  paid as
Percentage  Rent once room  revenues  reach certain  levels.  In the case of the
Newly- Renovated Hotels and the Newly- Developed Hotels, the Lessee will pay    
the Initial Fixed Rent until the First Adjustment Date or the Second  Adjustment
Date, as applicable, after which the Lessee will pay the greater of Base Rent or
Percentage  Rent. See "Business and  Properties--The  Initial Hotels" and "--The
Percentage  Leases--Amounts  Payable Under the  Percentage  Leases." The Initial
Fixed  Rent,  the Base Rent and  Percentage  Rent are  hereinafter  referred  to
collectively as "Rent."                                                         

Formation Transactions

         The  principal  transactions  in  connection  with the formation of the
Company and the  acquisition of interests in the Initial Hotels (the  "Formation
Transactions") are as follows:                                                  

o         The Company will sell 1,833,334 Priority Common Shares
      to the Underwriter at the Offering Price.  The net
     proceeds to the Company from the Offering will be
  contributed to the Partnership in exchange for
           approximately a 32% general partnership interest in the
     Partnership.  In addition, the Company will offer
           166,666 Priority Common Shares to the Hersha Affiliates
     at the Offering Price.  The information contained
      herein assumes that none of these 166,666 Priority
Common Shares are sold.                     

o         The Partnership will acquire the Initial Hotels by    
        acquiring either all of the partnership interests in
           the Combined Entities or the Initial Hotels in exchange
       for (i) Subordinated Units that will be redeemable,
       subject to certain limitations, for an aggregate of
         approximately 4 million Class B Common Shares, with a
     value of approximately $23.8 million based on the
           Offering Price and (ii) the assumption of approximately
       $23.8 million in indebtedness secured by all of the
       Initial Hotels, approximately $6.4 million of which
          will be repaid with the proceeds of the Offering.  The
      purchase prices of the Newly- Renovated Hotels and
       the Newly- Developed Hotels will be adjusted on the
           First Adjustment Date or the Second Adjustment Date, as
applicable, as described in "--The Company."

o         The land underlying the Holiday Inn Express,          
         Harrisburg, Pennsylvania and the Comfort Inn, Denver,
          Pennsylvania each will be leased to the Partnership by
           certain Hersha Affiliates for aggregate rent of $21,000
       per year for 99 years.  Also, a portion of the land
          adjacent to the Hampton Inn, Selinsgrove, Pennsylvania
        will be leased to a Hersha Affiliate for $1 per year
for 99 years.                               

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         o        Each Initial Hotel will be leased to the Lessee  pursuant to a
                  Percentage  Lease. The Percentage  Leases will have an initial
non-cancelable term of five years.          
                 All, but not less than all, of the  Percentage  Leases may be
                  extended for an additional  five-year  term. At the end of the
                  first  extended term,  the Lessee,  at its option,  may extend
                  some or all of the  Percentage  Leases for the Initial  Hotels
                  for  an  additional  five-year  term.  The  Percentage  Leases
                  generally  provide  for the  Lessee  to pay in  each  calendar
                  quarter the greater of the Base Rent or Percentage  Rent.  The
                  Percentage  Rent for each Initial  Hotel is comprised of (i) a
                  percentage  of  room  revenues  up to  the  Threshold,  (ii) a
                  percentage  of room  revenues in excess of the  Threshold  but
                  less than the Incentive Threshold,  (iii) a percentage of room
                  revenues  in  excess  of the  Incentive  Threshold  and (iv) a
        percentage of revenues other than room revenues. The
            Incentive  Threshold is designed to provide an incentive
                  to the Lessee to generate higher revenues at each hotel. Until
                  the First  Adjustment Date or the Second  Adjustment  Date, as
                applicable,  the rent on the Newly- Renovated Hotels and the
                Newly-  Developed  Hotels  will be the  Initial  Fixed Rents
                  applicable to those hotels. After the First Adjustment Date or
                  the  Second  Adjustment  Date,  as  applicable,  rent  will be
                computed with respect to the Newly- Renovated Hotels and the
                Newly-   Developed  Hotels  based  on  the  percentage  rent
                  formulas  described herein. The Lessee will hold the franchise
                  license (the "Franchise  License") for each Initial Hotel. See
     "Business and Properties--The Percentage Leases."

o         The Partnership and certain of the Hersha Affiliates  
       have entered into the Option Agreement, pursuant to
        which the Hersha Affiliates will agree that, if they
    develop or own any hotels in the future that are
         located within 15 miles of any Initial Hotel or hotel
        subsequently acquired by the Partnership, the Hersha
      Affiliates will give the Partnership the option to
           purchase such hotels for two years after acquisition or
 development.  See "Risk Factors--Conflicts of
         Interest--Competing Hotels Owned or to be Acquired by
       the Hersha Affiliates" and "Policies and Objectives
            with Respect to Certain Activities--Conflict of Interest
Policies--The Option Agreement."            

         o        The Company and the Lessee will enter into the  Administrative
                  Services Agreement,  pursuant to which the Lessee will provide
                  certain administrative  services in exchange for an annual fee
 equal to $55,000, plus $10,000 for each hotel
owned by the Company.                       

         o        The Company has granted the  Underwriter  warrants to purchase
                  183,333  Priority Common Shares (the  "Underwriter  Warrants")
                for a period  of five  years at a price  per share  of $9.90
(165% of the Offering                       
Price).                                     

         o        The Partnership has granted 2744 Associates,  L.P., which is a
                  Hersha  Affiliate,  warrants  to purchase  250,000  Units (the
                  "Hersha  Warrants")  for a period of five years at a price per
Unit  of $9.90 (165% of the Offering Price).

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         Following consummation of the Formation Transactions, the structure and
relationships of the Company, the Partnership, the Initial Hotels and the Lessee
will be as follows:                                                             

[Flow chart describing the organization of the    
Company after completion of the Offering appears here]

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(1)      Two of the Initial Hotels will be held directly by the                 
Partnership and the remaining eight initial Hotels will be    
held by subsidiary partnerships of the Partnership.  The      
Company will lease the land underlying the Holiday Inn        
Express, Harrisburg, Pennsylvania and the Comfort Inn,        
Denver, Pennsylvania from certain Hersha Affiliates pursuant  
to separate leases, each with a term of 99 years, and         
collectively providing for annual rent of $21,000.            

 Benefits to the Hersha Affiliates

         As a result of the Formation  Transactions,  the Hersha Affiliates will
receive significant benefits, including but not limited to the following:       

o        The Hersha Affiliates will receive approximately 4   
    million Subordinated Units in exchange for their
      interests in the Initial Hotels, which will have a
     value of approximately $23.8 million based on the
       Offering Price.  The Subordinated Units held by the
    Hersha Affiliates will be more liquid than their
          current interests in the Combined Entities if a public
          trading market for the Class B Common Shares commences
          or when such shares are converted into Priority Common
           Shares and after the applicable holding periods expire.

o        The Lessee, which is owned by the Hersha Affiliates, 
           will hold the Franchise Licenses for the Initial Hotels
         and will be entitled to all revenues from the Initial
     Hotels after payment of Rent under the Percentage
          Leases and other operating expenses.  The Company will
           pay certain expenses in connection with the transfer of
   the Franchise Licenses to the Lessee.  See "The
Lessee."                                    

 o        Approximately $6.4 million of indebtedness owed by the
          Combined Entities will be repaid with a portion of the
          proceeds of the Offering.  Approximately $4 million of
           such indebtedness is owed to entities controlled by the
      Hersha Affiliates and relates principally to hotel
       development expenses in connection with the Initial
       Hotels.  Certain of the Assumed Indebtedness is and
          will remain guaranteed by the Hersha Affiliates.  Upon
  the repayment of such indebtedness, the Hersha
Affiliates will be released from the related
  guarantees.  The Hersha Affiliates may receive
           increased cash distributions from the operations of the
  Initial Hotels as a result of the reduction of
indebtedness on the Initial Hotels.         

o        If the repricing on the First Adjustment Date or the 
     Second Adjustment Date, as applicable, produces a
       higher value for the Newly- Renovated Hotels or the
       Newly- Developed Hotels, the Hersha Affiliates will
      receive an additional number of Subordinated Units
           that, when multiplied by the Offering Price, equals the
         increase in value plus the value of any distributions
     that would have been made in connection with such
          Subordinated Units if such Subordinated Units had been
     issued in connection with the acquisition of such
hotels.                                     

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         o        The  Lessee,  which is owned by the  Hersha  Affiliates,  will
                  receive an annual fee equal to $55,000,  plus $10,000 for each
                  hotel   owned   by   the   Company   for   providing   certain
administrative services to the Company.     

 o        Certain tax consequences to the Hersha Affiliates from
          the transfer of equity interests in the Initial Hotels
will be deferred.                           

o        Messrs. Hasu P. Shah, K.D. Patel and Bharat C. Mehta 
         will receive $7,500 per year for serving as Trustees.
          Mr. Shah shall also be entitled to receive a salary of
     not more than $100,000 per year provided that the
        Priority Common Shares have a closing price of $9.00
           per share or higher for 20 consecutive trading days and
remain at or above $9.00 per share.         

         o        The Partnership has granted 2744 Associates,  L.P., which is a
                  Hersha  Affiliate,  the Hersha  Warrants to  purchase  250,000
                Units  for a period  of five  years at a price  per  Unit of
$9.90 (165% of the Offering Price ).        

         o        Certain  of the  Hersha  Affiliates  will  receive  a total of
                  $21,000  per year  pursuant  to  99-year  ground  leases  with
                  respect to the Holiday Inn Express,  Harrisburg,  Pennsylvania
and the Comfort Inn, Denver, Pennsylvania.  

         o        A  portion  of  the  land   adjacent  to  the   Hampton   Inn,
                  Selinsgrove, Pennsylvania will be leased to a Hersha Affiliate
for $1 per year for 99 years.               

 Conflicts of Interest

         The Company will be subject to certain conflicts of interest  resulting
from its  relationship  with the  Lessee.  Specifically,  certain  of the senior
officers of the Company will also be senior officers of the Lessee and will thus
be subject to  conflicting  fiduciary  duties  when  negotiating  between  those
entities.  In  addition,  certain  senior  officers  and Trustees of the Company
collectively own approximately 43% of the Lessee,  and their fiduciary duties to
the Company may be in conflict with their pecuniary interest in the Lessee. As a
result,  the terms of  negotiations  and agreements  between the Company and the
Lessee may not solely reflect the interests of the Company's shareholders.      

         The Company has adopted certain policies in its governing  instruments,
has entered  into  certain  agreements  and is subject to certain  provision  of
Maryland  law,  all of which are  designed to minimize  the effects of potential
conflicts of  interest.  The  Declaration  of Trust,  with  limited  exceptions,
requires  that three of the Company's  Trustees be  Independent  Trustees.  Such
Independent Trustee requirement may not be amended, altered, changed or repealed
without the affirmative  vote of at least a majority of the members of the Board
of Trustees (and the affirmative vote of the holders of not less than two-thirds
of the outstanding shares of beneficial interest of the Company entitled to vote
thereon).  In addition,  the Partnership  has entered into the Option  Agreement
with certain of the Hersha  Affiliates  pursuant to which the Hersha  Affiliates
will agree that if they develop or own any hotels in the future that are located
within  15 miles of any  Initial  Hotel or hotel  subsequently  acquired  by the
Partnership,  the  Hersha  Affiliates  will give the  Partnership  the option to
purchase   such  hotels  for  two  years.   See  "Risk   Factors--Conflicts   of
Interest--Competing Hotels Owned or to be Acquired by the Hersha Affiliates" and
"Policies  and  Objectives  with  Respect  to  Certain  Activities--Conflict  of
Interest  Policies--The  Option  Agreement."  The  Trustees  also are subject to
certain  provisions of Maryland law, which are designed to eliminate or minimize
certain  potential  conflicts of interest.  See  "Policies and  Objectives  with
Respect to Certain  Activities--Conflict  of  Interest  Policies--Provisions  of
Maryland  Law." However,  there can be no assurance  that these policies  always
will be successful in eliminating the influence of such  conflicts,  and if they
are not successful, decisions could be made that might fail to reflect fully the
interests of all shareholders.                                                  

Forecasted Distributions

         The Company intends to make regular quarterly  distributions to holders
of the Priority Common Shares  initially  equal to $0.18 per share,  which on an
annualized  basis  would be equal to $0.72  per  share or 12.0% of the  Offering
Price.  The first  distribution  will be  prorated  to cover the period from the
closing of the  Offering to March 31,  1999.  The Trustees  will  determine  the
actual  distribution  rate based on the Company's  actual results of operations,
economic conditions and other factors. See "Partnership  Agreement," "Forecasted
Distributions" and "Risk Factors--Forecasted Statement of Operations."          

         During the Priority  Period,  the holders of the Priority Common Shares
will be entitled to receive, prior to any distributions either to the holders of
the  Subordinated  Units  or to  the  holders  of the  Class  B  Common  Shares,
cumulative  dividends in an amount per Priority  Common Share equal to $0.18 per
quarter.  After the  holders  of the  Subordinated  Units and the Class B Common
Share have  received an amount per Unit or per Class B Common Share equal to the
Priority  Distribution,  the  holders  of the  Priority  Common  Shares  will be
entitled  to  receive  any  further  distributions  on a pro rata basis with the
holders  of the  Subordinated  Units  and the Class B Common  Shares.  As of the
closing of the Offering, no Class B Common Shares will be outstanding. Thus, the
Priority Common Shares  initially will have Priority Rights only with respect to
the  outstanding  Subordinated  Units.  In the  future,  the  Company  may issue
additional  Priority Common Shares, and the Partnership may issue Units that are
not  subordinated to the Priority Common Shares.  See  "Description of Shares of
Beneficial Interest" and "Partnership Agreement."                               

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Tax Status

         The  Company  intends to make an  election  to be taxed as a REIT under
Sections 856 through 860 of the Internal  Revenue Code of 1986,  as amended (the
"Code"),  commencing  with its initial taxable year ending December 31,  1999.  
If the Company  qualifies for taxation as a REIT, then with certain  exceptions,
the Company will not be taxed at the corporate  level on its taxable income that
is  distributed  to  its  shareholders.  A  REIT  is  subject  to  a  number  of
organizational  and operational  requirements,  including a requirement  that it
currently  distribute at least 95% of its taxable income,  excluding net capital
gains.  Failure to qualify as a REIT will render the Company  subject to federal
income tax  (including any  applicable  alternative  minimum tax) on its taxable
income at regular  corporate rates and  distributions to the shareholders in any
such year will not be deductible  by the Company.  Although the Company does not
intend to request a ruling from the Internal  Revenue Service (the "Service") as
to its REIT status,  the Company has obtained the opinion of its legal  counsel,
Hunton & Williams, based on certain assumptions and representations described in
"Federal  Income Tax  Consequences,"  that the  Company  has been  organized  in
conformity with the requirements for  qualification as a REIT beginning with its
taxable  year  ending  December  31,  1999,  and that its  proposed  method of  
operation as represented  to its counsel and as described  herein will enable it
to satisfy the  requirements of such  qualification.  Investors should be aware,
however,  that  opinions of counsel are not binding on the Service or any court.
Even if the  Company  qualifies  for  taxation  as a REIT,  the  Company  or the
Partnership  may be subject to certain  state and local  taxes on its income and
property.  In connection with the Company's  election to be taxed as a REIT, the
Declaration  of Trust  imposes  restrictions  on the  ownership  and transfer of
Priority  Common Shares.  The Company  intends to adopt the calendar year as its
taxable year. See "Risk Factors--Tax Risks," "--Ownership  Limitation," "Federal
Income Tax  Consequences--Taxation of the Company" and "Description of Shares of
Beneficial Interest - Declaration of Trust and Bylaw Provisions--Restrictions on
Transfer."                                                                      

The Offering

                                                        [Enlarge/Download Table]
                                                                                            

Priority Common Shares offered by the Company                                               
to the Underwriter........................................ 1,833,334(1)                     

Priority Common Shares and Subordinated Units to be                                         
outstanding after the Offering............................ 5,797,442(2)                     

Use of Proceeds........................................... To repay debt incurred in the    
                                                           acquisition of the Initial       
                                                           Hotels, to pay certain expenses  
                                                           of the Offering, to pay certain  
                                                           expenses associated with the     
                                                           acquisition of the Initial Hotels
                                                           and for working capital purposes.
Symbol on the American Stock                                                                
Exchange.................................................. "HT"                             

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

(1)      Excludes 166,666 Priority Common Shares offered to the                 
Hersha Affiliates.                                            

(2)      Excludes 166,666 Priority Common Shares offered to the                 
Hersha Affiliates, 183,333 Priority Common Shares issuable    
upon exercise of the Underwriter Warrants, 250,000 Class B    
Common Shares issuable upon the redemption of 250,000 Units   
issuable upon exercise of the Hersha Warrants, 650,000 Class  
B Common Shares reserved for issuance pursuant to the Option  
Plan (as herein defined) and 200,000 Class B Common Shares    
reserved for issuance pursuant to the Trustees' Plan (as      
herein defined).  The Class B Common Shares will be           
converted into Priority Common Shares on a one-for-one basis  
after the expiration of the Priority Period.  See             
"Description of Shares of Beneficial Interest--Class B Common 
Shares," "Formation Transactions," "Management--Option Plan"  
and "Underwriting."                                           

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Summary Selected Financial Information

         The following tables set forth unaudited summary  forecasted  statement
of  operations  data and  historical  and pro forma  balance  sheet data for the
Company, unaudited pro forma condensed combined statements of operations for the
Lessee,  and summary  combined  historical  operating and financial data for the
Combined  Entities--Initial Hotels. Such data should be read in conjunction with
the financial  statements  and notes thereto,  which are contained  elsewhere in
this  Prospectus.  A pro forma  statement of  operations  for the Company is not
presented  because  the  Company  has had no  historical  operations  as a hotel
lessor. The forecasted statement of operations data for the Company is presented
as if the Formation  Transactions had occurred on February 1, 1999 and therefore
incorporates  certain assumptions that are set forth in the Company's Forecasted
Statement  of  Operations  included  elsewhere  in this  Prospectus.  See  "Risk
Factors--Forecasted  Statement of  Operations."  The balance  sheet data for the
Company is presented as if the Formation  Transactions had occurred on September
30, 1998.  The pro forma  condensed  combined  statements of operations  for the
Lessee are presented as if the Formation Transactions had occurred on January 1,
1997 and carried forward through the interim period presented.                  

Hersha Hospitality Trust
 Unaudited Summary Statement of Operations
and Balance Sheet Data
(In thousands, except share and per share amounts)

                                                        [Enlarge/Download Table]


                                                                       Forecasted Twelve
                                                                         Months Ending  
                                                                       January 31, 2000 
                                                                       ---------------- 
                                                                                        

Statement of Operations Data:                                                           
Lease revenue.........................................................       7,175      
Expenses..............................................................      (4,543)     
Net income before minority interest...................................       2,632      
Minority interest.....................................................      (1,520)     
Net income............................................................       1,112      
Net income per Priority Common Share..................................        0.61      
Weighted average number of                                                              
  Priority Common Shares outstanding..................................   1,833,334      


                                                        [Enlarge/Download Table]


                                                                               September 30, 1998      
                                                                       Historical            Pro Forma 
                                                                       ----------            --------- 
                                                                                                       

Balance Sheet Data:                                                                                    
Net investment in hotel properties....................................        --             $   40,489
Minority interest in Partnership......................................        --             $   18,355
Shareholders' equity..................................................        --             $    8,488
Total assets..........................................................        --             $   44,243
Total debt............................................................        --             $   17,400

 Hersha Hospitality Management, L.P.
Unaudited Pro Forma Condensed Combined Statements of Operations(1)
(In thousands)

                                                        [Enlarge/Download Table]


                                                                       Nine Months Ended    Year Ended       
                                                                       September 30, 1998   December 31, 1997
                                                                       ------------------   -----------------
                                                                                                             

Room revenue..........................................................     $ 11,824         $10,880          
Other revenue (2).....................................................        2,111           2,565          
                                                                           --------         -------          

Total revenue.........................................................     $ 13,935         $13,445          
                                                                           --------         -------          

Hotel operating expenses (3)..........................................        8,506           9,214          

Percentage Lease payments (4).........................................        5,108           5,129          
                                                                              -----         -------          

Net income (loss).....................................................    $     321        $  (898)          
                                                                          =========        ========          

Combined Entities - Initial Hotels
Summary Combined Historical Operating and Financial Data
(In thousands)

                                                        [Enlarge/Download Table]


                                       Nine Months Ended                                                            
                                         September 30                           Year Ended December 31              
                              ----------------------------------  --------------------------------------------------
                                     1998            1997               1997             1996             1995      
                                     ----            ----               ----             ----             ----      
                                                                                                                    

Statement of Operations                                                                                             
Data:                                                                                                               
Room revenue                         $11,824        $  7,750            $10,880           $7,273           $5,262   
Other revenue                          2,111           1,942              2,565            2,716            1,957   
                                     -------         -------            -------          -------          -------   
(2)                                                                                                                 
Total revenue                        $13,935                            $13,445           $9,989           $7,219   
                                                      $9,692                                                        
Hotel operating expenses (3)           8,839                              9,173            8,172            6,250   
                                                       6,510                                                        
Interest                               1,497             831              1,354              921              634   
Depreciation                           1,161             799              1,189              924              711   
                                     -------         -------            -------          -------          -------   
and amortization                                                                                                    

Net income (loss) (5)               $  2,438        $  1,552             $1,729           $  (28)          $ (376)  
                                    ========        ========             ======           =======          =======  

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

(1)      The estimated information does not purport to represent what           
the Lessee's financial position or results of operations      
would actually have been if consummation of the Formation     
Transactions had, in fact, occurred on such date or at the    
beginning of the periods indicated, or to project the         
Lessee's financial position or results of operations at any   
future date or for any future period.  Represents pro forma   
revenue and expenses as if (i) the Partnership recorded       
depreciation and amortization, paid interest on remaining     
debt after the Formation Transactions occurred, and paid      
real and personal property taxes and property insurance as    
contemplated by the Percentage Leases, and (ii) the           
Formation Transactions occurred as of the beginning of the    
periods indicated.                                            
(2)      Represents restaurant revenue, telephone revenue and other revenue.    
(3)      Represents departmental costs and expenses, general and administrative,
         repairs and maintenance,  utilities,  marketing,  management fees, real
estate and personal                                           

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         property taxes,  property and casualty insurance and ground leases. The
         pro forma  amounts  exclude  real estate and personal  property  taxes,
         property and casualty  insurance,  ground leases and  management  fees.
         Real  estate  and  personal  property  taxes,   property  and  casualty
         insurance and ground leases are the  responsibility  of the Partnership
under the Percentage Leases.                                  
(4)      Represents lease payments calculated on a pro forma basis              
using the rent provisions in the Percentage Leases.  The      
rent provisions in the Percentage Leases are based upon an    
agreement between the Partnership and the Lessee in which     
the parties have agreed to the lease terms and the form of    
lease to be signed at the closing of the Offering.  Lease     
payments are calculated under two methods depending upon      
whether the Initial Hotel is a Stabilized Hotel with an       
established operating history or a Newly-Developed Hotel or   
a Newly-Renovated Hotel.  The Rents for the Stabilized        
Hotels are calculated by applying the percentage rent         
formulas to the historical room revenues and other revenues   
of those hotels for the periods presented.  Because the       
Newly-Developed Hotels and the Newly-Renovated Hotels pay     
Initial Fixed Rent for at least the first twelve months of    
operation, the Rent for those hotels is based on the Initial  
Fixed Rents, recognized on a straight-line basis over the     
period presented.  In the case of the Newly-Developed         
Hotels, the Initial Fixed Rents have been prorated for the    
periods the hotels were in operation because the hotels have  
not been in operation for the full periods presented.         
(5)      The  Combined  Entities  are not subject to income tax,  except  Hersha
         Enterprises,   Ltd.,  which  had  no  tax  liability  for  the  periods
presented.                                                    

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         This Prospectus contains forward-looking statements including,  without
limitation, the Forecasted Statement of Operations of the Company and statements
containing the words "believes,"  "anticipates,"  "expects" and words of similar
import. Such forward-looking  statements  relate  to  future  events  and  the  
future financial performance of the Company and the Lessee, and involve known   
and unknown risks, uncertainties and other factors which may cause the actual   
results, performance or achievements of the Company or the Lessee to be         
materially different from any future results, performance or achievements       
expressed or implied by such forward-looking statements. Prospective investors  
should specifically consider the various factors identified in this prospectus  
which could cause actual results to differ, including particularly those        
discussed in the section entitled "Risk Factors" beginning on this page. The    
Company disclaims any obligation to update any such factors or to publicly      
announce the result of any revisions to any forward-looking statements to       
reflect future events or developments after the date hereof.                    

RISK FACTORS

         In evaluating  the Company's  business,  prospective  investors  should
carefully  consider  the  following  risk  factors  in  addition  to  the  other
information contained in this Prospectus.                                       

Conflicts of Interest                                                           

         Because of the Hersha  Affiliates'  ownership in and/or  positions with
the Company,  the Partnership,  the Lessee and the Combined Entities,  there are
inherent conflicts of interest in the Formation  Transactions and in the ongoing
lease,   acquisition,   disposition   and  operation  of  the  Initial   Hotels.
Consequently, the interests of shareholders may not have been, and in the future
may not be,  reflected  fully in all decisions made or actions taken by officers
and  Trustees of the  Company.  See "The  Company--Formation  Transactions"  and
"Policies  and  Objectives  with  Respect  to  Certain  Activities--Conflict  of
Interest Policies."                                                             

Conflicts Relating to Sales or Refinancing of Initial Hotels  

         The  Hersha  Affiliates  have  unrealized  gain  associated  with their
interests in the Initial Hotels and, as a result, any sale of the Initial Hotels
or  refinancing  or prepayment of principal on the Assumed  Indebtedness  by the
Company may cause adverse tax consequences to the Hersha Affiliates.  Therefore,
the  interests  of the Company and the Hersha  Affiliates  could be different in
connection with the disposition or refinancing of an Initial Hotel. Decisions in
connection with any transaction involving the Company, including the disposition
of an Initial Hotel or  refinancing of or prepayment of principal on the Assumed
Indebtedness,  in which a Trustee or officer of the  Company,  or any  Affiliate
thereof,  has an  interest  (other  than  solely as a result of his  status as a
Trustee,  officer or  shareholder  of the Company) must be made by a majority of
the Trustees, including a majority of the Independent Trustees.                 

No Arm's-Length Bargaining on Percentage Leases,              
Contribution Agreements, the Administrative Services          
Agreement and Option Agreement                                

  The terms of the Percentage Leases, the agreements pursuant to which the
Company and the Partnership will acquire, directly or indirectly, the Initial   
Hotels, the Administrative Services Agreement and the Option Agreement were not 
negotiated on an arm's-length basis. See "Business and Properties--The          
Percentage Leases" and "Certain Transactions--The Percentage Leases." The       
Company will not own any interest in the Lessee. Messrs. Hasu P. Shah, K.D.     
Patel, and Bharat C. Mehta are Trustees of the Company and collectively own     
approximately 35% of the Lessee. Consequently, they have a conflict of interest 
regarding the negotiation and enforcement of the Percentage Leases, the         
Administrative Services Agreement and the Option Agreement. See "The Lessee."   

Competing Hotels Owned or to be Acquired by the Hersha        
Affiliates                                                                      

         The Hersha  Affiliates  may develop or acquire  new hotels,  subject to
certain  limitations.  While  it  is  anticipated  that  Mr.  Shah  will  devote
substantially  all of his time to the business of the Company,  such development
or acquisition by the Hersha Affiliates may materially affect the amount of time
Mr. Shah has                                                                    

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to devote to the affairs of the Company. The Lessee and its affiliates may      
operate hotels that are not owned by the Company, subject to certain            
restrictions, which may materially affect the amount of time that the Lessee has
to devote to managing the Initial Hotels. See "Policies and Objectives with     
Respect to Certain Activities--Conflict of Interest Policies--The Option        
Agreement."                                                                     

Acquisition of Hotels with Limited Operating History                            

         The  Newly-Developed  Hotels  have  little  operating  history  and the
Newly-Renovated  Hotels have been newly  renovated.  The purchase prices of such
hotels are based upon  projections  by management  as to the expected  operating
results of such hotels, subjecting the Company to risks that such hotels may not
achieve  anticipated  operating  results or may not achieve such results  within
anticipated  time frames.  As a result,  the Lessee may not generate  enough net
operating  income from such hotels to make the Initial  Fixed Rent  payments or,
after the First Adjustment Date or the Second Adjustment Date, as applicable, to
make the Base Rent payments.  In addition,  after the First  Adjustment  Date or
Second  Adjustment Date, as applicable,  room revenues may be less than required
to result in the payment of Percentage Rent at levels at a particular hotel that
provide the Company with its anticipated  return on investment.  In either case,
the amounts available for distribution to shareholders could be reduced.        

Need for Certain Consents from the Limited Partners                             

         Under the  partnership  agreement  of the  Partnership,  as amended and
restated (the  "Partnership  Agreement"),  the holders of at least two-thirds of
the interests in the  Partnership,  including the Company,  which initially will
own approximately only a 32% interest in the Partnership, must approve a sale of
all or  substantially  all of the  assets  of the  Partnership  or a  merger  or
consolidation of the Partnership, provided, however, that such approval shall no
longer be required if the Company ever fails to pay a  distribution  of $.72 per
share to the holders of the Priority Common Shares for any 12-month period.  The
Hersha  Affiliates  initially  will  own  approximately  a 68%  interest  in the
Partnership  and thus  initially  will  effectively  hold veto  power  over such
extraordinary  transactions,   which  could  result  in  the  disapproval  of  a
transaction  that would be beneficial to the  shareholders  of the Company.  See
"Partnership Agreement--Management."                                            

Risks Related to the Company's Initial Forecasted Distributions                 

         Based on the  Company's  forecasted  statement  of  operations  for the
twelve  months  ending  January 31,  2000,  the Company  estimates  that it will
distribute 100% of its forecasted cash available for  distribution  and that the
holders  of  Subordinated  Units  will be  entitled  to  receive  an amount  per
Subordinated Unit less than the Priority Distribution paid to the holders of the
Priority   Common   Shares.    See   "Forecasted    Distributions"   and   "Risk
Factors--Forecasted  Statement  of  Operations."  If actual cash  available  for
distribution  falls short of forecasted  cash  available for  distribution,  the
Company may not be able to maintain its proposed initial  distribution  rate. In
addition,  if the Company's  actual cash  available for  distribution  after the
Priority  Period does not  increase  above its  forecasted  cash  available  for
distribution,  the Company  will not be able to maintain  its  proposed  initial
distribution  rate after the Priority Period.  Distribution of substantially all
of the Company's cash available for distribution  will limit the funds available
to the Company for capital expenditures to maintain its properties or to finance
acquisitions of future hotels.                                                  

Inability to Operate the Properties                                             

         As a result of its status as a REIT,  the  Company  will not be able to
operate any hotels.  The Company will be unable to make and implement  strategic
business  decisions  with  respect to its  properties,  such as  decisions  with
respect to the repositioning of a franchise,  repositioning of food and beverage
operations and other similar  decisions,  even if such decisions are in the best
interests of a particular property.  Accordingly, there can be no assurance that
the Lessee  will  operate  the  Initial  Hotels in a manner  that is in the best
interests of the Company.                                                       

Dependence on the Lessee                                                        

         In order to  generate  revenues to enable it to make  distributions  to
shareholders,  the Company  will rely on the Lessee to make Rent  payments.  The
Lessee's  obligations under the Percentage  Leases,  including the obligation to
make Rent  payments,  are  unsecured.  Reductions  in revenues  from the Initial
Hotels or in the net  operating  income of the Lessee may  adversely  affect the
ability of the Lessee to make such Rent payments and thus the Company's  ability
to make anticipated  distributions to its shareholders.  Although failure on the
part of the Lessee to comply  materially  with the terms of a  Percentage  Lease
would  give the  Company  the right to  terminate  any or all of the  Percentage
Leases,  to  repossess  the  applicable  properties  and to enforce  the payment
obligations under the Percentage  Leases,  the Company then would be required to
find another lessee. There can be no assurance that the Company would be able to
find another lessee or that, if another lessee were found,  the Company would be
able to enter into a lease on favorable terms.                                  

Newly-Organized Entities                                                        

         The  Company,  the  Partnership  and the Lessee all have been  recently
organized and have no operating histories. Although the officers and Trustees of
the Company have experience in developing,  financing and operating hotels, most
of  them  have no  experience  in  operating  a REIT or a  public  company.  See
"Management--Trustees and Officers."                                            

Limited Numbers of Initial Hotels                                               

The Company will own initially only ten hotels, three of which will be
operated as Holiday Inn Express(R) hotels, two as Hampton Inn(R) hotels, two as 
Holiday Inn(R) hotels, two as a Comfort Inn(R) hotels and one as a Clarion      
Suites(R) hotel. Significant                                                    

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adverse  changes in the  operations  of any Initial  Hotel could have a material
adverse effect on the Lessee's  ability to make Rent payments and,  accordingly,
on the Company's ability to make expected distributions to its shareholders.    

Guarantors of Assumed Indebtedness                                              

         Mr.  Shah,  the  partners of the  Combined  Entities and certain of the
Combined Entities guarantee the indebtedness  secured by the Initial Hotels, and
the  bankruptcy of any of the  guarantors  would  constitute a default under the
related loan  documents,  which  default  would cause some or all of the Assumed
Indebtedness to become immediately due and payable. In the event that the lender
accelerates the payment,  such acceleration could adversely affect the Company's
cash available for distribution.  If the Company is unable to make such payment,
the Company may be forced to sell the  Initial  Hotels that serve as  collateral
for such Assumed Indebtedness in order to make such payment.                    

Substantial Dilution                                                            

         Purchasers  of  Priority  Common  Shares  sold  in  the  Offering  will
experience  immediate  and  substantial  dilution  of $2.14,  or  35.7% of the  
Offering Price,  in the net tangible book value per Priority  Common Share.  See
"Dilution."  In addition,  in the event that any of the  purchase  prices of the
Newly-Renovated  Hotels or the Newly-Developed Hotels are increased on the First
Adjustment  Date or the Second  Adjustment  Date, as  applicable,  owners of the
Priority Common Shares at such time will experience further dilution.           

Tax Risks                                                                       

Failure to Qualify as a REIT                                  

         The  Company  intends to operate so as to qualify as a REIT for federal
income tax purposes. Although the Company has not requested, and does not expect
to request,  a ruling from the Service that it qualifies as a REIT,  the Company
has  received  an opinion of its  counsel,  Hunton &  Williams,  that,  based on
certain assumptions and representations, it will so qualify. Investors should be
aware,  however,  that opinions of counsel are not binding on the Service or any
court. The REIT qualification opinion only represents the view of counsel to the
Company based on counsel's  review and analysis of existing law,  which includes
no controlling precedent.  Furthermore, both the validity of the opinion and the
continued  qualification  of the Company as a REIT will depend on the  Company's
continuing ability to meet various requirements concerning,  among other things,
the ownership of its outstanding  shares of beneficial  interest,  the nature of
its assets,  the sources of its income,  and the amount of its  distributions to
its  shareholders.   See  "Federal  Income  Tax  Consequences--Taxation  of  the
Company."                                                                       

         If the Company  were to fail to qualify as a REIT in any taxable  year,
the  Company  would  not  be  allowed  a  deduction  for  distributions  to  its
shareholders  in  computing  its taxable  income and would be subject to federal
income tax  (including any  applicable  alternative  minimum tax) on its taxable
income at regular corporate rates.  Unless entitled to relief under certain Code
provisions,  the Company also would be disqualified from treatment as a REIT for
the four taxable years following the year during which  qualification  was lost.
As a result, amounts available for distribution to shareholders would be reduced
for each of the years  involved.  Although  the  Company  currently  intends  to
operate in a manner  designed to qualify as a REIT,  it is possible  that future
economic,  market,  legal, tax or other  considerations  may cause the Trustees,
with the consent of two-thirds of the shareholders, to revoke the REIT election.
See "Federal Income Tax Consequences."                                          

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REIT Minimum Distribution Requirements                        

         In order to qualify as a REIT,  the Company  generally will be required
each year to  distribute  to its  shareholders  at least 95% of its net  taxable
income  (excluding  any net capital  gain).  In  addition,  the Company  will be
subject to a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of (i) 85% of its  ordinary  income for that year,  (ii) 95% of its capital gain
net income for that year,  and (iii) 100% of its  undistributed  taxable  income
from prior years. To the extent that the Company elects to retain and pay income
tax on its net long-term capital gains, such retained amounts will be treated as
having been distributed for purposes of the 4% excise tax.                      

         The Company intends to make distributions to its shareholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise tax.
The  Company's  income will consist  primarily of its share of the income of the
Partnership,  and the Company's cash available for  distribution to shareholders
will consist primarily of its share of cash  distributions from the Partnership.
Differences in timing between the  recognition of taxable income and the receipt
of  amounts  available  for  distribution  due to the  seasonality  of the hotel
industry could require the Company, through the Partnership,  to borrow funds on
a short-term  basis to meet the 95%  distribution  requirement  and to avoid the
nondeductible  excise tax. See "Risk  Factors--Risk  of  Leverage."  For federal
income tax purposes,  distributions paid to shareholders may consist of ordinary
income,  capital gains,  nontaxable return of capital, or a combination thereof.
The Company will  provide its  shareholders  with an annual  statement as to its
designation of the taxability of distributions.                                 

         Distributions by the Partnership will be determined by the Trustees and
will  be  dependent  on a  number  of  factors,  including  the  amount  of  the
Partnership's  distributable cash, the Partnership's  financial  condition,  any
decision by the Trustees to reinvest funds rather than to distribute such funds,
the Partnership's  capital  expenditures,  the annual distribution  requirements
under the REIT  provisions  of the Code and such other  factors as the  Trustees
deem  relevant.   See  "Federal   Income  Tax   Consequences--Requirements   for
Qualification - Distribution Requirements."                                     

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Forecasted Statement of Operations                                              

         The Forecast is based on certain  assumptions  and  estimates,  some of
which  may  not  materialize,  and  unanticipated  events  may occur  that could
materially  adversely  affect the actual results  achieved by the Company during
the forecasted period. Consequently,  the Company's actual results of operations
during the forecasted  period  may vary from the Forecast and such  variations  
may be material. The Company's independent public accountants have not examined,
compiled,  reviewed,  or applied  agreed-upon  procedures  to the Forecast  and,
consequently,  assume no responsibility  for the Forecast.  The Company does not
intend  to  update  or  otherwise  revise  the  Forecast  to  reflect  events or
circumstances  existing  or arising  after  January 20, 1999 or to reflect the  
occurrence of unanticipated  events.  The Forecast should not be relied upon for
any purpose following the consummation of the Offering.                         

Potential Adverse Effects of Leverage and Lack of Limits on                     
Indebtedness                                                                    

         Upon  completion  of the Offering and the  completion  of the Formation
Transactions, the Company will assume the Assumed Indebtedness (in the aggregate
principal amount of approximately $17.4 million),  which will be secured by some
of the Initial Hotels.  The Company may borrow additional  amounts from the same
or other lenders in the future, or may issue corporate debt securities in public
or private  offerings.  Certain of such additional  borrowings may be secured by
the Hotels. See "Management's Discussion and Analysis of Financial Condition and
Results of  Operations--Liquidity  and  Capital  Resources"  and  "Policies  and
Objectives with Respect to Certain Activities--Financing."                      

         There can be no  assurance  that the  Company  will be able to meet its
debt service  obligations  and, to the extent that it cannot,  the Company risks
the  loss  of  some or all of its  assets,  including  the  Initial  Hotels,  to
foreclosure. Although the Company's policy is to limit consolidated indebtedness
to less than 67% of the total purchase prices paid by the Company for the hotels
in which it has invested,  there is no limit on the  Company's  ability to incur
debt contained in the Declaration of Trust or Bylaws.  The Assumed  Indebtedness
will  represent  approximately  37% of the  total  purchase  prices  paid by the
Company  for the  Initial  Hotels.  The  Assumed  Indebtedness  will  limit  the
Company's   ability  to  acquire   additional   hotels  without  issuing  equity
securities.   See  "--Growth   Strategy--Competition   for   Acquisitions"   and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations--Liquidity and Capital Resources."                                   

The Price Being Paid for the Initial Hotels May Exceed Their                    
Value                                                                           

         No  arm's-length   negotiations   were  conducted  and  no  independent
appraisals  were obtained in connection with the Formation  Transactions.  There
can be no  assurance  that  the  price  to be  paid  by the  Company,  which  is
approximately  $47.3 million in the  aggregate,  will not exceed the fair market
value of the Initial Hotels  acquired by the Company.  The initial  valuation of
the  Company is based on a valuation  of the  Initial  Hotels and the rent to be
paid by the Lessee under the  Percentage  Leases.  The  Subordinated  Units were
allocated among the Hersha  Affiliates based upon their respective  interests in
the Combined Entities.                                                          

Emphasis on Franchise Hotels                                                    

         The Company  intends to place  particular  emphasis in its  acquisition
strategy on hotels similar to the Initial Hotels. The Company initially will own
five hotels licensed under the Holiday  Inn/Holiday Inn Express  franchise brand
and thus will be subject to risks  inherent in  concentrating  investments  in a
particular  franchise brand, which could have an adverse effect on the Company's
lease revenues and amounts  available for  distribution to  shareholders.  These
risks include, among others, the risk of a reduction in hotel revenues following
any  adverse  publicity  related  to the  franchise  brand.  See  "Business  and
Properties--Franchise Licenses."                                                

Concentration of Investments in Pennsylvania                                    

         All of the  Initial  Hotels are located in  Pennsylvania.  As a result,
localized  adverse events or conditions,  such as an economic  recession,  could
have a significant  adverse effect on the operations of the Initial Hotels,  and
ultimately on the amounts available for distribution to shareholders.           

Hotel Industry Risks                                                            

Operating Risks                                               

         The Initial  Hotels are subject to all  operating  risks  common to the
hotel industry.  The hotel industry has  experienced  volatility in the past, as
have the Initial Hotels, and there can be no assurance that such volatility will
not occur in the future.  These risks include,  among other things,  competition
from other hotels;  over-building  in the hotel  industry  that could  adversely
affect hotel  revenues;  increases in operating costs due to inflation and other
factors,  which increases may not be offset by increased room rates;  dependence
on  business  and  commercial  travelers  and  tourism;  strikes and other labor
disturbances of hotel employees; increases in energy costs and other expenses of
travel;  and adverse  effects of general and local  economic  conditions.  These
factors could reduce  revenues of the Initial  Hotels and  adversely  affect the
Lessee's ability to make Rent payments, and therefore,  the Company's ability to
make distributions to its shareholders.                                         

Competition for Guests                                        

         The hotel  industry  is highly  competitive.  The  Initial  Hotels will
compete with other existing and new hotels in their geographic markets.  Many of
the Company's  competitors have  substantially  greater  marketing and financial
resources than the                                                              

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Company and the Lessee.  See "Business and                                      
Properties--Competition."                                                       

Investment Concentration in Single Industry                   

         The Company's current growth strategy is to acquire hotels primarily in
the upper-economy and mid-scale segments of the hotel industry. The Company will
not seek to invest in assets  selected  to reduce the risks  associated  with an
investment in that segment of the hotel industry,  and, therefore, is subject to
risks inherent in concentrating investments in a single industry and in specific
market  segments  within that  industry.  The  adverse  effect on Rent under the
Percentage  Leases  and  amounts  available  for  distribution  to  shareholders
resulting from a downturn in the hotel industry in general or the  upper-economy
and  mid-scale  segments  in  particular  would be more  pronounced  than if the
Company had  diversified  its  investments  outside of the hotel  industry or in
additional hotel market segments.                                               

Seasonality of Hotel Business and the Initial Hotels          

         The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth  quarters.
The Initial  Hotels'  operations  historically  reflect this trend.  The Company
believes that it will be able to make its  forecasted  distributions  during its
initial year of operation  through cash flow from  operations.  See  "Forecasted
Distributions,"   "Risk   Factors--Forecasted   Statement  of  Operations."  and
"Management's  Discussion  and  Analysis of  Financial  Condition  and Result of
Operations--Seasonality."                                                       

Risks of Operating Hotels under Franchise Licenses            

         The  continuation  of the  Franchise  Licenses is subject to  specified
operating  standards  and other terms and  conditions.  Holiday Inn  Express(R),
Holiday  Inn(R),  Hampton  Inn(R),  and  Choice  Hotels  International,  Inc.(R)
("Choice  Hotels"),  the  franchisor of Comfort  Inns(R) and Clarion  Suites(R),
periodically  inspect their  licensed  properties to confirm  adherence to their
operating  standards.  The failure of the  Partnership or the Lessee to maintain
such  standards  respecting  the Initial Hotels or to adhere to such other terms
and  conditions  could  result  in the loss or  cancellation  of the  applicable
Franchise  License.  It is  possible  that  a  franchisor  could  condition  the
continuation  of a Franchise  License on the completion of capital  improvements
which the Trustees  determine are too  expensive or otherwise  not  economically
feasible in light of general  economic  conditions or the  operating  results or
prospects of the affected Initial Hotel.                                        
 In that event,  the Trustees may elect to allow the Franchise  License to lapse
or be terminated.  The franchisors  have agreed to amend the existing  Franchise
Licenses to substitute the Lessee as the franchisee.                            

         There can be no  assurance  that a  franchisor  will renew a  Franchise
License  at each  option  period.  If a  Franchise  License is  terminated,  the
Partnership and the Lessee may seek to obtain a suitable replacement  franchise,
or to operate the Initial Hotel independent of a Franchise License.  The loss of
a Franchise  License could have a material adverse effect upon the operations or
the  underlying  value  of the  related  Initial  Hotel  because  of the loss of
associated  name  recognition,  marketing  support and  centralized  reservation
systems provided by the franchisor.  Although the Percentage  Leases require the
Lessee to maintain the Franchise  Licenses for each Initial Hotel,  the Lessee's
loss of a Franchise  License for one or more of the Initial  Hotels could have a
material  adverse  effect on the  Partnership's  revenues  under the  Percentage
Leases and the Company's amounts available for distribution to shareholders. See
"Business and Properties--Franchise Licenses."                                  

Operating Costs and Capital Expenditures; Hotel Renovation    

         Hotels,  including the Initial  Hotels,  generally have an ongoing need
for   renovations  and  other  capital   improvements,   particularly  in  older
structures, including periodic replacement of furniture, fixtures and equipment.
Under the terms of the Percentage  Leases,  the  Partnership is obligated to pay
the cost of  expenditures  for items that are  classified as capital items under
generally  accepted  accounting  principles that are necessary for the continued
operation  of the  Initial  Hotels.  If  these  expenses  exceed  the  Company's
estimate,  the additional cost could have an adverse effect on amounts available
for distribution to shareholders. In addition, the Company may acquire hotels in
the future that require  significant  renovation.  Renovation of hotels involves
certain risks, including the possibility of environmental problems, construction
cost overruns and delays,  uncertainties as to market demand or deterioration in
market  demand  after   commencement   of   renovation   and  the  emergence  of
unanticipated  competition  from hotels.  See "Business and the  Properties--The
Percentage Leases."                                                             

Real Estate Investment Risks                                                    

General Risks of Investing in Real Estate                     

         The Initial Hotels will be subject to varying degrees of risk generally
incident to the ownership of real property.  The underlying value of the Initial
Hotels  and the  Company's  income  and  ability  to make  distributions  to its
shareholders are dependent upon the ability of the Lessee to operate the Initial
Hotels in a manner  sufficient  to maintain  or  increase  revenues in excess of
operating  expenses to enable the Lessee to make Rent  payments.  Hotel revenues
may be adversely  affected by adverse changes in national  economic  conditions,
adverse  changes in local market  conditions  due to changes in general or local
economic  conditions and  neighborhood  characteristics,  competition from other
hotels,  changes in interest  rates and in the  availability,  cost and terms of
mortgage funds,  the impact of present or future  environmental  legislation and
compliance with environmental  laws, the ongoing need for capital  improvements,
particularly  in older  structures,  changes in real  estate tax rates and other
operating  expenses,  adverse changes in governmental rules and fiscal policies,
civil unrest, acts of God, including  earthquakes,  hurricanes and other natural
disasters (which may result in                                                  

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uninsured  losses),  acts of war,  adverse  changes  in zoning  laws,  and other
factors that are beyond the control of the Company.                             

Illiquidity of Real Estate                                    

         Real estate  investments  are relatively  illiquid.  The ability of the
Company to vary its  portfolio  in  response  to changes in  economic  and other
conditions  will be  limited.  No  assurances  can be given that the fair market
value of any of the Initial Hotels will not decrease in the future.             

Uninsured and Underinsured Losses                             

         Each  Percentage   Lease  specifies   comprehensive   insurance  to  be
maintained  on each of the  Initial  Hotels,  including  liability  and fire and
extended coverage in amounts sufficient to permit the replacement of the Initial
Hotels  in the  event  of a  total  loss,  subject  to  applicable  deductibles.
Management of the Company  believes that such specified  coverage is of the type
and amount  customarily  obtained  by owners of hotels  similar  to the  Initial
Hotels.  Percentage Leases for hotels subsequently  acquired by the Company will
contain  similar  provisions.  However,  there  are  certain  types  of  losses,
generally of a catastrophic nature, such as earthquakes,  floods and hurricanes,
that may be uninsurable or not  economically  insurable.  Inflation,  changes in
building codes and ordinances,  environmental considerations,  and other factors
also  might  make  it  infeasible  to use  insurance  proceeds  to  replace  the
applicable  hotel after such  applicable  hotel has been  damaged or  destroyed.
Under such  circumstances,  the insurance proceeds received by the Company might
not be adequate to restore its economic  position with respect to the applicable
hotel.                                                                          

Property Taxes                                                

         Each Initial Hotel is subject to real and personal  property taxes. The
real and  personal  property  taxes on hotel  properties  in which  the  Company
invests  may  increase  or  decrease  as  property  tax rates  change and as the
properties are assessed or reassessed by taxing  authorities.  If property taxes
increase,   the  Company's  ability  to  make  expected   distributions  to  its
shareholders could be adversely affected.                                       

Environmental Matters                                         

         Operating  costs may be affected by the  obligation to pay for the cost
of complying with existing  environmental laws,  ordinances and regulations,  as
well as the cost of future legislation.  Under various federal,  state and local
environmental laws,  ordinances and regulations,  a current or previous owner or
operator of real property may be liable for the costs of removal or  remediation
of hazardous or toxic substances on, under or in such property.  Such laws often
impose  liability  whether  or  not  the  owner  or  operator  knew  of,  or was
responsible for, the presence of such hazardous or toxic substances. The cost of
complying with  environmental  laws could  materially  adversely  affect amounts
available  for  distribution  to  shareholders.  Recent  Phase  I  environmental
assessments  have been  obtained  on all of the Initial  Hotels.  The purpose of
Phase  I  environmental  assessments  is  to  identify  potential  environmental
contamination  that is made  apparent  from  historical  reviews of the  Initial
Hotels,  reviews of certain public records,  preliminary  investigations  of the
sites and  surrounding  properties,  and screening for the presence of hazardous
substances,  toxic  substances  and  underground  storage  tanks.  The  Phase  I
environmental   assessment   reports  have  not   revealed   any   environmental
contamination  that the Company believes would have a material adverse effect on
the Company's business,  assets, results of operations or liquidity,  nor is the
Company  aware of any such  liability.  Nevertheless,  it is possible that these
reports do not reveal all  environmental  liabilities or that there are material
environmental liabilities of which the Company is unaware.                      

Compliance with Americans with Disabilities Act and other     
Changes in Governmental Rules and Regulations                 

         Under the  Americans  with  Disabilities  Act of 1993 (the "ADA"),  all
public  accommodations are required to meet certain federal requirements related
to access and use by  disabled  persons.  While the  Company  believes  that the
Initial  Hotels are  substantially  in  compliance  with these  requirements,  a
determination that the Company is not in compliance with the ADA could result in
imposition  of fines or an award of damages to private  litigants.  In addition,
changes in governmental rules and regulations or enforcement  policies affecting
the use and  operation of the Hotels,  including  changes to building  codes and
fire and  life-safety  codes,  may occur.  If the Company were  required to make
substantial  modifications at the Initial Hotels to comply with the ADA or other
changes in governmental  rules and  regulations,  the Company's  ability to make
expected distributions to its shareholders could be adversely affected.         

Market for Priority Common Shares                                               

         Prior to the Offering, there has been no public market for the Priority
Common  Shares.  The  Priority  Common  Shares have been  approved  for listing,
subject  to final  notice of  issuance,  on The  American  Stock  Exchange.  The
Offering Price may not be indicative of the market price for the Priority Common
Shares  after the  Offering.  There can be no  assurance  that an active  public
market  for the  Priority  Common  Shares  will  develop or  continue  after the
Offering.  See  "Underwriting"  for a discussion  of factors to be considered in
establishing  the  Offering  Price.  If accepted  for  listing,  there can be no
assurances  that the Company will  continue to meet the  criteria for  continued
listing of the Priority Common Shares on The American Stock Exchange.           

Effect of Market Interest Rates on Price of Priority Common                     
Shares                                                                          

         One of the factors that may influence the price of the Priority  Common
Shares in public trading markets will be the annual yield from  distributions by
the Company on the Priority                                                     

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Common  Shares as compared to yields on other  financial  instruments.  Thus, an
increase  in  market  interest  rates  will  result  in  higher  yields on other
financial  instruments,  which could  adversely  affect the market  price of the
Priority Common Shares.                                                         

Anti-takeover Effect of Ownership Limit, Limited Partner                        
Consents, Staggered Board, Power to Issue Additional Shares and                 
Certain Provisions of Maryland Law                                              

Ownership Limitation                                          

         The  Declaration  of  Trust  generally  prohibits  direct  or  indirect
ownership of more than 9.9% of the number of outstanding  shares of any class of
securities of the Company,  including the Priority Common Shares,  by any person
(the  "Ownership  Limitation").  Generally,  Priority  Common  Shares  owned  by
affiliated  owners will be aggregated for purposes of the Ownership  Limitation.
The  Ownership  Limitation  could  have the  effect of  delaying,  deferring  or
preventing a change in control or other transaction in which holders of some, or
a majority, of Priority Common Shares might receive a premium for their Priority
Common Shares over the then prevailing  market price or which such holders might
believe to be otherwise in their best interests.  See  "Description of Shares of
Beneficial  Interest  -  Restrictions  on  Transfer"  and  "Federal  Income  Tax
Consequences--Requirements for Qualification."                                  

Limited Partner Consents                                      

         The holders of at least two-thirds of the interests in the Partnership,
including  the  Company,  which  initially  will  own  approximately  only a 32%
interest in the Partnership, must approve, subject to certain conditions, a sale
of all or  substantially  all of the  assets of the  Partnership  or a merger or
consolidation  of the  Partnership,  which could result in the  disapproval of a
transaction  that would be beneficial to the  shareholders  of the Company.  See
"--Need for Certain Consents from the Limited Partners."                        

Staggered Board                                               

The Company's Board of Trustees is divided into two classes.  
The initial terms of the first and second classes will expire in              
1999 and 2000, respectively.  Beginning at the annual meeting of shareholders in
1999,  Trustees  of each  class  will be  chosen  for  two-year  terms  upon the
expiration  of their  current  terms and each year one class of Trustees will be
elected by the shareholders. The staggered terms of Trustees may delay, defer or
prevent a tender offer, a change in control of the Company or other transaction,
even  though  such  a  transaction   might  be  in  the  best  interest  of  the
shareholders.  See  "Certain  Provisions  of Maryland  Law and of the  Company's
Declaration of Trust and Bylaws--Classification of the Board of Trustees."      

Issuance of Additional Shares                                 

         The Company's  Declaration  of Trust  authorizes the Board of Trustees,
without shareholder  approval, to (i) amend the Declaration of Trust to increase
or decrease the aggregate number of shares of beneficial  interest or the number
of shares of beneficial interest of any class that the Company has the authority
to issue,  (ii) cause the Company to issue  additional  authorized  but unissued
Priority  Common,  Class B Common or  Preferred  Shares  and (iii)  classify  or
reclassify any unissued Common or Preferred  Shares and to set the  preferences,
rights and other terms of such classified or reclassified shares,  including the
issuance of  additional  Priority  Common  Shares or preferred  shares that have
preference  rights over the Priority  Common  Shares with respect to  dividends,
liquidation,  voting and other matters. See "Description of Shares of Beneficial
Interest--Preferred Shares." Future equity offerings may cause the purchasers of
the Priority Common Shares sold in the Offering to experience  further dilution.
The Company has no current plans for future equity offerings. Although the Board
of Trustees has no such  intention  at the present  time,  it could  establish a
series of  Preferred  Shares that could,  depending on the terms of such series,
delay, defer or prevent a transaction or a change in control of the Company that
might involve a premium price for the Priority  Common Shares or otherwise be in
the best interest of the  shareholders.  The  Declaration of Trust and Bylaws of
the Company also contain other  provisions that may have the effect of delaying,
deferring or preventing a transaction or a change in control of the Company that
might involve a premium price for the Priority  Common Shares or otherwise be in
the best interest of the shareholders.  See "Certain  Provisions of Maryland Law
and of the  Company's  Declaration  of Trust and  Bylaws--Removal  of Trustees,"
"--Control Share Acquisitions" and "--Advance Notice of Trustees Nominations and
New Business."                                                                  

Maryland Business Combination Law                             

         Under the Maryland  General  Corporation Law, as amended  ("MGCL"),  as
applicable to real estate investment  trusts,  certain  "business  combinations"
(including  certain  issuances  of equity  securities)  between a Maryland  real
estate investment trust and any person who beneficially owns ten percent or more
of the voting power of the trust's shares (an  "Interested  Shareholder")  or an
affiliate  thereof are  prohibited  for five years after the most recent date on
which the Interested Shareholder becomes an Interested Shareholder.  Thereafter,
any such business combination must be approved by two super-majority shareholder
votes unless, among other conditions,  the trust's common shareholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received  in  cash or in the  same  form as  previously  paid by the  Interested
Shareholder for its common shares.  See "Certain  Provisions of Maryland Law and
the Company's Declaration of Trust and Bylaws--Business Combinations."          

Dependence Upon External Financing                                              

         The Company anticipates that its growth and acquisition strategies will
be largely financed through externally generated                                

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funds  such as  borrowings  under  the Line of  Credit  and  other  secured  and
unsecured  debt  financing and from issuance of equity  securities.  Because the
Company must distribute 95% of its taxable income to maintain its  qualification
as a REIT,  the  Company's  ability to rely upon income from  operations or cash
flow from  operations to finance its growth and  acquisition  activities will be
limited.  Accordingly,  were the Company  unable to obtain the Line of Credit or
other  funds from  borrowings  or to access the  capital  markets to finance its
growth  and  acquisition  activities,  the  Company's  ability  to grow could be
curtailed,  cash available for distribution to shareholders of the Company could
be adversely affected and the Company could be required to reduce distributions.

Assumption of Contingent Liabilities of Combined Entities                       

         Because the Partnership is acquiring  partnership  interests in certain
of the Combined Entities, the Partnership will assume all contingent liabilities
of those  Combined  Entities.  Certain of the  Hersha  Affiliates  are  managing
partners of the Combined Entities and have made  representations  and warranties
that the Combined Entities have no liabilities,  debts or obligations except for
liabilities   arising  under  operating   agreements,   equipment  leases,  loan
agreements or proration  credits on the Closing Date. There is, however,  a risk
that  unforeseen  liabilities  could exist and could  adversely  affect  amounts
available for distribution to shareholders.                                     

Possible Increase in Ground Lease Payments for Comfort Inn,                     
Denver, Pennsylvania                                                            

         The  Company  will  lease  the land  under  the  Comfort  Inn,  Denver,
Pennsylvania  from Hasu P. Shah and  Bharat C.  Mehta for $6,000 per year for 99
years.  Messrs.  Shah and Mehta have  pledged  their  interests in the land to a
lender  to  secure a loan  from the  lender.  Pursuant  to the terms of the loan
agreement,  in the event of a default  on the loan,  the  ground  lease with the
Company will not terminate, but the lender has the option to adjust the payments
to fair  rental  value at the time of the loan  default  based on a  third-party
appraisal.  Accordingly,  in the event of a default by Messrs. Shah and Mehta on
the loan that is secured by the land, the Company's rental obligations under the
ground lease may increase.                                                      

Year 2000 Risks                                                                 

         Many computer  systems were designed using only two digits to designate
years.  These systems may not be able to distinguish the year 2000 from the year
1900 (commonly known as the "Year 2000 Problem"). There can be no assurance that
the computer systems and operations of the Company or its third party vendors or
other service providers will be Year 2000 compliant.  The failure of the Company
or its  third  party  vendors  or other  services  providers  to have  Year 2000
compliant  systems could have a material  adverse  effect on the Company and its
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Year 2000 Compliance."                                    

Ability of Board of Trustees to Change Certain Policies                         

         The major policies of the Company,  including its policies with respect
to   acquisitions,   financing,   growth,   operations,   debt   limitation  and
distributions, will be determined by the Trustees.                              
 The  Trustees may amend or revise  these and other  policies  from time to time
without a vote of the holders of the Priority  Common Shares.  Although three of
the Trustees are required to be Independent  Trustees, a majority of the initial
Board of Trustees will not be Independent Trustees and thus such policies may be
changed by the non-Independent  Trustees.  The effect of any such changes may be
positive or negative.  Under the Declaration of Trust, the Company cannot change
its  policy of seeking to  maintain  its  qualification  as a REIT  without  the
approval of the holders of two-thirds of the outstanding Priority Common Shares.
See "Policies and Objectives  with Respect to Certain  Activities"  and "Certain
Provisions of Maryland Law and the Company's Declaration of Trust and Bylaws."  

Growth Strategy                                                                 

Competition for Acquisitions                                  

         There will be competition for investment opportunities in upper-economy
and mid-scale hotels from entities organized for purposes  substantially similar
to the Company's objectives,  as well as other purchasers of hotels. The Company
will be competing  for such  investment  opportunities  with  entities that have
substantially greater financial resources than the Company,  including access to
capital  or better  relationships  with  franchisors,  sellers or  lenders.  The
Company's policy is to limit  consolidated  indebtedness to less than 67% of the
total  purchase  prices  paid by the  Company  for the  hotels  in  which it has
invested.  See "Risk  Factors--The  Price Being Paid for the Initial  Hotels May
Exceed  Their  Value."  Because of the amount of the Assumed  Indebtedness,  the
success of the  Company's  acquisition  strategy  will depend  primarily  on its
ability to access additional capital through issuances of equity securities.    
 The  Company's  competitors  may generally be able to accept more risk than the
Company  can  manage  prudently  and may be able to borrow  the funds  needed to
acquire  hotels.  Competition  may  generally  reduce  the  number  of  suitable
investment  opportunities  offered to the Company and  increase  the  bargaining
power   of   property    owners    seeking   to   sell.    See   "Business   and
Properties--Competition."                                                       

Acquisition Risks                                             

         The  Company  intends  to  pursue   acquisitions  of  additional  hotel
properties.  Acquisitions  entail risks that investments will fail to perform in
accordance  with  expectations  and that  estimates of the cost of  improvements
necessary to market and acquire  properties  will prove  inaccurate,  as well as
general  investment  risks associated with any new real estate  investment.  The
Company  anticipates that its growth and acquisition  strategies will be largely
financed through externally generated                                           

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funds such as borrowings under credit facilities and other secured and unsecured
debt financing and from issuance of equity securities.  Because the Company must
distribute  95% of its taxable income to maintain its  qualification  as a REIT,
the  Company's  ability to rely upon  income from  operations  or cash flow from
operations  to finance its growth and  acquisition  activities  will be limited.
Accordingly,  were the Company  unable to obtain  funds from  borrowings  or the
capital markets to finance its growth and acquisition activities,  the Company's
ability  to grow could be  curtailed,  amounts  available  for  distribution  to
shareholders  could be adversely  affected and the Company  could be required to
reduce distributions.                                                           

Reliance on Trustees and Management                                             

         Common  shareholders  have  no  right  or  power  to  take  part in the
management  of the  Company  except  through the  exercise  of voting  rights on
certain   specified   matters.   See   "Description   of  Shares  of  Beneficial
Interest--Common  Shares" and  "Certain  Provisions  of Maryland  Law and of the
Company's Declaration of Trust and Bylaws." The Trustees will be responsible for
managing the Company.  The Company will rely upon the services and  expertise of
its Trustees for strategic business direction.                                  

         In addition, there may be conflicting demands on Mr. Shah caused by his
overlapping  management  of the  Company  and  Hersha  Enterprises  Ltd.  Hersha
Enterprises Ltd. owns and operates properties other than the Initial Hotels, and
Mr. Shah, who serves as Chairman of the Board and Chief Executive Officer of the
Company and President of Hersha Enterprises,  Ltd., may experience a conflict in
allocating his time between such entities.                                      

Possible Adverse Effect of Shares Available for Future Sale on                  
Price of Priority Common Shares                                                 

         After  termination  of the Priority  Period,  the Class B Common Shares
will  automatically  be converted  into Priority  Common Shares on a one-for-one
basis.  Sales of a substantial  number of Priority or Class B Common Shares,  or
the perception that such sales could occur,  could adversely  affect  prevailing
market prices of the Priority  Common  Shares.  In the  Formation  Transactions,
approximately  4  million  Subordinated  Units  will  be  issued  to the  Hersha
Affiliates in addition to the Priority  Common Shares  offered by the Company in
the  Offering.  See  "Formation  Transactions."  In general,  one year after the
closing of the Offering,  the Subordinated Units will be redeemable for cash or,
at the option of the Company,  Class B Common  Shares.  In the event the Class B
Common Shares are converted  into Priority  Common Shares prior to redemption of
the  Subordinated  Units,  such  outstanding   Subordinated  Units  will  become
redeemable for Priority  Common Shares.  See "Shares  Available for Future Sale"
and  "Underwriting."  At the  conclusion of such periods and upon the subsequent
redemption  of  Units,  the  Class B Common  Shares or  Priority  Common  Shares
received   therefor  may  be  sold  in  the  public  market  pursuant  to  shelf
registration  statements  that the  Company  is  obligated  to file on behalf of
limited  partners of the  Partnership,  or pursuant to any available  exemptions
from registration.                                                              

 THE COMPANY

         The  Company  has been  established  to own  initially  the ten Initial
Hotels and to continue the hotel acquisition and development  strategies of Hasu
P. Shah,  Chairman of the Board of Trustees and Chief  Executive  Officer of the
Company. The Company, formed in May 1998, is a self-advised Maryland real estate
investment  trust  that  intends to  qualify  as a REIT for  federal  income tax
purposes.  The Initial Hotels include three Holiday Inn Express(R)  hotels,  two
Hampton Inn(R) hotels,  two Holiday Inn(R) hotels, two Comfort Inn(R) hotels and
one Clarion  Suites(R) hotel. The Initial Hotels are located in Pennsylvania and
contain  an  aggregate  of 989  rooms.  The  Newly-Developed  Hotels  are  newly
constructed and therefore have limited operating  history.  The  Newly-Renovated
Hotels have been newly  renovated  and, as a result,  the Company  believes that
such hotels' future  performance  will improve  significantly  over such hotels'
prior operating histories.                                                      

         The Company will contribute  substantially all of the net proceeds from
the Offering to the Partnership in exchange for  approximately a 32% partnership
interest in the Partnership. The Company will be the sole general partner of the
Partnership.  Shortly after the closing of the Offering,  the  Partnership  will
acquire,  directly or through the  partnerships  that  currently own the hotels,
100% of the equity  interests  in the  Initial  Hotels.  Mr. Shah and the Hersha
Affiliates own the Combined  Entities.  Ownership of the land  underlying two of
the Initial  Hotels will be retained by certain  Hersha  Affiliates  and will be
leased to the  Partnership  pursuant  to  separate  ground  leases,  each with a
99-year  term,  and  collectively  providing  for rent of $21,000 per year.  See
"Certain Relationships and Transactions."                                       

         The  Partnership  will  acquire the Initial  Hotels in exchange for (i)
Subordinated Units that will be redeemable,  subject to certain limitations, for
an aggregate of  approximately 4 million Class B Common Shares,  with a value of
approximately $23.8 million based on the Offering Price, and (ii) the assumption
of  approximately  $23.8 million of indebtedness  related to the Initial Hotels,
including the Assumed  Indebtedness and approximately  $6.4 million that will be
repaid  immediately after the acquisition of the Initial Hotels.  See "Formation
Transactions."  The  purchase  prices  of the  Newly-Renovated  Hotels  will  be
adjusted  on  the  First   Adjustment   Date.   The   purchase   prices  of  the
Newly-Developed  Hotels  will be  adjusted on the Second  Adjustment  Date.  The
adjustments  will be calculated by applying the initial  pricing  methodology to
such  hotels'  cash flows as shown on the  Company's  and the  Lessee's  audited
financial  statements  for the year  ended on the First  Adjustment  Date or the
Second Adjustment Date, as applicable, and the adjustments must be approved by a
majority  of the  Independent  Trustees.  If the  repricing  produces  a  higher
aggregate  value  for  such  hotels,  the  Hersha  Affiliates  will  receive  an
additional                                                                      

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number of Subordinated Units that, when multiplied by the Offering Price, equals
the increase in value plus the value of any  distributions  that would have been
made with respect to such Subordinated Units if such Subordinated Units had been
issued at the time of the acquisition of such hotels. If, however, the repricing
produces a lower  aggregate  value for such hotels,  the Hersha  Affiliates will
forfeit  to the  Partnership  that  number  of  Subordinated  Units  that,  when
multiplied by the Offering Price, equals the decrease in value plus the value of
any distributions made with respect to such Subordinated Units.                 

         In order for the Company to qualify as a REIT,  neither the Company nor
the Partnership may operate hotels. Therefore, the Initial Hotels will be leased
to the Lessee pursuant to the Percentage Leases.  Each Percentage Lease has been
structured  to provide  anticipated  rents at least equal to 12% of the purchase
price paid for the hotel, net of (i) property and casualty  insurance  premiums,
(ii) real estate and personal property taxes, and (iii) a reserve for furniture,
fixtures and equipment  equal to 4% (6% for the Holiday Inn Hotel and Conference
Center, Harrisburg, PA and the Holiday Inn, Milesburg, PA) of gross revenues per
quarter at the hotel. This pro forma return is based on certain  assumptions and
historical revenues for the Initial Hotels (including projected revenues for the
Newly-Developed  Hotels and the Newly-Renovated  Hotels) and no assurance can be
given that future  revenues for the Initial Hotels will be consistent with prior
performance  or the  estimates.  See "Risk  Factors--Acquisition  of Hotels with
Limited  Operating  History."  Until the  First  Adjustment  Date or the  Second
Adjustment  Date, as applicable,  the rent on the Newly-  Renovated Hotels and  
the Newly-  Developed  Hotels will be the Initial  Fixed Rents  applicable  to  
those hotels.  After the First Adjustment Date or the Second Adjustment Date, as
applicable,  rent will be computed with respect to the Newly- Renovated Hotels  
and  the  Newly-  Developed  Hotels  based  on the  percentage  rent  formulas  
described  herein.  The Initial  Hotels  will be  operated  by the  Lessee.  The
Percentage  Leases will have initial terms of five years and may be extended for
two additional  five-year  terms at the option of the Lessee.  See "Business and
Properties--The Percentage Leases."                                             

         The following table sets forth certain  information with respect to the
Initial Hotels:                                                                 

                 Twelve Months Ended December 31, 1997

                                                        [Enlarge/Download Table]


                                                                                            Average           
                                            Number of    Room         Other                  Daily            
Initial Hotels                                Rooms     Revenue    Revenue(1)    Occupancy    Rate   REVPAR(2)
--------------                                -----     -------    ----------    ---------    ----   ---------
                                                                                                              

Newly-Developed                                                                                               
Holiday Inn Express                                                                                           

 Hershey, PA(3)............................      85     $210,612      $4,877       38.8%     $75.62   $29.35  
 New Columbia, PA(4).......................      81       13,369         253        9.0%     $59.68    $5.39  

Hampton Inn:                                                                                                  
 Carlisle, PA(5)...........................      95      659,861       8,421       53.5%     $65.33   $34.93  

Comfort Inn:                                                                                                  
 Harrisburg, PA(6).........................      81                                                           

Newly-Renovated                                                                                               
Holiday Inn Express:                                                                                          
 Harrisburg, PA(7).........................     117    1,357,241     176,868       56.4%     $56.33   $31.78  

Holiday Inn:                                                                                                  
 Milesburg, PA.............................     118    1,254,070     220,684       52.0%     $56.07   $29.13  

Comfort Inn:                                                                                                  
 Denver, PA (8)............................      45      658,285           0       54.7%     $73.26   $40.08  

Stabilized                                                                                                    
Holiday Inn Hotel and Conference Center:                                                                      
 Harrisburg, PA............................     196    3,103,820   1,787,958       63.3%     $68.22   $43.17  

Hampton Inn:                                                                                                  
 Selinsgrove, PA (9).......................      75    1,271,943      46,148       71.9%     $65.29   $46.96  

Clarion Suites:                                                                                               
 Philadelphia, PA..........................      96    2,350,702     319,950       73.7%     $91.02  $ 67.09  
                                                ---   ----------   ---------   ---------  ---------  -------  

Total/weighted average.....................     989  $10,879,903  $2,565,159       60.2%     $68.27   $41.09  
                                                ===  ===========  ==========   =========  =========   ======  

-------------------------                                                       
(1)      Represents restaurant revenue, telephone revenue and other revenue.    
(2)      REVPAR is determined  by dividing  room revenue by available  rooms for
the applicable period.                                        
(3)      This hotel opened in October 1997 and, thus,  the data shown  represent
operations from the date of opening through December 31, 1997.
(4)      This hotel opened in December 1997 and, thus, the data shown  represent
operations from the date of opening through December 31, 1997.
(5)      This hotel  opened in June 1997 and,  thus,  the data  shown  represent
operations from the date of opening through December 31, 1997.
(6)      This hotel opened in May 1998.                                         
(7)      The land  underlying  this hotel will be leased to the  Partnership  by
      certain Hersha Affiliates for rent of $15,000 per year for 99 years.
(8)      The land  underlying  this hotel will be leased to the  Partnership  by
     certain Hersha Affiliates for rent of $6,000 per year for 99 years.
(9)      A portion of the land  adjacent to this hotel,  which is not  currently
         used for hotel operations,  will be leased to a Hersha Affiliate for $1
per year for 99 years.                                        

For  further  information  regarding  the  Initial  Hotels,  see  "Business  and
Properties - The Initial Hotels" and " - The                                    
Percentage Leases."                                                             

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 GROWTH STRATEGY

         The  Company  will  seek to  enhance  shareholder  value by  increasing
amounts  available for distribution to shareholders by (i) acquiring  additional
hotels that meet the Company's  investment  criteria as described below and (ii)
participating  in any  increased  revenue  from the Initial  Hotels  through the
Percentage Leases.                                                              

Acquisition Strategy                                                            

          The Company will  emphasize  limited  service and full service  hotels
with strong,  national franchise affiliations in the upper-economy and mid-scale
market  segments,  or hotels with the  potential to obtain such  franchises.  In
particular,  the Company will consider  acquiring limited service hotels such as
Comfort Inn(R), Best Western(R),  Days Inn(R), Fairfield Inn(R), Hampton Inn(R),
Holiday  Inn(R)  and  Holiday  Inn  Express(R)   hotels,   and  limited  service
extended-stay hotels such as Hampton Inn and Suites(R), Homewood Suites(R), Main
Stay Suites(R) and Residence Inn by Marriott(R)  hotels.  Under the Bylaws,  any
transaction  involving  the Company,  including  the  purchase,  sale,  lease or
mortgage of any real estate asset, in which a Trustee or officer of the Company,
or any Affiliate thereof,  has an interest (other than solely as a result of his
status as a Trustee,  officer or shareholder of the Company) must be approved by
a majority of the Trustees, including a majority of the Independent Trustees.   

Investment Criteria                                           

         The Company intends to focus  predominantly on investments in hotels in
the eastern United States.  Such  investments may include hotels newly developed
by certain of the  Hersha  Affiliates.  Pursuant  to the Option  Agreement,  the
Partnership  will have an option to acquire any hotels owned or developed in the
future by the Hersha  Affiliates within 15 miles of any of the Initial Hotels or
any  hotel  subsequently  acquired  by  the  Partnership  for  two  years  after
acquisition or development.  See "Certain Relationships and Transactions--Option
Agreement." The Company's  initial policy with respect to acquisitions of hotels
(the "Acquisition  Policy") is to acquire hotels for which it expects to receive
rents at least equal to 12% of the  purchase  price paid for each hotel,  net of
(i)  property  and casualty  insurance  premiums,  (ii) real estate and personal
property taxes, and (iii) a reserve for furniture,  fixtures and equipment equal
to 4% (6% in the case of  full-service  hotels) of annual gross revenues at each
hotel.  The Trustees,  however,  may change the  Acquisition  Policy at any time
without  the  approval of the  Company's  shareholders.  The Company  expects to
acquire hotels that meet one or more of the following criteria:                 

         o        nationally-franchised  hotels in  locations  with a relatively
                  high  demand  for  rooms,  with a  relatively  low  supply  of
                  competing hotels and with  significant  barriers to entry into
                  the hotel business, such as a scarcity of suitable hotel sites
or zoning restrictions;                     

o        poorly managed hotels, which could benefit from new  
           management, new marketing strategy and association with
a national franchisor;                      

 o        hotels in a deteriorated physical condition that could
benefit significantly from renovations; and 

         o        hotels in attractive locations that the Company believes could
                  benefit  significantly  by changing  franchises to a brand the
Company believes is superior.               

         The Company  intends to lease  hotels that it acquires in the future to
operators,  including  the  Lessee as well as  operators  unaffiliated  with the
Lessee.  Future  leases  with  the  Lessee  generally  will  be  similar  to the
Percentage Leases. See "Business and Properties--The  Percentage Leases." Future
leases with operators  unaffiliated with the Lessee may or may not be similar to
the Percentage  Leases.  The Trustees will negotiate the terms and provisions of
each future lease, depending on the purchase price paid, economic conditions and
other factors deemed relevant at the time.                                      

Financing                                                     

         The  Company's  additional  investments  in hotels may be financed,  in
whole or in part,  with  undistributed  cash,  subsequent  issuances of Priority
Common  Shares or other  securities,  or  borrowings.  The Company is  currently
pursuing with lenders the Line of Credit. A failure to obtain the Line of Credit
could adversely affect the Company's ability to finance its growth strategy. See
"Risk Factors--Dependence Upon External Financing." The Company's Debt Policy is
to limit  consolidated  indebtedness to less than 67% of the aggregate  purchase
prices  paid by the  Company  for the  hotels  in  which  it has  invested.  The
Trustees,  however,  may change the Debt  Policy  without  the  approval  of the
Company's  shareholders.  The aggregate  purchase prices paid by the Company for
the  Initial  Hotels  is  approximately  $47.3  million.   After  the  Formation
Transactions,  the Company's  indebtedness  will be approximately  $17.4 million
(consisting of the Assumed Indebtedness),  which represents approximately 37% of
the aggregate  purchase price to be paid by the Company for the Initial  Hotels.
Because  of the Debt  Policy  and the amount of the  Assumed  Indebtedness,  the
success of the  Company's  acquisition  strategy  will depend  primarily  on its
ability to access additional capital through issuances of equity securities. See
"Risk  Factors--Risks of Leverage" and "Management's  Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

Internal Growth Strategy                                                        

         The Percentage  Leases are designed to allow the Company to participate
in growth in revenues at the Initial Hotels.  See "Business and  Properties--The
Percentage  Leases." The Percentage  Leases generally  provide for the Lessee to
pay in each calendar                                                            

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quarter the greater of Base Rent or Percentage  Rent.  The  Percentage  Rent for
each Initial  Hotel is comprised of (i) a percentage  of room revenues up to the
Threshold, (ii) a percentage of room revenues in excess of the Threshold but not
more than the Incentive Threshold, (iii) a percentage of room revenues in excess
of the Incentive  Threshold  and (iv) a percentage  of revenues  other than room
revenues. The Incentive Threshold is designed to provide incentive to the Lessee
to generate  higher revenues at each hotel by lowering the percentage of revenue
paid as Percentage Rent once room revenues reach certain levels.  In the case of
the Newly- Renovated Hotels and the Newly- Developed Hotels, the Lessee will    
pay the  Initial  Fixed  Rent  until the  First  Adjustment  Date or the  Second
Adjustment  Date, as applicable,  after which the Lessee will pay the greater of
Base Rent or Percentage Rent. See "Business and Properties--The  Initial Hotels"
and "--The Percentage Leases-- Amounts Payable Under the Percentage Leases."    

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 USE OF PROCEEDS

         The net  proceeds to the Company  from the sale of  1,833,334  Priority
Common Shares to the Underwriter are estimated to be approximately  $9.5 million
(based on the  Offering  Price),  after  deducting  underwriting  discounts  and
estimated  offering  expenses of  approximately  $1.5 million.  The Company will
contribute  the net proceeds of the Offering to the  Partnership in exchange for
approximately a 32% interest in the  Partnership.  The Partnership  will use the
net proceeds as follows:  (i) approximately $6.4 million to repay certain of the
outstanding  indebtedness related to the Initial Hotels, including approximately
$4 million in debt owed to certain Hersha Affiliates and related  principally to
the hotel  development  expenses in  connection  with the Initial  Hotels,  (ii)
approximately  $0.7 million for costs  associated  with the  acquisition  of the
Initial  Hotels  and  (iii)  approximately  $2.4  million  for  working  capital
purposes. In addition,  the Company will offer 166,666 Priority Common Shares to
the Hersha  Affiliates at the Offering Price and no selling  commission  will be
payable  to the  Underwriter  with  respect  to  such  shares.  The  information
contained  herein  assumes that none of the 166,666  Priority  Common Shares are
sold.  While the  Company has the option to purchase  certain  hotels  under the
Option  Agreement,  the Company  currently has no agreement or  understanding to
invest in any  specific  hotel  other  than the  Initial  Hotels.  See  "Certain
Relationships and Related Transactions--Option Agreement."                      

         Pending the use of proceeds  referenced above, the net proceeds will be
invested in interest-bearing,  short-term,  investment grade securities or money
market accounts, which are consistent with the Company's intention to qualify as
a REIT.  Such  investments may include,  for example,  government and government
agency securities,  certificates of deposit,  interest-bearing bank deposits and
mortgage loan participations.                                                   

         The  indebtedness  to be repaid with the net  proceeds of the  Offering
includes debt secured by some of the Initial Hotels as follows (in thousands):  

                                                                [Download Table]


Mortgages payable secured by                                        Annual   
the following Initial Hotels:         Amount(1)  Maturity Date  Interest Rate
-----------------------------         ---------  -------------  -------------
                                                                             

Holiday Inn, Milesburg, PA            $    860       1999           8.00%    
Clarion Suites, Philadelphia, PA      $  1,540     2002/2010        9.50%    

Amounts Due to Hersha Affiliates (2)  $  3,982        (3)           9.00%    
                                      --------                               
Total                                 $  6,382                               
                                      ========                               

--------------                                                                  
(1)      Based on balances at September 30, 1998.             
 (2)      Loans advanced by the Hersha Affiliates principally to
          fund hotel development expenses in connection with the
Initial Hotels.                             
(3)      Payable on demand.                                   

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FORECASTED DISTRIBUTIONS

          After the  Offering,  the Company  intends to make  regular  quarterly
distributions  to holders of the Priority Common Shares initially equal to $0.18
per share,  which on an  annualized  basis  would be equal to $0.72 per share or
12.0% of the Offering Price.  The first  distribution  will be prorated to cover
the period from the closing of the Offering to March 31, 1999.  The Company does
not expect to change its forecasted  initial  distribution  per Priority  Common
Share if the Underwriter's over-allotment option is exercised.                  

         Distributions  made by the Company will be  determined  by the Trustees
and will  depend on a number of  factors,  including  the  amount of funds  from
operations,   the  Partnership's   financial   condition,   capital  expenditure
requirements  for the Company's  hotels,  the annual  distribution  requirements
under the REIT  provisions  of the Code and such other  factors as the  Trustees
deem relevant.  The Company's ability to make distributions will be dependent on
the receipt of  distributions  from the  Partnership and lease payments from the
Lessee with respect to the Initial Hotels.  Initially,  the  Partnership's  sole
source of revenue  will be rent  payments  under the  Percentage  Leases for the
Initial Hotels. The Company must rely on the Lessee to generate  sufficient cash
flow  from  the  operation  of the  Initial  Hotels  to meet the  Lessee's  rent
obligations under the Percentage Leases.                                        

         During the Priority  Period,  the holders of the Priority Common Shares
will be entitled to receive, prior to any distributions either to the holders of
the  Subordinated  Units or to the  holders  of the Class B Common  Shares,  the
Priority  Distribution  (i.e.,  cumulative  dividends  in an amount per Priority
Common  Share equal to $0.18 per  quarter).  After the  holders of the  Priority
Common  Shares  have  received  the  Priority  Distribution,  the holders of the
Subordinated  Units and the Class B Common Shares will be entitled to receive an
amount per  Subordinated  Unit or per Class B Common Share equal to the Priority
Distribution paid to the holders of the Priority Common Shares.  Thereafter, the
holders of the  Priority  Common  Shares will be entitled to receive any further
distributions on a pro rata basis with the holders of the Subordinated Units and
the                                                                             

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Class B Common  Shares.  As of the  closing of the  Offering,  no Class B Common
Shares will be outstanding. Thus, the Priority Common Shares initially will have
Priority Rights only with respect to the outstanding  Subordinated Units. In the
future,  the  Company  may issue  additional  Priority  Common  Shares,  and the
Partnership  may issue Units that are not  subordinated  to the Priority  Common
Shares.  See  "Description  of Shares of Beneficial  Interest" and  "Partnership
Agreement."                                                                     

         The hotel  business is seasonal in nature and,  therefore,  revenues of
the Initial Hotels in the first and fourth quarters are traditionally lower than
those in the second and third  quarters.  The Company  believes  that it will be
able to make its forecasted  distributions  for the first and fourth quarters of
its  initial  year of  operation  by  drawing  on the Line of Credit to fund any
shortfalls  between cash available for  distribution to common  shareholders for
those quarters and the forecasted  quarterly  distributions  for those quarters.
See "Risk Factors--Risk of Leverage" and "--Dependence Upon External Financing."
Thereafter,  the  Company  expects to use  excess  cash flow from the second and
third  quarters to fund any such  shortfalls  in the first and fourth  quarters.
There are no  assurances  that cash  available  for  distribution  to the common
shareholders will be sufficient for the Company to make forecasted distributions
to common shareholders.                                                         

         Based on the  Company's  forecasted  statement  of  operations  for the
twelve months ending  January 31, 2000,  the Company  estimates  that 16% of the
forecasted initial annual  distribution to the holders of Priority Common Shares
will  represent a return of capital for federal  income tax purposes.  If actual
funds from  operations or taxable income vary from the forecasted  amounts,  the
percentage  of  distributions  that will  represent a return of capital may vary
substantially.  For a discussion  of the tax treatment of  distributions  to the
holders of Priority  Common Shares,  see "Federal Income Tax  Consequences."  In
order  to  qualify  to  be  taxed  as a  REIT,  the  Company  must  make  annual
distributions  to  shareholders  of at  least  95% of its  REIT  taxable  income
(determined by excluding any net capital gain). Under certain circumstances, the
Company may be required to make  distributions  in excess of cash  available for
distribution in order to meet such  distribution  requirements.  In such a case,
the  Company  may find it  necessary  to arrange  for  short-term  (or  possibly
long-term) borrowings,  to sell assets or to raise funds through the issuance of
additional shares of beneficial interest.                                       

         The following table  describes the Company's  calculation of forecasted
cash available for distribution and forecasted initial  distributions to holders
of the Priority Common Shares for the twelve months ending January 31, 2000. The
Company's  calculation of forecasted  cash available for  distribution  is being
made solely for the purpose of calculating the forecasted  initial  distribution
to the  Priority  Common  Shares and is not  intended  to be a  forecast  of the
Company's  results of operations or its liquidity,  nor is the methodology  upon
which  such  computations  were  made  necessarily  intended  to be a basis  for
determining  future  distributions.  The actual  return  that the  Company  will
realize and the actual  amount of cash that will be available  for  distribution
will be affected by a number of factors,  including  the revenues of the Initial
Hotels, the lease revenue received by the Company,  the debt service payments on
the Company's  borrowings,  the real estate and personal property taxes incurred
by the Company,  the property and casualty  insurance  premiums  incurred by the
Company,  the general and  administrative  expenses of the  Company,  the ground
lease payments made by the Company, and the capital expenditures incurred by the
Company.  No  assurance  can be given  that the  Company's  forecast  will prove
accurate. See "Risk Factors--Forecasted Statement of Operations."               

                                                        [Enlarge/Download Table]


                                                                          Twelve Months Ending
                                                                            January 31, 2000  
                                                                              (In thousands)  
                                                                              --------------  
                                                                                              

Forecasted net income applicable to                                                           
         holders of Priority Common Shares (1)...........................             $1,112  

Add:  Forecasted depreciation and amortization, net of minority                               
interest (2).............................................................                658  
                                                                                       -----  

Forecasted funds from operations applicable to                                                
         holders of Priority Common Shares (3) ..........................              1,770  

Forecasted cash provided by operating activities applicable to                                
         holders of Priority Common Shares (4)...........................              1,770  

Subtract:  Forecasted cash used in investing activities:                                      
         Forecasted additions to capital expenditure reserves,                                
         net of minority interest (5)....................................                268  
Subtract:  Forecasted cash used in financing activities:                                      
         Forecasted principal payments on debt, net of                                        
         minority interest (6)...........................................                182  
                                                                                       -----  

Forecasted cash available for distribution to holders of Priority                             
Common Shares............................................................              1,320  

Forecasted cash available for distribution to holders of                                      
Subordinated Units (7)...................................................              1,971  

Forecasted initial distribution (8)......................................              1,320  

Forecasted dividend yield based on Offering Price (9)....................                12%  


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

(1)      See the Company's  Forecasted  Statement of  Operations.  The Company's
         computation of forecasted net income  applicable to holders of Priority
         Common Shares is based on the  assumptions and limitations set forth in
the Company's Forecasted Statement of Operations.             

(2)      Forecasted depreciation and amortization,  net of minority interest, is
computed as follows:                                          

         Forecasted depreciation and amortization........................$ 2,081

Subtract:  Minority interest in forecasted                      
              depreciation and amortization (68.38%).......................1,423
                                                                           -----
Forecasted depreciation and amortization, net of minority     
              interest................................................. $    658

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(3)      In accordance with the resolution adopted by the Board of              
Governors of the National Association of Real Estate          
Investment Trusts ("NAREIT"), funds from operations           
represents net income (computed in accordance with generally  
accepted accounting principles), excluding gains (or losses)  
from debt restructuring and sales of property, plus           
depreciation and amortization, and after adjustments for      
unconsolidated partnerships and joint ventures.  Funds from   
operations should not be considered an alternative to net     
income or other measurements under generally accepted         
accounting principles as an indicator of operating            
performance or to cash flows from operating, investing or     
financing activities as a measure of liquidity.  The Company  
considers funds from operations to be an appropriate measure  
of the performance of an equity REIT in that such             
calculation is a measure used by the Company to measure its   
performance against its peer group and is a basis for making  
the determination as to the allocation of its resources and   
reflects the Company's ability to meet general operating      
expenses.  Although funds from operations has been computed   
in accordance with the NAREIT definition, funds from          
operations as presented may not be comparable to other        
similarly-titled measures used by other REITs.  Funds from    
operations does not reflect working capital changes, cash     
expenditures for capital improvements or debt service with    
respect to the Initial Hotels and, therefore, does not        
represent cash available for distribution to the              
shareholders of the Company.                                  

(4)      Excludes cash provided by (used in) operating activities due to changes
         in working  capital.  The Company  does not believe  that the  excluded
       items are material to the forecasted cash available for distribution.

(5)      Under the Percentage Leases, the Company has an obligation             
to pay the costs of certain capital improvements and to make  
available to the Lessee certain amounts for the replacement   
or refurbishment of furniture, fixtures and equipment at the  
Initial Hotels.  The Company anticipates that cash flow from  
operations, borrowing capacity and reserves will be           
sufficient to fund such obligation.  Forecasted additions to  
capital expenditure reserves, net of minority interest, is    
computed as follows:                                          

Management's estimate of additions to capital expenditure     
              reserves......................................................$847

Subtract:  Minority interest in forecasted additions          
              to capital expenditure reserves (68.38%).......................579
                                                                             ---
Forecasted additions to capital expenditure reserves,         
              net of minority interest..................................... $268

(6)      Computed as follows:                                                   

         Management's estimate of principal payments on debt................$575
Subtract:  Minority interest in forecasted                    
              principal payments on debt (68.38%)............................393
                                                                             ---
Forecasted principal payments on debt, net of                 
              minority interest.............................................$182

(7)      Computed as follows:                                                   

Forecasted distributable cash (see Forecasted Statement of    
              Operations)   ..............................................$3,291

Subtract:  Forecasted cash available for distribution to      
              holder of Priority Common Shares.............................1,320
                                                                           -----
Forecasted cash available for distribution to                 
              holders of Subordinated Units...............................$1,971

         As a result, based on the 3,964,108  Subordinated Units estimated to be
         outstanding upon completion of the Formation Transactions,  the holders
         of the  Subordinated  Units  would be  entitled  to a  distribution  of
approximately $.50 per Subordinated Unit.                     

(8)      Represents forecasted initial annual distribution per                  
Priority Common Share ($0.72) multiplied by the 1,833,334     
Priority Common Shares to be outstanding upon completion of   
the Offering.  The information contained herein assumes that  
none of the 166,666 Priority Common Shares offered to the     
Hersha Affiliates are sold.  If the 166,666 Priority Common   
Shares are sold, the forecasted initial annual distribution   
would be $1,440,000 and the forecasted amount available for   
distribution to holders of Subordinated Units would be        
$1,851,000, or approximately $.47 per Subordinated Unit.      
The proceeds from the sale of such shares would be used for   
working capital.                                              

(9)      Represents  forecasted initial annual  distribution per Priority Common
Share ($0.72) divided by Offering Price                       
($6.00).                                                      

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                                  PRO FORMA CAPITALIZATION

         The  following  table  sets  forth  the pro forma  short-term  debt and
capitalization  of the Company as of  September  30,  1998,  as adjusted to give
effect to the sale on such date by the Company of the Priority  Common Shares in
the Offering and the use of the net proceeds  therefrom as described  under "Use
of Proceeds."                                                                   

                                                                [Download Table]


                                                         Pro Forma    
                                                    September 30, 1998
                                                      (In thousands)  
                                                      --------------  
                                                                      

Mortgage debt....................................        $17,400      
Minority interest................................        $18,355      

Shareholders' Equity:                                                 
 Preferred Shares, $.01 par value,                                    
   10,000,000 shares authorized,                                      
   no shares issued and outstanding..............             --      
 Common Shares, $.01 par value,                                       
   50,000,000 Priority Class A Common                                 
   Shares and 50,000,000 Class B Common                               
   Shares authorized, 1,833,334                                       
   Priority Class A Common Shares                                     
   issued and outstanding(1).....................             18      
 Additional paid-in capital......................          8,470      
                                                         -------      

     Total shareholders' equity..................        $ 8,488      
                                                         -------      
        Total capitalization.....................        $44,243      
                                                         =======      

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

(1)      Excludes 166,666 Priority Common Shares offered to the                 
Hersha Affiliates, approximately 4 million Class B Common     
Shares issuable upon redemption of Subordinated Units issued  
in the Formation Transactions, 183,333 Priority Common        
Shares issuable upon exercise of the Underwriter Warrants,    
250,000 Class B Common Shares issuable upon the redemption    
of 250,000 Units issuable upon exercise of the Hersha         
Warrants, 650,000 Class B Common Shares reserved for          
issuance pursuant to the Option Plan and 200,000 Class B      
Common Shares reserved for issuance pursuant to the           
Trustees' Plan.  The Class B Common Shares will be converted  
into Priority Common Share on a one-for-one basis at a        
future date.  See "Description of Shares of Beneficial        
Interest--Class B Common Shares," "Formation Transactions,"   
"Management--The Option Plan" and "Underwriting."             

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DILUTION

         At September 30, 1998,  the Offering  Price  exceeded the pro forma net
tangible book value per Priority  Common Share.  The pro forma net tangible book
value  prior to the  Offering  represents  the  owners'  equity from the Selling
Entities  Combined  Balance  Sheet  of  $6,475,000  less  intangible  assets  of
$1,382,000  resulting in $5,093,000 or $1.28 per share based upon  approximately
3.96  million  Subordinated  Units  issuable  in  the  Formation   Transactions.
Therefore,  the holders of  Subordinated  Units  issued in  connection  with the
Formation  Transactions will realize an immediate increase in the net book value
of their  Subordinated  Units, while purchasers of Priority Common Shares in the
Offering  will  realize  an  immediate  dilution  in the net book value of their
Priority Common Shares. The pro forma net tangible book value after the Offering
is based upon the pro forma consolidated shareholders' equity of $8,488,000 less
intangibles  of  $1,404,000  (included  in the pro  forma  financial  statements
included  herein)  resulting in pro forma book value of  $7,084,000 or $3.86 per
share based on 1,833,334 shares outstanding immediately following the Offering. 

                                                        [Enlarge/Download Table]
                                                                                               
Assumed initial public offering price per share(1)..............................         $ 6.00
     Pro forma tangible net book value per share prior to the                                  
        Offering                                                                 $ 1.28        
     Increase attributable to purchase of Priority Common Share.................   2.58        
                                                                                 ------        
Pro forma net tangible book value per share after the                                          
 Offering           ...........................................................            3.86
                                                                                         ------
Dilution per share..............................................................         $ 2.14
                                                                                         ======


----------                                                                      
(1) Before  deducting  underwriting  discounts  and  estimated  expenses  of the
Offering.                                                                       

         The following  table sets forth the number of Priority Common Shares to
be sold by the Company in the Offering,  the total  contributions  to be paid to
the Company by purchasers of Priority Common Shares in the Offering (assuming an
Offering  Price of $6.00 per share),  the number of Priority  Common  Shares and
Subordinated Units previously outstanding or to be issued in connection with the
Formation Transactions,  the net tangible book value as of September 30, 1998 of
the assets  contributed to the Company and the  Partnership and the net tangible
book  value  of  the  average   contribution   per  Priority  Common  Share  and
Subordinated Unit based on total contributions.                                 

                                                        [Enlarge/Download Table]


                                                                        Purchase Price/                                   
                                     Shares Issued by the Company     Book Value of Total                                 
                                        and Units Issued by the    Tangible Contributions to                              
                                             Partnership (1)              the Company (1)           Purchase Price/       
                                 -----------------------------------------------------------------   Tangible Book        
                                                                                               Value of Contribution Per  
                                        Number          Percent      Amount         Percent     Priority Share/Unit (1)   
                                        ------          -------      ------         ------- ------------------------------
                                                                         (in thousands)                                   
                                                                                                                          

Priority Common Shares Issued to the Under-                                                                               
  writer by the Company in the Offering  1,833,334       31.62%        $11,000       68.35%         $6.00                 

Subordinated Units Issued by the Partner-                                                                                 
  ship in the Formation Transactions     3,964,108       68.38%        $ 5,093        31.65%        $1.28                 
                                         ---------       ------        -------        ------        -----                 

Total Priority Common Shares and                                                                                          
  Subordinated Units................     5,797,442       100.00%       $16,093       100.00%                              
                                         =========       =======       =======       =======                              

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

(1) Does not  include  166,666  Priority  Common  Shares  offered  to the Hersha
Affiliates.                                                                     

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SELECTED FINANCIAL INFORMATION

         The  following  tables  set forth:  (i)  unaudited  summary  forecasted
statement  of  operations  data for the  Company  for the twelve  months  ending
January 31, 2000, (ii) unaudited summary  historical and pro forma balance sheet
data for the Company at September 30, 1998;  (iii) unaudited pro forma condensed
combined  statement  of  operations  for the  Lessee for the nine  months  ended
September  30, 1998 and for the year ended  December 31, 1997;  and (iv) summary
combined   historical   operating   and   financial   data   for  the   Combined
Entities--Initial  Hotels for each of the years in the  three-year  period ended
December 31, 1997. The summary combined historical  operating and financial data
for the Combined Entities--Initial Hotels for the three years ended December 31,
1997, have been derived from the historical combined financial statements of the
Combined  Entities--Initial  Hotels audited by Moore Stephens, P.C., independent
public  accountants,  whose report with respect thereto is included elsewhere in
this  Prospectus.  In  the  opinion  of  management,   the  unaudited  financial
statements  include  all  adjustments   (consisting  only  of  normal  recurring
adjustments)  necessary to present fairly the information  set forth therein.  A
pro forma  statement of operations for the Company is not presented  because the
Company has had no historical operations as a hotel lessor.                     

         The  forecasted  statement  of  operations  data  for  the  Company  is
presented as if the Formation  Transactions had occurred on February 1, 1999 and
therefore  incorporates  certain assumptions that are set forth in the Company's
Forecasted  Statement of Operations  included elsewhere in this Prospectus.  See
"Risk  Factors--Forecasted  Statement of Operations."  The balance sheet data is
presented as if the Formation  Transactions  had occurred on September 30, 1998.
The pro forma  condensed  combined  statement of  operations  for the Lessee are
presented as if the  Formation  Transactions  had occurred as of January 1, 1997
and carried  forward  through  each  interim  period  presented,  and  therefore
incorporates certain assumptions that are included in the Notes to the Pro Forma
Condensed   Combined   Statement  of  Operations   included  elsewhere  in  this
Prospectus.  The pro forma  information  does not purport to represent  what the
Company's financial position or the Company's or the Combined  Entities--Initial
Hotels'  results  of  operations  would  actually  have  been  if the  Formation
Transactions had, in fact, occurred on such date or at the beginning of the year
indicated, or to project the Company's or the Combined Entities--Initial Hotels'
financial position or results of operations at any future date or for any future
period.                                                                         

         The  following  selected  financial   information  should  be  read  in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" and all of the financial statements and notes thereto
included elsewhere in this Prospectus.                                          

Hersha Hospitality Trust
 Unaudited Summary Statement of Operations
and Balance Sheet Data
(In thousands, except share and per share amounts)

                                                        [Enlarge/Download Table]


                                                                       Forecasted Twelve
                                                                         Months Ending  
                                                                       January 31, 2000 
                                                                       ---------------- 
                                                                                        

Statement of Operations Data:                                                           
Lease revenue.........................................................       7,175      
Expenses..............................................................      (4,543)     
Net income before minority interest...................................       2,632      
Minority interest.....................................................      (1,520)     
Net income............................................................       1,112      
Net income per Priority Common Share..................................        0.61      
Weighted average number of                                                              
  Priority Common Shares outstanding..................................   1,833,334      

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                                                        [Enlarge/Download Table]


                                                                              September 30, 1998       
                                                                       Historical            Pro Forma 
                                                                       ----------            --------- 
                                                                                                       

Balance Sheet Data:                                                                                    
Net investment in hotel properties....................................        --             $   40,489
Minority interest in Partnership......................................        --             $   18,355
Shareholders' equity..................................................        --             $    8,488
Total assets..........................................................        --             $   44,243
Total debt............................................................        --             $   17,400

 Hersha Hospitality Management, L.P.
Unaudited Pro Forma Condensed Combined Statements of Operations(1)
(In thousands)

                                                        [Enlarge/Download Table]


                                                                       Nine Months Ended    Year Ended       
                                                                       September 30, 1998   December 31, 1997
                                                                       ------------------   -----------------
                                                                                                             

Room revenue..........................................................     $ 11,824         $10,880          
Other revenue (2).....................................................        2,111           2,565          
                                                                           --------         -------          

Total revenue.........................................................     $ 13,935         $13,445          
                                                                           --------         -------          

Hotel operating expenses (3)..........................................        8,506           9,214          

Percentage Lease payments (4).........................................        5,108           5,129          
                                                                              -----         -------          
Net income (loss) (5).................................................    $     321        $  (898)          
                                                                          =========        ========          

Combined Entities - Initial Hotels
Summary Combined Historical Operating and Financial Data
(In thousands)

                                                        [Enlarge/Download Table]


                                        Nine Months Ended                                                            
                                          September 30                           Year Ended December 31              
                               ----------------------------------  --------------------------------------------------
                                      1998            1997               1997             1996             1995      
                                      ----            ----               ----             ----             ----      
                                                                                                                     

Statement of Operations Data:                                                                                        
Room revenue                          $11,824        $  7,750            $10,880           $7,273           $5,262   
Other revenue (2)                       2,111           1,942              2,565            2,716            1,957   
                                      -------         -------            -------          -------          -------   

Total revenue                         $13,935        $  9,692            $13,445           $9,989           $7,219   

Hotel operating expenses (3)            8,839           6,510              9,173            8,172            6,250   

Interest                                1,497             831              1,354              921              634   
Depreciation                            1,161             799              1,189              924              711   
                                      -------         -------            -------          -------          -------   
and amortization                                                                                                     
Net income (loss) (5)                $  2,438        $  1,552             $1,729           $  (28)          $ (376)  
                                     ========        ========             ======           =======          =======  


-------------------------                                                       
(1)      The estimated information does not purport to represent what           
the Lessee's financial position or results of operations      
would actually have been if consummation of the Formation     
Transactions had, in fact, occurred on such date or at the    
beginning of the periods indicated, or to project the         
Lessee's financial position or results of operations at any   
future date or for any future period.  Represents pro forma   
revenue and expenses as if (i) the Partnership recorded       
depreciation and amortization, paid interest on remaining     
debt after the Formation Transactions occurred, and paid      
real and personal property taxes and property insurance as    
contemplated by the Percentage Leases, and (ii) the           
Formation Transactions occurred as of the beginning of the    
periods indicated.                                            

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(2)      Represents restaurant revenue, telephone revenue and other revenue.    
(3)      Represents departmental costs and expenses, general and                
administrative, repairs and maintenance, utilities,           
marketing, management fees, real estate and personal          
property taxes, property and casualty insurance and ground    
leases.  The pro forma amounts exclude real estate and        
personal property taxes, property and casualty insurance,     
ground leases and management fees.  Real estate and personal  
property taxes, property and casualty insurance and ground    
leases are the responsibility of the Partnership under the    
Percentage Leases.                                            
(4)      Represents lease payments calculated on a pro forma basis              
using the rent provisions in the Percentage Leases.  The      
rent provisions in the Percentage Leases are based upon an    
agreement between the Partnership and the Lessee in which     
the parties have agreed to the lease terms and the form of    
lease to be signed at the closing of the Offering.  Lease     
payments are calculated under two methods depending upon      
whether the Initial Hotel is a Stabilized Hotel with an       
established operating history or a Newly-Developed Hotel or   
a Newly-Renovated Hotel.  The Rents for the Stabilized        
Hotels are calculated by applying the percentage rent         
formulas to the historical room revenues and other revenues   
of those hotels for the periods presented.  Because the       
Newly-Developed Hotels and the Newly-Renovated Hotels pay     
Initial Fixed Rent for at least the first twelve months of    
operation, the Rent for those hotels is based on the Initial  
Fixed Rents, recognized on a straight-line basis over the     
period presented.  In the case of the Newly-Developed         
Hotels, the Initial Fixed Rents have been prorated for the    
periods the hotels were in operation because the hotels have  
not been in operation for the full periods presented.         
(5)      The  Combined  Entities  are not subject to income tax,  except  Hersha
         Enterprises,   Ltd.,  which  had  no  tax  liability  for  the  periods
presented.                                                    

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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND RESULTS OF OPERATIONS

Overview                                                                        

         Upon consummation of the Formation  Transactions,  the Company will own
approximately a 32% general  partnership  interest in the Partnership.  In order
for the Company to qualify as a REIT,  neither  the Company nor the  Partnership
may operate hotels.  Therefore, the Initial Hotels will be leased to the Lessee.
The Partnership's, and therefore the Company's, principal source of revenue will
be Rent paid by the  Lessee  under the  Percentage  Leases.  See  "Business  and
Properties--The   Percentage  Leases."  The  Lessee's  ability  to  perform  its
obligations,  including  making  Rent  payments  to the  Partnership  under  the
Percentage  Leases,  will be  dependent  on the  Lessee's  ability  to  generate
sufficient  room  revenues  and net cash flow from the  operation of the Initial
Hotels, and any other hotels leased to the Lessee.                              

Results of Operations of the Initial Hotels                                     

Comparison of Nine Months Ended September 30, 1998 to the     
Nine Months Ended September 30, 1997                                            

         Room  revenue for the Initial  Hotels  increased  $4,074,000  or 53% to
$11,824,000  for the first nine months of 1998 from $7,750,000 in the comparable
period in 1997.  This  increase  came  through an addition  of 82,980  available
room-nights with an overall increase of 59,039 room-nights sold. The increase in
room-nights  available was a result of the opening of three  hotels,  which were
not opened as of September 30, 1997. In addition, there was a 2% increase in ADR
to $66.95 from $65.92.                                                          
REVPAR increased 6% to $43.82 from $41.48.                                      

         Total  expenses  less   depreciation,   amortization  and  interest
increased by  $2,329,000 to  $8,839,000,  but decreased as a percentage of total
revenue  to  63%  from   67%.  Operating  income  before  interest  expense,    
depreciation  and  amortization  increased  by  60% to   $5,096,000  from       
$3,182,000.                                                                     

Comparison of year ended December 31, 1997 to year ended      
December 31, 1996                                                               

         Room revenue increased by $3,607,000 or 50% to $10,880,000 in 1997 from
$7,273,000  in 1996.  The  increase in revenue came through the addition of four
new hotels opening in 1997 and one hotel which was only open during half of 1996
being open for the entire 1997 period.  These new  properties  added  additional
available room-nights of 43,171. In addition, a 13% increase in occupancy to 60%
from 53% in 1996 as well as a 7% increase in ADR to  $68.27 compared to $63.51  
in 1996 augmented the available  room-nights.  REVPAR increased 25% to  $41.09  
from $33.48.                                                                    

         Total  expenses  less   depreciation,   amortization  and  interest
increased by $1,001,000  or 12% to  $9,173,000  but decreased as a percentage of
total  revenue  to 68% from  82%.  Operating  income  before  interest  expense,
depreciation and amortization increased by 135% to $4,272,000 from $1,817,000.  

Comparison of year ended December 31, 1996 to year ended      
December 31, 1995                                                               

         Room revenue  increased  $2,011,000  or 38% to  $7,273,000 in 1996 from
$5,262,000  in 1995.  The  increase in revenue  came  through the opening of two
hotels in 1996 adding additional  room-nights  available of 41,168. In addition,
an overall  increase in occupancy of 10% to 53% from 48% in 1995 as well as a 2%
increase in ADR to $63.51  compared to $62.40 in 1995  augmented  the  available
room-nights. REVPAR increased 12% to $33.48 from $29.89.                        

         Total  expenses  less   depreciation,   amortization  and  interest
increased by $1,922,000  or 31% to  $8,172,000  but decreased as a percentage of
total  revenue  to 82% from  87%.  Operating  income  before  interest  expense,
depreciation and amortization increased by 87% to $1,817,000 from $969,000.     

Liquidity and Capital Resources                                                 

         The  Company  expects  to meet  its  short-term  liquidity  requirement
generally  through net cash provided by operations,  existing cash balances and,
if  necessary,  short-term  borrowings  under the Line of  Credit.  The  Company
believes that its net cash provided by operations  will be adequate to fund both
operating  requirements  and payment of dividends  by the Company in  accordance
with REIT  requirements.  The Company  expects to meet its  long-term  liquidity
requirements,  such as scheduled  debt  maturities  and  property  acquisitions,
through long-term secured and unsecured  borrowings,  the issuance of additional
equity  securities of the Company or, in connection  with  acquisitions of hotel
properties, issuance of Units.                                                  

         The Company is currently  pursuing  with various  lenders a $10 million
Line of Credit. The Line of Credit will be used to fund future  acquisitions and
for  working  capital.  A failure to obtain the Line of Credit  could  adversely
affect  the  Company's  ability  to  finance  its  growth  strategy.  See  "Risk
Factors-Dependence  Upon External  Financing." The Line of Credit may be secured
by certain of the Initial Hotels. The Company in the future may seek to increase
the amount of the Line of Credit,  negotiate  additional  credit  facilities  or
issue corporate debt instruments.                                               
 Any debt  incurred  or issued  by the  Company  may be  secured  or  unsecured,
long-term or short-term,  fixed or variable  interest rate and may be subject to
such other terms as the Trustees deem prudent.                                  

         The  Trustees  will  adopt the Debt  Policy  that  limits  consolidated
indebtedness  of the Company to less than 67% of the aggregate  purchase  prices
paid by the  Company  for the  hotels  in which it has  invested.  However,  the
Company's  organizational documents do not limit the amount of indebtedness that
the  Company may incur and the  Trustees  may modify the Debt Policy at any time
without shareholder approval. The Company intends to repay indebtedness incurred
under the Line of Credit from time to                                           

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time, for  acquisitions or otherwise,  out of cash flow and from the proceeds of
issuances of Priority  Common Shares and other  securities  of the Company.  See
"Risk  Factors-Risks  of Leverage" and "Policies and Objectives  with Respect to
Certain Activities-Investment Policies" and "-Financing."                       

         The  Company  will  invest  in  additional   hotels  only  as  suitable
opportunities  arise. The Company will not undertake  investments in such hotels
unless  adequate  sources of financing  are  available.  The Bylaws  require the
approval of a majority of the Trustees,  including a majority of the Independent
Trustees,  to acquire any additional  hotel in which a Trustee or officer of the
Company,  or any  Affiliate  thereof,  has an  interest  (other than solely as a
result of his status as a Trustee, officer or shareholder of the Company). It is
expected that future investments in hotels will be dependent on and financed by,
in whole or in part, the proceeds from  additional  issuances of Priority Common
Shares or other  securities or  borrowings.  Because of the level of the Assumed
Indebtedness,  the success of the  Company's  acquisition  strategy  will depend
primarily  on its ability to access  additional  capital  through  issuances  of
equity  securities.  The Company  currently has no agreement or understanding to
invest in any hotel other than the Initial  Hotels and there can be no assurance
that the Company  will make any  investments  in any other  hotels that meet its
investment criteria. See "Growth Strategy--Acquisition Strategy."               

         Pursuant to the Percentage  Leases, the Partnership will be required to
make  available  to the Lessee 4% (6% for the Holiday  Inn Hotel and  Conference
Center, Harrisburg, PA and the Holiday Inn, Milesburg, PA) of gross revenues per
quarter,  on a cumulative  basis,  for periodic  replacement or refurbishment of
furniture,  fixtures and  equipment at each of the Initial  Hotels.  The Company
believes  that a 4% (6%  for  the  Holiday  Inn  Hotel  and  Conference  Center,
Harrisburg,  PA and the Holiday Inn,  Milesburg,  PA) percentage  set-aside is a
prudent  estimate  for future  capital  expenditure  requirements.  The  Company
intends to cause the  Partnership  to spend  amounts in excess of the  obligated
amounts if necessary to comply with the reasonable requirements of any Franchise
License and otherwise to the extent that the Company deems such  expenditures to
be in the best  interests of the Company.  The Company will also be obligated to
fund  the cost of  certain  capital  improvements  to the  hotels.  Based on its
experience in managing  hotels,  management of the Company believes that amounts
required to be set aside in the  Percentage  Leases will be  sufficient  to meet
required  expenditures for furniture,  fixtures and equipment during the term of
the Percentage  Leases.  The Company will use  undistributed  cash or borrowings
under  credit  facilities  to pay for the cost of capital  improvements  and any
furniture,  fixture  and  equipment  requirements  in  excess  of the set  aside
referenced above. See "Business and Properties--The Percentage Leases."         

Inflation                                                                       

         Operators of hotels in general possess the ability to adjust room rates
quickly. However,  competitive pressures may limit the Lessee's ability to raise
room rates in the face of inflation,  and annual increases in ADR have failed to
keep pace with inflation.                                                       

Seasonality                                                                     

         The  Initial  Hotels'  operations  historically  have been  seasonal in
nature,  reflecting higher occupancy rates during the second and third quarters.
This  seasonality  can be  expected  to  cause  fluctuations  in  the  Company's
quarterly lease revenue to the extent that it receives Percentage Rent.         

Year 2000 Compliance                                                            

         Many computer  systems were designed using only two digits to designate
years.  These systems may not be able to distinguish the year 2000 from the year
1900. Like other  organizations,  the Company could be adversely affected if the
computer  systems used by it or its service  providers  do not properly  address
this  problem  prior  to  January  1,  2000.  Currently,  the  Company  does not
anticipate that the transition to the year 2000 will have any material impact on
its performance. The Company's plan to respond to the Year 2000 Problem consists
of three phases that address the state of readiness,  Year 2000 costs, risks and
contingency plans.                                                              

         Phase I  includes a plan to  respond  to the Year 2000  Problem,  which
includes  the  following  areas (the  "Focus  Areas"):  (i)  telephone  and call
accounting systems;  (ii) credit card readers;  (iii) sprinkler systems and fire
suppression system; (iv) security systems; (v) card entry systems; (vi) elevator
systems;  (vii) computer  systems and vendor  contracts  (hardware);  (viii) fax
machines and laundry equipment; (ix) HVAC (heating and air conditioning systems)
and  utility  companies;  and (x)  computer  software  systems.  The Company has
created a task force and  procedures  to survey,  test and  report  results  for
management's  review.  The Company  believes that the cost to remediate its Year
2000 problems  will be minimal and has allocated  funds of $25,000 to cover such
costs. The Holiday Inn hotel and conference center, Harrisburg, PA has been used
as an example for the other  Initial  Hotels.  This hotel was  reviewed for Year
2000  compliance,  and the review resulted in hardware and software  compliance.
The credit card readers,  card entry system and  computers  have been tested and
are compliant.  Based on the results  experienced  for the Holiday Inn hotel and
conference  center,   Harrisburg,  PA,  management  believes  that  the  $25,000
allocation for funding will be adequate.                                        

         The Company is currently  proceeding with Phase II of its assessment of
the Year 2000  Problem.  Phase II involves  initiating a survey and checklist to
each hotel  manager  for  completion  and return to  management.  The survey was
customized  for the Initial Hotels to include (i) the current vendor list with a
column for a listing of current  product usage and (ii) a vendor address log and
telephone number listing. Each hotel checklist included the front desk, business
center,  housekeeping/back  office,  beverage  and  guest  rooms.  Phase II also
involves the testing of the Company's computer systems. A                       

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test computer  disk-copy was sent to the Company for  reproduction  to test each
computer in the Company.  All written tests and written confirmation that relate
to the Initial Hotel products,  equipment and software are logged to monitor the
Company's  progress towards Year 2000 compliance.  The Company is in the process
of  conducting  such  testing and has yet to encounter  any  material  Year 2000
compliance problems.                                                            

         Phase III of the Company's assessment of the Year 2000 Problem includes
the results of testing, action plans, reporting of results and contingency plans
to remediate any Year 2000 Problems.  The risks and contingency  plans include a
"reasonably likely worst case Year 2000 scenario." The Company believes that the
consequences  of a worst case  scenario  rest almost  exclusively  with  outside
vendors and not in systems  within the Initial  Hotels.  The  contingency  plan,
which the Company is currently  initiating,  is to replace non-compliant vendors
with new compliant vendors. A thorough review of all vendors will continue to be
an  ongoing  Year  2000  strategy  for  the  Company.   However,  the  Company's
contingency plan has back-up support to address each of the Focus Areas.        

         The franchisors of the Initial Hotels have provided  compliance  guides
to assist in the  Company's  response  to the Year 2000  Problem.  Promus  Hotel
Corporation  (Hampton Inn  Hotels),  Holiday  Hospitality/Bass  Hotels & Resorts
(Holiday  Inn and Holiday Inn Express  Hotels) and Choice  Hotels  International
(Comfort  Inn and Clarion  Suites  Hotels)  have  completed  third party  vendor
checks,  reviewed  computer  systems  and  provided  for  reference  a preferred
compliant  vendor  list.  A checklist  for Year 2000  issues,  a work plan and a
sample vendor letter was provided to help the Company complete its assessment of
the Year 2000 Problem.                                                          

         The Company is in the process of mailing a questionnaire to third party
vendors to assess third party risks. The results of this risk assessment will be
completed by July 1999. In addition, the Company has sought assurances from     
the Lessee and other service  providers that they are taking all necessary steps
to ensure that their computer systems will accurately reflect the year 2000, and
the Company will  continue to monitor the  situation.  There can be no assurance
that the systems of such third  parties will be Year 2000  compliant or that any
third  party's  failure  to have Year 2000  compliant  systems  would not have a
material adverse effect on the Company's systems and operations.                

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 BUSINESS AND PROPERTIES

The Initial Hotels                                                              

         Set  forth  below is  certain  descriptive  information  regarding  the
Initial  Hotels,  each of which is currently  managed by a Hersha  Affiliate and
owned  by a  partnership  in  which  one or more of the  Hersha  Affiliates  own
interests.                                                                      

Holiday Inn Express (Riverfront), Harrisburg, Pennsylvania    

         Description.   The   Holiday  Inn   Express   Riverfront,   Harrisburg,
Pennsylvania,  is located  at 525 South  Front  Street.  The hotel was opened in
1968,  was purchased in 1984 and was fully  renovated in 1996. It is a 117-room,
limited  service  hotel  with  non-smoking  units  available  with  an  adjacent
restaurant and lounge.  Amenities  include a fitness center and adjacent banquet
and meeting facilities with a 200-person capacity.                              

         Guest Profile and Local  Competition.  Approximately 25% of the hotel's
business is related to  business  from the  Commonwealth  of  Pennsylvania.  The
remainder of the hotel's business consists of tourists,  overnight travelers and
people visiting local residents.  The Company considers its primary  competition
to be the Ramada Hotel on Second Street in Harrisburg, Pennsylvania.            

Holiday Inn Express, Hershey, Pennsylvania                    

         Description. The Holiday Inn Express, Hershey,  Pennsylvania is located
on Walton  Avenue,  one and one half miles from Hershey Park.  The hotel,  which
opened in October 1997, is an 85-room limited service hotel.  Amenities  include
an indoor pool,  hot tub,  fitness  center,  business  service  center,  meeting
facility, complimentary continental breakfast and 24-hour coffee. All rooms have
one king bed or two queen beds and some rooms have refrigerators,  coffee makers
and microwaves.                                                                 

         Guest Profile and Local  Competition.  Approximately 30% of the hotel's
business is related to  commercial  activity  from local  business.  The hotel's
group  business,  which  accounts  for  approximately  5% of  its  business,  is
generated from area  institutions,  local weddings and local social and sporting
events.  The  remainder of the hotel's  business  consists of transient  guests,
visitors to area  residents  and demand  generated  by the hotel's  proximity to
Hershey Park.  The Company  considers its primary  competition to be the Comfort
Inn in Hershey, Pennsylvania.                                                   

Holiday Inn Express, New Columbia, Pennsylvania               

         Description.  The Holiday Inn Express,  New Columbia,  Pennsylvania  is
located at the  intersection  of  Interstate  80 and Route 15. The hotel,  which
opened in December 1997, is an 81-room limited service hotel.  Amenities include
an  indoor  pool,  hot tub,  fitness  center,  meeting  facility,  complimentary
continental  breakfast  and 24-hour  coffee.  All rooms have one king bed or two
queen beds, some Jacuzzi suites are available and some rooms have refrigerators,
coffee  makers  and  microwaves.  The  Holiday  Inn  Express  in  New  Columbia,
Pennsylvania  was ranked  number one in its region for GSTS (Guest  Satisfaction
Tracking  System),  for February and March of 1998.  This award  recognizes  the
Holiday Inn  Express in New  Columbia  as the leader in guest  satisfaction  and
product  service out of 32 other  Holiday  Inns and Holiday  Inns Express in the
Eastern region.                                                                 

Guest Profile and Local Competition. Approximately 80% of the hotel's 
business is related to commercial activity from local business. As a result of  
its proximity to ski resorts and nearby                                         

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tourist attractions,  recreational  travelers generate  approximately 10% of the
hotel's  business.  The remainder of the hotel's business  consists of overnight
travelers  and visitors to area  residents.  The Company  considers  its primary
competition to be the Comfort Inn in New Columbia, Pennsylvania.                

Hampton Inn, Carlisle, Pennsylvania                           

         Description. The Hampton Inn, Carlisle,  Pennsylvania is located at the
intersection of Route 11 and exit 16 off the Pennsylvania  Turnpike.  The hotel,
which opened in June 1997, is a 95-room limited service hotel. Amenities include
an indoor pool,  hot tub,  fitness  center,  meeting  facilities,  complimentary
continental  breakfast  and 24-hour  coffee.  All rooms have one king bed or two
queen beds, some Jacuzzi suites are available and some rooms have refrigerators,
coffee makers and microwaves.                                                   

         Guest Profile and Local  Competition.  Approximately 50% of the hotel's
business is related to commercial activity from local businesses.  The remainder
of the hotel's  business  consists of  overnight  travelers  and general  demand
generated by the hotel's proximity to the Carlisle  Fairgrounds and the Army War
College.  The Company considers its primary competition to be the Holiday Inn in
Carlisle, Pennsylvania.                                                         

Hampton Inn, Selinsgrove, Pennsylvania                        

         Description.  The Hampton Inn, Selinsgrove,  Pennsylvania is located on
Pennsylvania  Routes 11 and 15. The hotel,  which opened in September 1996, is a
75-room,  three story, limited service hotel.  Amenities include an indoor pool,
hot tub, fitness center, meeting facilities, complimentary continental breakfast
and 24-hour coffee.  All rooms have one king bed or two queen beds, some Jacuzzi
suites  are  available  and some  rooms have  refrigerators,  coffee  makers and
microwaves.  The Hampton Inn in  Selinsgrove  was recently  named one of the top
hotels in the entire  Hampton Inn system,  receiving the hotel chain's Circle of
Excellence Award. The award recognizes  superior quality and guest  satisfaction
and is the highest distinction a Hampton Inn hotel can receive.                 

         Guest Profile and Local  Competition.  Approximately 80% of the hotel's
business is related to commercial activity from local businesses.  The remainder
of the hotel's  business  consists of pleasure  travelers,  transient guests and
demand  generated  by the hotel's  proximity to area  universities  and Knoebels
Amusement  Park.  The Company  considers its primary  competition to be the Best
Western near Selinsgrove, Pennsylvania.                                         

   Holiday Inn Hotel and Conference Center, Harrisburg, Pennsylvania

         Description.  The Holiday Inn Hotel and Conference Center,  Harrisburg,
Pennsylvania is located at the intersection of the Pennsylvania Turnpike exit 18
and Interstate 83, ten minutes from downtown,  Harrisburg  International Airport
and Hershey  Park.  The hotel opened in 1970 as a Sheraton Inn and was converted
to a Ramada Inn in 1984. It was completely  renovated and converted to a Holiday
Inn in  September  1995.  This  hotel has 196 deluxe  guest  units and is a full
service  hotel,  including a full  service  restaurant  as well as a  nightclub.
Amenities  include an indoor tropical  courtyard with a pool and Jacuzzi as well
as a banquet and conference facility for up to 700 people.                      

         Guest Profile and Local  Competition.  Approximately 40% of the hotel's
business is related to commercial activity from local businesses.  The remainder
of the hotel's  business  consists of overnight  travelers  visiting Hershey and
Harrisburg.  The Company  considers its primary  competition  to be the Radisson
Penn Harris in Camp Hill, Pennsylvania.                                         

Holiday Inn, Milesburg, Pennsylvania                          

         Description. The Holiday Inn, Milesburg/State College,  Pennsylvania is
located at Exit 23, I-80 and US 50 North. The hotel opened in 1977 as a Sheraton
and was  completely  renovated in 1992. In 1996,  the hotel was converted into a
Holiday Inn. It is a 118-room, full service hotel with a full service restaurant
and cocktail  lounge.  Amenities  include an outdoor pool as well as banquet and
meeting facilities for 220 people.                                              

         Guest Profile and Local  Competition.  Approximately 20% of the hotel's
business is related to  commercial  activity  from local  businesses  and demand
generated  by  local  businesses.  Approximately  80%  of the  hotel's  business
consists of leisure travelers visiting the many tourist attractions around State
College and I-80. The Company  considers its primary  competition to be the Best
Western in Milesburg, Pennsylvania.                                             

Comfort Inn, Denver, Pennsylvania                             

         Description.  The Comfort Inn, Denver,  Pennsylvania is located at 2015
North Reading Road.  This 45-room  limited service hotel was constructed in 1990
and  renovated  in 1995.  All  rooms  have one  king bed or two  queen  beds and
non-smoking units are available.  Amenities  include  hairdryers in all rooms, a
fitness center and a complimentary continental breakfast.                       

         Guest Profile and Local  Competition.  Approximately 75% of the hotel's
business is comprised of leisure  travelers and transient  guests related to its
location at the crossroads of two major  interstate  highways.  The remainder of
the hotel's  business is due to commercial  activity from local  businesses  and
people visiting area residents. The Company considers its primary competition to
be the Holiday Inn in Denver, Pennsylvania.                                     

Comfort Inn, Harrisburg, Pennsylvania                         

         Description.  The Comfort Inn,  Harrisburg,  Pennsylvania  is located 8
miles north of Hershey,  Pennsylvania  at 7744  Linglestown  Road off exit 27 of
Interstate  81. The hotel opened in May 1998. It is an 81-room  limited  service
hotel.  Amenities  include an indoor  pool,  hot tub,  fitness  center,  meeting
facilities, complimentary continental breakfast and 24-hour                     

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coffee.  All rooms have one king bed or two queen beds and some                 
Jacuzzi suites are available.                                                   

         Guest Profile and Local  Competition.  Approximately 25% of the hotel's
business is related to commercial  activity from local  businesses.  The hotel's
group  business,  which  accounts  for  approximately  5% of  its  business,  is
generated from area  institutions,  local weddings and local social and sporting
events.  The  remainder  of the  hotel's  business  consists  of  transient  and
recreational travelers generated by its proximity to Hershey,  Pennsylvania. The
Company  considers its primary  competition to be the Holiday Inn in Grantville,
Pennsylvania.                                                                   

Clarion Suites, Philadelphia, Pennsylvania                    

         Description. The Clarion Suites, Philadelphia,  Pennsylvania is located
at 1010 Race Street, one half block from the newly-built Philadelphia convention
center and six blocks  from the  Independence  Hall  historic  district  and the
Liberty  Bell.  The hotel is  located in the  historic  Bentwood  Rocking  Chair
Company  building,  which was  constructed  in 1896 and  converted  to a Quality
Suites hotel in the 1980s.  The hotel was  purchased by a Hersha  Affiliate as a
Ramada  Suites in 1995 and  substantially  rehabilitated.  The Hersha  Affiliate
later converted the hotel to a Clarion Suites. The hotel has 96 executive suites
with fully-equipped kitchens and an eight-story interior corridor with Victorian
style  architecture.  The hotel has a lounge  featuring  light fare and a comedy
cabaret.  Amenities include two large meeting rooms,  boardrooms, a fitness room
and a complimentary continental breakfast.                                      

         Guest Profile and Local  Competition.  Approximately 20% of the hotel's
business is comprised of leisure  travelers and transient  guests related to its
close proximity to the historic district.  The remainder of the hotel's business
is due to commercial  activity from local  businesses  and people  visiting area
residents.  The Company considers its primary competition to be all Center City,
Philadelphia hotels.                                                            

         The following table sets forth certain information with respect to each
Initial Hotel:                                                                  

                                                        [Enlarge/Download Table]


                                                            Year Ended December 31,         
                                             1997     1996         1995         1994   1993 
                                             ----     ----         ----         ----   ---- 
                                                                                            

Holiday Inn Express - Harrisburg, PA                                                        
   Occupancy                                 56.4%   40.7%        43.2%        44.9%   46.2%
   ADR                                      $56.33  $52.77       $48.05       $48.34  $45.72
   REVPAR                                   $31.78  $21.50       $20.74       $21.70  $21.13

Holiday Inn Express - Hershey, PA (1)                                                       
   Occupancy                                 38.8%                                          
   ADR                                      $75.62                                          
   REVPAR                                   $29.35                                          

Holiday Inn Express - New Columbia, PA (2)                                                  
   Occupancy                                  9.0%                                          
   ADR                                      $59.68                                          
   REVPAR                                    $5.39                                          

Hampton Inn - Carlisle, PA (3)                                                              
   Occupancy                                 53.5%                                          
   ADR                                      $65.33                                          
   REVPAR                                   $34.93                                          

Hampton Inn - Selinsgrove, PA (4)                                                           
   Occupancy                                 71.9%   50.1%                                  
   ADR                                      $65.29  $60.76                                  
   REVPAR                                   $46.96  $30.43                                  

Holiday Inn Hotel and Conference Center -                                                   
 Harrisburg, PA (5)                                                                         
   Occupancy                                 63.3%   58.9%        46.2%                     
   ADR                                      $68.22  $61.36       $56.97                     
   REVPAR                                   $43.17  $36.13       $26.31                     

Holiday Inn - Milesburg, PA                                                                 
   Occupancy                                 52.0%   48.4%        51.0%        55.3%   56.9%
   ADR                                      $56.07  $52.31       $51.59       $48.64  $42.27
   REVPAR                                   $29.13  $25.31       $26.29       $26.88  $24.02

Comfort Inn - Denver, PA                                                                    
   Occupancy                                 54.7%   53.5%        60.4%        60.4%   59.6%
   ADR                                      $73.26  $61.04       $50.68       $49.72  $48.79
   REVPAR                                   $40.08  $32.63       $30.60       $30.01  $29.06

Comfort Inn - Harrisburg, PA (6)                                                            
   Occupancy                                                                                
   ADR                                                                                      
   REVPAR                                                                                   

Clarion Suites, Philadelphia, PA                                                            
   Occupancy                                 73.7%   60.2%                                  
   ADR                                      $91.02  $86.10                                  
   REVPAR                                   $67.09  $51.83                                  
---------------                                                                             

(1)  This  hotel  opened in October  1997 and,  thus,  the data shown  represent
approximately three months of operations.                             
(2)  This hotel  opened in December  1997 and,  thus,  the data shown  represent
approximately one month of operations.                                
(3)  This  hotel  opened  in June  1997  and,  thus,  the data  shown  represent
approximately seven months of operations.                             
(4)  This hotel  opened in  September  1996 and,  thus,  the data shown for 1996
represent approximately four months of operations.                    
(5)  This hotel was converted to a                                              
     Holiday Inn in September  1995 and, thus, the data shown for 1995 represent
approximately four months of operations.                              
(6)  This hotel opened in May 1998 and, thus, there are no data shown.          

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The Percentage Leases                                                           

         The  following  summary is qualified in its entirety by the  Percentage
Leases,  the form of which  has been  filed as an  exhibit  to the  Registration
Statement of which this Prospectus is a part.                                   

         The  Initial  Hotels  will be  operated  by the Lessee  pursuant to the
Percentage  Leases.  The Company  intends to lease its future acquired hotels to
operators, including both the Lessee and operators unaffiliated with the Lessee.
Future  leases  with the Lessee  generally  will be  similar  to the  Percentage
Leases. Future leases with operators unaffiliated with the Lessee may or may not
be similar to the Percentage  Leases.  The Trustees will negotiate the terms and
provisions of each future lease,  depending on the purchase price paid, economic
conditions and other factors deemed relevant at the time.                       

         Percentage  Lease  Terms.  Each  Percentage  Lease will have an initial
non-cancelable term of five years. All, but not less than all, of the Percentage
Leases for the Initial  Hotels may be extended for an additional  five-year term
at the Lessee's option.                                                         
 At the end of the first extended term,  the Lessee,  at its option,  may extend
some or all of the  Percentage  Leases for the Initial  Hotels for an additional
five-year term. The Percentage  Leases are subject to earlier  termination  upon
the occurrence of defaults thereunder and certain other events described therein
(including,  particularly,  the provisions  described  herein under "--Damage to
Hotels,"  "--Condemnation  of Hotel" and  "--Termination of Percentage Leases on
Disposition of the Initial Hotels").                                            

         Amounts  Payable Under the Percentage  Leases.  The  Percentage  Leases
generally  provide for the Lessee to pay in each calendar quarter the greater of
the Base Rent or Percentage  Rent. The Percentage Rent for each Initial Hotel is
comprised  of (i) a  percentage  of room  revenues up to the  Threshold,  (ii) a
percentage  of room  revenues  in  excess  of the  Threshold  but less  than the
Incentive  Threshold,  (iii) a  percentage  of room  revenues  in  excess of the
Incentive  Threshold and (iv) a percentage of revenues other than room revenues.
The  Incentive  Threshold  is designed to provide an  incentive to the Lessee to
generate higher revenues at each hotel.  Until the First  Adjustment Date or the
Second Adjustment Date, as applicable, the rent on the Newly- Renovated Hotels  
and the Newly-  Developed Hotels will be the Initial Fixed Rents applicable to  
those hotels.  After the First Adjustment Date or the Second Adjustment Date, as
applicable,  rent will be computed with respect to the Newly- Renovated Hotels  
and  the  Newly-  Developed  Hotels  based  on the  percentage  rent  formulas  
described  herein.  The  Lessee  also will be  obligated  to pay  certain  other
amounts,  including  interest  accrued  on any late  payments  or  charges  (the
"Additional Charges"). Rent is payable quarterly in arrears.                    

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         The  following  table  sets  forth  (i)  the  Initial  Fixed  Rent,  if
applicable, (i) the annual Base Rent and (ii) the Percentage Rent formulas:     

                                                        [Enlarge/Download Table]


                                   Initial           Annual              Percentage                                          
       Initial Hotel            Fixed Rent(1)     Base Rent(1)          Rent Formula                                         
       -------------            -------------     ------------          ------------                                         
                                                                                                                             
Newly-Developed                                                                                                              
Holiday Inn Express                                                                                                          
 Hershey, PA................   $794,686        $364,000         42.1% of room revenue up to $1,479,523, plus 65.0% of room   
                                                                revenue in excess of $1,479,523 but less than $1,740,615,    
                                                                plus 29.0% of room revenue in excess of $1,740,615, plus     
                                                                8.0% of all non-room revenue.                                

New Columbia, PA...........     498,198         227,500         46.7%  of room revenue up to                                 
                                                                $850,986, plus 65.0%  of room revenue in excess of $850,986  
                                                                but  less than $1,001,160, plus 29.0%  of room revenue in    
                                                                excess of $1,001,160, plus 8.0% of    all non-room revenue.  

Hampton Inn:                                                                                                                 
 Carlisle, PA...............   699,062         325,000          42.3% of room revenue up to $1,293,906, plus 65.0% of room   
                                                                revenue in excess of $1,293,906 but less than $1,522,242,    
                                                                plus 29.0% of room revenue in excess of $1,522,242, plus     
                                                                8.0% of all non-room revenue.                                

Comfort Inn:                                                                                                                 
 Harrisburg, PA.............   514,171         234,000          40.7% of room revenue up to $980,050, plus 65.0% of room     
                                                                revenue in excess of $980,050 but less than $1,153,000,      
                                                                plus 29.0% of room revenue in excess of $1,153,000, plus     
                                                                8.0% of all non-room revenue.                                

Newly-Renovated Holiday Inn Express:                                                                                         
Harrisburg, PA.............   504,406          195,000          31.0% of room revenue up to $1,153,655, plus 65.0% of room   
                                                                revenue in excess of $1,153,655 but less than $1,357,241,    
                                                                plus 29.0% of room revenue in excess of $1,357,241, plus     
                                                                8.0% of all non-room revenue. Holiday Inn:                   

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                               524,750          214,500         36.1% of room revenue up to $1,065,960, plus 65.0% of room   
                                                                revenue in excess of $1,065,960 but less than $1,254,070,    
                                                                plus 31.0% of room revenue in excess of $1,254,070, plus 8.0%
                                                                of all non-room revenue.                                     
Comfort Inn:                                                                                                                 
 Denver, PA.................   262,234         112,288          35.4% of room revenue up to $559,542, plus 65.0% of room     
                                                                revenue in excess of $559,542 but less than $658,285, plus   
                                                                29.0% of room revenue in excess of $658,285, plus 8.0% of all
                                                                non-room revenue.                                            

Stabilized                                                                                                                   
Holiday Inn Hotel and Conference Center:                                                                                     
 Harrisburg, PA.............   n/a             675,921          44.3% of room revenue up to $2,638,247, plus 65.0% of room   
                                                                revenue in excess of $2,638,247 but less than $3,103,820,    
                                                                plus 31.0% of room revenue in excess of $3,103,820, plus 8.0%
                                                                of all non-room revenue.                                     

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Hampton Inn:                                                                                                                 
 Selinsgrove, PA............   n/a             308,469          49.0% of room revenue up to $1,081,152, plus 65.0% of room   
                                                                revenue in excess of $1,081,152 but less than $1,271,943,    
                                                                plus 29.0% of room revenue in excess of $1,271,943, plus 8.0%
                                                                of all non-room revenue.                                     
Clarion Suites:                                                                                                              
 Philadelphia, PA...........   n/a             418,593          36.1% of room revenue up to $1,998,097, plus 65.0% of room   
                                                                revenue in excess of $1,998,097 but less than $2,350,702,    
                                                                plus 29.0% of room revenue in excess of $2,350,702, plus 8.0%
                                                                of all non-room revenue.                                     


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

(1)      The Initial Fixed Rent  or Base Rent, as applicable, will              
accrue pro rata during each quarter of each lease year.  The  
Lessee, however, will pay the Initial Fixed Rent or the       
Base Rent, as applicable, for each calendar quarter in each   
lease year based on the ratio of budgeted gross revenues for  
such calendar quarter to budgeted gross revenues for such     
lease year.                                                   

         Other than real estate and personal  property taxes,  ground lease rent
(where applicable),  the cost of certain furniture,  fixtures and equipment, and
certain capital expenditures,  and property and casualty insurance premiums, all
of which are  obligations  of the Company,  the  Percentage  Leases  require the
Lessee to pay the operating expenses of the Initial Hotels (including  insurance
other than  property  and  casualty  insurance,  all costs and  expenses and all
utility and other  charges  incurred  in the  operation  of the Initial  Hotels)
during the term of the Percentage Leases. The Percentage Leases also provide for
rent  reductions  and  abatements  in  certain  cases in the  event of damage or
destruction  or a  partial  taking  of any  Initial  Hotel  as  described  under
"--Damage to Hotels" and "--Condemnation of Hotel."                             

         Maintenance and Modifications. Under the Percentage Leases, the Company
will make  available  to the Lessee for the  replacement  and  refurbishment  of
furniture,  fixtures and equipment and other capital improvements  determined in
accordance with generally accepted accounting  principles in the Initial Hotels,
when and as deemed  necessary  by the Lessee,  an amount equal to 4% (6% for the
Holiday Inn Hotel and  Conference  Center,  Harrisburg,  PA and the Holiday Inn,
Milesburg,  PA) of  gross  revenues  per  quarter  on a  cumulative  basis.  The
Company's  obligation  will be carried forward to the extent that the Lessee has
not expended such amount, and any unexpended amounts will remain the property of
the Company upon termination of the Percentage  Leases.  Other than as described
above,  the Lessee is responsible  for all repair and maintenance of the Initial
Hotels and any capital improvements to the Initial Hotels.                      

         The Lessee, at its expense, may make non-capital and capital additions,
modifications  or improvements to the Initial Hotels,  provided that such action
does not significantly  alter the character or purposes of the Initial Hotels or
significantly  detract from the value or operating  efficiencies  of the Initial
Hotels. All such alterations,  replacements and improvements shall be subject to
all the terms and  provisions  of the  Percentage  Leases  and will  become  the
property of the Company upon termination of the Percentage  Leases.  The Company
will own substantially  all personal property (other than inventory,  linens and
other nondepreciable personal property) not affixed to, or deemed a part of, the
real estate or  improvements  on the Initial  Hotels,  except to the extent that
ownership  of such  personal  property  would cause the Rent under a  Percentage
Lease  not to  qualify  as "rents  from  real  property"  for REIT  income  test
purposes.    See   "Federal    Income   Tax    Consequences--Requirements    for
Qualification--Income Tests."                                                   

         Insurance and Property Taxes.  The Company is responsible for paying or
reimbursing  the  Lessee  for real  estate and  personal  property  taxes on the
Initial Hotels (except to the extent that personal property  associated with the
Initial  Hotels is owned by the  Lessee),  and all  premiums  for  property  and
casualty insurance. The Lessee is required to pay for all other insurance on the
Initial  Hotels,  including  comprehensive  general public  liability,  workers'
compensation  and other  insurance  appropriate  and  customary  for  properties
similar to the  Initial  Hotels and naming the  Company as an  additional  named
insured.                                                                        

Assignment and Subleasing.  The Lessee will not be permitted  
to sublet all or any part of the Initial Hotels or assign its                   
interest under any of the Percentage Leases without the prior                   
written consent of the Company.  No assignment or subletting will               

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release the Lessee from any of its obligations under the                        
Percentage Leases.                                                              

         Damage to  Hotels.  In the event of  damage  to or  destruction  of any
Initial Hotel covered by insurance that renders the Initial Hotel unsuitable for
its primary  intended use, the Percentage Lease will terminate as of the date of
the  casualty,  neither  the  Company  nor the  Lessee  shall  have any  further
liability under the Percentage  Lease, and the Company will retain all insurance
proceeds.  In the event of damage to or destruction of any Initial Hotel covered
by insurance  that does not render the Initial Hotel  unsuitable for its primary
intended use, the Company (or, at the election of the Company,  the Lessee) will
restore the Initial  Hotel,  the Percentage  Lease will not  terminate,  and the
Company will retain all insurance proceeds (if, however, the Lessee restores the
Initial  Hotel,  the  insurance  proceeds will be paid out by the Company to the
Lessee).  If the cost of  restoration  exceeds the amount of insurance  proceeds
received by the Company, the Company will contribute any excess amounts prior to
requiring the Lessee to commence  work. In the event of damage to or destruction
of any  Initial  Hotel not covered by  insurance,  whether or not such damage or
destruction  renders the Initial Hotel  unsuitable for its primary intended use,
the Company at its option  either (i) will restore the Initial Hotel at its cost
and expense and the  Percentage  Lease will not terminate or (ii) will terminate
the  Percentage  Lease and neither  the  Company  nor the Lessee  shall have any
further  liability  under  the  Percentage  Lease.  Any  damage  or  destruction
notwithstanding,  and provided the Percentage Lease has not been terminated, the
Lessee's  obligation  to  pay  Rent  will  remain  unabated  by  any  damage  or
destruction that does not result in a reduction of gross revenues at the Initial
Hotel.  If any  damage or  destruction  results  in a  reduction  of such  gross
revenues,  the Company will receive all loss of income  insurance and the Lessee
will not have an  obligation  to pay Rent in excess of the amount of  Percentage
Rent, if any,  realizable from gross revenues  generated by the operation of the
Initial Hotel during the existence of such damage or destruction.               

         Condemnation  of  Hotel.  In the event of a total  condemnation  of any
Initial  Hotel,  or in the event of a partial  taking  that  renders the Initial
Hotel  unsuitable for its primary intended use, either the Company or the Lessee
will have the option to terminate the relevant  Percentage  Lease as of the date
of taking,  and the Company  and the Lessee will be entitled to their  shares of
the  condemnation  award in accordance  with the  provisions  of the  Percentage
Lease.  In the event of a partial  taking that does not render the Initial Hotel
unsuitable  for its primary  intended  use,  the Company  (or, at the  Company's
option,  the Lessee) will restore the untaken  portion of the Initial Hotel to a
complete  architectural  unit and the Company shall  contribute the cost of such
restoration in accordance  with the provisions of the Percentage  Lease.  In the
event  of  a  partial  taking,   the  Base  Rent  will  be  abated  taking  into
consideration,  among other factors,  the number of usable rooms,  the amount of
square footage, or the revenues affected by the partial taking.                 

Events of Default.  Events of Default under the Percentage    
Leases include, among others, the following:                                    

                (i) the failure by the Lessee to pay  Base Rent,  Percentage
         Rent (or, Initial Fixed Rent, as applicable) or Additional Charges when
         due and the  continuation of such failure for a period of 10 days after
         receipt  by the  Lessee of notice  from the  Company  that the same has
         become due and payable, provided that the Company shall not be required
         to give any such  notice more than twice in any lease year and that any
         third or  subsequent  failure by the Lessee  during  such lease year to
      make any payment of  Base Rent or Percentage Rent (or, Initial Fixed
         Rent, as applicable) on the date the same becomes due and payable shall
constitute an immediate Event of Default;                     

                  (ii) the failure by the Lessee to observe or perform any other
         term of a Percentage  Lease and the  continuation of such failure for a
         period of 30 days  after  receipt  by the  Lessee  of  notice  from the
         Company thereof,  unless:  (A) such failure cannot be cured within such
         period and the Lessee commences appropriate action to cure such failure
         within  such 30 day period and  thereafter  acts,  with  diligence,  to
         correct such failure  within such time as is necessary,  provided in no
         event shall such period  exceed 120 days,  which  120-day  period shall
         cease to run during any period that a cure of such failure is prevented
         by any of certain  "unavoidable  delays" and shall resume  running upon
         the  cessation of such  "unavoidable  delay;" and (B) such failure does
         not result in a notice or  declaration  of default  under any  material
         contract or agreement to which the Company or any affiliate  thereof is
a party or by which any of its assets are bound;              

                  (iii) if the Lessee  shall file a petition  in  bankruptcy  or
         reorganization  pursuant to any federal or state  bankruptcy law or any
         similar  federal or state law,  or shall be  adjudicated  a bankrupt or
         shall make an assignment for the benefit of creditors or shall admit in
         writing its inability to pay its debts generally as they become due, or
         if a petition or answer  proposing the  adjudication of the Lessee as a
         bankrupt  or its  reorganization  pursuant  to  any  federal  or  state
         bankruptcy  law or any  similar  federal or state law shall be filed in
         any court and the  Lessee  shall be  adjudicated  a  bankrupt  and such
         adjudication shall not be vacated or set aside or stayed within 60 days
         after the entry of an order in respect thereof, or if a receiver of the
         Lessee or of the whole or substantially all of the assets of the Lessee
         shall be  appointed in any  proceeding  brought by the Lessee or if any
         such  receiver,  trustee  or  liquidator  shall  be  appointed  in  any
         proceeding  brought  against the Lessee and shall not be vacated or set
aside or stayed within 60 days after such appointment;        

                  (iv) if the  Lessee  is  liquidated  or  dissolved,  or begins
proceedings toward such liquidation or dissolution,           

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or in any manner ceases to do business or permits the sale    
or divestiture of substantially all of its assets;            

                  (v) if the estate or interest of the Lessee in the  Percentage
         Lease or any part thereof is voluntarily or involuntarily  transferred,
         assigned, conveyed, levied upon or attached in any proceeding (for this
         purpose, a change in control of the Lessee constitutes an assignment of
the lease);                                                   

                  (vi) if the Lessee voluntarily  discontinues operations of any
         Initial   Hotel   except  as  a  result  of  damage,   destruction   or
condemnation;                                                 

                  (vii) if the  Franchise  License  with  respect  to an Initial
         Hotel is  terminated  by the  franchisor  as a result of any  action or
         failure to act by the Lessee or its  agents,  other than the failure to
         complete  improvements required by a franchisor because the Partnership
fails to pay the costs of such improvements; or               

                  (viii) the  occurrence of an Event of Default occurs under any
other Percentage Lease between the Company and the Lessee.    

         If an Event of Default occurs and continues beyond any curative period,
the Company will have the option of terminating the Percentage  Lease and any or
all other Percentage  Leases by giving the Lessee 10 days' written notice of the
date for termination of the Percentage  Leases and, unless such Event of Default
is cured prior to the termination date set forth in such notice,  the Percentage
Leases shall  terminate on the date  specified in the  Company's  notice and the
Lessee shall be required to surrender possession of the affected Initial Hotel. 

         Termination of Percentage  Leases on Disposition of the Initial Hotels.
In the event the Company enters into an agreement to sell or otherwise  transfer
an Initial Hotel to a third party,  the Company will have the right to terminate
the  Percentage  Lease with respect to such  Initial  Hotel if within six months
after the  closing of such sale it either  (i) pays the  Lessee the fair  market
value of the Lessee's leasehold interest in the remaining term of the Percentage
Lease to be  terminated,  or (ii)  offers  to lease  to the  Lessee  one or more
substitute hotels on terms that would create a leasehold interest in such hotels
with a fair market  value  equal to or  exceeding  the fair market  value of the
Lessee's  remaining   leasehold  interest  under  the  Percentage  Lease  to  be
terminated.                                                                     

Franchise License.  The Lessee will be the licensee under     
the Franchise Licenses on the Initial Hotels.  See "Business and                
Properties--Franchise Licenses."                                                

         Breach by the Company. Upon notice from the Lessee that the Company has
breached the Lease,  the Company will have 30 days to cure the breach or proceed
to cure the  breach,  which  period  may be  extended  in the  event of  certain
specified, unavoidable delays.                                                  

         Inventory.  All  inventory  required  in the  operation  of the Initial
Hotels will be  purchased  and owned by the Lessee at its  expense.  The Company
will have the option to purchase all inventory  related to a particular  Initial
Hotel at fair market value upon  termination  of the  Percentage  Lease for that
Initial Hotel.                                                                  

Franchise Licenses                                                              

         Holiday  Inn  Express and  Holiday  Inn are  registered  trademarks  of
Holiday Hospitality Corporation, Hampton Inn is a registered trademark of Promus
Hotels,  and Comfort Inn and Clarion Suites are registered  Trademarks of Choice
Hotels.  The Company  expects that the registered  owners of the trademarks will
approve the change of the Franchise  Licenses to the Lessee upon  acquisition of
the Initial Hotels by the  Partnership and will confirm that with respect to the
Initial Hotels the owner thereof is a licensee in good standing.                

         The Company  anticipates that most of the additional hotels in which it
invests will be operated under Franchise Licenses. The Company believes that the
public's  perception  of quality  associated  with a franchisor  is an important
feature in the operation of a hotel.  Franchisors  provide a variety of benefits
for  franchisees,  which  include  national  advertising,  publicity  and  other
marketing programs designed to increase brand awareness,  training of personnel,
continuous review of quality standards and centralized reservation systems.     

         The  Franchise   Licenses   generally   specify   certain   management,
operational,  recordkeeping,  accounting,  reporting and marketing standards and
procedures  with  which the  franchisee  must  comply.  The  Franchise  Licenses
obligate the Lessee to comply with the  franchisors'  standards and requirements
with respect to training of operational personnel, safety, maintaining specified
insurance,  the types of services and products  ancillary to guest room services
that may be provided by the Lessee,  display of signage,  and the type,  quality
and age of furniture,  fixtures and equipment  included in guest rooms,  lobbies
and other common areas and to pay the franchise fees described below.           

         The following  table sets forth certain  information in connection with
the Franchise Licenses:                                                         

                                                        [Enlarge/Download Table]


                     Hotel                     Effective Date  Expiration Date      Franchise Fee(1)
                     -----                     --------------  ---------------      ----------------
                                                                                                    
Holiday Inn Express, Harrisburg, PA       May 2, 1996          May 2, 2006                  8.00%   
Holiday Inn  Express, Hershey, PA         September 30, 1997   September 30, 2007           8.00%   
Holiday Inn Express, New Columbia, PA     December 3, 1997     December 3, 2007             8.00%   
Holiday Inn, Milesburg, PA                February 25, 1997    February 25, 2007            8.00%   
Holiday Inn Hotel and Conference Center,                                                            
Harrisburg, PA                            September 29, 1995   September 29, 2005           7.50%   

Hampton Inn, Carlisle, PA                 June 16, 1997        June  15, 2017               8.00%   
Hampton Inn, Selinsgrove, PA              September 12, 1996   September 11,  2016          8.00%   

Comfort Inn, Denver, PA                   June 11, 1996        June 11, 2016                8.85%   
Comfort Inn, Harrisburg, PA               May 15, 1998         May 15, 2018                 8.85%   
Clarion Suites, Philadelphia, PA          August 18, 1995      August 18, 2015              5.00%   


(1)      Percentage of room revenues payable to the franchisors.                

         HOLIDAY INN EXPRESS(R) AND HOLIDAY INN(R) ARE REGISTERED  TRADEMARKS OF
HOLIDAY  HOSPITALITY  CORPORATION.   HOLIDAY  HOSPITALITY  CORPORATION  HAS  NOT
ENDORSED OR APPROVED THE  OFFERING.  A GRANT OF A HOLIDAY INN EXPRESS OR HOLIDAY
INN FRANCHISE  LICENSE FOR CERTAIN OF THE INITIAL HOTELS IS NOT INTENDED AS, AND
SHOULD NOT BE INTERPRETED  AS, AN EXPRESS OR IMPLIED  APPROVAL OR ENDORSEMENT BY
HOLIDAY  HOSPITALITY  CORPORATION  (OR ANY OF ITS  AFFILIATES,  SUBSIDIARIES  OR
DIVISIONS) OF THE COMPANY, THE PARTNERSHIP OR THE PRIORITY COMMON SHARES OFFERED
HEREBY.                                                                         

         HAMPTON  INN(R) IS A  REGISTERED  TRADEMARK  OF PROMUS  HOTELS.  PROMUS
HOTELS HAS NOT  ENDORSED  OR  APPROVED  THE  OFFERING.  A GRANT OF A HAMPTON INN
FRANCHISE  LICENSE  FOR CERTAIN OF THE INITIAL  HOTELS IS NOT  INTENDED  AS, AND
SHOULD NOT BE INTERPRETED  AS, AN EXPRESS OR IMPLIED  APPROVAL OR ENDORSEMENT BY
PROMUS  HOTELS (OR ANY OF ITS  AFFILIATES,  SUBSIDIARIES  OR  DIVISIONS)  OF THE
COMPANY, THE PARTNERSHIP OR THE PRIORITY COMMON SHARES OFFERED HEREBY.          

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         COMFORT  INN(R) AND CLARION  SUITES(R)  ARE  REGISTERED  TRADEMARKS  OF
CHOICE HOTELS  INTERNATIONAL.  CHOICE HOTELS  INTERNATIONAL  HAS NOT ENDORSED OR
APPROVED THE OFFERING. A GRANT OF A COMFORT INN FRANCHISE LICENSE FOR CERTAIN OF
THE  INITIAL  HOTEL IS NOT  INTENDED  AS, AND SHOULD NOT BE  INTERPRETED  AS, AN
EXPRESS OR IMPLIED  APPROVAL OR ENDORSEMENT BY CHOICE HOTELS  INTERNATIONAL  (OR
ANY  OF  ITS  AFFILIATES,   SUBSIDIARIES  OR  DIVISIONS)  OF  THE  COMPANY,  THE
PARTNERSHIP OR THE PRIORITY COMMON SHARES OFFERED HEREBY.                       

Operating Practices                                                             

     The Company's management recognizes the need for aggressive, market driven,
creative management given the competition in the hospitality industry. Each of  
the Initial Hotels will be managed by the Lessee under separate Percentage      
Leases with the Partnership. The Lessee intends to continue the management      
systems developed by the Hersha Affiliates. See "The Lessee."                   

Employees                                                                       

         The  Company  intends  to be  self-advised  and thus will  utilize  the
services of its officers rather than retain an advisor.  Initially,  the Company
will have no employees other than its officers.  See  "Management--Trustees  and
Executive  Officers."  The  Lessee  will  employ  approximately  350  people  in
operating the Initial Hotels on behalf of the Lessee.                           

Environmental Matters                                                           

         Under various federal,  state and local laws and regulations,  an owner
or operator of real estate may be liable for the costs of removal or remediation
of certain  hazardous  or toxic  substances  on such  property.  Such laws often
impose  such  liability  without  regard to  whether  the owner  knew of, or was
responsible for, the presence of hazardous or toxic substances.  Furthermore,  a
person that arranges for the disposal or transports  for disposal or treatment a
hazardous  substance at a property  owned by another may be liable for the costs
of removal or remediation of hazardous  substances released into the environment
at that property.  The costs of remediation or removal of such substances may be
substantial,  and the  presence of such  substances,  or the failure to promptly
remediate such substances, may adversely affect the owner's ability to sell such
real estate or to borrow  using such real estate as  collateral.  In  connection
with the  ownership  and  operation  of the Initial  Hotels,  the  Company,  the
Partnership or the Lessee may be potentially liable for any such costs.         

         Recent Phase I environmental  assessments  have been obtained on all of
the Initial  Hotels.  The Phase I  environmental  assessments  were  intended to
identify potential environmental  contamination for which the Initial Hotels may
be  responsible.  The  Phase I  environmental  assessments  included  historical
reviews of the Initial Hotels,  reviews of certain public  records,  preliminary
investigations  of the  sites  and  surrounding  properties,  screening  for the
presence of hazardous  substances,  toxic  substances  and  underground  storage
tanks,  and the  preparation  and  issuance  of a  written  report.  The Phase I
environmental  assessments  did not include  invasive  procedures,  such as soil
sampling or ground water analysis.                                              

         The  Phase  I   environmental   assessments   have  not   revealed  any
environmental  liability that the Company believes would have a material adverse
effect on the Company's  business,  assets,  results of operations or liquidity,
nor is the Company  aware of any such  liability.  Nevertheless,  it is possible
that these environmental assessments do not reveal all environmental liabilities
or that there are  material  environmental  liabilities  of which the Company is
unaware.  Moreover,  no assurances can be given that (i) future laws, ordinances
or regulations will not impose any material environmental liability, or (ii) the
current  environmental  condition of the Initial  Hotels will not be affected by
the condition of the  properties in the vicinity of the Initial  Hotels (such as
the presence of leaking underground storage tanks) or by third parties unrelated
to the Company, the Partnership or the Lessee.                                  

         The Company  believes that the Initial  Hotels are in compliance in all
material  respects with all federal,  state and local ordinances and regulations
regarding hazardous or toxic substances and other environmental matters. Neither
the Company nor, to the knowledge of the Company,  any of the current  owners of
the Initial  Hotels  have been  notified by any  governmental  authority  of any
material  noncompliance,  liability  or claim  relating  to  hazardous  or toxic
substances or other  environmental  matter in connection with any of its present
or former properties.                                                           

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Competition                                                                     

         The hotel industry is highly competitive. Each of the Initial Hotels is
located  in a  developed  area that  includes  other  hotels,  many of which are
competitive with the Initial Hotels in their locality. The number of competitive
hotels in a particular area could have a material  adverse effect on revenues of
the  Initial  Hotels or at hotels  acquired  in the future.  See  "Business  and
Properties--The Initial Hotels."                                                

         There will be competition for investment opportunities in upper-economy
and mid-scale hotels from entities organized for purposes  substantially similar
to the Company's  objectives as well as other purchasers of hotels.  The Company
will be competing for such  investment  opportunities  with entities  which have
substantially greater financial resources than the Company,  including access to
capital or better  relationships  with  franchisors,  lenders and  sellers.  The
Company's competitors may generally be able to accept more risk than the Company
can  manage  prudently  and may be able to borrow  the funds  needed to  acquire
hotels.  Competition  may  generally  reduce the number of  suitable  investment
opportunities  offered to the  Company  and  increase  the  bargaining  power of
property   owners   seeking   to   sell.   See   "Risk   Factors--Conflicts   of
Interest--Competing Hotels Owned or to be Acquired by the Hersha Affiliates."   

Insurance                                                                       

         The  Company  will  keep in force  comprehensive  insurance,  including
liability, fire, workers' compensation, extended coverage, rental loss and, when
available on reasonable commercial terms, flood and earthquake  insurance,  with
policy  specifications,  limits and deductibles  customarily carried for similar
properties. Certain types of losses, however (generally of a catastrophic nature
such as acts of war, earthquakes,  etc.), are either uninsurable or require such
substantial premiums that the cost of maintaining such insurance is economically
infeasible.  Certain  types of losses,  such as those  arising  from  subsidence
activity,  are  insurable  only  to the  extent  that  certain  standard  policy
exceptions to insurability  are waived by agreement with the insurer.  See "Risk
Factors--Real Estate Investment  Risks--Uninsured and Underinsured  Losses." The
Company  believes,  however,  that the  Properties  are  adequately  insured  in
accordance with industry standards.                                             

Depreciation                                                                    

         To the extent that the  Partnership  acquires the Initial Hotels or the
partnership  interests  in the Combined  Entities in exchange  for  Subordinated
Units, the Partnership's  initial basis in each Initial Hotel for federal income
tax purposes should be the same as the Combined  Entities' basis in such Initial
Hotel on the date of acquisition.  Although the law is not entirely  clear,  the
Partnership  intends to depreciate such  depreciable  hotel property for federal
income tax  purposes  over the same  remaining  useful  lives and under the same
methods  used by the  Combined  Entities.  The  Partnership's  tax  depreciation
deductions  will be  allocated  among the  partners  in  accordance  with  their
respective  interests  in  the  Partnership  (except  to  the  extent  that  the
Partnership is required under Code Section 704(c) to use a method for allocating
depreciation  deductions attributable to the Initial Hotels or other contributed
properties  that results in the Company  receiving a  disproportionately  larger
share  of such  deductions).  Because  the  Partnership's  initial  basis in the
Initial  Hotels will be less than the fair market  value of those  hotels on the
date of acquisition, the Company's depreciation deductions may be less than they
otherwise would have been if the Partnership had purchased the Initial Hotels or
the partnership interests in the Combined Entities entirely for cash.           

Legal Proceedings                                                               

         Neither the Company nor the  Partnership  is currently  involved in any
material litigation nor, to the Company's knowledge,  is any material litigation
currently  threatened  against  the  Company  or the  Partnership  or any of the
Initial  Hotels.  The Lessee has advised the Company  that it  currently  is not
involved in any  litigation.  The  Combined  Entities  have  represented  to the
Partnership that there is no material litigation pending,  threatened against or
affecting the Initial Hotels.                                                   

Hersha Affiliates' Hotel Assets Not Acquired By The Company                     

         The Hersha  Affiliates  own the following  hotels,  which are not being
acquired by the Company  and are not subject to the Option  Agreement:  (i) Best
Western,  Indiana,  Pennsylvania  (107)  rooms and (ii)  Comfort  Inn,  McHenry,
Maryland (76 rooms).  In addition,  the Hersha  Affiliates own land in Carlisle,
Pennsylvania,  Valley Forge, Pennsylvania and Frederick,  Maryland that could be
used for  hotel  development.  The  Hampton  Inn,  Danville,  Pennsylvania,  the
Harrisburg   Inn,   Harrisburg,   Pennsylvania,   the  Sleep  Inn,   Pittsburgh,
Pennsylvania, and the land owned by Hersha Affiliates in Carlisle,  Pennsylvania
are  subject  to  the  Option   Agreement.   See  "Certain   Relationships   and
Transactions--Option Agreement."                                                

Ground Leases                                                                   

         The land underlying the Holiday Inn Express in Harrisburg, Pennsylvania
and  the  Comfort  Inn in  Denver,  Pennsylvania  each  will  be  leased  to the
Partnership by certain Hersha  Affiliates for aggregate rent of $21,000 per year
for 99 years. See "Risk Factors--Possible  Increase in Ground Lease Payments for
Comfort Inn, Denver,  Pennsylvania." Also, a portion of the land adjacent to the
Hampton Inn, Selinsgrove,  Pennsylvania will be leased to a Hersha Affiliate for
$1 per year for 99 years.                                                       

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POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES

         The following is a discussion of the Company's policies with respect to
investment,  financing,  conflicts of interest and certain other activities that
have not been discussed elsewhere. The policies with respect to these activities
have been  determined by the Trustees and may be amended or revised from time to
time at the discretion of the Trustees without a vote of the shareholders of the
Company,  except that (i) changes in certain  policies with respect to conflicts
of interest  must be  consistent  with legal  requirements  and (ii) the Company
cannot take any action intended to terminate its qualification as a REIT without
the approval of the holders of two-thirds  of the  outstanding  Priority  Common
Shares.                                                                         

Investment Policies                                                             

         The Company's  principal  investment  policy is to acquire  hotels that
offer  the  potential  for  high  current  rates of  return  to the  Company,  a
substantial  dividend to the Company's  shareholders  and long term increases in
value.  The  Company's  business  is  focused  solely on hotels.  The  Company's
Acquisition  Policy is to acquire a hotel for which it expects to receive  rents
at least  equal to 12% of the  purchase  price  paid for the  hotel,  net of (i)
property and casualty insurance premiums, (ii) real estate and personal property
taxes, and (iii) a reserve for furniture, fixtures and equipment equal to 4% (6%
for full-service hotels) of gross revenues per quarter at the hotel. In the case
of hotels with limited operating history or that have been newly renovated,  the
Company  intends to institute a mechanism  similar to the mechanism used for the
Newly-Developed  Hotels and  Newly-Renovated  Hotels for  establishing a minimum
initial fixed rent and  adjusting  the purchase  price for each such hotel based
upon the first two years of  operating  history of such hotel  after  opening or
completion of  renovation.  The Trustees,  however,  may change the  Acquisition
Policy at any time  without the  approval  of the  Company's  shareholders.  See
"--Growth  Strategy--Acquisition  Strategy" and "Risk Factors--Growth Strategy."
The Company has not developed a policy in connection  with a limit on the number
or amount of mortgages  that may be placed on any one piece of property owned by
the Company.  Although the Company intends  primarily to acquire hotels, it also
may  participate  with other  entities  in  property  ownership,  through  joint
ventures or other types of  co-ownership.  Equity  investments may be subject to
existing mortgage  financing and other  indebtedness that may have priority over
the equity interest of the Company.                                             

         The Company  intends to lease  hotels that it acquires in the future to
operators, including both the Lessee and operators unaffiliated with the Lessee.
Future  leases  with the Lessee  generally  will be  similar  to the  Percentage
Leases. See "Business and Properties--The Percentage Leases." Future leases with
operators  unaffiliated  with  the  Lessee  may or may  not  be  similar  to the
Percentage  Leases. The Trustees will negotiate the terms and provisions of each
future lease,  depending on the purchase  price paid,  economic  conditions  and
other factors deemed relevant at the time.                                      

         While the Company will emphasize equity  investments in hotels, it may,
in its  discretion,  invest  in  mortgages  and  other  real  estate  interests,
including  securities of other REITs.  The Company may invest in  participating,
convertible  or other types of mortgages if it concludes that by doing so it may
benefit  from the cash  flow or any  appreciation  in the  value of the  subject
property.  Such  mortgages  are similar to equity  participation,  because  they
permit the lender to either participate in increasing revenues from the property
or  convert  some or all of that  mortgage  to equity  ownership  interest.  The
Company  does not  presently  intend  to  invest  in  mortgages  or real  estate
interests other than hotels.                                                    

Financing                                                                       

         The  Company's  additional  investments  in hotels may be financed,  in
whole or in part,  with  undistributed  cash,  subsequent  issuances of Priority
Common  Shares or other  securities,  or  borrowings.  The Company is  currently
pursuing with lenders the Line of Credit. A failure to obtain the Line of Credit
could adversely affect the Company's ability to finance its growth strategy. See
"Risk  Factors-Dependence  Upon External  Financing." The Debt Policy will limit
consolidated indebtedness to less than 67% of the aggregate purchase prices paid
by the Company for the hotels in which it has invested.  The Trustees,  however,
may change the Debt  Policy at any time  without the  approval of the  Company's
shareholders.   The  aggregate   purchase  prices  for  the  Initial  Hotels  is
approximately  $47.3  million.  After the  Formation  Transactions,  the Assumed
Indebtedness will be approximately $17.4 million. Because of the Debt Policy and
the amount of the Assumed Indebtedness, the success of the Company's acquisition
strategy  will  depend  primarily  on its ability to access  additional  capital
through issuances of equity  securities.  See "Risk  Factors--Risks of Leverage"
and "Management's  Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."                                   

         The  Company  will  invest  in  additional   hotels  only  as  suitable
opportunities  arise. The Company will not undertake  investments in such hotels
unless  adequate  sources of financing  are  available.  The Bylaws  require the
approval of a majority of the Trustees,  including a majority of the Independent
Trustees,  to acquire any additional  hotel in which a Trustee or officer of the
Company,  or any  Affiliate  thereof,  has any interest  (other than solely as a
result of his status as a Trustee, officer or shareholder of the Company). It is
expected that future  investments in hotels will be dependent on and financed by
the proceeds from additional  equity  capital.  The Trustees have the authority,
without  shareholder  approval,  to issue  additional  Priority  Common  Shares,
preferred  shares or other  capital  shares of the Company in any manner (and on
such terms and for such  consideration)  as it deems  appropriate,  including in
exchange  for  property.  Existing  shareholders  have no  preemptive  right  to
purchase  shares  issued in any offering,  and any such  offering  might cause a
dilution of a shareholder's investment in the Company.                          

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Conflict of Interest Policies                                                   

         The Company  has  adopted  certain  policies  designed to minimize  the
effects of potential  conflicts of interest.  In addition,  the  Partnership has
entered into the Option  Agreement  with certain of the Hersha  Affiliates.  The
Trustees are subject to certain  provisions of Maryland law,  which are designed
to eliminate or minimize certain potential conflicts of interest. However, there
can be no assurance that these policies always will be successful in eliminating
the influence of such conflicts, and if they are not successful, decisions could
be made that might fail to reflect fully the interests of all shareholders.     

Declaration of Trust and Bylaw Provisions                     

         The Company's  Declaration of Trust, with limited exceptions,  requires
that three of the Company's Trustees be Independent Trustees. The Declaration of
Trust provides that such  Independent  Trustee  requirement  may not be amended,
altered, changed or repealed without the affirmative vote of at least a majority
of the members of the  Trustees and the  affirmative  vote of the holders of not
less than two-thirds of the outstanding Priority Common Shares (and other shares
of  beneficial  interest of the Company  entitled  to vote,  if any exist).  The
Bylaws  require that any action  pertaining  to any  transaction  involving  the
Company,  including  the  purchase,  sale,  lease or mortgage of any real estate
asset,  in which a  Trustee  or an  officer  of the  Company,  or any  Affiliate
thereof,  has an  interest  (other  than  solely as a result of his  status as a
trustee,  officer or shareholder of the Company,  must be approved by a majority
of the Trustees, including a majority of the Independent Trustees.              

The Option Agreement                                          

   Pursuant to the Option Agreement among Hasu P. Shah, Jay H. Shah, Neil H.
Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David
L. Desfor, Madhusudan I. Patni and Manhar Gandhi, each a Hersha Affiliate, and  
the Partnership, the Partnership will have an option to acquire any hotels owned
or developed in the future by the Hersha Affiliates within 15 miles of any of   
the Initial Hotels or any hotel subsequently acquired by the Partnership for two
years after acquisition or development.                                         

The Partnership                                               

         A conflict  of  interest  may arise  between  the  Company,  as General
Partner of the Partnership, and the Hersha Affiliates as limited partners of the
Partnership, due to the differing potential tax liability to the Company and the
Hersha Affiliates from the sale of an Initial Hotel or refinancing or prepayment
of principal on any of the Assumed Indebtedness resulting from the differing tax
bases in the  Initial  Hotels of the  Company,  on the one hand,  and the Hersha
Affiliates,  on the other hand. The Bylaws provide that the Company's  decisions
with respect to any  transaction,  including the disposition of an Initial Hotel
or refinancing or prepayment of principal on the Assumed Indebtedness,  in which
a Trustee or officer of the Company, or any Affiliate thereof,  has any interest
(other  than  solely  as a  result  of  his  status  as a  Trustee,  officer  or
shareholder  of the  Company)  must be approved  by a majority of the  Trustees,
including a majority of the  Independent  Trustees.  The  Partnership  Agreement
gives the Company,  as General Partner of the  Partnership,  full,  complete and
exclusive discretion in managing and controlling the business of the Partnership
and  in  making  all  decisions   affecting  the  business  and  assets  of  the
Partnership.                                                                    

Provisions of Maryland Law                                    

         Under  Maryland  law (the  jurisdiction  under  which  the  Company  is
organized),  the  Trustees or  shareholders  of the  Company are not  personally
liable for the  obligations  of the  Company.  The  Trustees  are not,  however,
relieved  from  liability  to the Company or its  shareholders  for any act that
constitutes  bad  faith,  willful  misfeasance,  gross  negligence  or  reckless
disregard  of the  Trustee's  duties.  Maryland  law permits a Maryland  REIT to
include in its  Declaration  of Trust a provision  limiting the liability of its
trustees  to the  trust  and its  shareholders  for  money  damages  except  for
liability  resulting from (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active and deliberate dishonesty  established
by a final judgment and that is material to the cause of action. The Declaration
of Trust of the Company contains such a provision limiting such liability to the
maximum extent permitted by Maryland law.                                       

         There is no Maryland statutory provision governing transactions between
the  Company  and  any of its  Trustees.  The  MGCL,  however,  provides  that a
transaction  involving a director of a Maryland  corporation  or a  corporation,
firm or other  entity in which such  director  is a  director  or has a material
financial  interest is not void or  voidable  solely  because of the  director's
directorship  or  the  director's   interest  in  the  transaction  if  (i)  the
transaction  is  authorized,  approved  or  ratified,  after  disclosure  of the
interest, by the affirmative vote of a majority of the disinterested  directors,
or by the  affirmative  vote of a  majority  of the votes  cast by  shareholders
entitled to vote other than the votes of shares owned of record or  beneficially
by the interested  director or  corporation,  firm or other entity,  or (ii) the
transaction is fair and  reasonable to the Company.  In the absence of statutory
provisions  governing such  transactions  with respect to Maryland  REITs, it is
possible,  though not certain,  that the Maryland courts would look, by analogy,
to the corporate provisions for guidance. In addition, the Company's Declaration
of Trust provides that in defining or interpreting  the powers and duties of the
Company and its Trustees and officers,  reference may be made by the Trustees or
officers to the MGCL to the extent  appropriate  and not  inconsistent  with the
Code or those sections of the Maryland Code governing REITs.                    

Policies with Respect to Other Activities                                       

The Company has authority to offer shares of beneficial       

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interest or other securities and to repurchase or otherwise reacquire its shares
or any other  securities  and may engage in such  activities  in the future.  As
described under "Shares  Available for Future Sale," the Company may issue Class
B Common  Shares or Priority  Common Shares to holders of Units upon exercise of
their Redemption Rights (as herein defined).  The Company has not issued Class B
Common Shares or Priority  Common Shares,  interests or any other  securities to
date, except in connection with the formation of the Company. The Company has no
outstanding  loans to other  entities or persons,  including  its  officers  and
Trustees.  The  Company  has not  engaged  in  trading,  underwriting  or agency
distribution  or  sale of  securities  of  other  issuers,  nor has the  Company
invested in the securities of other issuers other than the  Partnership  for the
purpose of exercising control. The Company intends to make investments in such a
way that it will not be treated as an investment  company  under the  Investment
Company Act of 1940, as amended.                                                

         At all times,  the Company intends to make investments in such a manner
consistent  with the  requirements  of the Code for the  Company to qualify as a
REIT  unless,  because of changing  circumstances  or changes in the Code (or in
Treasury  Regulations),  the  Trustees,  with  the  consent  of the  holders  of
two-thirds of the  outstanding  Class B Common Shares or Priority Common Shares,
determine  that it is no longer in the best  interests of the Company to qualify
as a REIT.                                                                      

Working Capital Reserves                                                        

         The Company initially will have  approximately $2.4 million in cash. In
the future, the Company intends to set aside  undistributed cash in amounts that
the Trustees determine to be adequate to meet normal contingencies in connection
with the  operation  of the  Company's  business  and  investments.  The Company
expects to obtain the Line of  Credit,  which may assist the  Company in meeting
its  distribution  and working  capital  needs.  A failure to obtain the Line of
Credit  could  adversely  affect the  Company's  ability  to finance  its growth
strategy. See "Risk Factors-Dependence Upon External Financing."                

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FORMATION TRANSACTIONS

The Formation Transactions will be as follows:                

o         The Company will sell 1,833,334 Priority Common Shares
      to the Underwriter at the Offering Price.  The net
     proceeds to the Company from the Offering will be
  contributed to the Partnership in exchange for
           approximately a 32% general partnership interest in the
     Partnership.  In addition, the Company will offer
           166,666 Priority Common Shares to the Hersha Affiliates
     at the Offering Price.  The information contained
           herein assumes that none of the 166,666 Priority Common
Shares are sold.                            

o         The Partnership will acquire the Initial Hotels by    
        acquiring either all of the partnership interests in
           the Combined Entities or the Initial Hotels in exchange
       for (i) Subordinated Units that will be redeemable,
       subject to certain limitations, for an aggregate of
         approximately 4 million Class B Common Shares, with a
     value of approximately $23.8 million based on the
           Offering Price and (ii) the assumption of approximately
       $23.8 million in indebtedness secured by all of the
       Initial Hotels, approximately $6.4 million of which
          will be repaid with the proceeds of the Offering.  The
      purchase prices of the Newly- Renovated Hotels and
       the Newly- Developed Hotels will be adjusted on the
           First Adjustment Date or the Second Adjustment Date, as
applicable, as described in "The Company."  

o         The land underlying the Holiday Inn Express,          
         Harrisburg, Pennsylvania and the Comfort Inn, Denver,
          Pennsylvania each will be leased to the Partnership by
           certain Hersha Affiliates for aggregate rent of $21,000
       per year for 99 years.  Also, a portion of the land
          adjacent to the Hampton Inn, Selinsgrove, Pennsylvania
        will be leased to a Hersha Affiliate for $1 per year
for 99 years.                               

         o        Each Initial Hotel will be leased to the Lessee  pursuant to a
                  Percentage  Lease. The Percentage  Leases will have an initial
non-cancelable term of five years.          
          All, but not less than all, of the Percentage Leases
         may be extended for an additional five-year term.  At
          the end of the first extended term, the Lessee, at its
           option, may extend some or all of the Percentage Leases
     for the Initial Hotels.  The Lessee will hold the
  Franchise License for each Initial Hotel.  See
     "Business and Properties--The Percentage Leases."

o         The Partnership and certain of the Hersha Affiliates  
      has entered into the Option Agreement, pursuant to
        which the Hersha Affiliates will agree that, if they
    develop or own any hotels in the future that are
   located within 15 miles of any Initial Hotel or
           subsequently acquired hotel, the Hersha Affiliates will
           give the Partnership the option to purchase such hotels
   for two years.  See "Risk Factors--Conflicts of
         Interest--Competing Hotels Owned or to be Acquired by
       the Hersha Affiliates" and "Policies and Objectives
            with Respect to Certain Activities--Conflict of Interest
Policies--The Option Agreement."            

         o        The Company and the Lessee will enter into the  Administrative
                  Services Agreement,  pursuant to which the Lessee will provide
                  certain administrative  services in exchange for an annual fee
 equal to $55,000, plus $10,000 for each hotel
owned by the Company.                       

         o        The  Company  has  granted  the  Underwriter  the  Underwriter
                  Warrants  to purchase  183,333  Priority  Common  Shares for a
 period of five years at a price per share  of

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$9.90 (165% of the Offering Price).         

         o        The Partnership has granted 2744 Associates,  L.P., which is a
                  Hersha  Affiliate,  the Hersha  Warrants to  purchase  250,000
                Units  for a period  of five  years at a price  per Unit  of
$9.90 (165% of the Offering Price ).        

Benefits to the Hersha Affiliates                                               

         As a result of the Formation  Transactions,  the Hersha Affiliates will
receive the following benefits:                                                 

o         The Hersha Affiliates will receive approximately 4    
    million Subordinated Units in exchange for their
      interests in the Initial Hotels, which will have a
     value of approximately $23.8 million based on the
       Offering Price.  The Subordinated Units held by the
    Hersha Affiliates will be more liquid than their
         current interests in the Selling Entities if a public
          trading market for the Class B Common Shares commences
          or when such shares are converted into Priority Common
           Shares and after the applicable holding periods expire.

o         The Lessee, which is owned by the Hersha Affiliates,  
           will hold the Franchise Licenses for the Initial Hotels
         and will be entitled to all revenues from the Initial
     Hotels after payment of Rent under the Percentage
          Leases and other operating expenses.  The Company will
           pay certain expenses in connection with the transfer of
   the Franchise Licenses to the Lessee.  See "The
Lessee."                                    

o         Approximately $6.4 million of indebtedness owed by the
          Combined Entities will be repaid with a portion of the
          proceeds of the Offering.  Approximately $4 million of
           such indebtedness is owed to entities controlled by the
      Hersha Affiliates and relates principally to hotel
       development expenses in connection with the Initial
       Hotels.  Certain of the Assumed Indebtedness is and
          will remain guaranteed by the Hersha Affiliates.  Upon
  the repayment of such indebtedness, the Hersha
Affiliates will be released from the related
  guarantees.  The Hersha Affiliates may receive
           increased cash distributions from the operations of the
  Initial Hotels as a result of the reduction of
indebtedness on the Initial Hotels.         

o         If the repricing on the First Adjustment Date or the  
     Second Adjustment Date, as applicable, produces a
      higher value for the Newly-Renovated Hotels or the
      Newly-Developed Hotels, the Hersha Affiliates will
      receive an additional number of Subordinated Units
           that, when multiplied by the Offering Price, equals the
         increase in value plus the value of any distributions
     that would have been made in connection with such
          Subordinated Units if such Subordinated Units had been
     issued in connection with the acquisition of such
hotels.                                     

         o        The  Lessee,  which is owned by the  Hersha  Affiliates,  will
                  receive an annual fee equal to $55,000,  plus $10,000 for each
                  hotel   owned   by   the   Company   for   providing   certain
administrative services to the Company.     

 o        Certain tax consequences to the Hersha Affiliates from
          the transfer of equity interests in the Initial Hotels
will be deferred.                           

o        Messrs. Hasu P. Shah, K.D. Patel and Bharat C. Mehta 
         will receive $7,500 per year for serving as Trustees.
          Mr. Shah shall also be entitled to receive a salary of
     not more than $100,000 per year provided that the
        Priority Common Shares have a closing price of $9.00
           per share or higher for 20 consecutive trading days and
remain at or above $9.00 per share.         

         o        The Partnership has granted to 2744 Associates, L.P., which is
                  a Hersha  Affiliate,  the Hersha Warrants to purchase  250,000
               Units  for a period  of five  years at a price  per Unit of
$9.90 (165% of the Offering Price).         

         o        Certain  of the  Hersha  Affiliates  will  receive  a total of
                  $21,000  per year  pursuant  to  99-year  ground  leases  with
                  respect to the Holiday Inn Express,  Harrisburg,  Pennsylvania
and the Comfort Inn, Denver, Pennsylvania.  

         o        A  portion  of  the  land   adjacent  to  the   Hampton   Inn,
                  Selinsgrove, Pennsylvania will be leased to a Hersha Affiliate
for $1 per year for 99 years.               

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MANAGEMENT

Trustees and Executive Officers                                                 

         Initially,  the Trustees will consist of seven  members,  three of whom
are Independent Trustees.  All of the Trustees will serve staggered terms of two
years and the Trustees will be divided into two classes. Each Trustee in Class I
will hold office  initially for a term  expiring at the first annual  meeting of
shareholders  (1999) and each Trustee in Class II will hold office initially for
a term expiring at the second annual  meeting of  shareholders  (2000).  Certain
information  regarding the Trustees and executive officers of the Company is set
forth below.                                                                    

                                                                [Download Table]


Name                               Age  Position                          
----                               ---  --------                          
                                                                          
Hasu P. Shah (Class II)             53  Chairman of the Board,            
                                        Chief Executive Officer           
                                        and Trustee                       

Kiran P. Patel                      48  Chief Financial Officer, Treasurer
                                           and Secretary                  

Bharat C. Mehta (Class II)*         53  Trustee                           

K.D. Patel (Class II)*              54  Trustee                           

L. McCarthy Downs, III (Class I)*   45  Trustee                           

Everette G. Allen, Jr. (Class I)*   58  Independent Trustee               

Thomas S. Capello (Class II)*       55  Independent Trustee               

Mark R. Parthemer (Class I)*        38  Independent Trustee               

         * Has  agreed  to  become a  Trustee  upon or  immediately  before  the
consummation of the Offering.                                                   

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   Hasu P. Shah is the President and CEO of Hersha Enterprises, Ltd. and has
held that position since its inception in 1984. He started Hersha Enterprises,  
Ltd. with the purchase of the 125-room Quality Inn Riverfront in Harrisburg,    
Pennsylvania which he converted to a 117-room Holiday Inn Express. Recently the 
"Central Penn Business Journal" honored Hersha Enterprises, Ltd. as one of the  
Fifty Fastest Growing Companies in 1997 in central Pennsylvania. His interest in
construction and renovations of hotels initiated the development of Hersha      
Construction Company for the construction and renovation of new properties and  
Hersha Hotel Supply Company to supply furniture, fixtures and equipment supplies
to the properties. Mr. Shah and his wife, Hersha, are active members of the     
community. Mr. Shah serves on the Board of Directors of several organizations   
including the Pennsylvania State University Capital Campus in Harrisburg,       
Pennsylvania, the Harrisburg Foundation, Human Enrichment by Love and Peace     
(H.E.L.P.), the Capital Region Chamber of Commerce and the Vraj Hindu Temple.   
Mr. Shah received a Bachelors of Science degree in Chemical Engineering from    
Tennessee Technical University and obtained a Masters degree in Administration  
from Pennsylvania State University.                                             

     K.D. Patel has been a principal of Hersha Enterprises, Ltd. since 1989. Mr.
Patel currently serves as the President of the Lessee. He has received national 
recognition from Holiday Inn Worldwide for the successful management of Hersha's
Holiday Inn Express Hotels. In 1996, Mr. Patel was appointed by Holiday Inn     
Worldwide to serve as an advisor on its Sales and Marketing Committee. Prior to 
joining Hersha Enterprises, Ltd., Mr. Patel was employed by Dupont Electronics  
in New Cumberland, Pennsylvania from 1973 to 1990. He is a member of the Board  
of Directors of a regional chapter of the American Red Cross and serves on the  
Advisory Board of Taneytown Bank and Trust. Mr. Patel received a Bachelor of    
Science degree in Mechanical Engineering from the M.S. University of India and a
Professional Engineering License from the Commonwealth of Pennsylvania in 1982. 

         Bharat C. Mehta has been a principal of Hersha Enterprises,  Ltd. since
1985. Mr. Mehta  currently  serves as President of Hersha Health Care Management
Division of Hersha Enterprises,  Ltd. Mr. Mehta  worked as a chemical engineer  
from  1967 to 1983 .  He was with  Lever  Brothers  Corporation  (UniLever,  a  
multinational company) where he started as a production supervisor in 1977 and  
gradually was promoted to Production Manager of a large manufacturing department
in 1981.  He left  Lever  Brothers  in 1983 to start his own  business.  He is a
charter member of  Denver-Adamstown  (PA) Rotary Club. He is also a Board Member
of Cocalico Community  Partnership,  a non-profit  organization whose goal is to
improve the health,  stability and emotional  well-being of the  community.  Mr.
Mehta  received a Bachelor of Science  degree in Chemical  Engineering  from the
Worcester  Polytechnic  Institute in  Massachusetts  and earned a Masters degree
from Pennsylvania State University.                                             

     Kiran P. Patel has been a principal of Hersha Enterprises, Ltd. since 1993.
Mr. Patel is currently the partner in charge of Hersha's Land Development and   
Business Services Divisions. Prior to joining Hersha Enterprises, Ltd., Mr.     
Patel was employed by AMP Incorporated, in Harrisburg, Pennsylvania. Mr. Patel  
serves on various Boards for community service organizations. Mr. Patel received
a Bachelor of Science degree in Mechanical Engineering from M.S. University of  
India and obtained a Masters of Science degree in Industrial Engineering from   
the University of Texas in Arlington.                                           

         L. McCarthy Downs, III, is the Senior Vice President and Manager of the
Corporate Finance Department of the Underwriter.  He has held the position since
1990 and has been involved in several  public and private  financings for REITs.
Prior to 1990,  Mr.  Downs  was  employed  by  another  investment  banking  and
brokerage firm for seven years.  Mr. Downs received a Bachelor of Science degree
in Business  Administration  from The Citadel  and  obtained an M.B.A.  from The
College of William and Mary.                                                    

    Everette G. Allen, Jr. is chairman of and a senior partner in the law firm
of Hirschler, Fleischer, Weinberg, Cox & Allen, P.C. in Richmond, Virginia. Mr. 
Allen concentrates his practice in litigation, real estate development,         
commercial disputes law, finance and debt restructuring and has been practicing 
at Hirschler, Fleischer since 1970. Mr. Allen was admitted to the Virginia State
Bar in 1965. He served as Executive Editor of the Virginia Law Review from 1964 
to 1965 and served as a Law Clerk to Fourth Circuit Judge Albert V. Bryan of the
U.S. Court of Appeals during 1965 and 1966. He was a member of the Board of     
Trustees of Randolph-Macon College from 1988 to 1992. Mr. Allen currently serves
as a member of the American College of Trial Lawyers, a member of the Board of  
Directors of Virginia Gas Company and as a Trustee of the Virginia Student Aid  
Foundation. Mr. Allen received his B.A. degree from Randolph Macon College in   
1962 and his law degree from University of Virginia in 1965.                    

         Thomas S. Capello is President, Chief Executive Officer and Director of
First Capitol Bank in York,  Pennsylvania and has held these positions since its
founding in 1988.  First Capitol Bank  specializes in small business lending and
has expanded into three branches with assets of almost  $105,000,000.  From 1983
to 1988                                                                         

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Mr. Capello served as Vice President and Manager of the Loan  Production  Office
of The  First  National  Bank of  Maryland.  Prior to his  service  at the First
National  Bank of Maryland,  Mr.  Capello  served as Vice  President  and Senior
Regional  Lending  Officer  at  Commonwealth  National  Bank and  worked  at the
Pennsylvania Development Credit Corporation.  Mr. Capello is an active member of
the board of the Central  Pennsylvania  Venture Capital Forum, Farm and National
Lands Trust,  Better York, WITF, Martin Library,  Motter Printing Company,  19th
District,  Second Mile and  Shadofax.  Mr.  Capello is a graduate of the Stonier
Graduate  School of  Banking at Rutgers  University  and holds an  undergraduate
degree with a major in Economics from Pennsylvania State University.            

         Mark R. Parthemer has served as Special Counsel at Saul, Ewing,  Remick
& Saul LLP in the  Harrisburg,  Pennsylvania  office since  January,  1998.  Mr.
Parthemer  concentrates his practice in general  business,  tax and estates law.
Prior to joining Saul, Ewing, Remick & Saul LLP, Mr. Parthemer worked at Coopers
& Lybrand LLP as a tax specialist  from 1985 to October 1989.  From October 1989
to January 1998 he worked at, and became a partner of, Boswell, Tintner, Piccola
&  Wickersham,  another  law  firm  located  in  Harrisburg,  Pennsylvania.  Mr.
Parthemer is the current First  Assistant  Solicitor of Dauphin  County where he
advises the County  Commissioners on legal matters,  including tax, business and
finance.  He has recently been  appointed to the Board of Keystone Area Council,
Boy Scouts of  America  and the Board of The Vision  Foundation.  Mr.  Parthemer
received his B.A. and B.S.  degrees from  Franklin and Marshall  College and his
law degree from The  Dickinson  School of Law. He is admitted to practice law in
Pennsylvania and before the United States Tax Court.                            

Audit Committee                                                                 

         The Audit Committee will consist of the three Independent Trustees. The
Audit  Committee  will  make   recommendations   concerning  the  engagement  of
independent public  accountants,  review with the independent public accountants
the plans and results of the audit  engagement,  approve  professional  services
provided by the independent public  accountants,  review the independence of the
independent public  accountants,  consider the range of audit and non-audit fees
and review the adequacy of the Company's internal accounting controls. The Audit
Committee  will  establish  procedures  to  monitor  compliance  with  the  REIT
provisions of the Code and the Securities  Exchange Act of 1934, as amended (the
"Exchange Act"), and such other laws and regulations applicable to the Company. 

Compensation Committee                                                          

         The  Compensation  Committee  will  consist  of the  three  Independent
Trustees.  The  Compensation  Committee  will  determine  compensation  for  the
Company's  executive officers and administer the Hersha Hospitality Trust Option
Plan (the "Option Plan").                                                       

Compensation                                                                    

         Each Trustee will initially be paid $10,000 per year for those residing
outside the State of Pennsylvania  and $7,500 per year for those residing in the
State of  Pennsylvania,  payable in quarterly  installments.  In  addition,  the
Company  will  reimburse  all  Trustees for  reasonable  out-of-pocket  expenses
incurred in connection with their services on the Board of Trustees. No officers
of the Company  initially shall receive any cash  compensation  from the Company
other than the Trustee's  fees for those  officers who are  Trustees,  provided,
however, that the Chairman of the Board of Trustees shall be entitled to receive
a salary of not more than $100,000 per year  provided  that the Priority  Common
Shares have a bid price of $9.00 per share or higher for 20 consecutive  trading
days and remains at or above $9.00 per share.  The Independent  Trustees who are
members of the Board on the effective  date of the Offering will receive on that
date options to purchase  the  following  Class B Common  Shares at the Offering
Price: Mr. Allen,  30,000;  Mr. Capello,  3,000; and Mr.  Parthemer,  1,000. The
options  will  be  granted  under  the  Hersha  Hospitality  Trust  Non-Employee
Trustees' Option Plan (the "Trustees' Plan"),  which may be amended by the Board
to provide for other awards,  including awards to future  Independent  Trustees.
The  options  granted  on  the  effective  date  of  the  Offering  will  become
exercisable as described below under "The Trustees' Plan."                      

Exculpation and Indemnification                                                 

         The Maryland REIT Law permits a Maryland real estate  investment  trust
to include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in  money,  property  or  services  or  (b)  active  and  deliberate  dishonesty
established by a final judgment and that is material to the cause of action. The
Declaration of Trust of the Company  contains such a provision which  eliminates
such liability to the maximum extent permitted by the Maryland REIT Law.        

         The  Declaration of Trust of the Company  authorizes it, to the maximum
extent  permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former shareholder,  Trustee or officer or (b) any individual
who, while a Trustee of the Company and at the request of the Company, serves or
has served another real estate investment trust, corporation, partnership, joint
venture,  trust,  employee  benefit plan or any other  enterprise  as a trustee,
director,  officer or partner of such real estate investment trust, corporation,
partnership,  joint venture,  trust,  employee  benefit plan or other enterprise
from and against any claim or liability to which such person may become  subject
or which  such  person  may incur by reason of his status as a present or former
shareholder,  Trustee  or  officer of the  Company.  The  Bylaws of the  Company
obligate it, to the maximum extent permitted by Maryland law, to indemnify:  (a)
any present or former Trustee, officer or                                       

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shareholder  (including  any  individual  who,  while  a  Trustee,   officer  or
shareholder and at the express request of the Company,  serves another entity as
a director,  officer,  shareholder,  partner or trustee of such  entity) who has
been successful,  on the merits or otherwise,  in the defense of a proceeding to
which  he was  made a party by  reason  of  service  in such  capacity,  against
reasonable  expenses  incurred by him in  connection  with the  proceeding;  (b)
subject to certain limitations under Maryland law, any present or former Trustee
or officer  against  any claim or  liability  to which he may become  subject by
reason of such status;  and (c) each present or former  shareholder  against any
claim or liability to which he may become  subject by reason of such status.  In
addition,  the Bylaws  obligate the Company,  subject to certain  provisions  of
Maryland  law,  to pay or  reimburse,  in  advance  of  final  disposition  of a
proceeding, reasonable expenses incurred by a present or former Trustee, officer
or  shareholder  made a party to a  proceeding  by  reason of such  status.  The
Company may, with the approval of its Trustees,  provide such indemnification or
payment or reimbursement  of expenses to any present or former Trustee,  officer
or  shareholder  of the  Company or any  predecessor  of the  Company and to any
employee or agent of the Company or predecessor of the Company.                 

         The Maryland REIT Law permits a Maryland real estate  investment  trust
to indemnify  and advance  expenses to its  trustees,  officers,  employees  and
agents to the same extent as permitted by the MGCL for directors and officers of
Maryland  corporations.  The MGCL permits a corporation to indemnity its present
and former directors and officers,  among others, against judgments,  penalties,
fines,  settlements  and  reasonable  expenses  actually  incurred  by  them  in
connection  with any  proceeding  to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the  director  or officer was  material to the matter  giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and  deliberate  dishonesty,  (b) the  director  or  officer  actually
received an improper  personal benefit in money,  property or services or (c) in
the case of any  criminal  proceeding,  the  director or officer had  reasonable
cause to believe  that the act or omission  was  unlawful.  However,  a Maryland
corporation  may not  indemnify  for an adverse  judgment in a suit by or in the
right of the  corporation  or for a  judgment  of  liability  on the basis  that
personal benefit was improperly  received,  unless in either case a court orders
indemnification  and then only for expenses.  In accordance  with the MGCL,  the
Bylaws of the Company  require  it, as a condition  to  advancing  expenses,  to
obtain  (a) a written  affirmation  by the  Trustee or officer of his good faith
belief that he has met the standard of conduct necessary for  indemnification by
the Company as authorized by the Bylaws and (b) a written  undertaking by him or
on his behalf to repay the amount paid or  reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.              

The Option Plan                                                                 

         The Board of Trustees and the  Partnership  have adopted,  and the sole
shareholder  of the  Company  has  approved,  the Option Plan for the purpose of
attracting and retaining executive officers and employees of the Company and the
Partnership and other persons and entities that provide  services to the Company
or the  Partnership.  The Option  Plan  authorizes  the  issuance  of options to
purchase  Class B Common  Shares  ("Share  Options")  and  options  to  purchase
Subordinated Units ("Unit Options"),  described more fully below. Administration
of the Option Plan will be carried  out by (i) the Board of  Trustees  (prior to
the Offering) or the Compensation  Committee of the Board of Trustees (following
the Offering), with respect to grants of Share Options; and (ii) the Partnership
or its  delegate,  with  respect  to grants of Unit  Options.  The  Compensation
Committee  may not  delegate  its  authority  with  respect to option  awards to
individuals  subject to Section 16 of the Exchange Act. As used in this summary,
the term "Administrator" means the Board of Trustees, the Compensation Committee
or its delegate, or the Partnership, as appropriate.                            

         Officers  and  employees of the Company and the  Partnership  and other
persons and entities that provide services to the Company or the Partnership are
eligible to participate in the Option Plan ("Participants").                    

         Under the Option Plan,  an aggregate of 650,000  Class B Common  Shares
and Subordinated Units will be available for issuance.  The Option Plan provides
for, in the event Class B Common Shares are converted  into another  security of
the Company,  the issuance of equivalent amounts of such security and options to
purchase such security into which the Class B Common Shares are  converted.  The
Plan  provides  for the grant of (i) Options  intended  to qualify as  incentive
stock  options  ("ISOs")  under  Section 422 of the Code,  and (ii)  Options not
intended to so qualify ("nonqualified  options"). All Unit Options granted under
the Plan will be  nonqualified  options;  Share  Options  may be either  ISOs or
nonqualified options.                                                           

         Code Section 422 imposes various requirements in order for an option to
qualify as an ISO,  including allowing a maximum ten-year term of the option and
an option price not less than the fair market value of the underlying  shares on
the date of grant.  In  addition,  under Code Section  422, no  Participant  may
receive  ISOs (under all  incentive  share  option  plans of the Company and its
parent or subsidiary  corporations)  that are first  exercisable in any calendar
year for Class B or Priority Common Shares having an aggregate fair market value
(determined  as of the date  the ISO is  granted)  that  exceeds  $100,000  (the
"$100,000  Limit").  To  the  extent  options  first  become  exercisable  by  a
Participant  in any  calendar  year for a number of Class B or  Priority  Common
Shares in excess of the  $100,000  Limit,  they will be treated as  nonqualified
options.                                                                        

The principal difference between options qualifying as ISOs under Code
Section 422 and nonqualified options is that a Participant generally will not   
recognize ordinary income at the time an ISO is granted or exercised, but rather
at the time the Participant disposes of shares acquired under the ISO. In       

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contrast,  the exercise of a  nonqualified  option  generally is a taxable event
that requires the Participant to recognize,  as ordinary income,  the difference
between  the shares' (or Units')  fair market  value and the option  price.  The
employer  will not be entitled to a federal  income tax  deduction on account of
the grant or the  exercise  of an ISO,  whereas  the  employer  is entitled to a
federal income tax deduction on account of the exercise of a nonqualified option
equal to the ordinary  income  recognized by the  Participant.  The employer may
claim a federal  income tax  deduction  on account  of certain  dispositions  of
shares acquired upon the exercise of an ISO.                                    

         Options under the Option Plan may be awarded by the Administrator,  and
the  Administrator  will determine the option exercise period and any conditions
on exercisability. The options granted under the Option Plan will be exercisable
only if (i) the Company obtains a per share closing price on the Priority Common
Shares of $9.00 or higher for 20  consecutive  trading days and (ii) the closing
price on the  Priority  Common  Shares  for the prior  trading  day was $9.00 or
higher.  In addition,  no option  granted under the Option Plan may be exercised
more than five years  after the date of grant.  The  exercise  price for options
granted  under the Option Plan will be determined  by the  Administrator  at the
time of grant,  but will not be less than the fair  market  value of the Class B
Common Shares on the date of grant (in the case of Share Options),  or less than
the fair  market  value of the  Units on the date of grant  (in the case of Unit
Options).                                                                       

         An option may be exercised  for any number of Class B Common  Shares or
Units  up to the full  number  for  which  the  option  could  be  exercised.  A
Participant  will have no rights as a shareholder with respect to Class B Common
Shares  subject to a Share Option until the Share Option is exercised,  and will
have no rights as a unitholder  with  respect to Units  subject to a Unit Option
until the Unit Option is  exercised.  Any Class B Common Shares or Units subject
to options  which are  forfeited (or expire  without  exercise)  pursuant to the
terms  established  at the time of grant will again be available for grant under
the Option Plan.                                                                

         Payment of the  exercise  price of an option  granted  under the Option
Plan may be made in cash, cash equivalents  acceptable to the  Administrator or,
if  permitted  by the  option  agreement  (i) in the case of Share  Options,  by
exchanging  Class B Common Shares having a fair market value equal to the option
exercise  price of the Share Option;  and (ii) in the case of Unit  Options,  by
exchanging  Units having a fair market value equal to the option  exercise price
of the Unit Option. If an Agreement  provides,  an option that is not an ISO may
be  transferred  by a  Participant  to one or more  persons or entities on terms
permitted  by the  Agreement  and by Rule 16b-3 of the Exchange Act as in effect
from time to time.                                                              

         No option award may be granted under the Option Plan more than 10 years
after  the  earlier  of the date  that the  Board of  Trustees  adopted,  or the
shareholder of the Company approved,  the Option Plan. The Board of Trustees and
the  Partnership  may amend or  terminate  the Option  Plan at any time,  but an
amendment  will not become  effective  without  the  approval  of the  Company's
shareholders  if it increases  the number of Class B Common Shares or Units that
may be issued  under the Option  Plan  (other than  equitable  adjustments  upon
certain  corporate  transactions).  No  amendment  will  affect a  Participant's
outstanding awards without the Participant's consent.                           

         On the  effective  date of the  Offering,  options for an  aggregate of
499,975  Class B Common  Shares and Units will be granted to employees and other
service  providers  of the Company and the  Partnership,  all of whom are Hersha
Affiliates. Of that total, Hasu P. Shah will receive a Share Option, intended to
qualify as an ISO, for  21,850 Class B Common Shares, and a Unit Option for     
32,775 Units; Kiran P. Patel will receive a Share Option, intended to qualify as
an ISO,  for  20,850  Class B Common  Shares,  and a Unit Option for  31,275    
Units;  Bharat C. Mehta will receive a Unit Option for 37,500  Units;  and K. D.
Patel will receive a Unit Option for 89,625 Units. The remaining options will be
Unit  Options  covering a total of 266,100  Units.  The Share  Options  and Unit
Options granted on the effective date of the Offering will become exercisable in
three  annual  installments  beginning on the first  anniversary  of the date of
grant.  The Share Options and Unit Options will have an exercise  price equal to
the Offering Price.                                                             

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The Trustees' Plan                                                              

         Prior to the Offering,  the Board of Trustees will also adopt,  and the
Company's  sole  shareholder  will  approve,   the  Trustees'  Plan  to  provide
incentives  to attract  and retain  Independent  Trustees.  The  Trustees'  Plan
authorizes  the issuance of up to 200,000 Class B Common  Shares.  The Trustees'
Plan provides  for, in the event the Class B Common  Shares are  converted  into
another  security of the  Company,  the issuance of  equivalent  amounts of such
security  and options to purchase  such  security  into which the Class B Common
Shares are converted.                                                           

         The Trustees' Plan provides for the grant of  nonqualified  options for
the following Class B Common Shares to the  Independent  Trustees of the Company
who are members of the Board on the effective  date of the Offering:  Mr. Allen,
30,000; Mr. Capello, 3,000; and Mr. Parthemer, 1,000. The exercise price of each
such option will be equal to the Offering  Price.  Each such option shall become
exercisable  over the  particular  Trustee's  initial  term,  provided  that the
Trustee  is a member  of the  Board on the  applicable  date.  Thus,  all of Mr.
Allen's and Mr.  Parthemer's  options  will become  exercisable  as of the first
anniversary  of the date of grant and  one-half of Mr.  Capello's  options  will
become  exercisable  on the  first  anniversary  of the  date of  grant  and the
remaining options will become  exercisable on the second anniversary of the date
of grant.  Notwithstanding the foregoing,  an option granted under the Trustees'
Plan will be  exercisable  only if (i) the Company  obtains a per share  closing
price on the Priority Common Shares of $9.00 for 20 consecutive                 

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trading days and (ii) the per share closing price on the Priority  Common Shares
for the  prior  trading  day was  $9.00 or  higher.  Options  issued  under  the
Trustees' Plan are exercisable for five years from the date of grant.           

         A Trustee's  outstanding  options will become fully  exercisable if the
Trustee  ceases  to serve on the Board due to death or  disability.  All  awards
granted  under the  Trustees'  Plan shall be subject to Board or other  approval
sufficient  to provide  exempt  status for such grants  under  Section 16 of the
Exchange  Act, as that section and Rules  thereunder  are in effect from time to
time. No option may be granted under the Trustees' Plan more than 10 years after
the date that the Board of Trustees  approved  the Plan.  The Board may amend or
terminate  the  Trustees'  Plan at any time  but an  amendment  will not  become
effective without shareholder  approval if the amendment increases the number of
shares  that may be issued  under  the  Trustees'  Plan  (other  than  equitable
adjustments upon certain corporate transactions).                               

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CERTAIN RELATIONSHIPS AND TRANSACTIONS

         The  Company  and  the  Partnership  have  entered  into  a  number  of
transactions  with the Hersha  Affiliates in connection with the organization of
the Company and the acquisition of the Initial Hotels. The officers and Trustees
of the Company collectively own 35% of the Lessee. The Lessee is entitled to all
income from the hotels after payment of operating  expenses and lease  payments.
There are no assurances that the terms of these transactions are as favorable as
those that the Company could have received from third parties. See "Risk Factors
--Conflicts of Interest" and "Formation Transactions."                          

Repayment of Indebtedness and Guarantees by Mr. Shah and the                    
Hersha Affiliates                                                               

         Approximately  $6.4  million  of  indebtedness  owed  by  the  Combined
Entities  will  be  repaid  with a  portion  of the  proceeds  of the  Offering.
Approximately $4 million of such indebtedness is owed to entities  controlled by
the Hersha Affiliates and relates  principally to hotel development  expenses in
connection with the Initial Hotels.  Certain of the Assumed  Indebtedness is and
will remain  guaranteed  by the Hersha  Affiliates.  Upon the  repayment of such
indebtedness,   the  Hersha   Affiliates  will  be  released  from  the  related
guarantees.  The Hersha Affiliates may receive increased cash distributions from
the  operations  of  the  Initial  Hotels  as  a  result  of  the  reduction  of
indebtedness  on the Initial  Hotels.  Mr.  Shah,  the  partners of the Combined
Entities  and  certain  of  the   Combined   Entities   guarantee   the  Assumed
Indebtedness,  and the  bankruptcy of any of the guarantors  would  constitute a
default under the related loan documents.                                       

Hotel Ownership and Management                                                  

         Subject to the terms of the  Option  Agreement,  the Hersha  Affiliates
could acquire  additional  hotels that may not be acquired  subsequently  by the
Partnership.   See   "Policies   and   Objectives   with   Respect   to  Certain
Activities--Conflict  of  Interest  Policies--The  Option  Agreement"  and "Risk
Factors--Conflicts of Interest--Competing  Hotels Owned or to be Acquired by the
Hersha Affiliates."                                                             

Option Agreement                                                                

         Hasu P. Shah,  Jay H. Shah,  Neil H. Shah,  Bharat C.  Mehta,  Kanti D.
Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor,  Madhusudan I. Patni
and Manhar Gandhi,  each a Hersha  Affiliate,  and the Partnership  have entered
into the Option  Agreement.  Pursuant to the Option  Agreement,  the Partnership
will have a two-year  option to acquire any hotels  acquired or developed by the
Hersha  Affiliates  within  15  miles  of  any  of  the  Initial  Hotels  or any
subsequently acquired hotel, including the Hampton Inn, Danville,  Pennsylvania,
the  Harrisburg  Inn,  Harrisburg,  Pennsylvania,  the  Sleep  Inn,  Pittsburgh,
Pennsylvania and the land owned by Hersha Affiliates in Carlisle,  Pennsylvania.
With  respect to the  Hampton  Inn,  Danville,  Pennsylvania  and the Sleep Inn,
Pittsburgh, Pennsylvania, the Partnership and the Hersha Affiliate that owns the
hotel have agreed that if the option is exercised by the Partnership,  they will
use a  purchase  price  methodology  similar  to the  methodology  used  for the
Newly-Developed  Hotels and have  agreed to fix the rent until the hotel has two
years of operating history. In addition, the Partnership has agreed that, if the
option is exercised by the Partnership,  it will issue Units valued at $6.00 per
Unit  as  consideration  for  the  purchase  of the  hotel.  See  "Policies  and
Objectives   with   Respect  to   Certain   Activities--Conflict   of   Interest
Policies--The Option Agreement." The rights granted to the Partnership under the
Option  Agreement  commenced  as of the date of the Option  Agreement  and shall
terminate  one year  after the later of:  (i) the date upon  which  Hasu P. Shah
ceases to be a trustee,  officer,  partner or employee of the Company;  (ii) the
date on which  Hasu P.  Shah  ceases  to be an  employee,  officer,  trustee  or
director of a consultant  to the  Company;  (iii) the date on which Hasu P. Shah
and the Hersha  Affiliates  cease to own, in the aggregate,  assuming a complete
conversion  of all Units into  shares of  beneficial  interest  in the  Company,
greater than 50% of shares of  beneficial  interest in the Company;  or (iv) the
date on which the  Company's  Board of Trustees has less than three members that
are Hersha Affiliates.                                                          

Payment of Franchise Transfer Fees by the Company                               

The Company will pay certain expenses in connection with the  
transfer of the Franchise Licenses to the Lessee.  See "Formation               
Transactions--Benefits to the Hersha Affiliates."                               

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THE LESSEE

         The Lessee is a recently-formed  Pennsylvania limited partnership.  The
Lessee will lease each Initial Hotel  pursuant to a separate  Percentage  Lease.
The Partnership intends to lease to the Lessee additional hotels acquired by the
Partnership  on terms and  conditions  substantially  similar to the  Percentage
Leases  applicable to the Initial  Hotels.  The Lessee's  ability to perform its
obligations, including making Rent payments under the Percentage Leases, will be
dependent on the Lessee's ability to generate  sufficient net cash flow from the
operation of the Initial  Hotels and any other hotels leased to the Lessee.  The
Lessee's  obligations under the Percentage  Leases are unsecured.  Mr. Shah will
not guarantee the Lessee's  obligations  under the  Percentage  Leases,  but the
Percentage  Leases  will  contain  cross-default  provisions.  Accordingly,  the
Lessee's  failure to make required  payments under any of the Percentage  Leases
will allow the Company to terminate  any or all of the  Percentage  Leases.  The
Hersha  Affiliates own 100% of the Lessee and certain Hersha Affiliates serve as
officers  of the  Company.  Consequently,  they  have  a  conflict  of  interest
regarding the enforcement of the Percentage Leases. See "Risk Factors--Conflicts
of  Interest--No  Arm's-Length  Bargaining  on Percentage  Leases,  Contribution
Agreements,   Administrative   Services  Agreement  and  Option  Agreement"  and
"Business and Properties."                                                      

         The Lessee will  provide  all  employees  and  perform  all  marketing,
accounting  and  management  functions  necessary to operate the Initial  Hotels
pursuant  to the  Percentage  Leases.  The  Lessee  has  in-house  programs  for
accounting and the management  and marketing of the Initial  Hotels.  The Lessee
intends to utilize its sales management program to coordinate, direct and manage
the sales activities of personnel located at the hotels.                        

Management of the Lessee                                                        

         Certain information regarding the management of the Lessee is set forth
below:                                                                          

Name                     Age        Position                  
----                     ---        --------                  

K.D. Patel                54        President                 

     Jay H. Shah               30        Vice President, General Counsel
                       and Secretary

  Rajendra O. Gandhi        49        Vice President and Treasurer

David L. Desfor           37        Controller                

Tracy L. Kundey           37        Director of Operations    

K.D.  Patel's biographical information  is set forth          
under "Management--Trustees and Executive Officers."                            

Jay H. Shah is a principal and general counsel for          
Hersha Enterprises, Ltd.  Mr. Shah also takes an active role in                 
the firm's development and construction activities.  He also                    
serves on the Choice Hotels International Franchise Board.  Mr.                 
Shah was employed by Coopers & Lybrand LLP as a tax consultant in               
1995 and 1996 and previously served the late Senator John Heinz                 
as a Legislative Assistant.  He also was employed by the                        
Philadelphia District Attorney's office and two                                 
Philadelphia-based law firms.  Mr. Shah received a Bachelor of                  
Science degree from the Cornell University School of Hotel                      
Administration, a Masters degree from the Temple University                     
School of Business Management and a Law degree from Temple                      
University School of Law.  Mr. Shah is the son of Hasu P. Shah,                 
the Company's Chairman and Chief Executive Officer.                             

Rajendra O.  Gandhi has been a principal of Hersha            
Enterprises, Ltd. since 1986.  Mr. Gandhi currently serves as                   
President of Hersha Hotel Supply, Inc., which provides                          
furnishings, case goods and interior furnishing materials to                    
hotels and nursing homes in several states.  Mr. Gandhi is a                    
graduate of the University of Bombay, India and obtained an MBA                 
degree from the University of West Palm Beach, Florida.                         

          David L. Desfor has been a principal of Hersha Enterprises, Ltd. since
1991.  Mr. Desfor is currently the  Controller of Hersha  Enterprises,  Ltd. Mr.
Desfor is a graduate of East  Stroudsburg  University with a Bachelor of Science
degree in Hotel Management.                                                     

       Tracy L.  Kundey was previously with  Wellsprings  Management  Group,
Inc., a company that he founded with a partner.                                 

He held the position of President responsible for all aspects of              
a hospitality management company.  Mr. Kundey has 19 years of                   
experience in the hospitality industry ranging from front desk                  
attendant to Corporate Rooms Division Manager.  He is a Certified               
Hotel Administrator and Certified Rooms Division Executive. Mr.                 
Kundey has a Bachelors of Science Degree from Eastern Washington                
University.                                                                     

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PRINCIPAL SHAREHOLDERS

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership of Priority and Class B Common  Shares by (i) each Trustee
of the  Company,  (ii) each  executive  officer of the  Company and (iii) by all
Trustees and executive officers of the Company as a group immediately  following
completion of the Formation Transactions. Unless otherwise indicated, all shares
are owned  directly  and the  indicated  person has sole  voting and  investment
power. The number of shares represents the number of Priority Common Shares into
which  Subordinated  Units  expected to be held by the person may be redeemed in
certain circumstances.                                                          

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                                                                [Download Table]


                                           Number of Shares       Percent of 
Name of Beneficial Owner                  Beneficially Owned (1)    Class (1)
------------------------                  ----------------------  -----------
                                                                             

Hasu P. Shah(1)                                 622,900(2)         25.4%     

K.D. Patel                                      451,900(2)         19.8%     

Bharat C. Mehta                                 736,200(2)         28.7%     

Kiran P. Patel                                  309,400(2)         14.4%     

L. McCarthy Downs                                10,000(3)           (5)     

Everette G. Allen, Jr.                           30,000(3)          1.6%     

Thomas S. Capello                                 3,000(3)           (5)     

Mark R. Parthemer                                 1,000(3)           (5)     

     Total for all officers and Trustees      2,164,400(4)         54.7%     


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

(1)      Does not include approximately 1.9 million Class B Common Shares       
    issuable upon redemption of approximately 1.9 million Subordinated
      Units in the Formation Transactions to Hersha Affiliates who are not
 officers or Trustees. Such Subordinated Units generally are not
        redeemable for Class B Common Shares until at least one year following
       the acquisition of the Initial Hotels. Four of such Hersha Affiliates
        will own an aggregate of approximately 1.7 million Subordinated Units.

(2)      Represents Subordinated Units to be owned by such person               
upon completion of the Formation Transactions and assumes     
(i) that all Subordinated Units held by such person are       
redeemed for Class B Common Shares and (ii) conversion of     
the Class B Common Shares into Priority Common Shares on a    
one-for-one basis.  The total number of shares outstanding    
used in calculating the percentage assumes that none of the   
Subordinated Units held by other persons are redeemed for     
Class B Common Shares.  Such Subordinated Units generally     
are not redeemable for Class B Common Shares until at least   
one year following the acquisition of the Initial Hotels.     
Does not include any Priority Common Shares that such person  
may purchase from the Company  in the offering of 166,666     
shares to Hersha Affiliates.                                  

(3)      Represents shares that the Trustee has advised the Company he intends  
to purchase in the Offering.                                  

(4)      Assumes (i) that all Subordinated Units held by such persons are       
       redeemed for Class B Common Shares and (ii) conversion of the Class B
       Common Shares into Priority Common Shares on a one-for-one basis. The
       total number of shares outstanding used in calculating the percentage
       assumes that none of the Subordinated Units held by other persons are
       redeemed for Class B Common Shares. Such Subordinated Units generally
      are not redeemable for Class B Common Shares until at least one year
       following the acquisition of the Initial Hotels. Does not include any
       Priority Common Shares that such person may purchase from the Company
in the offering of 166,666 shares to Hersha Affiliates.       

(5)      Will  own  less  than  1% of the  Priority  Common  Shares  immediately
following completion of the Formation Transactions.           

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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST

    The following summary of the terms of the shares of beneficial interest of
the Company does not purport to be complete and is subject to and qualified in  
its entirety by reference to the Declaration of Trust and Bylaws of the Company,
copies of which are exhibits to the Registration Statement of which this        
Prospectus is a part. See "Additional Information."                             

General                                                                         

         The  Declaration of Trust of the Company  provides that the Company may
issue up to 50,000,000  priority  Class A common shares of beneficial  interest,
$0.01 par value per share ("Priority Common Shares"),  50,000,000 Class B common
shares of  beneficial  interest,  $0.01  par  value  per share  ("Class B Common
Shares"),  and 10,000,000  preferred  shares of beneficial  interest,  $0.01 par
value per share ("Preferred  Shares").  Upon completion of this Offering and the
related  transactions,  2,000,000  Priority  Common  Shares  will be issued  and
outstanding  and no  Class B Common  or  Preferred  Shares  will be  issued  and
outstanding.  Upon the termination of the Priority  Period (as herein  defined),
the  outstanding  Class B Common  Shares will be  automatically  converted  into
Priority  Common Shares on a one-for-one  basis,  subject to adjustment upon the
occurrence of certain events. As permitted by the Maryland statute governing    
real estate investment trusts formed under the laws of that state (the "Maryland
REIT Law"), the Declaration of Trust contains a provision permitting the Board  
of Trustees, without any action by the shareholders of the Company, to amend the
Declaration of Trust to increase or decrease the aggregate number of shares of  
beneficial interest or the number of shares of any class of shares of beneficial
interest that the Company has authority to issue.                               

         Both the  Maryland  REIT  Law and the  Company's  Declaration  of Trust
provide that no  shareholder  of the Company will be  personally  liable for any
obligation of the Company  solely as a result of his status as a shareholder  of
the  Company.  The  Company's  Bylaws  further  provide  that the Company  shall
indemnify  each  shareholder  against  any  claim  or  liability  to  which  the
shareholder, subject to certain limitations, may become subject by reason of his
being or having been a shareholder  or former  shareholder  and that the Company
shall pay or reimburse each shareholder or former  shareholder for all legal and
other  expenses  reasonably  incurred  by him in  connection  with any  claim or
liability.  Inasmuch as the Company carries public liability  insurance which it
considers adequate, any risk of personal liability to shareholders is limited to
situations in which the Company's  assets plus its insurance  coverage  would be
insufficient to satisfy the claims against the Company and its shareholders.    

The Priority Common Shares                                                      

General                                                       

         The  holders of the  Priority  Common  Shares  shall be entitled to the
Priority  Rights for the  Priority  Period.  The  Priority  Period is the period
beginning  on the date of the closing of the  Offering and ending on the earlier
of: (i) the date that is 15 trading  days after the Company  sends notice to the
holders of the Priority Common Shares that their Priority Rights will terminate 

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in 15 trading days,  provided that the closing bid price of the Priority  Common
Shares is at least $7.00 on each trading day during such 15-day period;  or (ii)
the fifth  anniversary  of the  closing  of the  Offering.  Notwithstanding  the
foregoing,  the Priority  Period shall not end until the holders of the Priority
Common Shares have received any accrued, but unpaid, Priority Distributions.    

         Upon  termination  of the  Priority  Period:  (i)  the  holders  of the
Priority  and Class B Common  Shares will be entitled to their pro rata share of
the Company's dividends and amounts payable upon liquidation; and (ii) the Class
B Common Shares automatically will be converted into Priority Common Shares on a
one-for-one basis. See "--The Class B Common Shares."                           

         The  Priority   Rights  consist  of  the  dividend   priority  and  the
liquidation priority.                                                           

The Dividend Priority                                         

         The  holders of the  Priority  Common  Shares are  entitled  to receive
dividends,  when and as declared by the Board of Trustees, out of assets legally
available for the payment of dividends.  During the Priority Period, the holders
of the  Priority  Common  Shares  shall be  entitled  to  receive,  prior to any
distributions to either the holders of the Subordinated  Units or to the holders
of the Class B Common  Shares,  cumulative  dividends  in an amount per Priority
Common Share equal to $0.18 per quarter (the "Priority Distribution"). After the
holders of the Subordinated Units and the Class B Common Shares have received an
amount per  Subordinated  Unit or per Class B Common Share equal to the Priority
Distribution,  the holders of the  Priority  Common  Shares shall be entitled to
receive  any further  distributions  on a pro rata basis with the holders of the
Subordinated Units and the Class B Common Shares. After the Priority Period, the
holders of the Priority  Common  Shares shall be entitled to receive any further
distributions on a pro rata basis with the holders of the Subordinated Units and
the Class B Common  Shares.  The  dividends  paid to the holders of the Priority
Common  Shares will be subject to the rights of any class or series of Preferred
Shares.                                                                         

         Dividends  will  accrue from the date of the  original  issuance of the
Priority Common Shares, resulting in a partial dividend for the quarter in which
they are issued.  The initial  dividend  for the quarter in which the closing of
the Offering  occurs will be prorated based on the number of days in the quarter
following the closing of the Offering and will be paid with the dividend payable
to holders of record on March 31, 1999.  Such  dividend and any other  dividends
payable on the Priority Common Shares for any period greater or less than a full
dividend  period will be computed on the basis of a 360-day year  consisting  of
twelve 30-day  months.  Dividends on the Priority  Common Shares are  cumulative
from the most recent  dividend  payment date to which full  dividends  have been
paid and will accrue  whether or not the Company  has  earnings,  whether or not
there are funds  legally  available  for the payment of such  distributions  and
whether  or  not  such   distributions   are  authorized.   Accrued  but  unpaid
distributions  on the Priority  Common Shares will not bear interest and holders
of the  Priority  Common  Shares will not be entitled  to any  distributions  in
excess of full cumulative distributions as described above.                     

The Company intends to contribute the net proceeds of the sale of the 
Priority Common Shares to the Partnership in exchange for an equal number of    
Priority Class A Common Units in the Partnership, the economic terms of which   
will be substantially identical to those of the Priority Common Shares. See     
"Partnership Agreement."                                                        

         During the  Priority  Period,  no  dividend  may be declared or paid or
other  distribution  of cash or other property  declared or made directly by the
Company  or any  person  acting  on  behalf  of the  Company  on any  shares  of
beneficial  interest  that rank junior to the Priority  Common  Shares as to the
payment of  dividends or amounts upon  liquidation,  dissolution  and winding up
("Junior  Shares") unless full cumulative  dividends have been declared and paid
or are contemporaneously  declared and funds sufficient for payment set aside on
the Priority Common Shares for all prior and  contemporaneous  dividend periods;
provided,  however,  that if accumulated  and accrued  dividends on the Priority
Common Shares for all prior and  contemporaneous  dividend periods have not been
paid in full then any dividend  declared on the Priority  Common  Shares for any
dividend  period and on any shares of  beneficial  interest of the Company  that
rank on parity with the Priority Common Shares as to the payment of dividends or
amounts upon  liquidation,  dissolution and winding up ("Parity Shares") will be
declared  ratably in proportion to accumulated,  accrued and unpaid dividends on
the Priority Common Shares and such Parity Shares.                              

         No  distributions  on the Priority Common Shares shall be authorized by
the Board of  Trustees  or paid or set apart for  payment by the Company at such
time as the terms and provisions of any agreement of the Company,  including any
agreement relating to its indebtedness, prohibits such authorization, payment or
setting  apart for  payment  or  provides  that such  authorization,  payment or
setting  apart  for  payment  would  constitute  a breach  thereof  or a default
thereunder,  or  if  such  authorization  or  payment  shall  be  restricted  or
prohibited by law.                                                              

         Any distribution payment made on the Priority Common Shares shall first
be  credited  against the  earliest  accrued  but unpaid  distribution  due with
respect to such shares which remains payable.                                   

         If, for any taxable year,  the Company  elects to designate as "capital
gain  distributions"  (as defined in Section  857 of the Code) any portion  (the
"Capital Gains Amount") of the distributions paid or made available for the year
to the holders of all classes of shares  (the "Total  Distributions"),  then the
portion of the Capital  Gains  Amount that will be  allocable  to the holders of
Priority  Common  Shares  will  be the  Capital  Gains  Amount  multiplied  by a
fraction,  the  numerator of which will be the total  distributions  (within the
meaning  of the Code) paid or made  available  to the  holders  of the  Priority
Common Shares for                                                               

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the year and the denominator of which shall be the Total                        
Distributions.                                                                  

         As used herein,  the term "dividend" does not include dividends payable
solely in Junior Shares on Junior Shares,  or in options,  warrants or rights to
holders of Junior Shares to subscribe for or purchase any Junior Shares.        

The Liquidation Priority                                      

         In the  event of any  liquidation,  dissolution  or  winding  up of the
Company,  whether  voluntary or  involuntary,  during the Priority  Period,  the
holders of the Priority Common Shares shall be entitled to receive, prior to any
liquidating  payments  to the  holders of the Class B Common  Shares,  $6.00 per
Priority Common Share (the "Liquidation  Preference"),  plus any accumulated and
unpaid Priority  Distributions  (whether or not declared) on the Priority Common
Shares  to the date of  distribution.  After the  holders  of the Class B Common
Shares have  received an amount  equal to the  Liquidation  Preference  plus any
accumulated and unpaid Priority  Distributions  (whether or not declared) on the
Class B Common Shares to the date of  distribution,  the holders of the Priority
Common  Shares shall share ratably with the holders of the Class B Common Shares
in the assets of the Company.  In the event of any  liquidation,  dissolution or
winding up of the Company, whether voluntary or involuntary,  after the Priority
Period,  the holders of the Priority  Common Shares shall share ratably with the
holders of the Class B Common Shares in the assets of the Company. The rights of
the holders of the  Priority  Common  Shares to  liquidating  payments  shall be
subject to rights of any class or series of Preferred Shares.                   

         If, upon any liquidation, dissolution or winding up of the Company, the
assets of the Company,  or proceeds thereof,  distributable among the holders of
the  Priority  Common  Shares are  insufficient  to pay in full the  Liquidation
Preference and all accumulated  and unpaid  dividends with respect to any of the
Parity  Shares,  then such assets or the proceeds  thereof  will be  distributed
among the  holders of the  Priority  Common  Shares and any such  Parity  Shares
ratably in accordance  with the respective  amounts that would be payable on the
Priority  Common  Shares and such Parity Shares if all amounts  payable  thereon
were paid in full.  None of (i) a  consolidation  or merger of the Company  with
another  corporation,  (ii) a statutory share exchange by the Company or (iii) a
sale or transfer of all or  substantially  all of the  Company's  assets will be
considered a liquidation,  dissolution or winding up,  voluntary or involuntary,
of the Company.                                                                 

The Class B Common Shares                                                       

General                                                       

         Subject to the preferential rights of the Priority Common Shares during
the Priority Period or of any other shares or series of beneficial  interest and
to  the  provisions  of  the  Company's   Declaration  of  Trust  regarding  the
restriction on the transfer of shares of beneficial interest, holders of Class B
Common  Shares are  entitled  to  receive  dividends  on shares if,  when and as
authorized  and  declared  by the Board of Trustees of the Company out of assets
legally  available  therefor  and to share  ratably in the assets of the Company
legally  available  for  distribution  to its  shareholders  in the event of its
liquidation,  dissolution or winding-up after payment of, or adequate  provision
for, all known debts and  liabilities  of the Company.  See "--Voting  Rights of
Priority  Common Shares and Class B Common Shares." In the event that during the
Priority  period the  Company at any time is unable to pay to the holders of the
Class B Common  Shares an amount per Class B Common  Share equal to the Priority
Distribution,  the  holders of the Class B Common  Shares  shall be  entitled to
receive  such  amounts  from  time to time to the  effect  that  the  cumulative
distributions  received  per Class B Common  Share  are equal to the  cumulative
Priority  Distribution received per Priority Common Share. The Company shall pay
such amounts at such subsequent dividend payment dates, if any, that the Company
has cash available for distribution to shareholders to pay such dividends.      

         Holders of Class B Common  Shares  have no  preference,  sinking  fund,
redemption or appraisal  rights and have no  preemptive  rights to subscribe for
any securities of the Company.  Subject to the provisions of the  Declaration of
Trust  regarding the  restriction on transfer of shares of beneficial  interest,
the Class B Common Shares have equal voting, dividend, distribution, liquidation
and other rights.                                                               

Conversion                                                    

         The Class B Common  Shares  will be  converted  automatically  upon the
termination  of the Priority  Period into  authorized  but  previously  unissued
Priority  Common  Shares  on a  one-for-one  basis,  subject  to  adjustment  as
described below (the "Conversion  Ratio"). See "--Conversion Ratio Adjustments."
A notice informing  holders of the Class B Common Shares of such conversion will
be mailed by the Company to the  holders of record of the Class B Common  Shares
as of the dividend  payment record date for the next dividend  payable after the
expiration of the Priority  Period,  together with the dividend  payable on such
shares,  at their  respective  addresses  as they  appear on the share  transfer
records  of the  Company.  No fewer than all of the  outstanding  Class B Common
Shares shall be converted.                                                      

         If the expiration of the Priority Period falls after a dividend payment
record date and prior to the related  payment  date,  the holders of the Class B
Common  Shares at the close of  business on such record date will be entitled to
receive  the  dividend  payable  on such  shares on the  corresponding  dividend
payment  date,  notwithstanding  the  conversion  of such  shares  prior to such
dividend payment date.                                                          

         Upon expiration of the Priority  Period,  each holder of Class B Common
Shares will be,  without any  further  action,  deemed a holder of the number of
Priority  Common  Shares,  as the case may be,  into  which  such Class B Common
Shares are  convertible.  Fractional  Priority  Common Shares will not be issued
upon                                                                            

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conversion of the Class B Common Shares.                                        

Conversion Ratio Adjustments                                  

         The  Conversion  Ratio is subject to  adjustment  upon certain  events,
including  (i) the payment of  dividends  (and other  distributions)  payable in
Priority  Common  Shares on any class of shares of  beneficial  interest  of the
Company,  (ii)  subdivisions,  combinations  and  reclassifications  of Priority
Common Shares and (iii)  distributions  to all holders of Priority Common Shares
of evidences of indebtedness of the Company or assets (including securities, but
excluding those dividends,  rights,  warrants and  distributions  referred to in
clause (i) or (ii)  above and  dividends  and  distributions  paid in cash).  In
addition to the  foregoing  adjustments,  the Company  will be permitted to make
such reductions in the Conversion Ratio as it considers to be advisable in order
that any event  treated for Federal  income tax purposes as a dividend of Shares
or share rights will not be taxable to the holders of the Class B Common  Shares
or, if that is not  possible,  to diminish any income  taxes that are  otherwise
payable because of such event.                                                  

         No  adjustment  of the  Conversion  Ratio is required to be made in any
case until cumulative  adjustments amount to 1% or more of the Conversion Ratio.
Any  adjustments  not so required  to be made will be carried  forward and taken
into account in subsequent adjustments.                                         

Voting Rights of Priority Common Shares and Class B Common Shares               

         The holders of the Priority Common Shares and the Class B Common Shares
(the "Common  Shares") have identical  voting rights and will vote together as a
single class.                                                                   

         Subject to the  provisions of the  Declaration  of Trust  regarding the
restriction of the transfer of shares of beneficial  interest,  each outstanding
Common Share entitles the holder to one vote on all matters  submitted to a vote
of  shareholders,  including the election of trustees,  and,  except as provided
with respect to any other class or series of shares of beneficial interest,  the
holders of such Common Shares  possess the exclusive  voting power.  There is no
cumulative voting in the election of Trustees, which means that the holders of a
majority of the outstanding  Common Shares,  voting as a single class, can elect
all of the Trustees  then standing for election and the holders of the remaining
shares will not be able to elect any trustees.                                  

         Under the Maryland REIT Law, a Maryland REIT generally cannot amend its
declaration  of  trust or  merge  unless  approved  by the  affirmative  vote of
shareholders  holding at least  two-thirds of the shares entitled to vote on the
matter unless a lesser percentage (but not less than a majority of all the votes
entitled  to be cast on the  matter) is set forth in the REIT's  Declaration  of
Trust. The Company's Declaration of Trust provides for approval by a majority of
all the votes entitled to be cast on the matter in all situations  permitting or
requiring action by the shareholders except with respect to: (a) the intentional
disqualification  of the Company as a REIT or  revocation  of its election to be
taxed as a REIT (which requires the affirmative vote of two-thirds of the number
of  Common  Shares  entitled  to  vote  on  such  matter  at a  meeting  of  the
shareholders  of the Company);  (b) the election of trustees  (which  requires a
plurality of all the votes cast at a meeting of  shareholders  of the Company at
which a quorum is  present);  (c) the removal of trustees  (which  requires  the
affirmative  vote of the holders of two-thirds of the outstanding  voting shares
of the Company);  (d) the amendment or repeal of certain designated  sections of
the  Declaration of Trust (which require the  affirmative  vote of two-thirds of
the outstanding  shares entitled to vote on such matters);  (e) the amendment of
the Declaration of Trust by shareholders (which requires the affirmative vote of
a majority  of votes  entitled to be cast on the matter,  except  under  certain
circumstances specified in the Declaration of Trust that require the affirmative
vote of two-thirds of all the votes entitled to be cast on the matter);  and (f)
the  termination  of  the  Company  (which  requires  the  affirmative  vote  of
two-thirds  of all the  votes  entitled  to be cast on the  matter).  Under  the
Maryland  REIT  Law,  a  declaration  of trust  may  permit  the  trustees  by a
two-thirds  vote to amend the  declaration of trust from time to time to qualify
as a REIT under the Code or the Maryland REIT Law without the  affirmative  vote
or written  consent of the  shareholders.  The  Company's  Declaration  of Trust
permits  such action by a majority  vote of the  Trustees.  As  permitted by the
Maryland REIT Law, the Declaration of Trust contains a provision  permitting the
Trustees,  without  any action by the  shareholders  of the Trust,  to amend the
Declaration  of Trust to increase or decrease the aggregate  number of shares of
beneficial interest or the number of shares of any class of shares of beneficial
interest that the Company has authority to issue.                               

Preferred Shares                                                                

         The  Declaration of Trust  authorizes the Board of Trustees to classify
any unissued  Preferred  Shares and to reclassify any previously  classified but
unissued Preferred Shares of any series from time to time in one or more series,
as  authorized  by the Board of  Trustees.  Prior to  issuance of shares of each
series,  the Board of  Trustees is  required  by the  Maryland  REIT Law and the
Company's  Declaration  of Trust to set for each  such  series,  subject  to the
provisions of the Company's  Declaration of Trust  regarding the  restriction on
transfer  of  shares  of  beneficial  interest,   the  terms,  the  preferences,
conversion or other  rights,  voting  powers,  restrictions,  limitations  as to
dividends or other  distributions,  qualifications  and terms or  conditions  of
redemption for each such series. Thus, the Board of Trustees could authorize the
issuance  of  Preferred  Shares with terms and  conditions  which could have the
effect of delaying, deferring or preventing a transaction or a change in control
of the Company that might  involve a premium  price for holders of Common Shares
or  otherwise  might be in  their  best  interest.  As of the  date  hereof,  no
Preferred  Shares are  outstanding and the Company has no present plans to issue
any Preferred Shares.                                                           

Classification or Reclassification of Common Shares or Preferred                

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Shares                                                                          

         The Company's  Declaration of Trust authorizes the Board of Trustees to
classify or reclassify any unissued  Common Shares or Preferred  Shares into one
or more  classes  or series  of shares of  beneficial  interest  by  setting  or
changing  the   preferences,   conversion  or  other  rights,   voting   powers,
restrictions,  limitations as to dividends or  distributions,  qualifications or
terms or  conditions  of  redemption  of such new  class or  series of shares of
beneficial interest.                                                            

Restrictions on Ownership and Transfer                                          

         The  Declaration  of Trust,  subject  to certain  exceptions  described
below,  provides  that no person  may own,  or be deemed to own by virtue of the
attribution  provisions  of the  Code,  more  than  9.9%  of (i) the  number  of
outstanding  Common  Shares of any class or series of Common  Shares or (ii) the
number of  outstanding  Preferred  Shares  of any  class or series of  Preferred
Shares (the  "Ownership  Limitation").  For this  purpose,  a person  includes a
"group" and a "beneficial owner" as those terms are used for purposes of Section
13(d)(3) of the Exchange  Act.  Any transfer of Common or Preferred  Shares that
would  (i)  result in any  person  owning,  directly  or  indirectly,  Common or
Preferred  Shares in  excess of the  Ownership  Limitation,  (ii)  result in the
Common and  Preferred  Shares being owned by fewer than 100 persons  (determined
without  reference  to any rules of  attribution),  (iii)  result in the Company
being  "closely  held" within the meaning of Section 856(h) of the Code, or (iv)
cause  the  Company  to  own,  actually  or  constructively,  10% or more of the
ownership  interests  in a tenant of the  Company's  or the  Partnership's  real
property,  within the meaning of Section  856(d)(2)(B) of the Code, will be null
and void, and the intended  transferee  will acquire no rights in such Common or
Preferred Shares.                                                               

         Subject to certain  exceptions  described  below,  any Common Shares or
Preferred Shares the purported  transfer of which would (i) result in any person
owning,  directly or indirectly,  Common Shares or Preferred Shares in excess of
the Ownership Limitation,  (ii) result in the Common Shares and Preferred Shares
being owned by fewer than 100 persons (determined without reference to any rules
of  attribution),  (iii) result in the Company being  "closely  held" within the
meaning  of  Section  856(h) of the Code,  or (iv)  cause  the  Company  to own,
actually or constructively,  10% or more of the ownership  interests in a tenant
of the  Company's  or the  Partnership's  real  property,  within the meaning of
Section  856(d)(2)(B) of the Code, will be designated as  "Shares-in-Trust"  and
transferred automatically to a trust (a "Trust") effective on the day before the
purported  transfer of such Common Shares or Preferred Shares. The record holder
of the Common or Preferred  Shares that are designated as  Shares-in-Trust  (the
"Prohibited  Owner") will be required to submit such number of Common  Shares or
Preferred  Shares to the Company for  registration in the name of the Trust (the
"Record Holder"). The Trustee will be designated by the Company, but will not be
affiliated with the Company. The beneficiary of a Trust (the "Beneficiary") will
be one or more charitable organizations that are named by the Company.          

         Shares-in-Trust  will remain  issued and  outstanding  Common Shares or
Preferred  Shares and will be entitled to the same rights and  privileges as all
other  shares of the same class or series.  The Record  Holder will  receive all
dividends and distributions on the  Shares-in-Trust and will hold such dividends
or distributions in trust for the benefit of the Beneficiary.  The Record Holder
will vote all  Shares-in-Trust.  The Record  Holder  will  designate a permitted
transferee of the  Shares-in-Trust,  provided that the permitted  transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust  without  such  acquisition  resulting  in a transfer to another
Trust.                                                                          

         The Prohibited Owner with respect to  Shares-in-Trust  will be required
to repay to the  Record  Holder  the amount of any  dividends  or  distributions
received   by  the   Prohibited   Owner  (i)  that  are   attributable   to  any
Shares-in-Trust  and (ii) the record date of which was on or after the date that
such shares became Shares-in-Trust.  The Prohibited Owner generally will receive
from the Record  Holder  the  lesser of (i) the price per share such  Prohibited
Owner paid for the Common  Shares or Preferred  Shares that were  designated  as
Shares-in-Trust  (or,  in the case of a gift or  devise,  the  Market  Price (as
defined  below)  per share on the date of such  transfer)  or (ii) the price per
share received by the Record Holder from the sale of such  Shares-in-Trust.  Any
amounts received by the Record Holder in excess of the amounts to be paid to the
Prohibited Owner will be distributed to the Beneficiary.                        

         The Shares-in-Trust will be deemed to have been offered for sale to the
Company,  or its  designee,  at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or  devise,  the  Market  Price  per  share  on the  date of such
transfer) or (ii) the Market  Price per share on the date that the  Company,  or
its designee, accepts such offer. The Company will have the right to accept such
offer for a period of 90 days  after the later of (i) the date of the  purported
transfer  which  resulted in such  Shares-in-Trust  or (ii) the date the Company
determines  in good  faith  that a transfer  resulting  in such  Shares-in-Trust
occurred.                                                                       

         "Market Price" on any date shall mean the average of the Closing Prices
(as defined  below) for the five  consecutive  Trading  Days (as defined  below)
ending on such date. The "Closing  Price" on any date shall mean the last quoted
sale price as reported by The American Stock Exchange.  "Trading Day" shall mean
a day on which the principal national securities exchange on which the Common or
Preferred  Shares are listed or admitted to trading is open for the  transaction
of business or, if the Common or Preferred  Shares are not listed or admitted to
trading on any  national  securities  exchange,  shall mean any day other than a
Saturday,  a Sunday or a day on which banking  institutions  in the State of New
York are authorized or obligated by law or executive order to close.            

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         Any person who  acquires  or attempts  to acquire  Common or  Preferred
Shares in  violation  of the  foregoing  restrictions,  or any  person who owned
Common or Preferred  Shares that were  transferred to a Trust,  will be required
(i) to give immediately  written notice to the Company of such event and (ii) to
provide to the  Company  such other  information  as the  Company may request in
order to determine the effect,  if any, of such transfer on the Company's status
as a REIT.                                                                      

         All persons  who own,  directly  or  indirectly,  more than 5% (or such
lower  percentages as required  pursuant to  regulations  under the Code) of the
outstanding  Common and Preferred Shares must,  within 30 days after December 31
of each year,  provide to the Company a written  statement or affidavit  stating
the name and address of such direct or indirect owner,  the number of Common and
Preferred  Shares owned  directly or  indirectly,  and a description of how such
shares are held. In addition,  each direct or indirect shareholder shall provide
to the Company such  additional  information as the Company may request in order
to determine the effect,  if any, of such ownership on the Company's status as a
REIT and to ensure compliance with the Ownership Limitation.                    

         The Ownership Limitation generally will not apply to the acquisition of
Common or  Preferred  Shares by an  underwriter  that  participates  in a public
offering of such shares.  In addition,  the Trustees,  upon receipt of advice of
counsel  or other  evidence  satisfactory  to the  Trustees,  in their  sole and
absolute discretion, may, in their sole and absolute discretion, exempt a person
from the Ownership Limitation under certain circumstances.                      
 The  foregoing  restrictions  will  continue  to apply  until (i) the  Trustees
determines  that it is no longer in the best interests of the Company to attempt
to  qualify,  or to  continue  to  qualify,  as a  REIT  and  (ii)  there  is an
affirmative  vote of  two-thirds  of the number of Common and  Preferred  Shares
entitled  to vote  on  such  matter  at a  regular  or  special  meeting  of the
shareholders of the Company.                                                    

         All  certificates  representing  Common or Preferred Shares will bear a
legend referring to the restrictions described above.                           

         The Ownership  Limitation could have the effect of delaying,  deferring
or preventing a change in control or other transaction in which holders of some,
or a  majority,  of shares of Common  Shares  might  receive a premium for their
shares of Common  Shares  over the then  prevailing  market  price or which such
holders might believe to be otherwise in their best interest.                   

Other Matters                                                                   

The transfer agent and registrar for the Company's Priority   
Common Shares will be First Union  National Bank of North  Carolina,  Charlotte,
North Carolina.                                                                 

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CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S DECLARATION
 OF TRUST AND BYLAWS

The following summary of certain provisions of Maryland law   
and of the Declaration of Trust and Bylaws of the Company is                    
subject to and qualified in its entirety by reference to Maryland               
law and to the Declaration of Trust and Bylaws of the Company,                  
copies of which are included as exhibits to the Registration                    
Statement of which this Prospectus is a part.  See "Additional                  
Information."                                                                   

Classification of the Board of Trustees                                         

         The Bylaws  provide  that the number of  trustees of the Company may be
established  by the Board of  Trustees  but may not be fewer than three nor more
than nine. At the closing of the  Offering,  there will be seven  Trustees.  The
Trustees  may  increase or decrease the number of Trustees by a vote of at least
80% of the  members  of the  Board of  Trustees,  provided  that the  number  of
Trustees  shall never be less than the number  required by Maryland law and that
the tenure of office of a Trustee  shall not be affected by any  decrease in the
number of Trustees.  Any vacancy will be filled,  including a vacancy created by
an increase in the number of Trustees,  at any regular meeting or at any special
meeting called for that purpose,  by a majority of the remaining Trustees or, if
no Trustees remain, by a majority of the shareholders.                          

         Pursuant to the Declaration of Trust,  the Board of Trustees is divided
into two  classes of  Trustees  with  initial  terms  expiring in 1999 and 2000,
respectively.  Beginning in 1999, Trustees of each class are chosen for two-year
terms  upon the  expiration  of their  current  terms and each year one class of
Trustees  will  be  elected  by the  shareholders.  The  Company  believes  that
classification  of the Board of Trustees will help to assure the  continuity and
stability of the Company's business strategies and policies as determined by the
Trustees.  Holders of Common Shares will have no right to  cumulative  voting in
the election of Trustees.  Consequently, at each annual meeting of shareholders,
the holders of a majority of the Common  Shares will be able to elect all of the
successors of the class of Trustees whose terms expire at that meeting.         

         The  classified  board  provision  could  have the effect of making the
replacement  of  incumbent  trustees  more time  consuming  and  difficult.  The
staggered  terms of Trustees  may delay,  defer or prevent a tender  offer or an
attempt to change control of the Company or other transaction that might involve
a premium price for holders of Common Shares, even though a tender offer, change
in  control  or  other  transaction  might  be  in  the  best  interest  of  the
shareholders.                                                                   

Removal of Trustees                                                             

         The Declaration of Trust provides that a Trustee may be removed with or
without  cause upon the  affirmative  vote of at least  two-thirds  of the votes
entitled to be cast in the election                                             

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of Trustees. Absent removal of all of the Trustees, this provision, when coupled
with the  provision  in the Bylaws  authorizing  the Board of  Trustees  to fill
vacant  trusteeships,  precludes  shareholders from removing incumbent Trustees,
except upon a substantial affirmative vote, and filling the vacancies created by
such removal with their own nominees.                                           

Business Combinations                                                           

         Under the MGCL,  as  applicable to Maryland  REITs,  certain  "business
combinations" (including a merger, consolidation,  share exchange or, in certain
circumstances,  an asset  transfer  or issuance  or  reclassification  of equity
securities)  between a Maryland  REIT and any person who  beneficially  owns ten
percent or more of the voting  power of the trust's  shares or an  affiliate  or
associate of the trust who, at any time within the two-year  period prior to the
date in question,  was the  beneficial  owner of 10% or more of the voting power
(an "Interested  Shareholder")  or an affiliate  thereof are prohibited for five
years after the most recent date on which the shareholder  becomes an Interested
Shareholder.  Thereafter,  any such business  combination must be recommended by
the board of trustees of such trust and approved by the  affirmative  vote of at
least (a) 80% of the votes entitled to be cast by holders of outstanding  voting
shares of  beneficial  interest  of the trust  and (b)  two-thirds  of the votes
entitled  to be cast by holders of voting  shares of the trust other than shares
held by the  Interested  Shareholder  with whom (or with  whose  affiliate)  the
business  combination is to be effected,  or by an affiliate or associate of the
Interested  Shareholder,  voting together as a single group, unless, among other
conditions,  the trust's common shareholders receive a minimum price (as defined
in the MGCL) for their  shares and the  consideration  is received in cash or in
the same form as previously  paid by the Interested  Shareholder for its shares.
These provisions of Maryland law do not apply, however, to business combinations
that are approved or exempted by the board of trustees of the trust prior to the
time that the  Interested  Shareholder  becomes an Interested  Shareholder.  The
Company   has  adopted a  resolution  opting out of the  business  combination  
provisions .                                                                    

Control Share Acquisitions                                                      

         The MGCL contains control share acquisition  provisions.  The Bylaws of
the Company contain a provision opting out of these provisions, but there can be
no assurance that such Bylaw  provision will not be amended or eliminated at any
time in the future.                                                             

         The MGCL, as  applicable  to Maryland  REITs that have not opted out of
the  provisions,  provides that control  shares (as defined below) of a Maryland
REIT acquired in a "control share  acquisition"  have no voting rights except to
the extent  approved by a vote of two-thirds of the votes entitled to be cast on
the matter,  excluding shares of beneficial  interest owned by the acquiror,  by
officers or by trustees  who are  employees of the trust.  "Control  Shares" are
voting shares of beneficial  interest  which,  if aggregated with all other such
shares of beneficial  interest previously acquired by the acquiror or in respect
of which the acquiror is able to exercise or direct the exercise of voting power
(except  solely by virtue of a revocable  proxy),  would entitle the acquiror to
exercise voting power in electing trustees within one of the following ranges of
voting power:  (i) one-fifth or more but less than one-third,  (ii) one-third or
more but less than a majority,  or (iii) a majority or more of all voting power.
Control  Shares do not include  shares the acquiring  person is then entitled to
vote as a result of having previously obtained shareholder  approval. A "control
share acquisition"  means the acquisition of Control Shares,  subject to certain
exceptions.                                                                     

         A person who has made or proposes to make a control share  acquisition,
upon  satisfaction  of  certain  conditions  (including  an  undertaking  to pay
expenses),  may  compel  the  board of  trustees  of the trust to call a special
meeting of  shareholders  to be held  within 50 days of demand to  consider  the
voting rights of the shares.  If no request for a meeting is made, the trust may
itself present the question at any shareholders meeting.                        

         If voting  rights are not  approved at the meeting or if the  acquiring
person  does not  deliver an  acquiring  person  statement  as  required  by the
statute,  then,  subject to certain  conditions and  limitations,  the trust may
redeem any or all of the Control  Shares  (except  those for which voting rights
have previously been approved) for fair value determined,  without regard to the
absence of voting  rights  for the  Control  Shares,  as of the date of the last
control share  acquisition by the acquiror or of any meeting of  shareholders at
which the voting  rights of such  shares are  considered  and not  approved.  If
voting rights for Control Shares are approved at a shareholders  meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other  shareholders may exercise  appraisal rights. The fair value of the shares
as  determined  for purposes of such  appraisal  rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.  

         The  control  share  acquisition  statute  does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the trust is a party to
the transaction or (b) to  acquisitions  approved or exempted by the declaration
of trust or bylaws of the trust prior to such acquisition.                      

Amendment                                                                       

         The  Declaration  of Trust  provides  that it may be  amended  with the
approval of at least a majority  of all of the votes  entitled to be cast on the
matter,  but that certain  provisions of the  Declaration of Trust regarding (i)
the Company's Board of Trustees,  including the provisions regarding Independent
Trustee requirements, (ii) the restrictions on transfer of the Common Shares and
the  Preferred  Shares,  (iii)  amendments  to the  Declaration  of Trust by the
Trustees and the  shareholders  of the Company and (iv) the  termination  of the
Company may not be amended, altered, changed or repealed without the approval of

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two-thirds  of all of the  votes  entitled  to be  cast  on  these  matters.  In
addition,  the Declaration of Trust provides that it may be amended by the Board
of  Trustees,  without  shareholder  approval to (a)  increase  or decrease  the
aggregate number of shares of beneficial interest or the number of shares of any
class of  beneficial  interest  that the  Trust  has  authority  to issue or (b)
qualify as a REIT under the Code or under the Maryland  REIT law. The  Company's
Bylaws may be amended or altered exclusively by the Board of Trustees.          

Limitation of Liability and Indemnification                                     

         The  Maryland  REIT Law  permits  a  Maryland  REIT to  include  in its
Declaration  of Trust a provision  limiting  the  liability  of its trustees and
officers  to the  trust  and its  shareholders  for  money  damages  except  for
liability  resulting from (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active and deliberate dishonesty  established
by a final judgment and that is material to the cause of action. The Declaration
of Trust of the Company contains such a provision which limits such liability to
the maximum extent permitted by Maryland law.                                   

         The  Declaration of Trust of the Company  authorizes it, to the maximum
extent  permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer or (b) any individual  who, while a
Trustee of the Company and at the request of the  Company,  serves or has served
another real estate investment trust, corporation,  partnership,  joint venture,
trust,  employee  benefit plan or any other  enterprise as a trustee,  director,
officer, partner of such real estate investment trust, corporation, partnership,
joint  venture,  trust,  employee  benefit  plan or any  other  enterprise  as a
trustee,  director,  officer or partner of such real  estate  investment  trust,
corporation,  partnership,  joint venture, trust, employee benefit plan or other
enterprise  from and  against  any claim or  liability  to which such person may
become  subject  or which  such  person  may incur by reason of his  status as a
present or former shareholder,  Trustee or officer of the Company. The Bylaws of
the Company  obligate it, to the maximum  extent  permitted by Maryland  law, to
indemnify:  (a) any present or former Trustee, officer or shareholder (including
any individual  who, while a Trustee,  officer or shareholder and at the express
request  of  the  Company,  serves  another  entity  as  a  director,   officer,
shareholder,  partner or trustee of such entity) who has been successful, on the
merits or otherwise, in the defense of a proceeding to which he was made a party
by reason of service in such capacity,  against reasonable  expenses incurred by
him in connection with the proceeding;  (b) subject to certain limitations under
Maryland  law,  any  present or former  Trustee or officer  against any claim or
liability to which he may become subject by reason of such status;  and (c) each
present or former  shareholder  against any claim or  liability  to which he may
become subject by reason of such status.  In addition,  the Bylaws  obligate the
Company,  subject to certain provisions of Maryland law, to pay or reimburse, in
advance of final disposition of a proceeding,  reasonable expenses incurred by a
present or former Trustee,  officer or shareholder  made a party to a proceeding
by reason of such status.  The Company may,  with the approval of its  Trustees,
provide  such  indemnification  or payment or  reimbursement  of expenses to any
present  or  former  Trustee,  officer  or  shareholder  of the  Company  or any
predecessor  of the  Company  and to any  employee  or agent of the  Company  or
predecessor of the Company.                                                     

         The Maryland  REIT Law permits a Maryland REIT to indemnify and advance
expenses to its trustees,  officers,  employees and agents to the same extent as
permitted by the MGCL for directors and officers of Maryland  corporations.  The
MGCL permits a  corporation  to indemnify  its present and former  directors and
officers,  among others, against judgments,  penalties,  fines,  settlements and
reasonable  expenses actually incurred by them in connection with any proceeding
to which  they may be made a party by reason of their  service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the  proceeding and (i) was
committed  in bad  faith  or (ii)  was  the  result  of  active  and  deliberate
dishonesty,  (b) the director or officer actually  received an improper personal
benefit  in  money,  property  or  services  or (c) in the case of any  criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful.  However, a Maryland corporation may not indemnify for
an adverse  judgment  in a suit by or in the right of the  corporation  or for a
judgment  of  liability  on the  basis  that  personal  benefit  was  improperly
received, unless in either case a court orders indemnification and then only for
expenses.  In accordance with the MGCL, the Bylaws of the Company require it, as
a condition to advancing  expenses,  to obtain (a) a written  affirmation by the
director  or officer of his good faith  belief  that he has met the  standard of
conduct necessary for indemnification by the Company as authorized by the Bylaws
and (b) a written  undertaking  by him or on his behalf to repay the amount paid
or  reimbursed  by the Company if it shall  ultimately  be  determined  that the
standard of conduct was not met.                                                

Operations                                                                      

         The  Company  is  generally   prohibited   from   engaging  in  certain
activities,  including acquiring or holding property or engaging in any activity
that would cause the Company to fail to qualify as a REIT.                      

Dissolution of the Company                                                      

         Pursuant  to the  Company's  Declaration  of Trust,  and subject to the
provisions  of any  class or series of  shares  of  beneficial  interest  of the
Company  then  outstanding,  the  shareholders  of the  Company,  at any meeting
thereof,  may terminate the Company by the affirmative vote of two-thirds of all
of the votes entitled to be cast on the matter after the  authorization,  advice
and approval thereof by a majority of the Board of Trustees.                    

Advance Notice of Trustees Nominations and New Business                         

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         The Bylaws of the Company  provide  that (a) with  respect to an annual
meeting of  shareholders,  nominations  of persons for  election to the Board of
Trustees and the proposal of business to be  considered by  shareholders  may be
made only (i) pursuant to the Company's notice of the meeting, (ii) by the Board
of Trustees or (iii) by a shareholder  who was a  shareholder  of record both at
the  time of the  provision  of  notice  and at the time of the  meeting  who is
entitled  to vote at the  meeting  and has  complied  with  the  advance  notice
procedures  set forth in the Bylaws and (b) with respect to special  meetings of
shareholders, only the business specified in the Company's notice of meeting may
be brought  before the meeting of  shareholders  and  nominations of persons for
election to the Board of Trustees may be made only (i) pursuant to the Company's
notice of the meeting,  (ii) by the Board of Trustees or (iii) provided that the
Board of Trustees has determined that Trustees shall be elected at such meeting,
by a  shareholder  who was a  shareholder  of  record  both  at the  time of the
provision  of notice and at the time of the  meeting  who is entitled to vote at
the meeting and has complied with the advance notice provisions set forth in the
Bylaws.                                                                         

Possible Anti-takeover Effect of Certain Provisions of Maryland                 
Law and of the Declaration of Trust and Bylaws                                  

         The business combination provisions and, if the applicable provision in
the Bylaws is rescinded,  the control share acquisition  provisions of the MGCL,
the  provisions of the  Declaration of Trust on  classification  of the Board of
Trustees, the removal of Trustees and the restrictions on the transfer of shares
of  beneficial  interest and the advance  notice  provisions of the Bylaws could
have the effect of delaying,  deferring or preventing a transaction  or a change
in control of the  Company  that might  involve a premium  price for  holders of
Common Shares or otherwise be in their best interest.                           

Maryland Asset Requirements                                                     

         To maintain its qualification as a Maryland REIT, the Maryland REIT Law
requires at least 75% of the value of the Company's assets to be held,  directly
or indirectly,  in real estate assets, mortgages or mortgage related securities,
government  securities,  cash and cash equivalent  items,  including  high-grade
short term securities and receivables.  The Maryland REIT Law also prohibits the
Company from using or applying land for farming, agricultural,  horticultural or
similar purposes.                                                               

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SHARES AVAILABLE FOR FUTURE SALE

         Upon the completion of the Offering and the related  transactions,  the
Company will have 1,833,334 Priority Common Shares outstanding and approximately
4 million Class B Common Shares and Priority Common Shares reserved for issuance
upon  redemption  of  Subordinated  Units.  In addition,  the Company will offer
166,666  Priority Common Shares to the Hersha  Affiliates at the Offering Price.
The  information  contained  herein  assumes  that none of the 166,666  Priority
Common Shares are sold. As described  herein,  the Class B Common Shares will be
converted  into  Priority  Common  Shares upon the  termination  of the Priority
Period on a one-for-one basis. The Priority Common Shares issued in the Offering
will be freely  tradeable  by persons  other than  "affiliates"  of the  Company
without  restriction under the Securities Act, subject to certain limitations on
ownership set forth in the Declaration of Trust.  See  "Description of Shares of
Beneficial Interest--Restrictions on Transfer."                                 

         Pursuant to the Partnership  Agreement,  the Hersha Affiliates that own
the Combined Entities  (collectively,  the "Limited  Partners") will receive the
right to redeem their Subordinated Units (the "Redemption  Rights"),  which will
enable  them  to  cause  the  Partnership  to  redeem  their  interests  in  the
Partnership  in  exchange  for cash or, at the  option of the  Company,  Class B
Common  Shares on a  one-for-one  basis.  In the  event  that the Class B Common
Shares are  converted  into  Priority  Common  Shares prior to redemption of the
Subordinated  Units, such outstanding  Subordinated Units will be redeemable for
Priority  Common  Shares.If  the Company  does not exercise its option to redeem
such  interests for Class B Common Shares or Priority  Common  Shares,  then the
Limited Partner may make a written demand that the Company redeem such interests
for Class B Common  Shares or  Priority  Common  Shares,  to the extent that the
issuance  of such  shares  would not result in the  violation  of the  Ownership
Limitation.  The  Redemption  Rights  generally  may be exercised by the Limited
Partners at any time after one year  following  the  acquisition  of the Initial
Hotels with  respect to the  Subordinated  Units issued in  connection  with the
Stabilized  Hotels  and at any time  after the First  Adjustment  Date or Second
Adjustment Date, as applicable, with respect to the Subordinated Units issued in
connection with the Newly- Renovated Hotels and the Newly- Developed  Hotels, in
whole  or in part.  See  "The  Partnership  Agreement--Redemption  Rights."  Any
amendment to the Partnership  Agreement that would affect the Redemption  Rights
would require the consent of Limited Partners holding more than 50% of the Units
held by Limited Partners (except the Company).                                  

         Common  Shares  issued  to  holders  of  Units  upon  exercise  of  the
Redemption Rights will be "restricted"  securities under the meaning of Rule 144
promulgated  under the  Securities  Act ("Rule  144") and may not be sold in the
absence  of  registration  under the  Securities  Act unless an  exemption  from
registration is available, including exemptions contained in Rule 144.          

         In  general,  under Rule 144 as  currently  in effect,  if one year has
elapsed since the later of the date of acquisition of restricted shares from the
Company or any  "affiliate"  of the Company,  as that term is defined  under the
Securities  Act, the acquiror or subsequent  holder  thereof is entitled to sell
within  any  three-month  period a number of shares  that  does not  exceed  the
greater  of 1% of the then  outstanding  Common  Shares  or the  average  weekly
trading volume of the Common Shares during the four calendar weeks preceding the
date on which  notice  of the sale is filed  with the  Securities  and  Exchange
Commission (the "Commission"). Sales under Rule 144 also are subject to certain 

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manner of sale provisions,  notice  requirements and the availability of current
public  information about the Company.  If two years have elapsed since the date
of acquisition of restricted  shares from the Company or from any "affiliate" of
the Company, and the acquiror or subsequent holder thereof is deemed not to have
been an "affiliate" of the Company at any time during the three months preceding
a sale,  such person would be entitled to sell such shares in the public  market
under  Rule  144(k)  without  regard to the volume  limitations,  manner of sale
provisions, public information requirements or notice requirements.             

         Under  certain  circumstances,   the  Company  has  agreed  to  file  a
registration  statement  with the  Commission  covering the resale of any Common
Shares  issued to a Limited  Partner  upon  redemption  of  Units.  The  Limited
Partners may request such a registration  if the Limited  Partners,  as a group,
request registration of at least 250,000 Common Shares;  provided however,  that
only two such registrations may occur each year. Upon such request,  the Company
will use its best efforts to have the registration statement declared effective.
In addition,  the Limited  Partners will have "piggyback"  registration  rights,
subject to certain volume and marketing  limitations imposed by the Underwriter.
If, during the prior two years there has not been an opportunity for a piggyback
registration,  the Limited Partners holding Units redeemable for at least 50,000
Common Shares may request a registration of those shares.  Upon effectiveness of
such  registration  statement,  those  persons  who receive  Common  Shares upon
redemption of Units may sell such shares in the secondary  market  without being
subject to the volume limitations or other requirements of Rule 144. The Company
will bear expenses incident to its registration  requirements,  except that such
expenses  shall  not  include  any  selling  commissions,  Commission  or  state
securities  registration  fees,  transfer  taxes or certain  other fees or taxes
relating to such shares. Registration rights may be granted to future sellers of
hotels to the Partnership who may receive, in lieu of cash, Common Shares, Units
or other securities convertible into Common Shares.                             

         Prior to the date of this  Prospectus,  there has been no public market
for the  Common  Shares.  Listing  of the Common  Shares on the  American  Stock
Exchange is expected to commence  following the  completion of the Offering.  No
prediction can be made as to the effect, if any, that future sales of shares, or
the  availability  of shares for  future  sale,  will have on the  market  price
prevailing from time to time. Sales of substantial  amounts of Common Shares, or
the  perception  that such sales could occur,  may affect  adversely  prevailing
market  prices of the Common  Shares.  See "Risk  Factors--Market  for  Priority
Common Shares" and "The Partnership Agreement--Transferability of Interests."   

         For a description of certain restrictions on transfers of Common Shares
held by certain shareholders of the Company, see "Underwriting."                

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 PARTNERSHIP AGREEMENT

         The  following   summary  of  the   Partnership   Agreement,   and  the
descriptions  of  certain   provisions  thereof  set  forth  elsewhere  in  this
Prospectus,  is  qualified  in its  entirety  by  reference  to the  Partnership
Agreement,  which is filed as an exhibit to the Registration  Statement of which
this Prospectus is a part.                                                      

Management                                                                      

         The  Partnership has been organized as a Virginia  limited  partnership
pursuant to the terms of the Partnership Agreement.  Pursuant to the Partnership
Agreement,  the Company,  as the sole general partner of the  Partnership,  will
have,  subject to certain protective rights of Limited Partners described below,
full, exclusive and complete responsibility and discretion in the management and
control of the  Partnership,  including the ability to cause the  Partnership to
enter into certain  major  transactions  including  acquisitions,  dispositions,
refinancings and selection of lessees and to cause changes in the  Partnership's
line of business  and  distribution  policies.  However,  any  amendment  to the
Partnership  Agreement that would affect the Redemption  Rights will require the
consent  of  Limited  Partners  holding  more than 50% of the Units held by such
partners.                                                                       

         The affirmative vote of Limited Partners holding at least two-thirds of
the general  partnership  interests in the  Partnership,  including the Company,
which will initially own  approximately  only a 32% interest in the Partnership,
is  required  for a sale  of  all or  substantially  all  of the  assets  of the
Partnership,  or to  approve  a  merger  or  consolidation  of the  Partnership,
provided, however, that such approval shall no longer be required if the Company
fails to pay a  distribution  of $.72 per share to the  holders of the  Priority
Common Shares for any 12-month period.                                          

Transferability of Interests                                                    

         The  Company  may not  voluntarily  withdraw  from the  Partnership  or
transfer or assign its interest in the  Partnership  unless the  transaction  in
which  such  withdrawal  or  transfer  occurs  results in the  Limited  Partners
receiving property in an amount equal to the amount they would have received had
they exercised their Redemption Rights immediately prior to such transaction, or
unless the successor to the Company contributes  substantially all of its assets
to  the  Partnership  in  return  for a  general  partnership  interest  in  the
Partnership.  With  certain  limited  exceptions,  the Limited  Partners may not
transfer their interests in the  Partnership,  in whole or in part,  without the
written  consent of the Company,  which  consent the Company may withhold in its
sole  discretion.  The Company may not consent to any transfer  that would cause
the Partnership to be treated as a corporation for federal income tax purposes. 

Capital Contribution                                                            

The Company will contribute to the Partnership substantially  
all the net proceeds of the Offering as its initial capital                     

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contribution in exchange for approximately a 32% general partnership interest in
the Partnership. Although the Partnership will receive substantially all the net
proceeds  of the  Offering,  the  Company  will be deemed to have made a capital
contribution  to the  Partnership in the amount of  substantially  all the gross
proceeds of the Offering and the Partnership  will be deemed  simultaneously  to
have paid the  underwriting  discount  and other  expenses  paid or  incurred in
connection with the Offering.  The Hersha Affiliates will make  contributions to
the  Partnership  and  will  become  Limited  Partners  in the  Partnership  and
collectively  will own approximately a 68% limited  partnership  interest in the
Partnership.  The value of each Limited  Partner's  capital  contribution  shall
equal  its  pro  rata  share  of the  value  of the  interests  received  by the
Partnership. The Partnership Agreement provides that if the Partnership requires
additional  funds at any time or from time to time in excess of funds  available
to the  Partnership  from  borrowing or capital  contributions,  the Company may
borrow such funds from a  financial  institution  or other  lender and lend such
funds to the  Partnership  on the same terms and conditions as are applicable to
the Company's  borrowing of such funds.  Under the  Partnership  Agreement,  the
Company  generally  is obligated  to  contribute  the proceeds of an offering of
shares  of  beneficial  interest  as  additional  capital  to  the  Partnership.
Moreover,   the  Company  is  authorized  to  cause  the  Partnership  to  issue
partnership  interests  for less  than  fair  market  value if the  Company  has
concluded  in good  faith that such  issuance  is in the best  interests  of the
Company and the Partnership. If the Company so contributes additional capital to
the  Partnership,  the Company will receive  additional  Units and the Company's
percentage  interest in the  Partnership  will be increased  on a  proportionate
basis based upon the amount of such  additional  capital  contributions  and the
value of the  Partnership  at the time of such  contributions.  Conversely,  the
percentage   interests  of  the  Limited   Partners   will  be  decreased  on  a
proportionate  basis in the event of  additional  capital  contributions  by the
Company.  In  addition,  if the Company  contributes  additional  capital to the
Partnership,  the Company will revalue the  property of the  Partnership  to its
fair market value (as determined by the Company) and the capital accounts of the
partners will be adjusted to reflect the manner in which the unrealized  gain or
loss  inherent  in such  property  (that has not been  reflected  in the capital
accounts  previously)  would be allocated  among the partners under the terms of
the Partnership  Agreement if there were a taxable  disposition of such property
for such fair market value on the date of the revaluation.                      

Redemption Rights                                                               

         Pursuant  to the  Partnership  Agreement,  the  Limited  Partners  will
receive the Redemption  Rights,  which will enable them to cause the Partnership
to redeem  their  interests in the  Partnership  in exchange for cash or, at the
option of the Company,  Class B Common  Shares on a  one-for-one  basis.  In the
event that the Class B Common Shares are converted  into Priority  Common Shares
prior to redemption of the Subordinated  Units,  such  outstanding  Subordinated
Units will be redeemable  for Priority  Common  Shares.  If the Company does not
exercise its option to redeem such interests for Class B Common Shares, then the
Limited Partner may make a written demand that the Company redeem such interests
for Class B Common  Shares.  Notwithstanding  the foregoing,  a Limited  Partner
shall not be entitled to exercise its  Redemption  Rights to the extent that the
issuance of Common Shares to the redeeming  Limited  Partner would (i) result in
any  person  owning,  directly  or  indirectly,  Common  Shares in excess of the
Ownership  Limitation,  (ii) result in the shares of beneficial  interest of the
Company being owned by fewer than 100 persons  (determined  without reference to
any rules of  attribution),  (iii) result in the Company  being  "closely  held"
within the meaning of Section 856(h) of the Code, (iv) cause the Company to own,
actually or constructively,  10% or more of the ownership  interests in a tenant
of the  Company's  or the  Partnership's  real  property,  within the meaning of
Section  856(d)(2)(B) of the Code, or (v) cause the acquisition of Common Shares
by such redeeming Limited Partner to be "integrated" with any other distribution
of Common Shares for purposes of complying with the Securities Act. With respect
to the  Subordinated  Units issued in  connection  with the  acquisition  of the
Stabilized  Hotels,  the  Redemption  Rights  may be  exercised  by the  Limited
Partners at any time after one year following the  acquisition of the Stabilized
Hotels.  With respect to the  Subordinated  Units issued in connection  with the
acquisition of the Newly-  Renovated Hotels and the Newly- Developed Hotels,    
the Redemption  Rights may not be exercised by the Limited  Partners until after
the First  Adjustment  Date or Second  Adjustment  Date, as  applicable.  In all
cases,  however,  (i) each Limited Partner may not exercise the Redemption Right
for fewer than 1,000 Units or, if such  Limited  Partner  holds fewer than 1,000
Units, all of the Units held by such Limited Partner,  (ii) each Limited Partner
may not  exercise  the  Redemption  Right for more than the number of Units that
would,  upon  redemption,  result in such  Limited  Partner or any other  person
owning,  directly  or  indirectly,  Common  Shares in  excess  of the  Ownership
Limitation and (iii) each Limited Partner may not exercise the Redemption  Right
more than two times annually.  The aggregate  number of Common Shares  initially
issuable  upon  exercise  of the  Redemption  Rights will be  approximately  4.0
million.  The number of Common Shares  issuable upon exercise of the  Redemption
Rights will be adjusted upon the  revaluation on the First  Adjustment  Date and
the  Second  Adjustment  Date  or  the  occurrence  of  share  splits,  mergers,
consolidations  or similar pro rata share  transactions,  which  otherwise would
have the effect of diluting or increasing the ownership interests of the Limited
Partners or the shareholders of the Company.                                    

Operations                                                                      

         The Partnership  Agreement requires that the Partnership be operated in
a manner  that will enable the  Company to satisfy  the  requirements  for being
classified  as a REIT,  to avoid any  federal  income or  excise  tax  liability
imposed by the Code (other than any federal income tax liability associated with
the Company's  retained capital gains),  and to ensure that the Partnership will
not be classified  as a "publicly  traded  partnership"  for purposes of Section
7704 of the Code.                                                               

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         In addition to the  administrative  and  operating  costs and  expenses
incurred by the Partnership,  the Partnership will pay all administrative  costs
and expenses of the Company (the "Company  Expenses")  and the Company  Expenses
will be treated as expenses of the Partnership.  The Company Expenses  generally
will  include (A) all  expenses  relating to the  formation  and  continuity  of
existence of the Company,  (B) all expenses  relating to the public offering and
registration of securities by the Company,  (C) all expenses associated with the
preparation  and filing of any periodic  reports by the Company  under  federal,
state or local laws or regulations,  (D) all expenses associated with compliance
by the Company with laws,  rules and  regulations  promulgated by any regulatory
body and (E) all other operating or administrative costs of the Company incurred
in the ordinary course of its business on behalf of the Partnership. The Company
Expenses,  however,  will not include any administrative and operating costs and
expenses  incurred by the Company that are attributable to hotel properties that
are owned by the Company directly.  The Company initially will not own any hotel
directly.                                                                       

Distributions                                                                   

         The Partnership  Agreement  provides that,  during the Priority Period,
the Partnership will distribute cash available for  distribution  (including net
sale or  refinancing  proceeds,  but excluding net proceeds from the sale of the
Partnership's property in connection with the liquidation of the Partnership) on
a quarterly  (or, at the  election of the  Company,  more  frequent)  basis,  in
amounts determined by the Company in its sole discretion, in the following order
of priority:  (i) first,  to the Company  until the Company has  received,  on a
cumulative basis, $0.18 per quarter per Unit held by the Company (the "Preferred
Return"),  (ii)  second,  to the  Limited  Partners  in  accordance  with  their
respective  percentage  interests in the Partnership  until each Limited Partner
has received an amount equal to the Preferred Return, and (iii) finally,  to the
Company and the Limited Partners in accordance with their respective  percentage
interests in the Partnership.  After the Priority  Period,  the Partnership will
distribute cash from operations (including net sale or refinancing proceeds, but
excluding net proceeds from the sale of the Partnership's property in connection
with the liquidation of the  Partnership) on a quarterly (or, at the election of
the Company,  more frequent) basis, in amounts  determined by the Company in its
sole  discretion,  to the Company and the Limited  Partners in  accordance  with
their respective percentage interests in the Partnership.                       

         Upon liquidation of the Partnership  during the Priority Period,  after
payment of, or adequate provision for, debts and obligations of the Partnership,
including any partner loans,  any remaining  assets of the  Partnership  will be
distributed in the following order of priority:  (i) first, to the Company until
the Company has  received  any unpaid  Preferred  Return plus an amount equal to
$6.00 per Unit held by the  Company,  (ii)  second,  to the Limited  Partners in
accordance with their respective  percentage  interests in the Partnership until
each Limited Partner has received an amount equal to any unpaid Preferred Return
plus $6.00 per Unit held by the such Limited Partner,  and (iii) finally, to the
Company and the Limited  Partners with positive  capital  accounts in accordance
with their respective positive capital account balances. Upon liquidation of the
Partnership after the Priority Period,  after payment of, or adequate  provision
for, debts and obligations of the Partnership,  including any partner loans, any
remaining  assets of the Partnership  will be distributed to the Company and the
Limited  Partners  with  positive  capital  accounts  in  accordance  with their
respective  positive  capital  account  balances.  If the Company has a negative
balance in its capital account  following a liquidation of the  Partnership,  it
will be obligated to contribute  cash to the  Partnership  equal to the negative
balance in its capital account.                                                 

Allocations                                                                     

         Depreciation  and  amortization  deductions of the Partnership for each
fiscal  year will be  allocated  to the  Company  and the  Limited  Partners  in
accordance with their respective percentage interests in the Partnership. Profit
of the Partnership (excluding depreciation and amortization deductions) for each
fiscal year will be allocated in the following order of priority:               
 (i) first, to the Company until the aggregate amount of profit allocated to the
Company  under this clause (i) for the  current  and all prior years  equals the
aggregate amount of Preferred Return  distributed to the Company for the current
and all prior years,  (ii) second,  to the Limited  Partners in accordance  with
their  respective  percentage  interests in the Partnership  until the aggregate
amount of profit  allocated to the Limited  Partners  under this clause (ii) for
the current and all prior years equals the aggregate  amount of Preferred Return
distributed  to the Limited  Partners for the current and all prior  years,  and
(iii) finally,  to the Company and the Limited Partners in accordance with their
respective  percentage  interests in the Partnership.  Losses of the Partnership
(excluding  depreciation  and  amortization  deductions)  for each  fiscal  year
generally  will  be  allocated  to the  Company  and  the  Limited  Partners  in
accordance with their respective percentage interests in the Partnership. All of
the foregoing  allocations  will be subject to compliance with the provisions of
Code Sections 704(b) and 704(c) and Treasury Regulations promulgated thereunder.

Term                                                                            

         The Partnership  will continue until December 31, 2050, or until sooner
dissolved  upon (i) the  bankruptcy,  dissolution  or  withdrawal of the Company
(unless the Limited Partners elect to continue the  Partnership),  (ii) the sale
or other  disposition of all or substantially all the assets of the Partnership,
(iii) the redemption of all Units (other than those held by the Company, if any)
or (iv) an election by the General Partner.                                     

Tax Matters                                                                     

Pursuant to the Partnership Agreement, the Company will be    
the tax matters partner of the Partnership and, as such, will                   

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have authority to handle tax audits and to make tax elections  under the Code on
behalf of the Partnership.                                                      

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 FEDERAL INCOME TAX CONSEQUENCES

         The following is a summary of material  federal income tax consequences
that may be relevant to a prospective holder of Common Shares. Hunton & Williams
has acted as counsel to the Company and has reviewed  this summary and is of the
opinion that the  discussion  contained  herein  fairly  summarizes  the federal
income tax consequences that are likely to be material to a holder of the Common
Shares.  The  discussion  does not address  all aspects of taxation  that may be
relevant to particular shareholders in light of their personal investment or tax
circumstances,   or  to  certain  types  of  shareholders  (including  insurance
companies,  tax-exempt  organizations  (except as  discussed  below),  financial
institutions  or  broker-dealers,   and,  except  as  discussed  below,  foreign
corporations and persons who are not citizens or residents of the United States)
subject to special treatment under the federal income tax laws.                 

         The statements in this  discussion and the opinion of Hunton & Williams
are based on current provisions of the Code, existing,  temporary, and currently
proposed Treasury  Regulations,  the legislative  history of the Code,  existing
administrative rulings and practices of the Service, and judicial decisions.  No
assurance  can be given that future  legislative,  judicial,  or  administrative
actions or decisions,  which may be retroactive  in effect,  will not affect the
accuracy of any statements in this Prospectus  with respect to the  transactions
entered into or contemplated prior to the effective date of such changes.       

         EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL,  STATE,  LOCAL,  FOREIGN,  AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. 

Taxation of the Company                                                         

         The  Company  currently  has in  effect  an  election  to be taxed as a
pass-through  entity under subchapter S of the Code, but intends to revoke its S
election on the day prior to the closing of the  Offering.  The Company plans to
make an  election  to be taxed as a REIT under  sections  856 through 860 of the
Code,  effective for its short taxable year  beginning on the date of revocation
of its S election and ending on December 31, 1999.  The Company  believes  that,
commencing with such taxable year, it will be organized and will operate in such
a manner as to qualify for  taxation  as a REIT under the Code,  and the Company
intends to continue to operate in such a manner,  but no assurance  can be given
that the Company will  operate in a manner so as to qualify or remain  qualified
as a REIT.                                                                      

         The sections of the Code relating to  qualification  and operation as a
REIT are highly technical and complex.  The following  discussion sets forth the
material  aspects  of the Code  sections  that  govern  the  federal  income tax
treatment of a REIT and its  shareholders.  The  discussion  is qualified in its
entirety by the applicable Code  provisions,  Treasury  Regulations  promulgated
thereunder,  and administrative  and judicial  interpretations  thereof,  all of
which are subject to change prospectively or retrospectively.                   

         Hunton & Williams  has acted as counsel  to the  Company in  connection
with the  Offering  and the  Company's  election  to be taxed as a REIT.  In the
opinion of Hunton & Williams,  commencing  with the Company's short taxable year
ending  December  31,   1999,  and  assuming  that  the  elections  and  other  
procedural   steps   described  in  this   discussion  of  "Federal  Income  Tax
Consequences" are completed by the Company in a timely fashion, the Company will
be organized in conformity with the  requirements  for  qualification as a REIT,
and its proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code.  Investors should be aware,
however, that opinions of counsel are not binding upon the Service or any court.
It must be  emphasized  that  Hunton &  Williams'  opinion  is based on  various
assumptions and is conditioned upon certain  representations made by the Company
as to factual  matters,  including  representations  regarding the nature of the
Company's  properties,  the  Percentage  Leases,  and the future  conduct of the
Company's  business.  Such factual assumptions and representations are described
below in this discussion of "Federal Income Tax Consequences" and are set out in
the federal  income tax opinion  that will be  delivered by Hunton & Williams at
the closing of the Offering. Moreover, such qualification and taxation as a REIT
depend upon the Company's ability to meet on a continuing basis,  through actual
annual operating results,  distribution levels, and share ownership, the various
qualification  tests imposed under the Code discussed  below.  Hunton & Williams
will not review the Company's compliance with those tests on a continuing basis.
Accordingly,  no assurance can be given that the actual results of the Company's
operation for any particular taxable year will satisfy such requirements.  For a
discussion  of the tax  consequences  of  failure  to  qualify  as a  REIT,  see
"--Failure to Qualify."                                                         

         If the Company  qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment  substantially  eliminates the    
"double taxation" (i.e., taxation at both the corporate and shareholder levels) 
that generally results from an investment in a corporation. However, the Company
will be subject to federal income tax in the following circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed REIT      
taxable income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on   
its undistributed items of tax preference. Third, if the Company has (i) net    
income from the sale or other disposition of "foreclosure property" that is held
primarily for sale to customers in the ordinary course of business or (ii) other
non-qualifying income from foreclosure property, it will be subject to tax at   
the highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other     

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dispositions  of property (other than  foreclosure  property) held primarily for
sale to  customers  in the  ordinary  course of  business),  such income will be
subject to a 100% tax.  Fifth,  if the  Company  should  fail to satisfy the 75%
gross income test or the 95% gross  income test (as  discussed  below),  and has
nonetheless  maintained  its  qualification  as a  REIT  because  certain  other
requirements have been met, it will be subject to a 100% tax on the gross income
attributable  to the greater of the amount by which the Company fails the 75% or
95% gross  income  test,  multiplied  by a  fraction  intended  to  reflect  the
Company's profitability.  Sixth, if the Company should fail to distribute during
each calendar  year at least the sum of (i) 85% of its REIT ordinary  income for
such year, (ii) 95% of its REIT capital gain net income for such year, and (iii)
any  undistributed  taxable  income from prior  periods,  the  Company  would be
subject to a 4% excise tax on the excess of such required  distribution over the
amounts  actually  distributed.  To the extent that the Company elects to retain
and pay income tax on its net long-term capital gain, such retained amounts will
be  treated  as having  been  distributed  for  purposes  of the 4% excise  tax.
Seventh,  if the  Company  acquires  any asset  from a C  corporation  (i.e.,  a
corporation  generally subject to full  corporate-level tax) in a transaction in
which the basis of the asset in the  Company's  hands is determined by reference
to the basis of the asset (or any other asset) in the hands of the C corporation
and the Company  recognizes  gain on the  disposition  of such asset  during the
10-year  period  beginning  on the date on which such asset was  acquired by the
Company, then to the extent of such asset's "built-in gain" (i.e., the excess of
the fair market  value of such asset at the time of  acquisition  by the Company
over the adjusted  basis in such asset at such time),  such gain will be subject
to tax at the highest regular corporate rate applicable (as provided in Treasury
Regulations  that have not yet been  promulgated).  The results  described above
with respect to the recognition of "built-in gain" assume that the Company would
make an  election  pursuant  to IRS  Notice  88-19  if it were to make  any such
acquisition.                                                                    

Requirements for Qualification                                                  

         The Code defines a REIT as a corporation, trust or association (i) that
is managed by one or more trustees or directors;  (ii) the beneficial  ownership
of which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,  but
for  sections  856  through  860 of the Code;  (iv) that is neither a  financial
institution nor an insurance company subject to certain  provisions of the Code;
(v) the beneficial  ownership of which is held by 100 or more persons;  (vi) not
more than 50% in value of the outstanding shares of beneficial interest of which
is owned,  directly or indirectly,  by five or fewer  individuals (as defined in
the Code to include certain  entities) during the last half of each taxable year
(the "5/50  Rule");  (vii) that makes an election to be a REIT (or has made such
election for a previous  taxable  year) and  satisfies  all relevant  filing and
other administrative requirements established by the Service that must be met in
order to elect and to maintain REIT status; (viii) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping  requirements of
the Code and  Treasury  Regulations;  and (ix) that meets  certain  other tests,
described  below,  regarding  the  nature of its  income  and  assets.  The Code
provides that conditions (i) to (iv),  inclusive,  must be met during the entire
taxable  year and that  condition  (v) must be met during at least 335 days of a
taxable year of 12 months,  or during a proportionate  part of a taxable year of
less than 12  months.  Conditions  (v) and (vi) will not apply  until  after the
first taxable year for which an election is made by the Company to be taxed as a
REIT. The Company  anticipates  issuing sufficient Common Shares with sufficient
diversity  of  ownership  pursuant  to  the  Offering  to  allow  it to  satisfy
requirements  (v) and (vi).  In addition,  the  Company's  Declaration  of Trust
provides for restrictions  regarding ownership and transfer of the Common Shares
that are  intended  to assist the  Company in  continuing  to satisfy  the share
ownership   requirements   described  in  (v)  and  (vi)  above.  Such  transfer
restrictions   are   described   in   "Description   of  Shares  of   Beneficial
Interest--Restrictions on Transfer."                                            

         For  purposes of  determining  share  ownership  under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust  permanently  set aside or used  exclusively  for  charitable
purposes is considered an individual, although a trust that is a qualified trust
under Code section 401(a) is not considered an individual and the  beneficiaries
of such trust are  treated as holding  shares of a REIT in  proportion  to their
actuarial interests in the trust for purposes of the 5/50 Rule.                 

         The Company does not  currently  have any corporate  subsidiaries,  nor
will it have any  corporate  subsidiaries  immediately  after  completion of the
Offering,  although  it may have  corporate  subsidiaries  in the  future.  Code
section 856(i) provides that a corporation that is a "qualified REIT subsidiary"
shall not be treated as a separate corporation, and all assets, liabilities, and
items of income, deduction, and credit of a "qualified REIT subsidiary" shall be
treated as assets,  liabilities,  and items of income,  deduction, and credit of
the REIT. A "qualified  REIT  subsidiary" is a  corporation,  all of the capital
stock of  which  is  owned by the  REIT.  Thus,  in  applying  the  requirements
described herein,  any "qualified REIT  subsidiaries"  acquired or formed by the
Company  will be  ignored,  and all  assets,  liabilities,  and items of income,
deduction,   and  credit  of  such  subsidiaries  will  be  treated  as  assets,
liabilities and items of income, deduction, and credit of the Company.          

         Pursuant to Treasury Regulations  effective January 1, 1997 relating to
entity  classification  (the  "Check-the-Box  Regulations"),  an  unincorporated
entity that has a single owner is  disregarded  as an entity  separate  from its
owner for  federal  income tax  purposes.  Some of the  hotels  will be owned by
partnerships  ("Subsidiary  Partnerships") that are owned 99% by the Partnership
and 1% by a limited  liability company (the "Subsidiary LLC") that is owned 100%
by the Partnership. Under                                                       

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the  Check-the-Box  Regulations,  because the Partnership  will be deemed to own
100% of the interests in the  Subsidiary  LLC and the  Subsidiary  Partnerships,
both the Subsidiary LLC and the Subsidiary  Partnerships  will be disregarded as
entities  separate from the  Partnership  for federal  income tax purposes.  The
Subsidiary LLC and the Subsidiary Partnerships, however, may be subject to state
and local taxation.                                                             

         In the case of a REIT  that is a  partner  in a  partnership,  Treasury
Regulations  provide that the REIT will be deemed to own its proportionate share
of the assets of the  partnership and will be deemed to be entitled to the gross
income of the partnership  attributable  to such share. In addition,  the assets
and gross income of the partnership  will retain the same character in the hands
of the REIT for purposes of section 856 of the Code,  including  satisfying  the
gross income and asset tests, described below. Thus, the Company's proportionate
share of the assets,  liabilities and items of income of the Partnership will be
treated as assets and gross  income of the Company for  purposes of applying the
requirements described herein.                                                  

Income Tests                                                  

         In order for the Company to maintain its qualification as a REIT, there
are two  requirements  relating  to the  Company's  gross  income  that  must be
satisfied annually. First, at least 75% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real  property or  mortgages  on real  property  (including  "rents from real
property"  and, in certain  circumstances,  interest)  or  temporary  investment
income.  Second,  at least 95% of the Company's  gross income  (excluding  gross
income from prohibited  transactions) for each taxable year must be derived from
such real property or temporary investments,  and from dividends, other types of
interest, and gain from the sale or disposition of stock or securities,  or from
any combination of the foregoing. The specific application of these tests to the
Company is discussed below.                                                     

         Rents  received  by the  Company  will  qualify  as  "rents  from  real
property" in satisfying the gross income requirements for a REIT described above
only if several  conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person.  However,  an amount
received or accrued  generally  will not be  excluded  from the term "rents from
real  property"  solely  by  reason  of  being  based on a fixed  percentage  or
percentages of receipts or sales.  Second, the Code provides that rents received
from a tenant will not qualify as "rents from real  property" in satisfying  the
gross income  tests if the  Company,  or an owner of 10% or more of the Company,
directly or  constructively  owns 10% or more of such  tenant (a "Related  Party
Tenant"). Third, if rent attributable to personal property, leased in connection
with a lease of real  property,  is greater than 15% of the total rent  received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property."  Finally,  for rents received to
qualify as "rents from real property," the Company generally must not operate or
manage  the  property  or  furnish  or render  services  to the  tenants of such
property,  other than  through an  "independent  contractor"  who is  adequately
compensated  and from whom the  Company  derives no  revenue.  The  "independent
contractor"  requirement,  however,  does not apply  with  respect to certain de
minimis  services  or to the extent the  services  provided  by the  Company are
"usually or  customarily  rendered" in  connection  with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant."     

         Pursuant  to the  Percentage  Leases,  the  Lessee  will lease from the
Partnership  the  land,  buildings,  improvements,   furnishings  and  equipment
comprising the Initial  Hotels for a five-year  period.  The  Percentage  Leases
provide that the Lessee will be obligated to pay to the  Partnership  (i) either
the Initial Fixed Rents (for the Newly-Developed  Hotels and the Newly-Renovated
Hotels) or the greater of Base Rent and  Percentage  Rent,  with  respect to the
other Initial Hotels and (ii) certain other Additional  Charges.  The Percentage
Rent is calculated by multiplying  fixed percentages by the gross room and other
revenues for each of the Initial Hotels.  The Rent accrues and is required to be
paid quarterly.  Until the First Adjustment Date or the Second  Adjustment Date,
as  applicable,  the rent on the  Newly-  Renovated  Hotels  and the  Newly-    
Developed  Hotels will be the Initial  Fixed Rents  applicable  to those hotels.
After the First  Adjustment Date or the Second  Adjustment  Date, as applicable,
rent will be computed  with  respect to the  Newly-  Renovated  Hotels and the  
Newly-  Developed  Hotels  based on the  Percentage  Rent  formulas  described  
herein.                                                                         

         In order for the Rent and the Additional  Charges to constitute  "rents
from real property," the Percentage  Leases must be respected as true leases for
federal income tax purposes and not treated as service contracts, joint ventures
or some other type of arrangement.  The  determination of whether the Percentage
Leases are true leases depends on an analysis of all the  surrounding  facts and
circumstances. In making such a determination,  courts have considered a variety
of factors,  including the  following:  (i) the intent of the parties,  (ii) the
form of the  agreement,  (iii) the degree of control over the  property  that is
retained by the property owner (e.g., whether the lessee has substantial control
over the operation of the property or whether the lessee was required  simply to
use its best efforts to perform its obligations  under the agreement),  and (iv)
the extent to which the property  owner retains the risk of loss with respect to
the property (e.g.,  whether the lessee bears the risk of increases in operating
expenses or the risk of damage to the property).                                

         In  addition,  Code  section  7701(e)  provides  that a  contract  that
purports  to be a service  contract  (or a  partnership  agreement)  is  treated
instead as a lease of  property if the  contract  is  properly  treated as such,
taking into  account all  relevant  factors,  including  whether or not: (i) the
service  recipient is in physical  possession of the property,  (ii) the service
recipient  controls the property,  (iii) the service recipient has a significant
economic or possessory interest in                                              

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the property (e.g.,  the property's use is likely to be dedicated to the service
recipient  for a  substantial  portion of the useful life of the  property,  the
recipient shares the risk that the property will decline in value, the recipient
shares in any appreciation in the value of the property, the recipient shares in
savings in the property's  operating  costs,  or the recipient bears the risk of
damage to or loss of the property),  (iv) the service provider does not bear any
risk  of   substantially   diminished   receipts  or   substantially   increased
expenditures  if there is  nonperformance  under the  contract,  (v) the service
provider does not use the property  concurrently to provide significant services
to entities  unrelated  to the service  recipient,  and (vi) the total  contract
price does not  substantially  exceed the rental  value of the  property for the
contract period.  Since the  determination  whether a service contract should be
treated as a lease is inherently factual,  the presence or absence of any single
factor may not be dispositive in every case.                                    

         The Company believes that the Percentage Leases will be treated as true
leases for federal  income tax purposes.  Such belief is based,  in part, on the
following   facts:   (i)  the  Partnership  and  the  Lessee  intend  for  their
relationship  to be that of a lessor and lessee  and such  relationship  will be
documented by lease agreements, (ii) the Lessee will have the right to exclusive
possession and use and quiet  enjoyment of the Initial Hotels during the term of
the  Percentage  Leases,  (iii)  the  Lessee  will  bear  the  cost  of,  and be
responsible for, day-to-day  maintenance and repair of the Initial Hotels, other
than the cost of capital expenditures that are classified as capital items under
generally accepted  accounting  principles which are necessary for the continued
operation  of the Initial  Hotels and will  dictate  how the Initial  Hotels are
operated,  maintained,  and improved, (iv) the Lessee will bear all of the costs
and  expenses  of  operating  the  Initial  Hotels  (including  the  cost of any
inventory  used in their  operation)  during the term of the  Percentage  Leases
(other  than  real  and  personal  property  taxes,  ground  lease  rent  (where
applicable)),  property  and  casualty  insurance,  the cost of  replacement  or
refurbishment   of  furniture,   fixtures  and  equipment,   and  other  capital
improvements,  to the extent  such costs do not  exceed the  allowance  for such
costs provided by the Partnership under each Percentage  Lease),  (v) the Lessee
will  benefit  from any savings in the costs of  operating  the  Initial  Hotels
during  the  term of the  Percentage  Leases,  (vi) in the  event of  damage  or
destruction to an Initial Hotel,  the Lessee will be at economic risk because it
will be obligated either (A) to restore the property to its prior condition,  in
which  event  it will  bear all  costs  of such  restoration  in  excess  of any
insurance  proceeds or (B) to purchase the Initial Hotel for an amount generally
equal to the fair market value of the  property,  less any  insurance  proceeds,
(vii) the Lessee will indemnify the Partnership  against all liabilities imposed
on the  Partnership  during the term of the  Percentage  Leases by reason of (A)
injury to persons or damage to property  occurring at the Initial  Hotels or (B)
the  Lessee's  use,  management,  maintenance  or repair of the Initial  Hotels,
(viii) the Lessee is obligated to pay  substantial  fixed rent for the period of
use of the Initial Hotels and (ix) the Lessee stands to incur substantial losses
(or reap  substantial  gains)  depending  on how  successfully  it operates  the
Initial Hotels.                                                                 

         Investors  should  be aware  that  there  are no  controlling  Treasury
Regulations,  published  rulings,  or judicial  decisions  involving leases with
terms  substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. If the Percentage
Leases are  recharacterized  as service  contracts  or  partnership  agreements,
rather  than  true  leases,  part or all of the  payments  that the  Partnership
receives from the Lessee may not be considered rent or may not otherwise satisfy
the various  requirements  for  qualification  as "rents from real property." In
that case, the Company likely would not be able to satisfy either the 75% or 95%
gross income test and, as a result, would lose its REIT status.                 

         In order for the Rent to constitute "rents from real property," several
other  requirements  also must be satisfied.  One  requirement  is that the Rent
attributable  to personal  property  leased in connection  with the lease of the
real  property  comprising  an Initial Hotel must not be greater than 15% of the
Rent received under the Percentage  Lease. The Rent attributable to the personal
property  in an Initial  Hotel is the amount  that bears the same ratio to total
rent for the taxable year as the average of the  adjusted  bases of the personal
property  associated  with the Initial  Hotel at the beginning and at the end of
the taxable year bears to the average of the  aggregate  adjusted  bases of both
the real and personal property comprising the Initial Hotel at the beginning and
at the end of such taxable year (the "Adjusted  Basis  Ratio").  With respect to
each Initial Hotel, the initial adjusted bases of the personal  property in such
hotel will be less than 15% of the initial  adjusted  bases of both the real and
personal property comprising such Hotel.  Furthermore,  the Partnership will not
acquire  additional  personal  property for an Initial  Hotel to the extent that
such  acquisition  would cause the Adjusted Basis Ratio for that hotel to exceed
15%. There can be no assurance,  however, that the Service would not assert that
the adjusted basis of the personal property acquired by the Partnership exceeded
the adjusted basis claimed by the Partnership,  or that a court would not uphold
such  assertion.  If such a challenge were  successfully  asserted,  the Company
could fail the  Adjusted  Basis Ratio as to one or more of the  Initial  Hotels,
which in turn potentially could cause it to fail to satisfy the 95% or 75% gross
income test and thus lose its REIT status.                                      

         Another  requirement for  qualification of the Rent as "rents from real
property" is that the  Percentage  Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however,  will qualify
as "rents from real property" if it is based on percentages of receipts or sales
and the percentages (i) are fixed at the time the Percentage  Leases are entered
into, (ii) are not  renegotiated  during the term of the Percentage  Leases in a
manner that has the effect of basing  Percentage Rent on income or profits,  and
(iii) conform with                                                              

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normal business practice.  More generally,  the Percentage Rent will not qualify
as "rents from real property" if,  considering the Percentage Leases and all the
surrounding circumstances, the arrangement does not conform with normal business
practice,  but is in reality  used as a means of basing the  Percentage  Rent on
income or profits.  Since the Percentage  Rent is based on fixed  percentages of
the gross revenues per quarter from the Initial  Hotels that are  established in
the Percentage  Leases, and the Company has represented that the percentages (i)
will not be renegotiated  during the terms of the Percentage  Leases in a manner
that has the effect of basing the Percentage  Rent on income or profits and (ii)
conform  with  normal  business  practice,  the  Percentage  Rent  should not be
considered  based in whole or in part on the income or  profits  of any  person.
Furthermore, the Company has represented that, with respect to other hotels that
it  acquires in the future,  it will not charge  rent for any  property  that is
based in whole or in part on the  income or  profits  of any  person  (except by
reason of being based on a fixed  percentage of gross  revenues per quarter,  as
described above).                                                               

         A third  requirement for  qualification of the Rent as "rents from real
property" is that the Company must not own, actually or  constructively,  10% or
more of the ownership interests in the Lessee. The constructive  ownership rules
generally  provide  that,  if 10% or more in value of the  shares of  beneficial
interest in the Company are owned, directly or indirectly, by or for any person,
the Company is considered as owning the shares owned, directly or indirectly, by
or  for  such  person.   The  Company   initially  will  not  own,  actually  or
constructively,  any  interest  in  the  Lessee.  The  Limited  Partners  of the
Partnership,  including  Mr. Shah,  who is a partner of the Lessee,  may acquire
Common Shares by exercising their Redemption Rights. The Partnership  Agreement,
however,  provides that a redeeming  Limited  Partner will receive cash,  rather
than Common  Shares,  at the  election of the Company or if the  acquisition  of
Common  Shares by such  partner  would  cause the  Company to own,  actually  or
constructively,  10% or more  of the  ownership  interests  in a  tenant  of the
Company's  or the  Partnership's  real  property,  within the meaning of section
856(d)(2)(B)  of the  Code.  The  Declaration  of  Trust  likewise  prohibits  a
shareholder  of the Company from owning  Common or  Preferred  Shares that would
cause  the  Company  to  own,  actually  or  constructively,  10% or more of the
ownership  interests  in a tenant of the  Company's  or the  Partnership's  real
property,  within the meaning of section  856(d)(2)(B)  of the Code.  Thus,  the
Company should never own, actually or constructively, 10% of more of the Lessee.
Furthermore, the Company has represented that, with respect to other hotels that
it  acquires  in the future,  it will not rent any  property to a Related  Party
Tenant.                                                                         

         A fourth  requirement for qualification of the Rent as "rents from real
property" is that the Company cannot furnish or render noncustomary  services to
the tenants of the  Initial  Hotels,  or manage or operate  the Initial  Hotels,
other than through an independent  contractor who is adequately  compensated and
from whom the Company itself does not derive or receive any income. However, the
Company may furnish or render a de minimis amount of "noncustomary  services" to
the tenants of an Initial Hotel other than through an independent  contractor as
long as the  amount  that the  Company  receives  that is  attributable  to such
services  does not exceed 1% of its total  revenue from the Initial  Hotel.  For
that purpose,  the amount  attributable to the Company's  noncustomary  services
will be at least equal to 150% of the Company's  cost of providing the services.
Provided that the  Percentage  Leases are respected as true leases,  the Company
should satisfy that  requirement  because the  Partnership  will not perform any
services other than customary ones for the Lessee. Furthermore,  the Company has
represented  that,  with respect to other hotels that it acquires in the future,
it will not  perform  noncustomary  services  with  respect to the tenant of the
property.                                                                       
 As described above,  however,  if the Percentage Leases are  recharacterized as
service  contracts  or  partnership   agreements,   the  Rent  likely  would  be
disqualified  as  "rents  from  real  property"  because  the  Company  would be
considered to furnish or render  services to the occupants of the Initial Hotels
and to manage or operate the Initial  Hotels other than  through an  independent
contractor who is adequately  compensated  and from whom the Company  derives or
receives no income.                                                             

         If the Rent does not qualify as "rents from real property"  because the
rents  attributable  to personal  property  exceed 15% of the total Rent from an
Initial Hotel for a taxable year,  the portion of the Rent that is  attributable
to personal  property will not be  qualifying  income for purposes of either the
75% or 95%  gross  income  test.  Thus,  if the Rent  attributable  to  personal
property,  plus any other non-qualifying income, during the taxable year exceeds
5% of the  Company's  gross income  during the year,  the Company would lose its
REIT  status.  If,  however,  the Rent  does not  qualify  as  "rents  from real
property"  because either (i) the Percentage Rent is considered  based on income
or profits of the Lessee, (ii) the Company owns, actually or constructively, 10%
or more of the Lessee,  or (iii) the  Company  furnishes  noncustomary  services
(other than certain de minimis  services) to the tenants of the Initial  Hotels,
or manages or  operates  the Initial  Hotels,  other than  through a  qualifying
independent  contractor,  none of the Rent  would  qualify  as "rents  from real
property." In that case,  the Company  likely would lose its REIT status because
it would be unable to satisfy either the 75% or 95% gross income test.          

         In  addition  to  the  Rent,  the  Lessee  is  required  to  pay to the
Partnership the Additional  Charges.  To the extent that the Additional  Charges
represent either (i)  reimbursements  of amounts that the Lessee is obligated to
pay to third parties or (ii)  penalties  for  nonpayment or late payment of such
amounts, the Additional Charges should qualify as "rents from real property." To
the extent,  however,  that the Additional  Charges  represent  interest that is
accrued  on  the  late  payment  of the  Rent  or the  Additional  Charges,  the
Additional Charges should not qualify as "rents from real property," but instead
should be treated as interest that qualifies for the 95% gross income test.     

         The term  "interest"  generally does not include any amount received or
accrued (directly or indirectly) if the determination                           

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of such  amount  depends  in whole or in part on the  income or  profits  of any
person.  However,  an amount received or accrued  generally will not be excluded
from the term "interest"  solely by reason of being based on a fixed  percentage
or percentages of receipts or sales.                                            

         The net income derived from any prohibited  transaction is subject to a
100% tax. The term "prohibited  transaction"  generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for  sale to  customers  in the  ordinary  course  of a trade or  business.  All
inventory  required in the operation of the Initial  Hotels will be purchased by
the Lessee or its  designee as required by the terms of the  Percentage  Leases.
Accordingly,  the  Company  believes  that no asset  owned by the Company or the
Partnership will be held for sale to customers and that a sale of any such asset
will  not  be in  the  ordinary  course  of  business  of  the  Company  or  the
Partnership.  Whether  property is held  "primarily for sale to customers in the
ordinary  course  of a trade or  business"  depends,  however,  on the facts and
circumstances  in  effect  from  time to  time,  including  those  related  to a
particular property.  Nevertheless, the Company and the Partnership will attempt
to comply with the terms of safe-harbor  provisions in the Code prescribing when
asset  sales will not be  characterized  as  prohibited  transactions.  Complete
assurance  cannot be given,  however,  that the Company and the  Partnership can
comply with the safe-harbor provisions of the Code or avoid owning property that
may be  characterized  as property held  "primarily for sale to customers in the
ordinary course of a trade or business."                                        

         The Company will be subject to tax at the maximum corporate rate on any
income from  foreclosure  property  (other  than income that would be  qualified
income under the 75% gross income test), less expenses  directly  connected with
the  production  of such income.  However,  gross  income from such  foreclosure
property will be qualifying  income for purposes of the 75% and 95% gross income
tests.  "Foreclosure  property"  is  defined  as any  real  property  (including
interests  in real  property)  and any personal  property  incident to such real
property (i) that is acquired by a REIT as the result of such REIT having bid in
such  property at  foreclosure,  or having  otherwise  reduced such  property to
ownership  or  possession  by  agreement  or process of law,  after  there was a
default  (or  default  was  imminent)  on a  lease  of  such  property  or on an
indebtedness  that such  property  secured  and (ii) for which such REIT makes a
proper election to treat such property as foreclosure  property.  As a result of
the rules with respect to foreclosure  property,  if the Lessee  defaults on its
obligations  under a Percentage  Lease for a Hotel,  the Company  terminates the
Lessee's  leasehold  interest,  and the Company is unable to find a  replacement
lessee for such Hotel  within 90 days of such  foreclosure,  gross  income  from
hotel operations conducted by the Company from such Hotel would cease to qualify
for the 75% and 95% gross income tests. In such event,  the Company likely would
be unable to satisfy the 75% and 95% gross income tests and, thus, would fail to
qualify as a REIT.                                                              

         It is possible that,  from time to time, the Company or the Partnership
will enter into hedging  transactions  with respect to one or more of its assets
or  liabilities.  Any such hedging  transactions  could take a variety of forms,
including  interest rate swap contracts,  interest rate cap or floor  contracts,
futures or forward contracts, and options. To the extent that the Company or the
Partnership enters into an interest rate swap or cap contract,  option,  futures
contract,  forward rate agreement or similar financial  instrument to reduce its
interest  rate risk with respect to  indebtedness  incurred or to be incurred to
acquire  or carry  real  estate  assets,  any  periodic  income or gain from the
disposition of such contract should be qualifying income for purposes of the 95%
gross  income test,  but not the 75% gross  income test.  To the extent that the
Company or the Partnership  hedges with other types of financial  instruments or
in other  situations,  it may not be  entirely  clear how the income  from those
transactions will be treated for purposes of the various income tests that apply
to  REITs  under  the  Code.  The  Company  intends  to  structure  any  hedging
transactions in a manner that does not jeopardize its status as a REIT.         

         If the  Company  fails to satisfy  one or both of the 75% and 95% gross
income tests for any taxable  year,  it may  nevertheless  qualify as a REIT for
such year if it is  entitled to relief  under  certain  provisions  of the Code.
Those relief provisions will be generally  available if the Company's failure to
meet such tests is due to reasonable cause and not due to willful  neglect,  the
Company attaches a schedule of the sources of its income to its return,  and any
incorrect  information on the schedule was not due to fraud with intent to evade
tax. It is not  possible,  however,  to state whether in all  circumstances  the
Company  would be  entitled  to the  benefit  of  those  relief  provisions.  As
discussed above in "Federal Income Tax  Consequences--Taxation  of the Company,"
even if those relief  provisions apply, a 100% tax would be imposed with respect
to the gross  income  attributable  to the  greater  of the  amount by which the
Company  fails  the 75% or 95%  gross  income  test,  multiplied  by a  fraction
intended to reflect the Company's profitability.                                

Asset Tests                                                   

         The  Company,  at the close of each quarter of its taxable  year,  also
must satisfy two tests relating to the nature of its assets. First, at least 75%
of the value of the Company's  total assets must be  represented by cash or cash
items  (including  certain  receivables),  government  securities,  "real estate
assets,"  or, in cases where the Company  raises new  capital  through  share or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments  during the one-year period following the Company's  receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the  principal  balance of
the mortgage  does not exceed the value of the  associated  real  property,  and
shares of other REITs. For purposes of the 75% asset test, the term "interest in
real property"  includes an interest in land and improvements  thereon,  such as
buildings or other  inherently  permanent  structures  (including items that are
structural components of such buildings                                         

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or  structures),  a leasehold  in real  property,  and an option to acquire real
property (or a leasehold  in real  property).  Second,  of the  investments  not
included in the 75% asset class, the value of any one issuer's  securities owned
by the Company may not exceed 5% of the value of the Company's  total assets and
the Company  may not own more than 10% of any one  issuer's  outstanding  voting
securities  (except  for  its  ownership  interests  in the  Partnership  or any
qualified REIT subsidiary).                                                     

         For purposes of the asset tests,  the Company will be deemed to own its
proportionate  share  of  the  assets  of  the  Partnership,   rather  than  its
partnership interest in the Partnership. The Company has represented that, as of
the date of the Offering, (i) at least 75% of the value of its total assets will
be  represented  by  real  estate  assets,   cash  and  cash  items   (including
receivables),  and government securities and (ii) it will not own any securities
that do not satisfy the 75% asset test. In addition, the Company has represented
that it will not  acquire or  dispose,  or cause the  Partnership  to acquire or
dispose,  of assets in the future in a way that would cause it to violate either
asset test.                                                                     

         If the  Company  should fail to satisfy the asset tests at the end of a
calendar  quarter,  such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the  preceding  calendar
quarter and (ii) the discrepancy  between the value of the Company's  assets and
the asset  test  requirements  arose from  changes  in the market  values of its
assets and was not wholly or partly caused by an acquisition  of  non-qualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the quarter in which it arose.    

Distribution Requirements                                     

         The Company,  in order to qualify as a REIT,  is required to distribute
dividends  (other than capital gain dividends) to its  shareholders in an amount
at least equal to (i) the sum of (A) 95% of its "REIT taxable income"  (computed
without regard to the dividends paid deduction and its net capital gain) and (B)
95% of the net income (after tax), if any, from foreclosure property, minus (ii)
the sum of certain items of noncash income.  Such  distributions must be paid in
the taxable  year to which they  relate,  or in the  following  taxable  year if
declared  before the  Company  timely  files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration.  To
the extent that the Company does not  distribute  all of its net capital gain or
distributes  at least 95%, but less than 100%, of its "REIT taxable  income," as
adjusted,  it will be subject to tax  thereon at regular  ordinary  and  capital
gains corporate tax rates. Furthermore, if the Company should fail to distribute
during  each  calendar  year at least  the sum of (i) 85% of its  REIT  ordinary
income for such year,  (ii) 95% of its REIT  capital  gain income for such year,
and (iii) any undistributed taxable income from prior periods, the Company would
be subject  to a 4%  nondeductible  excise  tax on the  excess of such  required
distribution  over the amounts  actually  distributed.  The Company may elect to
retain and pay income tax on its net long-term  capital  gains,  as described in
"--Taxation  of Taxable U.S.  Shareholders."  Any such retained  amount would be
treated as having been  distributed by the Company for purposes of the 4% excise
tax. The Company intends to make timely distributions  sufficient to satisfy all
annual distribution requirements.                                               

         It is possible  that,  from time to time,  the  Company may  experience
timing  differences  between (i) the actual receipt of income and actual payment
of  deductible  expenses and (ii) the  inclusion of that income and deduction of
such  expenses  in arriving  at its REIT  taxable  income.  For  example,  it is
possible  that,  from time to time,  the Company may be allocated a share of net
capital gain  attributable to the sale of depreciated  property that exceeds its
allocable share of cash  attributable to that sale.  Therefore,  the Company may
have less cash available for  distribution  than is necessary to meet its annual
95% distribution  requirement or to avoid corporate income tax or the excise tax
imposed on certain  undistributed  income. In such a situation,  the Company may
find it necessary to arrange for short-term (or possibly  long-term)  borrowings
or to raise funds through the issuance of additional Common or Preferred Shares.

         Under  certain  circumstances,  the  Company  may be able to  rectify a
failure to meet the  distribution  requirement for a year by paying  "deficiency
dividends"  to its  shareholders  in a later year,  which may be included in the
Company's  deduction  for  dividends  paid for the earlier  year.  Although  the
Company may be able to avoid being taxed on amounts  distributed  as  deficiency
dividends,  it will be required to pay to the  Service  interest  based upon the
amount of any deduction taken for deficiency dividends.                         

Recordkeeping Requirement                                     

Pursuant to applicable Treasury Regulations, the Company must maintain
certain records and request on an annual basis certain information from its     
shareholders designed to disclose the actual ownership of its outstanding       
shares. The Company intends to comply with such requirements.                   

Failure to Qualify                                                              

         If the Company  fails to qualify for  taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including  any  applicable  alternative  minimum tax) on its taxable  income at
regular corporate rates.  Distributions to the shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will they
be required to be made. In such event,  to the extent of current and accumulated
earnings and  profits,  all  distributions  to  shareholders  will be taxable as
ordinary  income  and,  subject to certain  limitations  of the Code,  corporate
distributees  may be  eligible  for the  dividends  received  deduction.  Unless
entitled to relief under specific statutory                                     

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provisions,  the Company also will be  disqualified  from taxation as a REIT for
the four taxable  years  following  the year during which the Company  ceased to
qualify as a REIT. It is not possible to state whether in all  circumstances the
Company would be entitled to such statutory relief.                             

Taxation of Taxable U.S. Shareholders                                           

         As long as the Company qualifies as a REIT,  distributions  made to the
Company's taxable U.S.  shareholders out of current or accumulated  earnings and
profits (and not designated as capital gain dividends or retained capital gains)
will be taken into account by such U.S. shareholders as ordinary income and will
not be eligible for the  dividends  received  deduction  generally  available to
corporations.  As used  herein,  the term "U.S.  shareholder"  means a holder of
Common  Shares  that for U.S.  federal  income tax  purposes is (i) a citizen or
resident of the United States, (ii) a corporation,  partnership, or other entity
created  or  organized  in or under  the  laws of the  United  States  or of any
political subdivision thereof, (iii) an estate whose income from sources without
the United  States is  includible  in gross income for U.S.  federal  income tax
purposes  regardless of its  connection  with the conduct of a trade or business
within  the  United  States or (iv) any trust  with  respect to which (A) a U.S.
court is able to exercise primary  supervision over the  administration  of such
trust  and (B) one or more  U.S.  persons  have the  authority  to  control  all
substantial decisions of the trust. Distributions that are designated as capital
gain dividends  will be taxed as long-term  capital gains (to the extent they do
not exceed the  Company's  actual net capital gain for the taxable year) without
regard to the  period  for which the  shareholder  has held his  Common  Shares.
However,  corporate  shareholders  may be required to treat up to 20% of certain
capital gain dividends as ordinary  income.  The Company may elect to retain and
pay income tax on its net long-term  capital gains.  In that case, the Company's
shareholders would include in income their  proportionate share of the Company's
undistributed  long-term capital gains. In addition,  the shareholders  would be
deemed to have paid their  proportionate  share of the tax paid by the  Company,
which would be credited or  refunded  to the  shareholders.  Each  shareholder's
basis in his  shares  would be  increased  by the  amount  of the  undistributed
long-term  capital  gain  included  in  the  shareholder's   income,   less  the
shareholder's share of the tax paid by the Company.                             

         Distributions in excess of current and accumulated earnings and profits
will not be taxable to a  shareholder  to the extent that they do not exceed the
adjusted basis of the  shareholder's  Common Shares,  but rather will reduce the
adjusted  basis of such shares.  To the extent that  distributions  in excess of
current and  accumulated  earnings and profits  exceed the  adjusted  basis of a
shareholder's  Common Shares,  such  distributions will be included in income as
long-term  capital gain (or  short-term  capital gain if the Common  Shares have
been held for one year or less) assuming the Common Shares are capital assets in
the hands of the  shareholder.  In addition,  any  distribution  declared by the
Company  in  October,  November,  or  December  of any  year  and  payable  to a
shareholder  of record on a specified date in any such month shall be treated as
both paid by the Company and received by the  shareholder on December 31 of such
year,  provided that the  distribution  is actually  paid by the Company  during
January of the following calendar year.                                         

         Shareholders may not include in their individual income tax returns any
net  operating  losses or capital  losses of the Company.  Instead,  such losses
would be carried  over by the Company for  potential  offset  against its future
income (subject to certain limitations).  Taxable distributions from the Company
and gain from the  disposition  of the  Common  Shares  will not be  treated  as
passive activity income and, therefore,  shareholders generally will not be able
to apply any "passive  activity  losses"  (such as losses from certain  types of
limited partnerships in which the shareholder is a limited partner) against such
income. In addition,  taxable  distributions  from the Company and gain from the
disposition of Common Shares generally will be treated as investment  income for
purposes  of the  investment  interest  limitations.  The  Company  will  notify
shareholders after the close of the Company's taxable year as to the portions of
the  distributions  attributable to that year that constitute  ordinary  income,
return of capital, and capital gain.                                            

Taxation of Shareholders on the Disposition of the Common Shares                

         In general, any gain or loss realized upon a taxable disposition of the
Common Shares by a shareholder who is not a dealer in securities will be treated
as long-term  capital gain or loss if the Common  Shares have been held for more
than one year and otherwise as  short-term  capital gain or loss.  However,  any
loss upon a sale or exchange of Common Shares by a shareholder who has held such
shares for six months or less (after  applying  certain  holding  period rules),
will be treated as a long-term capital loss to the extent of distributions  from
the Company  required to be treated by such  shareholder  as  long-term  capital
gain.  All or a portion of any loss realized upon a taxable  disposition  of the
Common Shares may be  disallowed if other Common Shares are purchased  within 30
days before or after the disposition.                                           

Capital Gains and Losses                                                        

         A capital asset  generally must be held for more than one year in order
for gain or loss  derived  from its sale or exchange to be treated as  long-term
capital gain or loss.  The maximum tax rate on net capital  gains  applicable to
noncorporate  taxpayers  is 20% for sales and  exchanges of assets held for more
than one year.  The maximum tax rate on long-term  capital gain from the sale or
exchange of "section 1250 property"  (i.e.,  depreciable real property) held for
more than one year is 25% to the extent  that such gain would have been  treated
as ordinary income if the property were "section 1245 property." With respect to
distributions  designated  by the  Company as  capital  gain  dividends  and any
retained capital gains that the Company is deemed to distribute, the Company may
designate (subject to certain limits) whether such a dividend or distribution is
taxable to its                                                                  

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noncorporate  stockholders at a 20% or 25% rate. Thus, the tax rate differential
between  capital  gain and ordinary  income for  noncorporate  taxpayers  may be
significant.  In addition, the characterization of income as capital or ordinary
may affect the  deductibility  of capital  losses.  Capital losses not offset by
capital gains may be deducted against a noncorporate  taxpayer's ordinary income
only up to a maximum  annual  amount of  $3,000.  Unused  capital  losses may be
carried forward.  All net capital gain of a corporate taxpayer is subject to tax
at ordinary corporate rates. A corporate taxpayer can deduct capital losses only
to the extent of capital  gains,  with unused  losses  being  carried back three
years and forward five years.                                                   

Information Reporting Requirements and Backup Withholding                       

         The Company  will report to its U.S.  Shareholders  and the Service the
amount of  distributions  paid during each calendar  year, and the amount of tax
withheld,  if any.  Under the backup  withholding  rules,  a shareholder  may be
subject to backup  withholding at the rate of 31% with respect to  distributions
paid unless such  holder (i) is a  corporation  or comes  within  certain  other
exempt categories and, when required,  demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding,  and otherwise  complies with the  applicable  requirements  of the
backup  withholding  rules. A shareholder  who does not provide the Company with
his correct  taxpayer  identification  number  also may be subject to  penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability.  In addition, the Company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify  their  nonforeign  status to the  Company.  The Service has
issued final  regulations  regarding the backup  withholding rules as applied to
non-U.S.  Shareholders.  Those  regulations  alter the current  system of backup
withholding  compliance and are effective for distributions  made after December
31, 1999. See "--Taxation of Non-U.S.                                           
Shareholders."                                                                  

Taxation of Tax-Exempt Shareholders                                             

         Tax-exempt  entities,  including  qualified employee pension and profit
sharing  trusts and individual  retirement  accounts  ("Exempt  Organizations"),
generally are exempt from federal income taxation.  However, they are subject to
taxation  on their  unrelated  business  taxable  income  ("UBTI").  While  many
investments  in real estate  generate  UBTI,  the Service has issued a published
ruling that dividend distributions by a REIT to an exempt employee pension trust
do not constitute  UBTI,  provided that the shares of the REIT are not otherwise
used in an unrelated trade or business of the exempt employee pension trust.    
 Based  on  that  ruling,   amounts   distributed   by  the  Company  to  Exempt
Organizations  generally  should  not  constitute  UBTI.  However,  if an Exempt
Organization  finances its  acquisition of Common Shares with debt, a portion of
its income from the Company will constitute UBTI pursuant to the  "debt-financed
property"  rules.   Furthermore,   social  clubs,   voluntary  employee  benefit
associations,  supplemental  unemployment  benefit  trusts,  and qualified group
legal services plans that are exempt from taxation  under  paragraphs  (7), (9),
(17),  and (20),  respectively,  of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions from
the Company as UBTI. In addition, in certain circumstances, a pension trust that
owns more than 10% of the Company's shares of beneficial interest is required to
treat a  percentage  of the  dividends  from  the  Company  as UBTI  (the  "UBTI
Percentage").  The UBTI Percentage is the gross income derived from an unrelated
trade or business (determined as if the Company were a pension trust) divided by
the gross  income of the Company for the year in which the  dividends  are paid.
The UBTI rule applies to a pension  trust holding more than 10% of the Company's
shares of beneficial  interest  only if (i) the UBTI  Percentage is at least 5%,
(ii) the Company  qualifies as a REIT by reason of the  modification of the 5/50
Rule that allows the beneficiaries of the pension trust to be treated as holding
shares of beneficial  interest of the Company in  proportion to their  actuarial
interests in the pension trust, and (iii) either (A) one pension trust owns more
than 25% of the value of the Company's  shares of  beneficial  interest or (B) a
group of pension trusts  individually  holding more than 10% of the value of the
Company's shares of beneficial  interest  collectively owns more than 50% of the
value of the Company's shares of beneficial interest.                           

Taxation of Non-U.S. Shareholders                                               

         The rules governing U.S.  federal income taxation of nonresident  alien
individuals,  foreign  corporations,  foreign  partnerships,  and other  foreign
shareholders (collectively,  "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide  more than a summary of such  rules.  PROSPECTIVE
NON-U.S.  SHAREHOLDERS  SHOULD  CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE  IMPACT OF  FEDERAL,  STATE,  AND LOCAL  INCOME  TAX LAWS WITH  REGARD TO AN
INVESTMENT IN THE COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS.          

         Distributions  to Non-U.S.  Shareholders  that are not  attributable to
gain from sales or exchanges by the Company of U.S. real property  interests and
are not designated by the Company as capital gains dividends or retained capital
gains will be treated as  dividends  of ordinary  income to the extent that they
are made out of current or accumulated earnings and profits of the Company. Such
distributions  ordinarily  will be subject to a withholding  tax equal to 30% of
the gross amount of the distribution  unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Common Shares
is treated as effectively connected with the Non-U.S. Shareholder's conduct of a
U.S. trade or business,  the Non-U.S.  Shareholder  generally will be subject to
federal income tax at graduated  rates, in the same manner as U.S.  Shareholders
are taxed with respect to such distributions (and also may be subject to the 30%
branch  profits  tax in the case of a  Non-U.S.  Shareholder  that is a  foreign
corporation). The Company expects to withhold U.S. income tax at the rate of 30%
on the gross amount of any such distributions made to a Non-U.S. Shareholder    

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unless  (i) a lower  treaty  rate  applies  and  any  required  form  evidencing
eligibility for that reduced rate is filed with the Company or (ii) the Non-U.S.
Shareholder  files  an  IRS  Form  4224  with  the  Company  claiming  that  the
distribution  is  effectively  connected  income.  The Service has issued  final
regulations  that  modify  the  manner in which the  Company  complies  with the
withholding requirements. Those regulations are effective for distributions made
after  December 31,  1999.  Distributions  in excess of current and  accumulated
earnings and profits of the Company will not be taxable to a shareholder  to the
extent  that  such  distributions  do  not  exceed  the  adjusted  basis  of the
shareholder's  Common Shares,  but rather will reduce the adjusted basis of such
shares.  To the extent that  distributions  in excess of current and accumulated
earnings  and  profits  exceed the  adjusted  basis of a Non-U.S.  Shareholder's
Common  Shares,  such  distributions  will  give  rise to tax  liability  if the
Non-U.S. Shareholder would otherwise be subject to tax on any gain from the sale
or disposition of his Common Shares, as described below.                        
 Because it generally  cannot be determined at the time a  distribution  is made
whether or not such  distribution  will be in excess of current and  accumulated
earnings and profits,  the entire  amount of any  distribution  normally will be
subject  to  withholding  at the same rate as a  dividend.  However,  amounts so
withheld are  refundable to the extent it is determined  subsequently  that such
distribution  was, in fact,  in excess of current and  accumulated  earnings and
profits of the Company.                                                         

         The Company is required to withhold 10% of any  distribution  in excess
of the Company's  current and  accumulated  earnings and profits.  Consequently,
although the Company  intends to withhold at a rate of 30% on the entire  amount
of any distribution,  to the extent that the Company does not do so, any portion
of a distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.                                                   

         For any year in which the Company  qualifies  as a REIT,  distributions
that are  attributable  to gain from sales or  exchanges  by the Company of U.S.
real  property  interests  will be taxed to a  Non-U.S.  Shareholder  under  the
provisions  of  the  Foreign  Investment  in  Real  Property  Tax  Act  of  1980
("FIRPTA").  Under FIRPTA, distributions attributable to gain from sales of U.S.
real property interests are taxed to a Non-U.S. Shareholder as if such gain were
effectively connected with a U.S. business. Non-U.S.  Shareholders thus would be
taxed at the normal capital gain rates applicable to U.S.  shareholders (subject
to applicable  alternative  minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to a 30% branch  profits tax in the hands of a foreign  corporate
shareholder not entitled to treaty relief or exemption.  The Company is required
to withhold 35% of any distribution that could be designated by the Company as a
capital gains dividend.  The amount withheld is creditable  against the Non-U.S.
Shareholder's FIRPTA tax liability.                                             

         Gain  recognized  by a Non-U.S.  Shareholder  upon a sale of his Common
Shares   generally  will  not  be  taxed  under  FIRPTA  if  the  Company  is  a
"domestically  controlled  REIT,"  defined  generally  as a REIT in which at all
times during a specified  testing period less than 50% in value of the stock was
held  directly or  indirectly by foreign  persons.  However,  because the Common
Shares will be publicly traded,  no assurance can be given that the Company will
be a "domestically  controlled  REIT."  Furthermore,  gain not subject to FIRPTA
will be taxable to a Non-U.S. Shareholder if (i) investment in the Common Shares
is effectively connected with the Non-U.S. Shareholder's U.S. trade or business,
in which case the Non-U.S.  Shareholder will be subject to the same treatment as
U.S. shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain  other  conditions  apply,  in which
case  the  nonresident  alien  individual  will be  subject  to a 30% tax on the
individual's capital gains. However, a Non-U.S. Shareholder that owned, actually
or  constructively,  5% or less of the  Common  Shares  at all  times  during  a
specified  testing  period will not be subject to tax under FIRPTA if the Common
Shares are "regularly  traded" on an established  securities market. If the gain
on the sale of the Common  Shares were to be subject to taxation  under  FIRPTA,
the  Non-U.S.  Shareholder  would  be  subject  to the  same  treatment  as U.S.
shareholders  with  respect  to such gain  (subject  to  applicable  alternative
minimum tax, a special  alternative minimum tax in the case of nonresident alien
individuals,  and the possible  application of the 30% branch profits tax in the
case of foreign corporations).                                                  

Other Tax Consequences                                                          

         The Company,  the  Partnership,  or the Company's  shareholders  may be
subject  to state or local  taxation  in various  state or local  jurisdictions,
including those in which it or they own property,  transact business, or reside.
The state and local tax  treatment of the Company and its  shareholders  may not
conform to the federal income tax consequences  discussed  above.  CONSEQUENTLY,
PROSPECTIVE  SHAREHOLDERS  SHOULD  CONSULT THEIR OWN TAX ADVISORS  REGARDING THE
EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN THE COMPANY.             

Tax Aspects of the Partnership                                                  

         The  following   discussion   summarizes  certain  federal  income  tax
considerations  applicable to the Company's  investment in the Partnership.  The
discussion  does not cover state or local tax laws or any federal tax laws other
than income tax laws.                                                           

Classification as a Partnership                               

         The Company will be entitled to include in its income its  distributive
share of the  Partnership's  income and to deduct its distributive  share of the
Partnership's  losses only if the  Partnership  is classified for federal income
tax  purposes  as a  partnership  rather  than as an  association  taxable  as a
corporation.  An entity will be  classified  as a  partnership  rather than as a
corporation  for federal  income tax  purposes if the entity (i) is treated as a
partnership  under the  Check-the-Box  Regulations  and (ii) is not a  "publicly
traded" partnership.                                                            

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         In general,  under the  Check-the-Box  Regulations,  an  unincorporated
entity  with at least  two  members  may  elect to be  classified  either  as an
association  taxable as a  corporation  or as a  partnership.  If such an entity
fails to make an election,  it generally  will be treated as a  partnership  for
federal  income tax  purposes.  The  Partnership  intends to be  classified as a
partnership and the Company has represented  that the Partnership will not elect
to be treated as an association  taxable as a corporation for federal income tax
purposes under the Check-the-Box Regulations.                                   

         A publicly  traded  partnership  is a partnership  whose  interests are
traded  on an  established  securities  market  or  are  readily  tradable  on a
secondary  market (or the  substantial  equivalent  thereof).  A publicly traded
partnership  will be treated as a  corporation  for federal  income tax purposes
unless at least  90% of such  partnership's  gross  income  for a  taxable  year
consists  of  "qualifying  income"  under  section  7704(d)  of the Code,  which
generally  includes any income that is qualifying income for purposes of the 95%
gross income test applicable to REITs (the "90% Passive-Type Income Exception").
See  "--Requirements  for   Qualification--Income   Tests."  The  U.S.  Treasury
Department has issued  regulations (the "PTP  Regulations") that provide limited
safe harbors from the definition of a publicly traded  partnership.  Pursuant to
one of those safe harbors (the "Private  Placement  Exclusion"),  interests in a
partnership will not be treated as readily tradable on a secondary market or the
substantial  equivalent  thereof if (i) all  interests in the  partnership  were
issued in a transaction (or transactions) that was not required to be registered
under the Securities Act, and (ii) the  partnership  does not have more than 100
partners at any time during the  partnership's  taxable year. In determining the
number  of  partners  in  a  partnership,  a  person  owning  an  interest  in a
flow-through  entity (i.e., a partnership,  grantor trust or S corporation) that
owns an interest in the partnership is treated as a partner in such  partnership
only if (a)  substantially  all of the  value  of the  owner's  interest  in the
flow-through  entity  is  attributable  to the  flow-through  entity's  interest
(direct or indirect) in the partnership  and (b) a principal  purpose of the use
of  the  flow-through  entity  is to  permit  the  partnership  to  satisfy  the
100-partner  limitation.  The  Partnership  qualifies for the Private  Placement
Exclusion.                                                                      

         The  Partnership has not requested,  and does not intend to request,  a
ruling from the Service that it will be classified as a partnership  for federal
income tax purposes.  Instead, at the closing of the Offering, Hunton & Williams
will deliver its opinion that the Partnership will be treated for federal income
tax  purposes  as  a  partnership  and  not  as  an  association  taxable  as  a
corporation.  Unlike a tax ruling, an opinion of counsel is not binding upon the
Service,  and no assurance  can be given that the Service will not challenge the
status of the Partnership as a partnership  for federal income tax purposes.  If
such challenge were sustained by a court, the Partnership  would be treated as a
corporation for federal income tax purposes,  as described below. The opinion of
Hunton & Williams will be based on existing law,  which is to a great extent the
result of administrative and judicial interpretation.  No assurance can be given
that  administrative  or  judicial  changes  would not  modify  the  conclusions
expressed in the opinion.                                                       

         If for any reason the Partnership was taxable as a corporation,  rather
than as a partnership, for federal income tax purposes, the Company would not be
able to qualify as a REIT. See "--Requirements for Qualification--Income  Tests"
and "--Requirements for Qualification--Asset  Tests." In addition, any change in
the  Partnership's  status for tax purposes might be treated as a taxable event,
in which case the Company might incur a tax  liability  without any related cash
distribution. See "--Requirements for Qualification--Distribution Requirements."
Further, items of income and deduction of the Partnership would not pass through
to its  partners,  and its  partners  would be treated as  shareholders  for tax
purposes.  Consequently,  the Partnership would be required to pay income tax at
corporate tax rates on its net income,  and  distributions to its partners would
constitute dividends that would not be deductible in computing the Partnership's
taxable income.                                                                 

Income Taxation of the Partnership and its Partners           

         Partners,  Not the Partnership,  Subject to Tax. A partnership is not a
taxable  entity for federal  income tax  purposes.  Rather,  the Company will be
required to take into account its allocable share of the  Partnership's  income,
gains, losses,  deductions,  and credits for any taxable year of the Partnership
ending within or with the taxable year of the Company, without regard to whether
the Company has received or will receive any distribution from the Partnership. 

         Partnership  Allocations.  Although a partnership  agreement  generally
will  determine  the  allocation  of income  and  losses  among  partners,  such
allocations  will be  disregarded  for tax purposes  under section 704(b) of the
Code if they do not comply with the provisions of section 704(b) of the Code and
the  Treasury  Regulations  promulgated  thereunder.  If an  allocation  is  not
recognized for federal  income tax purposes,  the item subject to the allocation
will  be  reallocated  in  accordance  with  the  partners'   interests  in  the
partnership,  which will be  determined  by taking into account all of the facts
and  circumstances  relating to the economic  arrangement  of the partners  with
respect to such item. The Partnership's  allocations of taxable income, gain and
loss are intended to comply with the  requirements of section 704(b) of the Code
and the Treasury Regulations promulgated thereunder.                            

         Tax  Allocations  With Respect to Contributed  Properties.  Pursuant to
section 704(c) of the Code,  income,  gain, loss, and deduction  attributable to
appreciated  or  depreciated  property that is  contributed  to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the  contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution.                                                       

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The amount of such  unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the time
of  contribution  and the  adjusted  tax basis of such  property  at the time of
contribution.   The  Treasury   Department  has  issued  regulations   requiring
partnerships  to use a  "reasonable  method" for  allocating  items  affected by
section 704(c) of the Code and outlining several reasonable  allocation methods.
The  Partnership  generally  will  elect  to  use  the  traditional  method  for
allocating  Code section  704(c) items with respect to the hotels it acquires in
exchange for Units.                                                             

         Under  the   Partnership   Agreement,   depreciation   or  amortization
deductions of the Partnership  generally will be allocated among the partners in
accordance with their  respective  interests in the  Partnership,  except to the
extent that the  Partnership  is  required  under Code  section  704(c) to use a
method for allocating tax  depreciation  deductions  attributable to the Initial
Hotels or other  contributed  properties that results in the Company receiving a
disproportionately large share of such deductions. In addition, gain on the sale
of an Initial Hotel will be specially  allocated to the Limited  Partners to the
extent of any  "built-in"  gain with respect to such  Initial  Hotel for federal
income tax  purposes.  Depending on the  allocation  method  elected  under Code
section  704(c),  it is possible  that the Company  (i) may be  allocated  lower
amounts of depreciation  deductions for tax purposes with respect to contributed
hotels than would be  allocated to the Company if such hotels were to have a tax
basis equal to their fair market value at the time of contribution  and (ii) may
be allocated  taxable gain in the event of a sale of such contributed  hotels in
excess of the economic profit allocated to the Company as a result of such sale.
These allocations may cause the Company to recognize taxable income in excess of
cash proceeds, which might adversely affect the Company's ability to comply with
the 95% distribution requirement,  although the Company does not anticipate that
this event will occur. The foregoing principles also will affect the calculation
of the Company's  earnings and profits for purposes of determining which portion
of the  Company's  distributions  is  taxable  as a  dividend.  The  allocations
described  in this  paragraph  may result in a higher  portion of the  Company's
distributions being taxed as a dividend than would have occurred had the Company
purchased the Initial Hotels for cash.                                          

         Basis in Partnership Interest.  The Company's adjusted tax basis in its
partnership  interest  in the  Partnership  generally  will be  equal to (i) the
amount  of  cash  and  the  basis  of  any  other  property  contributed  to the
Partnership  by the Company,  (ii)  increased by (A) its allocable  share of the
Partnership's  income  and  (B)  its  allocable  share  of  indebtedness  of the
Partnership,  and  (iii)  reduced,  but not  below  zero,  by (A) the  Company's
allocable share of the Partnership's loss and (B) the amount of cash distributed
to the Company,  including  constructive  cash  distributions  resulting  from a
reduction in the Company's share of indebtedness of the Partnership.            

         If  the  allocation  of  the  Company's   distributive   share  of  the
Partnership's  loss  would  reduce  the  adjusted  tax  basis  of the  Company's
partnership interest in the Partnership below zero, the recognition of such loss
will be  deferred  until  such time as the  recognition  of such loss  would not
reduce the  Company's  adjusted  tax basis  below  zero.  To the extent that the
Partnership's  distributions,  or any  decrease  in the  Company's  share of the
indebtedness of the Partnership  (such decrease being  considered a constructive
cash  distribution  to the  partners),  would reduce the Company's  adjusted tax
basis below zero, such distributions (including such constructive distributions)
will  constitute   taxable  income  to  the  Company.   Such  distributions  and
constructive  distributions normally will be characterized as capital gain, and,
if the  Company's  partnership  interest  in the  Partnership  has been held for
longer than the long-term  capital gain holding period (currently one year), the
distributions and constructive  distributions will constitute  long-term capital
gain.                                                                           

         Depreciation Deductions Available to the Partnership. Immediately after
the Offering,  the Company will make a cash  contribution  to the Partnership in
exchange  for a  partnership  interest  in the  Partnership.  The  Partnership's
initial  basis in each Initial Hotel for federal  income tax purposes  should be
the  same  as  the  Combined  Entity's  basis  in  that  hotel  on the  date  of
acquisition.  Although the law is not entirely clear, the Partnership intends to
depreciate such depreciable  hotel property for federal income tax purposes over
the same remaining  useful lives and under the same methods used by the Combined
Entities. The Partnership's tax depreciation  deductions will be allocated among
the partners in accordance  with their  respective  interests in the Partnership
(except to the extent that the Partnership is required under Code section 704(c)
to use a method  for  allocating  depreciation  deductions  attributable  to the
Initial  Hotels or other  contributed  properties  that  results in the  Company
receiving a  disproportionately  large share of such deductions).  To the extent
the Partnership acquires additional hotel properties for cash, the Partnership's
initial basis in the properties  for federal income tax purposes  generally will
be equal to the purchase price paid by the Partnership. The Partnership plans to
depreciate such depreciable hotel property for federal income tax purposes under
MACRS.  Under MACRS, the Partnership  generally will depreciate such furnishings
and equipment over a seven-year  recovery period using a 200% declining  balance
method and a half-year convention. If, however, the Partnership places more than
40% of its  furnishings and equipment in service during the last three months of
a taxable  year,  a  mid-quarter  depreciation  convention  must be used for the
furnishings and equipment  placed in service during that year.  Under MACRS, the
Partnership  generally will depreciate buildings and improvements over a 39-year
recovery period using a straight line method and a mid-month convention.        

Sale of the Company's or the Partnership's Property                             

Generally, any gain realized by the Company or the            
Partnership on the sale of property held for more than one year                 

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will be  long-term  capital  gain,  except for any  portion of such gain that is
treated as depreciation or cost recovery  recapture.  Any gain recognized on the
disposition  of the  Initial  Hotels  will be  allocated  first  to the  Limited
Partners under section 704(c) of the Code to the extent of their "built-in gain"
on those hotels for federal income tax purposes. The Limited Partners' "built-in
gain" on the Initial Hotels sold will equal the excess of the Limited  Partners'
proportionate  share of the book value of the  Initial  Hotels  over the Limited
Partners' tax basis allocable to the Initial Hotels at the time of the sale. Any
remaining gain  recognized by the  Partnership on the disposition of the Initial
Hotels will be allocated among the partners in accordance with their  respective
percentage  interests  in the  Partnership.  The Board of Trustees has adopted a
policy that any  decision  in  connection  with any  transaction  involving  the
Company,  including  the  purchase,  sale lease or  mortgage  of any real estate
asset, in which a Trustee or officer of the Company,  or any Affiliate  thereof,
has any  interest  (other  than  solely as a result of his  status as a Trustee,
officer or  shareholder  of the  Company)  must be approved by a majority of the
Trustees,   including  a  majority  of  the  Independent  Trustees.   See  "Risk
Factors--Conflicts  of  Interest--Conflicts  Relating to Sales or Refinancing of
Initial Hotels."                                                                

         Any gain  realized on the sale of any  property  held by the Company or
the  Partnership  as  inventory or other  property  held  primarily  for sale to
customers in the ordinary course of the Company's or the Partnership's  trade or
business will be treated as income from a prohibited transaction that is subject
to a 100% penalty tax. See  "--Requirements  for  Qualification--Income  Tests."
Such  prohibited  transaction  income  also may have an adverse  effect upon the
Company's   ability  to  satisfy  the  income   tests  for  REIT   status.   See
"--Requirements For  Qualification--Income  Tests" above. The Company,  however,
does not  presently  intend to  acquire or hold or to allow the  Partnership  to
acquire or hold any property that  represents  inventory or other  property held
primarily  for sale to customers in the ordinary  course of the Company's or the
Partnership's trade or business.                                                

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UNDERWRITING

         Subject to the terms and conditions of the Underwriting Agreement,  the
Company has agreed to sell to the Underwriter, and the Underwriter has agreed to
take and pay for,  1,833,334  Priority  Common  Shares,  if any are  taken.  The
Company  intends to sell  166,666  Priority  Common  Shares  directly to certain
Hersha  Affiliates  at the  Offering  Price and no  selling  commission  will be
payable to the Underwriter with respect to such shares.                         

         The  Underwriter  proposes to offer the Priority  Common Shares in part
directly to the public at the Offering  Price set forth on the cover page of the
Prospectus  and in part to  certain  securities  dealers  at such  price  less a
concession of $.25 per share. After the Priority Common Shares are released     
for sale to the public, the Offering Price and other selling terms may from time
to time be varied by the Underwriter.                                           

         The Company has granted the  Underwriter an option  exercisable  for 30
days after the date of this Prospectus to purchase up to an aggregate of 275,000
additional Priority Common Shares solely to cover over-allotments, if any.      

         Pursuant  to  the  Underwriting  Agreement,   the  obligations  of  the
Underwriter  to  purchase  the Common  Shares are subject to approval of certain
legal  matters by counsel to the  Underwriter  and to various  other  conditions
which are  customary in  transactions  of this type,  including  that, as of the
closing date of the Offering,  there shall not have occurred (i) a suspension or
material  limitation  in trading in  securities  generally on the New York Stock
Exchange or The American Stock Exchange; (ii) a general moratorium on commercial
banking  activities in Virginia or New York,  (iii) the engagement by the United
States in  hostilities  which have  resulted  in the  declaration  of a national
emergency or war if any such event would have such a materially  adverse effect,
in the  Underwriter's  reasonable  judgment,  as to  make  it  impracticable  or
inadvisable  to  proceed  with the  purchase  of  shares on the terms and in the
manner  contemplated  herein;  or (iv) such a material adverse change in general
economic,  political,  financial or international conditions affecting financial
markets in the United States having a material  adverse impact on trading prices
of securities in general, as, in the Underwriter's reasonable judgment, makes it
inadvisable to proceed with the solicitation of offers to purchase the shares or
to  consummate  the  offering  with  respect  to  investors   solicited  by  the
Underwriter on the terms and  conditions  contemplated  herein.  The Company has
agreed to indemnify  the  Underwriter  against  certain  liabilities,  including
liabilities under the Securities Act.                                           

         The Company will issue to the Underwriter  the Underwriter  Warrants to
purchase 183,333  Priority Common Shares  exercisable for a period of five years
after the effective  date of the Offering at a price per share  of $9.90 (165%  
of the Offering Price).  Until January 20, 2004, the Company has agreed to file 
with the Commission a shelf  registration  statement  covering the resale of the
Underwriter  Warrants and all of the Priority  Common  Shares that may be issued
upon exercise of the Underwriter  Warrants  ("Warrant Shares") in the event that
the holders of at least 50,000 Underwriter  Warrants (or Warrant Shares) request
such  registration.  The  first  such  registration  shall  be at the  Company's
expense.  The holders of  Underwriter  Warrants  and/or  Warrant Shares may also
request piggyback registration of the Underwriter Warrants and Warrant Shares at
the Company's  expense for a period ending January 20,  2006.  Upon any of such 
requests,  the  Company  will use its best  efforts  to have  such  registration
statement declared effective.                                                   

         The Company has granted the Underwriter a right of first refusal, for a
period  of  three  years  following  consummation  of  the  Offering,  to act as
underwriter or sales agent with respect to any future offering by the Company or
the Partnership of any debt or equity  securities.  This right of first refusal,
by limiting the ability of the Company and the Partnership to use               

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other  potential  underwriters  or  selling  agents,  might  have the  effect of
limiting the access of the Company and the Partnership to capital markets.      

   Pursuant to the Underwriter's right to designate two Trustees to serve on
the Board of Trustees of the Company, L. McCarthy Downs, III and Everette G.    
Allen, Jr. have agreed to serve as Trustees. Messrs. Downs and Allen each will  
receive $10,000 per year for serving as a Trustee of the Company.               

         The  Underwriter  does not intend to sell the Priority Common Shares to
any accounts over which it exercises discretionary authority.                   

 Prior to the Offering, there has been no public market for the Priority
Common Shares. The initial public offering price is anticipated to be $6.00 per 
share. See "Risk Factors--Market for Common Shares."                            

         The Company and the Limited  Partners  have agreed,  subject to certain
limited exceptions, not to offer, sell, contract to sell or otherwise dispose of
any Priority Common Shares (or any securities  convertible  into, or exercisable
or  exchangeable  for shares in the  Company)  for a period of 90 days after the
date of this Prospectus, without the prior written consent of the Underwriter.  

         The  Underwriter  will receive,  along with the holders of the Priority
Common Shares,  notice from the Company that the Priority  Rights will terminate
in 15 trading days from the date the Company  sends such notice,  provided  that
the closing bid price of the  Priority  Common  Shares is at least $7.00 on each
trading day during such 15-day period.                                          

         The Underwriter has agreed to pay $25,000 of the legal fees incurred by
the Company in connection with the Offering.                                    

         The Priority  Common Shares have been approved for listing,  subject to
final  notice of  issuance,  on The American  Stock  Exchange  under the trading
symbol "HT."                                                                    

 EXPERTS

         The  balance  sheet of the Company as of May 27, 1998 and of the Lessee
as of May 27,  1998  included in this  Prospectus,  and the  Combined  Financial
Statements and financial  statement schedule of the Combined  Entities-- Initial
Hotels as of  December  31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997 included in this Prospectus, have been audited by
Moore Stephens, P.C., independent certified public accountants,  as set forth in
their  reports  thereon  included  elsewhere  herein  and  in  the  Registration
Statement.  Such Balance  Sheets,  Combined  Financial  Statements and financial
statement  schedule  are included in reliance  upon such reports  given on their
authority as experts in accounting and auditing.                                

 REPORTS TO SHAREHOLDERS

         The Company  intends to furnish its  shareholders  with annual  reports
containing   consolidated   financial  statements  audited  by  its  independent
certified public  accountants and with quarterly  reports  containing  unaudited
condensed consolidated financial statements for each of the first three quarters
of each fiscal year.                                                            

 LEGAL MATTERS

      Certain legal matters in connection with the Offering will be passed
upon for the  Company  by  Hunton &  Williams  and by  Ballard  Spahr  Andrews &
Ingersoll,  LLP with regard to certain matters of Maryland law. In addition, the
description of federal income tax  consequences  contained in the section of the
Prospectus entitled "Federal Income Tax Consequences" is based on the opinion of
Hunton & Williams. Certain legal matters related to this Offering will be passed
upon for the Underwriter by Willcox & Savage, P.C. Hunton & Williams and Willcox
& Savage,  P.C.  will rely on the opinion of Ballard  Spahr Andrews & Ingersoll,
LLP as to all matters of Maryland law.                                          

ADDITIONAL INFORMATION

         The Company has filed with the Commission a  Registration  Statement on
Form S-11 (of which this  Prospectus  is a part) under the  Securities  Act with
respect to the securities offered hereby. This  Prospectus does not contain all 
of the information set forth in the Registration Statement, certain portions of 
which have been omitted as permitted by the rules and regulations of the        
Commission. Statements contained in this Prospectus as to the content of any    
contract or other document are not necessarily complete. In each instance       
reference is made to the copy of such contract or other document filed as an    
exhibit to the Registration Statement, each such statement being qualified in   
all respects by such reference and the exhibits and schedules hereto. For       
further information regarding the Company and the Common Shares offered hereby, 
reference is hereby made to the Registration Statement and such exhibits and    
schedules.                                                                      

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         The  Registration  Statement and the exhibits and  schedules  forming a
part thereof  filed by the Company  with the  Commission  can be  inspected  and
copies  obtained from the Commission at Room 1204,  Judiciary  Plaza,  450 Fifth
Street, N.W.,  Washington,  D.C. 20549, and at the following regional offices of
the Commission:  7 World Trade Center,  13th Floor, New York, New York 10048 and
Northwestern  Atrium  Center,  500 West  Madison  Street,  Suite 1400,  Chicago,
Illinois  60661.  Copies  of such  material  can be  obtained  from  the  Public
Reference Section of the Commission,  450 Fifth Street, N.W.,  Washington,  D.C.
20549,  at  prescribed  rates.  The  Commission  also  maintains a website  that
contains  reports,  proxy  and  information  statements  and  other  information
regarding  registrants  that file documents with the  Commission,  including the
Company, and the address is http://www.sec.gov.                                 

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GLOSSARY

         Unless the context otherwise requires,  the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus.    

         "5/50 Rule" means the requirement in the Code that not more than 50% in
value of the outstanding shares of beneficial  interest of the Company be owned,
directly or indirectly,  by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of each taxable year.            

         "Acquisition  Policy" means the Company's  initial  policy to acquire a
hotel  for  which it  expects  to  receive  rents  at least  equal to 12% of the
purchase  price paid for the hotel,  net of (i) property and casualty  insurance
premiums,  (ii) real estate and personal property taxes, and (iii) a reserve for
furniture,  fixtures and equipment  equal to 4% of gross revenues per quarter at
the hotel.                                                                      

"ADA" means the Americans with Disabilities Act of 1990.      

         "Additional  Charges"  means certain  amounts  payable by the Lessee in
connection  with  Percentage  Leases,  including  interest  accrued  on any late
payments or charges.                                                            

"ADR" means average daily room rate.                          

         "Affiliate"  means  (i)  any  person  directly  or  indirectly  owning,
controlling,  or  holding,  with  power  to  vote  ten  percent  or  more of the
outstanding voting securities of such other person,  (ii) any person ten percent
or more of whose outstanding voting securities are directly or indirectly owned,
controlled,  or held, with power to vote, by such other person, (iii) any person
directly or indirectly controlling,  controlled by, or under common control with
such other person,  (iv) any  executive  officer,  director,  trustee or general
partner of such other  person,  and (v) any legal  entity for which such  person
acts as an executive  officer,  director,  trustee or general partner.  The term
"person"  means and  includes  any  natural  person,  corporation,  partnership,
association,  limited  liability  company or any other legal entity. An indirect
relationship shall include  circumstances in which a person's spouse,  children,
parents, siblings or mothers-,  fathers-,  sisters- or brothers-in-law is or has
been associated with a person.                                                  

         "Assumed Indebtedness" means that certain indebtedness in the aggregate
principal amount of approximately $17.4 million secured by Initial Hotels, to be
assumed  by  the  Partnership  in  the  Formation  Transactions  and  to  remain
outstanding after the application of the net proceeds of the Offering.          

         "Base Rent" means the fixed  obligation  of the Lessee to pay a minimum
sum certain in quarterly Rent under each of the Percentage Leases.              

"Beneficiary" means the beneficiary of a Trust.               

 "Board of Trustees" means the Board of Trustees of the Company.

"Bylaws" means the Bylaws of the Company.                     

"Choice Hotels" means Choice Hotels International, Inc.       

         "Class B Common  Shares" means the  Company's  Class B common shares of
beneficial interest, par value $0.01 per share.                                 

"Closing Date" means the closing date of the Offering.        

         "Closing  Price" means the last sale price quoted on the American Stock
Exchange.                                                                       

"Code" means the Internal Revenue Code of 1986, as amended.   

"Combined Entities" means Hasu P. Shah; Neil H. Shah; Bharat  
C. Mehta; David L. Desfor; Madhusudan I. Patni; Manhar Gandhi;                  
Shree Associates; JSK Associates; Shanti Associates; Shreeji                    
Associates; Kunj Associates; Devi Associates; Shreenathji                       
Enterprises, Ltd.; 2144 Associates; and 144 Associates, 344                     
Associates, 544 Associates and 644 Associates, joint tenants                    
doing business as 2544 Associates, collectively the limited                     
partnerships, corporation and individuals that, prior to the                    
Formation Transactions, own the Initial Hotels.                                 

"Commission" means the United States Securities and Exchange  
Commission.                                                                     

"Common Shares" means the Priority Common Shares and the      
Class B Common Shares.                                                          

         "Company"  means  Hersha  Hospitality  Trust,  a Maryland  real  estate
investment trust.                                                               

         "Conversion  Ratio" means the ratio representing the number of Priority
Common Shares into which one Class B Common Share is convertible.               

         "Debt Policy" means the Company's initial policy to limit  consolidated
indebtedness  to less  than  67% of the  aggregate  purchase  price  paid by the
Company for the hotels in which it has invested.                                

"Declaration of Trust" means the Declaration of Trust of the  
Company, as amended and restated.                                               

         "FIRPTA" means Foreign  Investment in Real Property Tax Act of 1980, as
amended.                                                                        

"First Adjustment Date" means December 31, 1999.              

         "Forecast" means the Company's  Forecasted  Statement of Operations for
the twelve months ending January 31, 2000.                                      

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         "Formation Transactions" means the principal transactions in connection
with the formation of the Company as a REIT, the Offering and the acquisition of
the Initial Hotels.                                                             

  "Franchise Licenses" means the franchise licenses held by the Lessee for
the Initial Hotels.                                                             

         "Funds From Operations" means net income,  (computed in accordance with
generally accepted accounting principles), excluding gains, or losses, from debt
restructuring  or sales of property,  plus  depreciation and  amortization,  and
after adjustments for unconsolidated partnerships and joint ventures.           

         "General Partner" means Hersha  Hospitality  Trust, as the sole general
partner of the Partnership.                                                     

"Hersha Affiliates" means Hasu P. Shah; Jay H. Shah; Neil H.  
Shah; Bharat C. Mehta; Kanti D. Patel; Rajendra O. Gandhi; Kiran                
P. Patel; David L. Desfor; Madhusudan I. Patni; Manhar Gandhi;                  
Shree Associates; JSK Associates; Shanti Associates; Shreeji                    
Associates; Kunj Associates; Devi Associates; Shreenathji                       
Enterprises, Ltd.; 2144 Associates; 144 Associates, 344                         
Associates, 544 Associates and 644 Associates, joint tenants                    
doing business as 2544 Associates; the Lessee and their                         
Affiliates, collectively owning 100% of the interests of the                    
Combined Entities.                                                              

         "Hersha  Warrants"  means warrants that the  Partnership has granted to
2744 Associates,  L.P., which is a Hersha  Affiliate,  to purchase 250,000 Units
for a period of five years at a price per Unit  of $9.90 (165% of the Offering  
Price).                                                                         

         "Incentive  Threshold" means a certain amount for each Initial Hotel in
excess of the Threshold up to which the Company receives a certain percentage of
the room revenues in excess of the Threshold as a component of Percentage Rent. 

         "Independent  Trustee"  means a Trustee  of the  Company  who is not an
officer, director or employee of the Company, any lessee of the Company's or the
Partnership's  properties or any underwriter or placement agent of the shares of
beneficial  interest of the Company that has been engaged by the Company  within
the past three years, or any Affiliate thereof.                                 

         "Initial Hotels" means ten hotels to be owned by the Partnership  after
the Formation Transactions are completed, which hotels include three Holiday Inn
Express hotels,  two Hampton Inn hotels, two Holiday Inn hotels, two Comfort Inn
hotels and one Clarion Suites hotel.                                            

         "Initial  Fixed Rent"  means the fixed rent  payable by the Lessee with
respect to the Newly- Renovated Hotels and the Newly- Developed Hotels until    
the First Adjustment Date or the Second Adjustment Date, as applicable.         

         "Interested  Shareholder" means any person who beneficially owns 10% or
more of a company's  voting  shares,  or an  Affiliate or associate of a company
that, at any time within the two-year period prior to the date in question,  was
the  beneficial  owner of 10% or more of the voting power of a company's  voting
shares.                                                                         

         "Junior  Shares" means any class or series of the  Company's  shares of
beneficial interest ranking junior to the Priority Common Shares with respect to
payment of dividends or amounts upon liquidation, dissolution or winding up.    

         "Lessee"  means  Hersha  Hospitality  Management,  LP,  a  Pennsylvania
limited  partnership,  which will lease from the  Partnership  and  operate  the
Initial Hotels pursuant to the Percentage Leases.                               

"Limited Partners" means the limited partners of the          
Partnership.                                                                    

         "Line of Credit"  means a $10 million line of credit  facility that the
Company is currently pursuing from various lenders.                             

         "Market Price" means, on a given day, the average of the Closing Prices
for the five consecutive Trading Days ending on such date.                      

"NAREIT" means the National Association of Real Estate        
Investment Trusts, Inc.                                                         

         "Newly-Developed  Hotels"  means  the  Holiday  Inn  Express(R)  hotels
located in Hershey,  Pennsylvania  and New Columbia,  Pennsylvania,  the Hampton
Inn(R) hotel  located in  Carlisle,  Pennsylvania  and the Comfort  Inn(R) hotel
located in Harrisburg, Pennsylvania.                                            

         "Newly-Renovated Hotels" means the Holiday Inn Express(R) hotel located
in  Harrisburg,  Pennsylvania,  the Holiday  Inn(R) hotel  located in Milesburg,
Pennsylvania and the Comfort Inn located in Denver, Pennsylvania.               

"Non-U.S. Shareholders" means nonresident alien individuals,  
foreign corporations, foreign partnerships and other foreign                    
shareholders.                                                                   

"Offering" means the offering of Priority Common Shares hereby.       

         "Offering  Price"  means  the  initial  public  offering  price  of the
Priority Common Shares in the Offering of $6.00 per share.                      

"Option Agreement" means the option agreement to be executed by the   
Partnership and Hasu P. Shah, Jay H. Shah, Neil H. Shah, Bharat C. Mehta, Kanti 
D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I.    
Patni and Manhar Gandhi, each a Hersha Affiliate, granting the Partnership      
certain rights to acquire certain hotels developed or acquired by the Hersha    
Affiliates.                                                                     

"Option Plan" means the Hersha Hospitality Trust Option       
Plan.                                                                           

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         "Ownership  Limitation"  means the  restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of more than 9.9%
of the  number  of  outstanding  Common  Shares  or the  number  of  outstanding
Preferred Shares of any series.                                                 

         "Parity  Shares" means any class or series of the  Company's  shares of
beneficial  interest  ranking in parity  with the  Priority  Common  Shares with
respect to payment of  dividends  or amounts upon  liquidation,  dissolution  or
winding up.                                                                     

         "Partnership" means Hersha Hospitality Limited  Partnership,  a limited
partnership organized under the laws of the Commonwealth of Virginia.           

"Partnership Agreement" means the partnership agreement of    
the Partnership, as amended and restated.                                       

         "Percentage  Leases" mean  operating  leases between the Lessee and the
Partnership  pursuant to which the Lessee will lease the ten Initial Hotels from
the Partnership and any additional hotels acquired by the Company after the date
of the Offering.                                                                

         "Percentage  Rents"  means Rent  payable by the Lessee  pursuant to the
Percentage  Leases that is based on  percentages  of gross  revenues per quarter
from the Initial Hotels.                                                        

         "Preferred  Shares" means the preferred shares of beneficial  interest,
par value $.01 per share, of the Company.                                       

         "Priority  Common  Shares" means the Company's  Priority Class A common
shares of beneficial interest, par value $0.01 per share.                       

         "Priority  Distribution"  means  cumulative  dividends in an amount per
Priority  Common  Share of $0.18 per quarter,  to which  holders of the Priority
Common Shares are entitled during the Priority Period prior to  distributions to
any Junior Shares.                                                              

         "Priority Period" means the period beginning on the date of the closing
of the  Offering  and ending on the  earlier of: (i) the date that is 15 trading
days after the Company sends notice to the holders of the Priority Common Shares
that their Priority Rights will terminate in 15 trading days,  provided that the
closing  bid  price of the  Priority  Common  Shares  is at least  $7.00 on each
trading day during  such 15-day  period,  or (ii) the fifth  anniversary  of the
closing of the Offering.                                                        

         "Priority  Rights" means the priority  rights with respect to dividends
and amounts payable upon liquidation, dissolution or winding up to which holders
of the Priority Common Shares are entitled.                                     

"Prohibited Owner" means the record owner of                  
Shares-in-Trust.                                                                

         "Redemption   Right"   means  the  right  of  the   persons   receiving
Subordinated  Units in the  Formation  Transactions  to cause the  redemption of
Subordinated Units in exchange for cash or, at the option of the Company, Common
Shares on a one-for-one basis.                                                  

         "REIT" means real estate investment trust, as defined in section 856 of
the Code.                                                                       

        "Rent" means the amounts payable under the Percentage Leases, which is
the greater of the Base Rent or Percentage Rent (or, in certain cases, the      
Initial Fixed Rent).                                                            

         "REVPAR" means revenue per available  room for the  applicable  period,
determined by dividing room revenue by available rooms.                         

         "Rule 144" means the rule  promulgated  under the  Securities  Act that
permits  holders of restricted  securities as well as affiliates of an issuer of
the  securities,   pursuant  to  certain   conditions  and  subject  to  certain
restrictions,  to sell their securities publicly without  registration under the
Securities Act.                                                                 

"Securities Act" means the Securities Act of 1933, as amended.

"Second Adjustment Date" means December 31, 2000.             

"Service" means the United States Internal Revenue Service.   

         "Shares-in-Trust"  means any  Common  Shares or  Preferred  Shares  the
purported  transfer of which would (i) result in any person owning,  directly or
indirectly,  Common  Shares or  Preferred  Shares  in  excess  of the  Ownership
Limitation, (ii) result in the Common Shares and Preferred Shares being owned by
fewer  than  100  persons   (determined   without  reference  to  any  rules  of
attribution),  (iii)  result in the  Company  being  "closely  held"  within the
meaning  of  Section  856(h) of the Code,  or (iv)  cause  the  Company  to own,
actually or constructively,  10% or more of the ownership  interests in a tenant
of the  Company's  or the  Partnership's  real  property,  within the meaning of
Section 856(d)(2)(B) of the Code.                                               

         "Stabilized   Hotels"  means  the  Hampton   Inn(R)  hotel  located  in
Selinsgrove,  Pennsylvania,  the  Holiday  Inn(R)  hotel and  conference  center
located in Harrisburg,  Pennsylvania and the Clarion  Suites(R) hotel located in
Philadelphia, Pennsylvania.                                                     

         "Subordinated  Units" means Units received by the Hersha  Affiliates in
exchange for the Initial Hotels.                                                

         "Threshold"  means a certain  amount for each Initial Hotel up to which
the Company  receives a certain  percentage  of room  revenues as a component of
Percentage Rent.                                                                

"Trading Day" means a trading day on the American Stock       

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Exchange.                                                                       

"Treasury Regulations" means the income tax regulations       
promulgated under the Code.                                                     

"Trust" means a trust established to hold Shares-in-Trust.    

"Trustee" means a member of the Company's Board of Trustees.  

"Trustees' Plan" means the Hersha Hospitality Trust           
Non-Employee Trustees' Option Plan.                                             

"Underwriter" means Anderson & Strudwick, Incorporated.       

         "Underwriter  Warrants" means the warrants that the Company has granted
the Underwriter to purchase  183,333 Priority Common Shares for a period of five
years at a price per  Priority  Common  Share  of $9.90 (165% of the  Offering  
Price).                                                                         

"Units" means units of limited partnership interest in the    
Partnership.                                                                    

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INDEX TO PRO FORMA CONDENSED AND COMBINED FINANCIAL STATEMENTS

                                                        [Enlarge/Download Table]


                                                                                                          

Hersha Hospitality Trust                                                                                  

   Forecasted Statement of Operations................................................................ F-2 

   Forecasted Statement of Operations for the Twelve Months ended January 31, 2000................... F-4 

   Notes to Forecasted Statement of Operations....................................................... F-5 

   Pro Forma Condensed Combined Balance Sheet as of September 30, 1998............................... F-9 

   Independent Auditors' Report...................................................................... F-13

   Balance Sheet as of May 27, 1998.................................................................. F-14

   Notes to Balance Sheet............................................................................ F-15

Hersha Hospitality Limited Partnership                                                                    

Financial statements are not presented as the Partnership is not active and when                          
active will be  consolidated  with the financial  results of Hersha  Hospitality                          
Trust.                                                                                                    

Hersha Hospitality Management, L.P.                                                                       

   Independent Auditors' Report...................................................................... F-18

   Balance Sheet as of May 27, 1998.................................................................. F-19

   Notes to Balance Sheet............................................................................ F-20

Combined Entities - Initial Hotels                                                                        

   Pro Forma Condensed Combined Statement of Operations                                                   
   for the nine months ended September 30, 1998 ..................................................... F-21

   Pro Forma Condensed Combined Statement of Operations                                                   
   for the year ended December 31, 1997.............................................................. F-23

   Independent Auditors' Report...................................................................... F-25

   Combined Financial Statements                                                                          

     Balance Sheets as of September 30, 1998 [Unaudited] and December 31, 1997                            
     and 1996........................................................................................ F-26

     Statements of Operations for the nine months ended September 30, 1998 and 1997                       
     [Unaudited] and for the years ended December 31, 1997, 1996, and 1995........................... F-27

     Statement of Owners' Equity for the nine months ended September 30, 1998                             
     [Unaudited] and for the years ended December 31, 1997, 1996, and 1995........................... F-28

     Statements of Cash Flows for the nine months ended September 30, 1998 and 1997                       
     [Unaudited] and for the years ended December 31, 1997, 1996, and 1995........................... F-29

     Notes to Combined Financial Statements.......................................................... F-31

   Schedule III - Real Estate and Accumulated Depreciation........................................... F-39


 . . . . . . . . .

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HERSHA HOSPITALITY TRUST
FORECASTED STATEMENT OF OPERATIONS
 (UNAUDITED)

         The following  unaudited  Forecasted  Statement of Operations  has been
prepared giving effect to the Formation Transactions. The Formation Transactions
include the transactions  designed to consolidate the ownership interests of the
Initial  Hotels in the  Company,  to  facilitate  the Offering and to enable the
Company to qualify as a REIT for federal income tax purposes commencing with its
taxable year ending  December 31, 1999. The  Forecasted  Statement of Operations
for the twelve  months  ending  January  31,  2000  assumes  that the  Formation
transactions occurred on February 1, 1999.                                      

         The unaudited Forecasted Statement of Operations presents,  to the best
of  management's  knowledge  and  belief,  the  Company's  expected  results  of
operations for the forecast period. The forecast reflects management's judgment,
as of the date of this  forecast,  of the expected  conditions  and its expected
course  of  action  based on the rents and  certain  expenses  reflected  in the
forecast.  The assumptions  disclosed herein are those that management  believes
are significant to the forecast but are not an all-inclusive  list of those used
in  the  preparation  of  the  prospective  information.  Management  reasonably
expects,  to the best of its  knowledge and belief,  that the actual  results of
operations will approximate those shown; however, there is no assurance that the
forecasted  results will be  achieved.  Furthermore,  there may be  differences 
between  forecasted and actual results,  because events and circumstances do not
occur as expected, and those differences may be material.                       

         The  unaudited  Forecasted  Statement of  Operations  has been prepared
using generally accepted  accounting  principles that the Company expects to use
when  preparing  its  historical  financial  statements  and  should  be read in
conjunction  with "Risk  Factors,"  the Company's  Pro Forma  Condensed  Balance
Sheet, historical financial statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations"  included elsewhere herein. In
addition,  Moore Stephens,  P.C., independent  accountants for the Company, have
not  examined,  reviewed,  compiled  or applied  agreed-upon  procedures  to the
Forecasted  Statement of Operations and,  accordingly,  assume no responsibility
for and disclaim any association  with such forecast,  and no other  independent
expert has reviewed such forecast.                                              

          The following Forecasted Statement of Operations has been completed on
January 20,  1999.  The Company does not  undertake  any  obligation  to release
publicly  the  results of any  future  revisions  it may make to the  Forecasted
Statement of Operations or to update the  Forecasted  Statement of Operations to
reflect events or circumstances after the date hereof, even if any or all of the
underlying  assumptions do not  materialize.  Furthermore,  the Company will not
update or revise the  Forecasted  Statement of Operations to reflect  changes in
general  economic  or  industry  conditions.  Investors  are  cautioned  against
attributing  undue certainty to the Company's  assessment of future  operations.
The Forecasted Statement of Operations should not be relied upon for any purpose
following the consummation of the Offering.                                     

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          The Forecasted  Statement of Operations contains  extrapolations based
upon a number of estimates and assumptions  that, while presented with numerical
specificity and as of January 20, 1999,  considered  reasonable by management of
the  Company,  are  inherently  subject  to  significant   business,   economic,
competitive,  regulatory and other uncertainties and contingencies, all of which
are  difficult  to  predict  and many of which are  beyond  the  control  of the
Company.  The assumptions  disclosed  herein are those that the Company believes
are   significant  to  the  Forecasted   Statement  of  Operations  and  reflect
management's  judgment as of January  20,  1999.  The  Forecasted  Statement  of
Operations is necessarily speculative in nature, and it is usually the case that
one or more of the assumptions do not  materialize.  Not all assumptions used in
the  preparation of the Forecasted  Statement of Operations  have been set forth
herein.  The actual results achieved during the forecasted  period may vary from
those set forth in the Forecasted Statement of Operations,  and those variations
may be material. As disclosed elsewhere in this Prospectus under "Risk Factors,"
the business and operations of the Company are subject to substantial risks that
increase the  uncertainty  inherent in the  Forecasted  Statement of Operations.
Many of the factors  disclosed  under "Risk  Factors" in this  Prospectus  could
cause actual results to differ materially from those expressed in the Forecasted
Statement of Operations.                                                        

         THE INCLUSION OF THE FORECASTED  STATEMENT OF OPERATIONS  HEREIN SHOULD
NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT SUCH
FORECAST  WILL BE ACHIEVED.  PROSPECTIVE  INVESTORS  ARE  CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THE  FORECASTED  STATEMENT OF OPERATIONS AND SHOULD MAKE THEIR
OWN INDEPENDENT ASSESSMENT OF THE COMPANY'S FUTURE RESULTS OF OPERATIONS.       

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HERSHA HOSPITALITY TRUST
FORECASTED STATEMENT OF OPERATIONS
 TWELVE MONTHS ENDING JANUARY 31, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
 (UNAUDITED)

                                                        [Enlarge/Download Table]


                                                                                                                   

Lease revenue (1).......................................................................................     7,175 

Depreciation and amortization (2).......................................................................     2,081 
Interest expense (3)....................................................................................     1,501 
Real estate and personal property taxes and                                                                        
         property and casualty insurance (4)............................................................       605 
General and administrative expenses (5).................................................................       335 
Ground lease (6)........................................................................................        21 
                                                                                                               --- 
Total expenses..........................................................................................     4,543 

Net income before minority interest.....................................................................     2,632 

Minority interest (7)...................................................................................    (1,520)

Net income..............................................................................................     1,112 

Net income per Priority Common Share....................................................................      0.61 

Weighted average number of Priority Common Shares outstanding (8)....................................    1,833,334 


See Notes to Forecasted Statement of Operations.

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HERSHA HOSPITALITY TRUST
 NOTES TO FORECASTED STATEMENT OF OPERATIONS
 (UNAUDITED)

         The following  notes present a summary of significant  assumptions  and
accounting  policies used by the Company in the  preparation  of the  Forecasted
Statement of Operations.                                                        

(1)      Forecasted  lease  revenue  is  based  on  an  agreement   between  the
         Partnership  and the  Lessee in which the  parties  have  agreed to the
         lease  terms and the form of lease to be signed at the  closing  of the
         Offering.  Forecasted  lease  revenue  is  calculated  under one of two
         methods  depending upon whether the Initial Hotel is a Stabilized Hotel
         with  an  established  operating  history  or  a  Newly-Developed  or a
         Newly-Renovated  Hotel.  Because  the Lessee is required to pay Initial
         Fixed  Rents  on the  Newly-Developed  Hotels  and the  Newly-Renovated
         Hotels  for  at  least  the  first  twelve  months  of  operation,  the
         forecasted  lease revenue for those hotels for the twelve months ending
         January 31, 2000 is based on the Initial  Fixed Rents.  The  forecasted
         lease  revenue for the  Stabilized  Hotels for the twelve months ending
         January 31, 2000 is calculated by applying the percentage rent formulas
         to the historical revenues for those hotels for the twelve months ended
         September  30, 1998.  Forecasted  lease  revenue for the twelve  months
ending January 31, 2000 is computed as follows:               

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                                                                                               Forecasted         
                                                                                         Lease Revenue for the    
                                          Initial Fixed          Percentage                      12 Months        
               Initial Hotel                  Rent              Rent Formula               Ending January 31, 2000
               ------------               -------------         ------------             -------------------------
                                                                                                                  

Newly-Developed Hotels                                                                                            
Holiday Inn Express, Hershey, PA              $795                                                 $  795         
Holiday Inn Express, New Columbia, PA          498                                                    498         
Hampton Inn, Carlisle, PA                      699                                                    699         
Comfort Inn, Harrisburg, PA                    514                                                    514         
Newly-Renovated Hotels                                                                                            
Holiday Inn Express, Harrisburg, PA            504                                                    504         
Holiday Inn, Milesburg, PA                     525                                                    525         
Comfort Inn, Denver, PA                        262                                                    262         

Stabilized Hotels                                                                                                 
Holiday Inn Hotel and Conference Center,               44.3% of room revenue up to                  1,670         
Harrisburg, PA                                         $2,638,247, plus 65.0% of room                             
                                                       revenue in excess of                                       
                                                       $2,638,247  but less                                       
                                                       than     $3,103,820,                                       
                                                       plus  31.0%  of room                                       
                                                       revenue in excess of                                       
                                                       $3,103,820,     plus                                       
                                                       8.0% of all non-room                                       
                                                       revenue.                                                   

Hampton Inn, Selinsgrove, PA                           49.0% of room revenue up to                    690         
                                                       $1,081,152, plus 65.0% of room                             
                                                       revenue in excess of $1,081,152                            
                                                       but less than $1,271,943, plus                             
                                                       29.0% of room revenue in excess of                         
                                                       $1,271,943, plus 8.0% of all                               
                                                       non-room revenue.                                          

Clarion Suites, Philadelphia, PA                       36.1% of room revenue up to                  1,018         
                                                       $1,998,097, plus 65.0% of room                             
                                                       revenue in excess of $1,998,097                            
                                                       but less than $2,350,702, plus                             
                                                       29.0% of room revenue in excess of                         
                                                       $2,350,702, plus 8.0% of all                               
                                                       non-room revenue.                                          
Total                                                                                              $7,175         

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(2)      Represents management's estimate of depreciation and amortization based
         on the  Company's  pro  forma  balance  sheet at  September  30,  1998,
         straight-line  deprecation and amortization  methods,  estimated useful
         lives of 15-40  years for  buildings  and  improvement,  and  estimated
useful lives of 5-7 years for furniture and equipment.        

(3)      Represents a weighted average interest rate of 8.32% per annum on the  
Assumed Indebtedness.                                         

(4)      Represents  management's  estimate of real estate and personal property
taxes and property and casualty insurance.                    

(5)      Represents   management's   estimate   of  fees   payable   under   the
         Administrative  Services Agreement ($155), legal and audit fees ($100),
Trustees' fees ($60) and other expenses ($20).                

(6)      Represents  management's estimate of ground lease payments with respect
         to the Holiday Inn Express, Harrisburg, PA and the Comfort Inn, Denver,
PA pursuant to lease agreements.                              

(7)      The Partnership  Agreement  provides that depreciation and amortization
         deductions of the Partnership for each fiscal year will be allocated to
         the  Company  and  the  Limited   Partners  in  accordance  with  their
         respective  percentage  interests  in the  Partnership.  Profit  of the
         Partnership  (excluding  depreciation and amortization  deductions) for
         each year will be allocated  in the  following  order of priority:  (i)
         first, to the Company until the aggregate amount of profit allocated to
         the  Company  under this clause (i) for the current and all prior years
         equals the  aggregate  amount of Preferred  Return (as herein  defined)
         distributed  to the Company for the current and all prior  years,  (ii)
         second,  to the Limited  Partners in accordance  with their  respective
         percentage  interests in the Partnership  until the aggregate amount of
         profit  allocated to the Limited  Partners under this clause second for
         the  current  and all  prior  years  equals  the  aggregate  amount  of
         Preferred  Return  distributed to the Limited  Partners for the current
         and all prior years, and (iii) finally,  to the Company and the Limited
         Partners in accordance with their  respective  percentage  interests in
         the Partnership.  Accordingly, forecasted minority interest is computed
as follows:                                                   

                                                        [Enlarge/Download Table]


                                                                                         

Distributable Cash:                                                                      

Forecasted net income........................................................... $ 2,632 
Add:  Forecasted depreciation and amortization..................................   2,081 
Forecasted net cash from operations.............................................   4,713 
Less:  Forecasted FF&E reserves and debt repayments.............................  (1,422)
                                                                                  -------
Forecasted distributable cash................................................... $ 3,291 

                             F-7                                                         

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Allocations:                                                                             

Forecasted depreciation and amortization (68.38% minority interest)............. $(1,423)
Forecasted net income (before depreciation and amortization) up to                       
      distributable cash ($3,291 - $1,320 priority distribution)................   1,971 
Forecasted remaining net income (before depreciation and amortization)                   
      ($2,632 + $2,081 - $3,291 x 68.38% minority interest).....................     972 
                                                                                  ------ 
Forecasted minority interest....................................................  $1,520 

(8)      Excludes 166,666 Priority Common Shares offered to the                 
Hersha Affiliates.                                            

         The Company plans to make an election to be taxed as a REIT  commencing
with its taxable year ending December 31, 1999. As a REIT, the Company generally
will not be taxed on income it currently distributes to its shareholders so long
as it  distributes  at least  95% of its  taxable  income  currently.  REITs are
subject to a number of organizational and operational requirements.  Even if the
Company  continues to qualify for taxation as a REIT, the Company may be subject
to federal  income taxes and to certain  state and local taxes on its income and
property.                                                                       

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HERSHA HOSPITALITY TRUST                                                        
--------------------------------------------------------------------------------

PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1998.            
[UNAUDITED, IN THOUSANDS]                                                       
--------------------------------------------------------------------------------

This unaudited pro forma Condensed Combined Balance Sheet is presented as if the
acquisition  of  the  Initial  Hotels  and  the  consummation  of  the  Offering
contemplated  by this  prospectus  had occurred on September 30, 1998.  Such pro
forma  information  is based upon the  Combined  Balance  Sheets of the Combined
Entities - Initial Hotels as adjusted for the application of the proceeds of the
Offering  as set forth  under  the  caption  "Use of  Proceeds"and  assumes  the
issuance  of  3,964,108  Units to the  Hersha  Affiliates  which  give rise to a
minority  interest  percentage of 68.38%.  It should be read in conjunction with
the Combined Financial  Statements of the Combined Entities - Initial Hotels and
the Notes  thereto  included at pages F-31 through F-38 of this  Prospectus.  In
management's  opinion, all adjustments  necessary to reflect the effects of this
transaction have been made.                                                     

This unaudited pro forma  Condensed  Combined  Balance Sheet is not  necessarily
indicative of what the actual  financial  position would have been assuming such
transactions had been completed as of September 30, 1998, nor does it purport to
represent the future financial position of the Company.                         

Pro forma  Condensed  Combined  Statements  of  Operations  are not presented as
Hersha Hospitality Trust has had no historical operations as a hotel lessor.    

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HERSHA HOSPITALITY TRUST                                                        
--------------------------------------------------------------------------------

PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1998.            
[UNAUDITED, IN THOUSANDS]                                                       
--------------------------------------------------------------------------------

                                                        [Enlarge/Download Table]


                                 Historical                                          Adjustments                
                                  Combined                                               and                    
                                  Entities        Proceeds of      Pro Forma           Use of         Pro Forma 
                               Initial Hotels      Offering         Company           Proceeds         Company  
                               --------------     -----------      ---------         -----------      ----------
                                                      [A]             [B]                                [C]    
                                                                                                                
Assets:                                                                                                         
   Net Investment in Hotel                                                                                      
     Properties                $       26,904  $        --     $       26,904      $    250     [D]  $    40,489
                                                                                       (552)    [E]             
                                                                                       (150)    [E]             
                                                                                     14,037     [F]             
   Cash                                 1,258        9,470             10,728        (8,378)    [D]        2,350
   Other Assets                         1,536           --              1,536        (1,536)    [E]           --
   Intangibles                          1,382           --              1,382           488     [D]        1,404
                                                                                       (466)    [E]             
                               --------------  -----------     --------------   ------------         -----------
   Total Assets                $       31,080  $     9,470     $       40,550      $  3,693          $    44,243
                               ==============  ===========     ==============   ============         ===========

Liabilities:                                                                                                    
   Mortgages                   $       19,800  $        --     $       19,800      $ (2,400)    [D]  $    17,400
   Due to Related Parties               3,982           --              3,982        (3,982)    [D]           --
   Accounts Payable, Accrued                                                                                    
     Expenses and Other                                                                                         
     Liabilities                          823           --                823          (823)    [E]           --
                               --------------  -----------     --------------  ------------          -----------
   Total Liabilities                   24,605           --             24,605        (7,205)              17,400
                               --------------  -----------     --------------  ------------          -----------
Minority Interest in                                                                                            
   Partnership                             --           --                 --        18,355     [G]       18,355
                               --------------  -----------     --------------  ------------          -----------
Shareholders' Equity:                                                                                           
   Common Shares                           --           18                 18            --                   18

   Additional Paid-in Capital              --        9,452              9,452          (982)    [H]        8,470

   Net Combined Equity                  6,475           --              6,475        14,037     [F]             
                                                                                    (20,512)  [G,H]           --
                               --------------  -----------     --------------  ------------          -----------
   Total Shareholders' Equity           6,475        9,470             15,945        (7,457)               8,488
                               --------------  -----------     --------------  ------------          -----------
   Total Liabilities and                                                                                        
    Shareholders' Equity       $       31,080  $     9,470     $       40,550      $  3,693          $    44,243
                               ==============  ===========     ==============  ============          ===========


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HERSHA HOSPITALITY TRUST                                                        
--------------------------------------------------------------------------------

PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1998.            
[UNAUDITED, IN THOUSANDS]                                                       
--------------------------------------------------------------------------------

                                                        [Enlarge/Download Table]

                                                                                            

[A]  Represents  proceeds of the Offering ($11,000) less estimated expenses of              
     the Offering  ($1,530)  which  excludes  $1,000 of proceeds from sales of              
     common shares to Hersha affiliates.                                                    

[B]  Represents  the combined  interests of the Initial Hotels and the Company              
     after the proceeds of the Offering, but before the use of proceeds.                    

[C]  Represents  the  combined  interests  of the  Company  after the use of the            
     proceeds of the offering.                                                              

[D]  Net decrease reflects the following proposed transactions:                             
         Cash Not Being Purchased                                                 $   1,258 
         Repayment of Amounts Payable to Affiliates and Partners                      3,982 
         Repayment of Mortgage Indebtedness                                           2,400 
         Payment of Franchise License Transfer Fees ($145) Transfer Taxes ($233)            
           Improvements ($250) and Other ($110)                                         738 
                                                                                  --------- 
         Net Decrease in Cash                                                     $   8,378 
                                                                                  ========= 

[E] Assets and liabilities; not being purchased consist of:                                 
       Cash                                                                       $  (1,258)
       Land and Building                                                               (552)
       Personal Property                                                               (150)
       Other Assets                                                                  (1,536)
       Initial Franchise License Fees and Loan Acquisition Costs                       (466)
       Accounts Payable, Accrued Expenses and Other Liabilities                         823 
                                                                                  --------- 
       Net Assets and Liabilities Not Purchased                                   $  (3,139)
                                                                                  ========= 

[F]  Where a number of businesses combine prior to or contemporaneously with an 
     initial public offering Securities and Exchange Commission Staff Accounting
  Bulletin ["SAB"] 97 requires that purchase accounting be applied. SAB 97
 requires that, unless there is persuasive evidence to the contrary, the
    accounting acquiror is the ownership group receiving the largest ownership
 interest in the combined entity. Of the twelve entities being combined,
   eight are limited partnerships ["LP's"] with the same one percent general
partner [the "Related Entities"], three are limited partnerships with 
  different general partners than the other eight and one is a corporation
  [the "Unrelated Entities"]. Based on an analysis of ownership interests,
the partners of 1244 Associates [one of the eight LP's with the same  
general partner] received approximately 29 percent of the ownership   
  interest in the combined entity and 1244 Associates was deemed to be the
 acquiror. Therefor, the transaction was accounted for as a purchase and
   purchase accounting adjustments were made to the other eleven entities to
adjust the assets to fair market value measured by the number of      
partnership units allocated to each entity multiplied by $6 per unit. 
Management feels that the purchase price as measured by the units     
     approximates fair market value. Where common ownership existed by virtue of
   the same one percent general partner purchase accounting adjustments were
only made to the extent of the 99 percent non-common ownership. The   
purchase accounting adjustments are as follows:                       

                                                        [Enlarge/Download Table]

                                                                                            
Partnership Units Distributed to Unrelated Entities Acquired                      $      500
99% of Partnership Units Issued to Limited Partners of Related Entities Acquired       2,392
                                                                                  ----------

                                                                                       2,892
Purchase Price Per Unit                                                           $        6
                                                                                  ----------

Total Purchase Price                                                                  17,352
Book Value of Assets Purchased                                                         3,315
                                                                                  ----------
Excess Purchase Price                                                             $   14,037
                                                                                  ==========

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HERSHA HOSPITALITY TRUST                                                        
--------------------------------------------------------------------------------

PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1998.            
[UNAUDITED, IN THOUSANDS]                                                       
--------------------------------------------------------------------------------

[Continued]                                                                     

[F]    [Continued]                                                              

Excess purchase price is allocated as follows:                    

       Land                                                           $    1,355
       Buildings and Improvements                                         12,682
                                                                      ----------

       Total Addition to Net Investment in Hotel Properties           $   14,037
                                                                      ==========

[G]    Represents the recognition of the interest in the  Partnership  that will
not be owned by the Company determined as follows:                

      Net Proceeds of Offering                                      $    9,470
      Net Combined Equity                                                6,475
      Excess Purchase Price                                             14,037
       Net Assets Not Acquired                                           (3,139)
                                                                    ----------

                                                                        26,843
      Minority Interest Percentage                                       .6838
                                                                    ----------
      Minority Interest                                             $   18,355
                                                                    ==========
[H] Net decrease reflects the following proposed transactions:                  

        Elimination of Net Combined Equity                          $    6,475
        Excess Purchase Price                                           14,037
         Assets and Liabilities of Initial Hotels Not Purchased          (3,139)
         Recognition of Minority Interest in Partnership                (18,355)
                                                                    ----------
                                                                     $     (982)
                                                                    ==========

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INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholder                                       
Hersha Hospitality Trust                                                  

                  We have  audited  the  accompanying  balance  sheet of  Hersha
Hospitality  Trust as of May 27, 1998. This balance sheet is the  responsibility
of the Company's management.  Our responsibility is to express an opinion on the
balance sheet based on our audit.                                               

                  We conducted our audit in accordance  with generally  accepted
auditing  standards.  Those standards require that we plan and perform the audit
to obtain  reasonable  assurance  about  whether  the  balance  sheet is free of
material  misstatement.  An audit includes examining,  on a test bases, evidence
supporting  the amounts and  disclosures  in the  balance  sheet.  An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation.  We
believe that our audit provides a reasonable basis for our opinion.             

                  In our opinion,  the balance sheet  referred to above presents
fairly, in all material  respects,  the financial position of Hersha Hospitality
Trust as of May 27, 1998,  in  conformity  with  generally  accepted  accounting
principles.                                                                     

                                           MOORE STEPHENS, P. C.
                                                   Certified Public Accountants.

Cranford, New Jersey                                                            
May 27, 1998 [Except as to                                                      
the Notes to the Financial Statements                                           
as to which the Date is December 4, 1998]                                       

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HERSHA HOSPITALITY TRUST                                                        
--------------------------------------------------------------------------------

BALANCE SHEETS                                                                  
--------------------------------------------------------------------------------

                                                        [Enlarge/Download Table]


                                                                September 30,             
                                                                   1998           May 27, 
                                                                [Unaudited]       1998    
                                                                -----------     --------- 
                                                                                          

Assets                                                          $         --  $        -- 
                                                                ============  =========== 

Liabilities and Shareholders' Equity:                                                     
Liabilities                                                               --           -- 

Commitments and Contingencies                                             --           -- 

Shareholders' Equity:                                                                     
   Common Shares, $.01 par value, 1,000 shares authorized, 100                            
     shares issued and outstanding                                         1            1 

   Additional paid-in capital                                             99           99 

   Subscription Receivable                                              (100)        (100)
                                                                ------------  ----------- 

   Total Liabilities and Shareholders' Equity                   $         --  $        -- 
                                                                ============  =========== 

The Accompanying Notes Are an Integral Part of This Financial Statement.        

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HERSHA HOSPITALITY TRUST                                                        
NOTES TO BALANCE SHEET AS OF MAY 27, 1998                                       
--------------------------------------------------------------------------------

[1] Organization and Basis of Financial Presentation                            

Hersha  Hospitality  Trust [the  "Company"]  was formed in May,  1998 to acquire
equity   interests  in  ten  existing  hotel   properties.   The  Company  is  a
self-administered, Maryland real estate investment trust ["REIT"] and expects to
qualify as a REIT for  Federal  income tax  purposes.  As such,  the  Company is
subject to a number of organizational and operational requirements,  including a
requirement that it currently distribute at least 95% of its taxable income. The
Company intends to offer for sale 2,000,000 [See Note 3] Priority Class A Common
Shares of beneficial  interest of which 1,833,334  shares will be offered to the
public  and  166,666  shares  will be offered  to Mr.  Hasu P. Shah and  certain
affiliates  [the  "Hersha  Affiliates"]  in  an  initial  public  offering  [the
"Offering"] and Hersha Hospitality  Limited Partnership [the "Partnership"] will
issue  approximately  3,960,000 Units of partnership  interest  ["Units"] to the
Hersha  Affiliates  owning 100% of the  ownership  interest in the ten  existing
hotel  properties  [the "Initial  Hotels"],  which are redeemable  under certain
circumstances  beginning  after one year from the closing of the  Offering.  The
number of Units  issued is subject to  adjustment  based on the  performance  of
certain  Initial  Hotels  which  as of the  date  of the  Offering  do not  have
established operating histories.                                                

Upon completion of the offering,  the Company will contribute  substantially all
of the net  proceeds of the  Offering  to the  Partnership  in  exchange  for an
approximate 32% general partnership interest in the Partnership. The Partnership
will use the  proceeds  from the  Company to acquire  the  Initial  Hotels.  The
Partnership  will acquire the Initial  Hotels in exchange  for (i) Units,  which
will  be  redeemable,  subject  to  certain  limitations,  for an  aggregate  of
approximately 3,960,000 Common Shares of the Company valued at approximately $24
million  based on an  offering  price of $6.00 per Common  Share [the  "Offering
Price"] , and (ii) the  assumption of  approximately  $26 million of outstanding
indebtedness  as of December 31, 1997.  The Hersha  Affiliates  have agreed that
they will (i)  exchange all their  interests in the Initial  Hotels for Units in
the  Partnership,  and (ii) grant an option to the Company to acquire any hotels
acquired or  developed  by the Hersha  Affiliates  within 15 miles of any of the
Initial Hotels or any hotel subsequently acquired by the Company.               

After  consummation of the Offering,  (a) the Company will own approximately 32%
of the Partnership,  (b) the Hersha Affiliates will own approximately 68% of the
Partnership, and (c) the Partnership will own 100% of the equity interest in the
Initial Hotels.                                                                 

[2] Summary of Significant Accounting Policies                                  

Distributions - The Company intends to pay regular quarterly dividends which are
initially dependent upon receipt of distributions from the Partnership.         

[3] Commitments and Contingencies                                               

The Company, in conjunction with the Offering,  intends to amend its Declaration
of Trust to  provide  for the  issuance  of up to  50,000,000,  $.01 par  value,
Priority  Class A Common Shares of  beneficial  interest,  50,000,000,  $.01 par
value,  Class B Common Shares of beneficial  interest and  10,000,000,  $.01 par
value, Preferred Shares of beneficial interest.                                 

The Priority  Class A Common Shares have priority as to the payment of dividends
until dividends equal $.72 per share on a cumulative basis and shares equally in
additional  dividends  after the Class B Common  Shares have  received  $.72 per
share  in each  annual  period.  The  Priority  Class A  Common  Shares  carry a
liquidation  preference of $6.00 per share plus unpaid  dividends and votes with
the Class B Common Shares on a one vote per share basis.  The Priority period of
the Class A Shares  will  commence  on the date of the  closing  of the  initial
public  offering  and end on the  earlier  of (i) five years  after the  initial
public  offering  of the  Priority  Common  Shares,  or (ii) the date that is 15
trading  days after the  Company  sends  notice to the  holders of the  Priority
Common Shares, provided that the closing bid price of the Priority Common Shares
is at least $7 on each trading day during such 15-day period.                   

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HERSHA HOSPITALITY TRUST                                                        
NOTES TO BALANCE SHEET AS OF MAY 27, 1998, Sheet #2                             
--------------------------------------------------------------------------------

[3] Commitments and Contingencies [Continued]                                   

In conjunction  with the offering,  the Partnership will acquire the ten Initial
Hotels and will enter into percentage lease  agreements with Hersha  Hospitality
Management L.P. [the "Lessee"].  Under the Percentage Leases, the Partnership is
obligated  to pay the costs of certain  capital  improvements,  real  estate and
personal  property  taxes and property  insurance,  and to make available to the
Lessee an amount equal to 4% [6% for some hotels] of room  revenues per quarter,
on a  cumulative  basis,  for  the  periodic  replacement  or  refurbishment  of
furniture, fixtures and equipment at the Initial Hotels.                        

Pursuant  to the  Partnership  Agreement,  the Hersha  Affiliates  will  receive
Redemption  Rights,  which will enable them to cause the  Partnership  to redeem
their  interests in the  Partnership in exchange for cash or, at the election of
the Company, Class B Common Shares on a one-for-one basis. The Redemption Rights
may be exercised by the Hersha  Affiliates  commencing  one year  following  the
closing of the  Offering  depending  on the length of time the hotel has been in
operation.  The  number  of  Common  Shares  initially  issuable  to the  Hersha
Affiliates upon exercise of the Redemption Rights is approximately 3,960,000 and
has been  determined  based on the  value of  their  interests  in the  Combined
Entities  divided by the expected  offering price of $6.00 per share. The number
of shares issuable upon exercise of the Redemption  Rights will be adjusted upon
the  occurrence of stock  splits,  mergers,  consolidations  or similar pro rata
share  transactions  which  otherwise  would  have the  effect of  diluting  the
ownership interests of the Hersha Affiliates or the shareholders of the Company.

The  Company  acts as the general  partner in the  Partnership  and as such,  is
liable for all recourse  debt of the  Partnership  to the extent not paid by the
Partnership.  In the opinion of management,  the Company does not anticipate any
losses as a result of its general partner obligations.                          

The Company expects to incur expenses of  approximately  $275,000 related to the
transfer of ownership of the franchise  licenses from the existing owners to the
Lessee.                                                                         

Summary operating results for the Initial Hotels [in thousands] are as follows: 

                                                        [Enlarge/Download Table]

                             Nine months ended               Years  ended              
                               September 30,                 December 31,              
                           1998          1997          1997       1996       1995      
                         -------        -------      -------     -------    -------    
                       [Unaudited]    [Unaudited]                                      
                                                                                       

Total Revenue         $   13,935     $     9,692   $   13,445  $    9,989  $     7,219 
Total Expenses            11,497           8,140       11,716      10,017        7,595 
                      ----------     -----------   ----------  ----------  ----------- 
   Net Income [Loss]  $    2,438     $     1,552   $    1,729  $      (28) $      (376)
   -----------------  ==========     ===========   ==========  ==========  =========== 

[4] Subsequent Events [Unaudited]                                               

[A] Prior to the Offering,  the Company will adopt the Company's  "Option Plan".
The Option Plan will be administered by the Compensation  Committee of the Board
of Trustees, or its delegate [the "Administrator"].                             

Officers  and other  employees  of the  Company  generally  will be  eligible to
participate in the Option Plan. The  Administrator  will select the  individuals
who will participate in the Option Plan ["Participants"].                       

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HERSHA HOSPITALITY TRUST                                                        
NOTES TO BALANCE SHEET AS OF MAY 27, 1998, Sheet #3                             
--------------------------------------------------------------------------------

[4] Subsequent Event [Unaudited]                                                

[A]  [Continued]  The Option  Plan will  authorize  the  issuance  of options to
purchase up to 650,000 Class B Common Shares. The Plan provides for the grant of
(i) options  intended to qualify as incentive stock options under Section 422 of
the Code, and (ii) options not intended to so qualify.  Options under the Option
Plan may be awarded by the  Administrator,  and the Administrator will determine
the option  exercise  period and any vesting  requirements.  The options granted
under the Option Plan will be exercisable  only if (i) the Company obtains a per
share closing  price on the Common Shares of $9.00 or higher for 20  consecutive
trading days and (ii) the closing  price per Common Share for the prior  trading
day was $9.00 or higher.  In addition,  no option  granted under the Option Plan
may be  exercised  more than five years  after the date of grant.  The  exercise
price for  options  granted  under the  Option  Plan will be  determined  by the
Compensation Committee at the time of grant.                                    

No option  award may be granted  under the Option Plan more than ten years after
the date the  Board of  Trustees  approved  such  Plan.  The  Board may amend or
terminate  the  Option  Plan at any  time,  but an  amendment  will  not  become
effective without shareholder approval if the amendment (i) increases the number
of shares that may be issued under the Option Plan, (ii) materially  changes the
eligibility  requirements  or (iii)  extends the length of the Option  Plan.  No
amendment   will  affect  a   Participant's   outstanding   award   without  the
Participant's consent.                                                          

No options have been granted under the Option Plan.                             

[B] Prior to the  Offering,  the Board of  Trustees  will  also  adopt,  and the
Company's  sole  shareholder  will  approve,   the  Trustees'  Plan  to  provide
incentives  to attract  and retain  Independent  Trustees.  The  Trustees'  Plan
authorizes  the issuance of up to 200,000 Class B Common  Shares.  The Trustees'
Plan provides  for, in the event the Class B Common  Shares are  converted  into
another  security of the  Company,  the issuance of  equivalent  amounts of such
security  and options to purchase  such  security  into which the Class B Common
Shares are converted.                                                           

The Trustees' Plan provides for the grant of a  nonqualified  option for Class B
Common Shares to the Independent  Trustees of the Company who are members of the
Board on the  effective  date of the Offering.  The exercise  price of each such
option  will be equal to the  Offering  Price.  Each such  option  shall  become
exercisable for over the particular  Trustee's  initial term,  provided that the
Trustee is a member of the Board on the applicable date. An option granted under
the Trustees'  Plan will be  exercisable  only if (i) the Company  obtains a per
share  closing price on the Priority  Common Shares of $9.00 for 20  consecutive
trading days and (ii) the per share closing price on the Priority  Common Shares
for the  prior  trading  day was  $9.00 or  higher.  Options  issued  under  the
Trustees' Plan are exercisable for five years from the date of grant.           

A Trustee's  outstanding  options will become fully  exercisable  if the Trustee
ceases to serve on the  Board due to death or  disability.  All  awards  granted
under the Trustees' Plan shall be subject to Board or other approval  sufficient
to provide  exempt  status for such grants under Section 16 of the Exchange Act,
as that section and Rules  thereunder are in effect from time to time. No option
may be granted under the  Trustees'  Plan more than 10 years after the date that
the Board of Trustees  approved the Plan.  The Board may amend or terminate  the
Trustees'  Plan at any time but an amendment will not become  effective  without
shareholder approval if the amendment increases the number of shares that may be
issued under the Trustees' Plan (other than equitable  adjustments  upon certain
corporate transactions).                                                        

No options have been granted under the Trustees' Plan.                          

 . . . . . . . .

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INDEPENDENT AUDITORS' REPORT

To the Partners of                                                              
Hersha Hospitality Management, L.P.                                       

                  We have  audited  the  accompanying  balance  sheet of  Hersha
Hospitality  Management,  L.P. as of May 27,  1998.  This  balance  sheet is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on the balance sheet based on our audit.                             

                  We conducted our audit in accordance  with generally  accepted
auditing  standards,  Those standards require that we plan and perform the audit
to obtain  reasonable  assurance  about  whether  the  balance  sheet is free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting  the amounts and  disclosures  in the  balance  sheet.  An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation.  We
believe that our audit provides a reasonable basis for our opinion.             

                  In our opinion,  the balance sheet  referred to above presents
fairly, in all material  respects,  the financial position of Hersha Hospitality
Management,  L.P. as of May 27, 1998,  in  conformity  with  generally  accepted
accounting principles.                                                          

                                           MOORE STEPHENS, P. C.
                                                   Certified Public Accountants.
Cranford, New Jersey                                                            
May 27, 1998                                                                    

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HERSHA HOSPITALITY MANAGEMENT, L.P.                                             
--------------------------------------------------------------------------------

BALANCE SHEETS                                                                  
--------------------------------------------------------------------------------

                                                                [Download Table]

                                                    September 30,               
                                                        1998            May 27, 
                                                     [Unaudited]         1998   
                                                    ------------       -------- 
                                                                                

Assets                                              $           --  $         --
                                                    ==============  ============

Liabilities and Partners' Capital:                                              
Liabilities                                                     --            --

Commitments and Contingencies                                   --            --

Partners' Capital                                               --            --
                                                    --------------  ------------

   Total Liabilities and Partners' Capital          $           --  $         --
                                                    ==============  ============

The Accompanying Notes Are an Integral Part of This Financial Statement.        

F-19          

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HERSHA HOSPITALITY MANAGEMENT, L.P.                                             
NOTES TO BALANCE SHEET AS OF MAY 27, 1998.                                      
--------------------------------------------------------------------------------

[1] Organization                                                                

Hersha Hospitality Management,  L.P. [the "Lessee"] was organized under the laws
of the State of  Pennsylvania  in May,  1998 to lease and operate  ten  existing
hotel properties from Hersha Hospitality Limited Partnership [the "Partnership"]
[collectively the "Initial Hotels"]. The Lessee is owned by Mr. Hasu P. Shah and
certain affiliates some of whom have ownership interests in the Initial Hotels. 

[2] Commitments                                                                 

The Lessee will enter into  Percentage  Leases,  each with an initial  term of 5
years with two 5 year renewal  options,  relating to each of the Initial Hotels.
Pursuant to the terms of the  Percentage  Leases,  the Lessee is required to pay
the greater of the Base Rent or the Percentage Rent for hotels with  established
operating histories. The Base Rent is 6.5 percent of the purchase price assigned
to each Initial Hotel.  The Percentage  Rent for each Initial Hotel is comprised
of (i) a percentage of room revenues up to the  Threshold,  (ii) a percentage of
room  revenues  in excess  of the  Threshold,  but not more  than the  Incentive
Threshold,  (iii) a  percentage  of room  revenues  in excess  of the  Incentive
Threshold and (iv) a percentage of revenues other than room revenues. For hotels
with limited operating histories,  the leases provide for the payment of Initial
Fixed Rent for  certain  periods as  specified  in the leases and the greater of
Base Rent or Percentage  Rent  thereafter.  The Lessee also will be obligated to
pay certain other amounts,  including  interest  accrued on any late payments or
charges.  The Lessee is  entitled  to all  profits  from the  operations  of the
Initial Hotels after the payment of certain specified operating expenses.       

The Lessee  will assume the rights and  obligations  under the terms of existing
franchise licenses relating to the Initial Hotels upon acquisition of the hotels
by the Partnership. The franchise licenses generally specify certain management,
operational,  accounting,  reporting and marketing standards and procedures with
which the  franchisee  must comply and provide for annual  franchise  fees based
upon percentages of gross room revenue.                                         

The Lessee will provide certain  administrative  services to the Partnership for
an annual fee of $55,000 plus $10,000 per hotel.                                

 . . . . . . . .

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COMBINED ENTITIES - INITIAL HOTELS                                              
--------------------------------------------------------------------------------

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE               
MONTHS ENDED SEPTEMBER 30, 1998.                                                
[UNAUDITED IN THOUSANDS]                                                        
--------------------------------------------------------------------------------

This unaudited pro forma Condensed Combined Statement of Operations is presented
as if the  sale of the  Initial  Hotels  and the  consummation  of the  Offering
contemplated  by this prospectus had occurred on January 1, 1997. Such pro forma
information  is based in part upon the Combined  Statements of Operations of the
Combined  Entities - Initial  Hotels and the  application of the proceeds of the
Offering  as set  forth  under the  caption  "Use of  Proceeds."  It is meant to
represent the pro forma operations of Hersha Hospitality  Management,  L.P. [the
"Lessee"]  and successor to the  operations  of the Combined  Entities - Initial
Hotels.  The separate  operations  of the Lessee are  inconsequential.  This pro
forma  information  should be read in  conjunction  with the Combined  Financial
Statements and Notes thereto of the Combined  Entities - Initial Hotels included
at pages F-31 through F-38 of this  Prospectus.  In  management's  opinion,  all
adjustments necessary to reflect the effects of this transaction have been made.

This  unaudited  pro forma  Condensed  Combined  Statement of  Operations is not
necessarily  indicative of what actual results of operations of the Lessee would
have been assuming such  transactions  had been completed as of January 1, 1997,
nor does it purport to represent the results of operations for future periods.  

                                                                [Download Table]


                                        Nine months ended September 30, 1998  
                                        ------------------------------------- 
                                    Historical                                
                                     Combined                                 
                                    Entities -                                
                                  Initial Hotels     Adjustments     Pro Forma
                                  --------------     -----------     ---------
                                                                              

Total Revenue                      $    13,935      $       --       $  13,935
Expenses:                                                                     
   Initial Hotel Operating                                                    
   Costs and Expenses                    6,806            (417) [A]      6,389
   Advertising and Marketing               388              --             388
   Depreciation and Amortization         1,161          (1,135) [B]         26
   Interest Expense                      1,497          (1,497) [C]         --
   General and Administrative            1,645            (112) [D]      1,703
                                                           170  [E]           
   Percentage Lease Payments                --           5,108  [F]      5,108
                                   -----------      ----------       ---------
   Lessee Operating Income         $     2,438      $   (2,117)      $     321
   -----------------------         ===========      ==========       =========

[A]   Decrease  reflects  personal  property,  real  estate  taxes and  casualty
insurance to be paid by the Partnership.                            
[B]   Decrease reflects  elimination of amortization expense excluding franchise
      fee  amortization  and the  elimination  of  depreciation  expense  at the
Combined Entity level.                                              
[C]   Decrease  reflects  reduction  of  interest  costs  due  to  the  expected
      repayment of certain of the related  party and mortgage  indebtedness  and
    the elimination of the remaining interest to be paid by the Partnership.
[D]   Decrease  reflects the  elimination of certain  expenses to be paid by the
Partnership as required by the Administrative Services Agreement.   
[E]   To eliminate related party management fees of $288 and replace with       
anticipated salaries of $458 based on salary agreements.            

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COMBINED ENTITIES - INITIAL HOTELS                                              
--------------------------------------------------------------------------------

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE               
MONTHS ENDED SEPTEMBER 30, 1998.                                                
[UNAUDITED IN THOUSANDS]                                                        
--------------------------------------------------------------------------------

[Continued]                                                                     

[F]   Represents lease payments calculated on a pro forma basis using the rent  
   provisions in the Percentage Lease Agreements. Percentage rents under the
    lease agreements are calculated under two methods depending on whether the
hotel is a stabilized hotel with an established operating history or a
    newly-developed or newly-renovated hotel. Stabilized hotels pay percentage
rent based on a percentage of room revenue which changes at various   
thresholds as described on pages 46 and 47 of this prospectus plus a  
 percentage of all non-room revenue. Newly-developed or newly- renovated
hotels pay initial fixed rent for the first two years of operation and
     percentage rent thereafter with such initial fixed rent being recognized on
a straight-line basis over the course of the period presented. Certain
  newly developed or newly-renovated hotels have not been in operation for
   the full period presented and in those cases percentage rent payments are
   recognized on a straight-line basis prorated for the period the hotel was
    in operation. Pro forma percentage rent payments for stabilized hotels has
   been calculated using the terms of the percentage lease agreement applied
    to historical room revenue and other revenue for the period presented. For
    the nine months ended September 30, 1998 percentage lease payments consist
     of $2,431 of percentage rent and $2,677 of initial fixed rent calculated as
follows:                                                              

Hotels Under Percentage Lease Agreements:                           
 Holiday Inn - Harrisburg, PA                            $   1,203
 Hampton Inn - Selinsgrove, PA                                 528
 Clarion Suites - Philadelphia, PA                             700
                                                         ---------
 Total                                                   $   2,431
                                                         =========

Hotels Under Initial Fixed Rent Agreements:                         
 Holiday Inn Express - Hershey, PA                       $     596
 Holiday Inn Express - New Columbia, PA                        374
 Holiday Inn Express - Harrisburg, PA                          378
 Hampton Inn - Carlisle, PA                                    524
 Comfort Inn - Denver, PA                                      197
 Comfort Inn - West Hanover, PA (Open 5 months)                214
 Holiday Inn - Milesburg, PA                                   394
                                                         ---------
 Total                                                   $   2,677
                                                         =========

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COMBINED ENTITIES - INITIAL HOTELS                                              
--------------------------------------------------------------------------------

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR               
ENDED DECEMBER 31, 1997.                                                        
[UNAUDITED IN THOUSANDS]                                                        
--------------------------------------------------------------------------------

This unaudited pro forma Condensed Combined Statement of Operations is presented
as if the  sale of the  Initial  Hotels  and the  consummation  of the  Offering
contemplated  by this prospectus had occurred on January 1, 1997. Such pro forma
information  is based in part upon the Combined  Statements of Operations of the
Combined  Entities - Initial  Hotels and the  application of the proceeds of the
Offering  as set  forth  under the  caption  "Use of  Proceeds."  It is meant to
represent the pro forma operations of Hersha Hospitality  Management,  L.P. [the
"Lessee"]  and successor to the  operations  of the Combined  Entities - Initial
Hotels.  The separate  operations  of the Lessee are  inconsequential.  This pro
forma  information  should be read in  conjunction  with the Combined  Financial
Statements and Notes thereto of the Combined  Entities - Initial Hotels included
at pages F-31 through F-38 of this  Prospectus.  In  management's  opinion,  all
adjustments necessary to reflect the effects of this transaction have been made.

This  unaudited  pro forma  Condensed  Combined  Statement of  Operations is not
necessarily  indicative of what actual results of operations of the Lessee would
have been assuming such  transactions  had been completed as of January 1, 1997,
nor does it purport to represent the results of operations for future periods.  

                                                                [Download Table]

                                             Year ended December 31, 1997        
                                    ---------------------------------------------
                                    Historical                                   
                                     Combined                                    
                                    Entities -                                   
                                  Initial Hotels      Adjustments       Pro Forma
                                  --------------      -----------       ---------
                                                                                 

Total Revenue                      $    13,445      $                  $  13,445 
Expenses:                                                                        
   Initial Hotel Operating                                                       
   Costs and Expenses                    7,088            (375) [A]        6,713 
   Advertising and Marketing               370              --               370 
   Depreciation and Amortization         1,189            (988) [B]          201 
   Interest Expense                      1,354          (1,354) [C]           -- 
   General and Administrative            1,701            (123) [D]        1,916 
                                                           338  [E]              
   Other                                    14              --                14 
   Percentage Lease Payments                --           5,129  [F]        5,129 
                                   -----------      ----------         --------- 
   Lessee Operating Income         $     1,729      $   (2,627)        $    (898)
   -----------------------         ===========      ==========         ========= 


[A]   Decrease  reflects  personal  property,  real  estate  taxes and  casualty
insurance to be paid by the Partnership.                            
[B]   Decrease reflects  elimination of amortization expense excluding franchise
      fee  amortization,  write-off of loan  acquisition  fees upon  transfer of
      mortgage  indebtedness  to the Company and the elimination of depreciation
expense at the Combined Entity level.                               
[C]   Decrease  reflects  reduction  of  interest  costs  due  to  the  expected
      repayment of certain of the related  party and mortgage  indebtedness  and
    the elimination of the remaining interest to be paid by the Partnership.
[D]   Decrease  reflects the  elimination of certain  expenses to be paid by the
Partnership as required by the Administrative Services Agreement.   
[E]   To eliminate related party management fees of $272 and replace with       
anticipated salaries of $610 based on salary agreements.            

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COMBINED ENTITIES - INITIAL HOTELS                                              
--------------------------------------------------------------------------------

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR               
ENDED DECEMBER 31, 1997.                                                        
[UNAUDITED IN THOUSANDS]                                                        
--------------------------------------------------------------------------------

[Continued]                                                                     

[F]   Represents lease payments calculated on a pro forma basis using the rent  
   provisions in the Percentage Lease Agreements. Percentage rents under the
    lease agreements are calculated under two methods depending on whether the
hotel is a stabilized hotel with an established operating history or a
    newly-developed or newly-renovated hotel. Stabilized hotels pay percentage
rent based on a percentage of room revenue which changes at various   
thresholds as described on pages 46 and 47 of this prospectus plus a  
 percentage of all non-room revenue. Newly-developed or newly- renovated
hotels pay initial fixed rent for the first two years of operation and
     percentage rent thereafter with such initial fixed rent being recognized on
a straight-line basis over the course of the period presented. Certain
  newly developed or newly-renovated hotels have not been in operation for
   the full period presented and in those cases percentage rent payments are
   recognized on a straight-line basis prorated for the period the hotel was
    in operation. Pro forma percentage rent payments for stabilized hotels has
   been calculated using the terms of the percentage lease agreement applied
    to historical room revenue and other revenue for the period presented. For
the year ended December 31, 1997 percentage lease payments consist of 
  $3,248 of percentage rent and $1,881 of initial fixed rent calculated as
follows:                                                              

Hotels Under Percentage Lease Agreements:                           
      Holiday Inn - Harrisburg, PA                                $    1,614
      Hampton Inn - Selinsgrove, PA                                      658
      Clarion Suites - Philadelphia, PA                                  976
                                                                  ----------
      Total                                                       $    3,248
                                                                  ==========

Hotels Under Initial Fixed Rent Agreements:                         
      Holiday Inn Express - Hershey, PA (Open 3 months)           $      199
      Holiday Inn Express - New Columbia, PA (Open 1 month)               42
      Holiday Inn Express - Harrisburg, PA                               504
      Hampton Inn - Carlisle, PA (Open 7 months)                         349
      Comfort Inn - Denver, PA                                           262
      Holiday Inn - Milesburg, PA                                        525
                                                                  ----------
      Total                                                       $    1,881
                                                                  ==========

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INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholder                                       
Hersha Hospitality Trust                                                  

                  We have audited the  accompanying  combined  balance sheets of
the Combined  Entities  Initial Hotels as of December 31, 1997 and 1996, and the
related combined  statements of operations,  owners' equity,  and cash flows for
each of the three years in the period ended  December 31, 1997.  Our audits also
included the combined  financial  statement  schedule included on pages F-39 and
F-40 of the accompanying Prospectus. These Combined financial statements and the
combined  financial  statement  schedule are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion  on these  combined
financial  statements and the combined financial statement schedule based on our
audits.                                                                         

                  We conducted our audits in accordance with generally  accepted
auditing  standards.  Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the combined financial  statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence  supporting  the  amounts and  disclosures  in the  combined  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
combined financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.                                               

                  In our opinion,  the  financial  statements  referred to above
present fairly, in all material respects, the combined financial position of the
Combined  Entities - Initial  Hotels as of December  31, 1997 and 1996,  and the
combined  results of their operations and their cash flows for each of the three
years in the period ended  December  31,  1997,  in  conformity  with  generally
accepted  accounting  principles.  In  addition,  in our  opinion,  the combined
financial  statement schedule referred to above, when considered in relationship
to the basic combined financial statements taken as a whole, presents fairly, in
all material  respects,  the information  required to be included  therein as of
December 31, 1997.                                                              

                                       MOORE STEPHENS, P. C.
                                               Certified Public Accountants.

Cranford, New Jersey                                                            
March 21, 1998                                                                  

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COMBINED ENTITIES - INITIAL HOTELS                                              
--------------------------------------------------------------------------------

COMBINED BALANCE SHEETS                                                         
[IN THOUSANDS]                                                                  
--------------------------------------------------------------------------------

                                                        [Enlarge/Download Table]

                                               September 30,               December 31,         
                                               -------------               ------------         
                                                  1998               1997                1996   
                                                  ----               ----                ----   
                                               [Unaudited]                                      
                                                                                                
Assets:                                                                                         
Investment in Hotel Properties:                                                                 
   Land                                   $            2,099  $        2,099     $         1,843
   Buildings and Improvements                         22,274          19,276               9,950
   Furniture, Equipment and Other                      6,977           6,056               3,682
                                          ------------------  --------------     ---------------

   Totals                                             31,350          27,431              15,475
   Less: Accumulated Depreciation                      4,446           3,356               2,533
                                          ------------------  --------------     ---------------

   Totals                                             26,904          24,075              12,942
   Construction in Progress                               --           1,412                 857
                                          ------------------  --------------     ---------------

   Net Investment in Hotel Properties                 26,904          25,487              13,799

   Cash and Cash Equivalents                           1,258             694                 237
   Accounts Receivable                                   626             394                 191
   Prepaid Expenses and Other Assets                     339             182                 154
   Due from Related Parties                              571             268                 107
   Intangible Assets                                   1,382           1,427               1,418
                                          ------------------  --------------     ---------------

   Total Assets                           $           31,080  $       28,452     $        15,906
                                          ==================  ==============     ===============
Liabilities and Owners' Equity:                                                                 
   Mortgages Payable                      $           19,800  $       14,713     $         8,571
   Accounts Payable and Accrued Expenses                 493           1,092                 649
   Accrued Expenses - Related Parties                    116             153                  11
   Due to Related Parties                              3,982           9,169               4,236
   Other Liabilities                                     214             172                 250
                                          ------------------  --------------     ---------------

   Total Liabilities                                  24,605          25,299              13,717

Commitments                                               --              --                  --

Owners' Equity:                                                                                 
   Net Combined Equity                                 6,475           3,153               2,189
                                          ------------------  --------------     ---------------

   Total Liabilities and Owners' Equity   $           31,080  $       28,452     $        15,906
                                          ==================  ==============     ===============

The Accompanying Notes Are an Integral Part of These Combined Financial         
Statements.                                                                     

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COMBINED ENTITIES - INITIAL HOTELS                                              
--------------------------------------------------------------------------------

COMBINED STATEMENTS OF OPERATIONS                                               
[IN THOUSANDS]                                                                  
--------------------------------------------------------------------------------

                                                        [Enlarge/Download Table]


                                               Nine months ended                      Years  ended                     
                                                 September 30,                         December 31,                    
                                              1998           1997           1997           1996             1995       
                                              ----           ----           ----           ----             ----       
                                          [Unaudited]     [Unaudited]                                                  
                                                                                                                       

Revenues from Hotel Operations:                                                                                        
   Room Revenue                        $       11,824    $       7,750  $      10,880    $       7,273  $        5,262 
   Restaurant Revenue                           1,497            1,377          1,744            2,106           1,515 
   Other Revenue                                  614              565            821              610             442 
                                       --------------    -------------  -------------    -------------  -------------- 

   Total Revenue                               13,935            9,692         13,445            9,989           7,219 
                                       --------------    -------------  -------------    -------------  -------------- 

Expenses:                                                                                                              
   Hotel Operating Expenses                     5,732            4,284          5,906            4,887           3,789 
   Restaurant Operating Expenses                1,074              850          1,182            1,406             961 
   Advertising and Marketing                      388              281            370              418             185 
   Depreciation and Amortization                1,161              799          1,189              924             711 
   Interest Expense                             1,138              710            821              605             434 
   Interest Expense - Related Parties             359              121            533              316             200 
   General and Administrative                   1,357              939          1,381            1,085             779 
   General and Administrative -                                                                                        
     Related Parties                              288              142            320              364             102 
   Loss on Asset Disposals                         --               --             --               12             284 
   Liquidation Damages                             --               14             14               --             150 
                                       --------------    -------------  -------------    -------------  -------------- 

   Total Expenses                              11,497            8,140         11,716           10,017           7,595 
                                       --------------    -------------  -------------    -------------  -------------- 

   Net Income [Loss]                   $        2,438    $       1,552  $       1,729    $         (28) $         (376)
                                       ==============    =============  =============    =============  ============== 

The Accompanying Notes Are an Integral Part of These Combined Financial         
Statements.                                                                     

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COMBINED ENTITIES - INITIAL HOTELS                                              
--------------------------------------------------------------------------------

COMBINED STATEMENTS OF OWNERS' EQUITY                                           
[IN THOUSANDS]                                                                  
--------------------------------------------------------------------------------

                                      Net Combined
                                      Owners' Equity
                                      ------------------
Balance - December 31, 1994                       $              772            

Net [Loss]                                                   (376)        
Capital Contributions                                       2,287         
Cash Distributions                                           (466)        
                                      ------------------

Balance - December 31, 1995                                    2,217            

Net [Loss]                                                    (28)        
Capital Contributions                                         470         
Cash Distributions                                           (470)        
                                      ------------------

Balance - December 31, 1996                                    2,189            

Net Income                                                  1,729         
Capital Contributions                                          59         
Cash Distributions                                           (824)        
                                      ------------------

Balance - December 31, 1997                                 3,153         

Net Income                                                  2,438         
Capital Contributions                                       1,156         
Cash Distributions                                           (272)        
                                      ------------------

Balance - September 30, 1998 [Unaudited]       $            6,475         
                                      ==================

The Accompanying Notes Are an Integral Part of These Combined Financial         
Statements.                                                                     

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COMBINED ENTITIES - INITIAL HOTELS                                              
--------------------------------------------------------------------------------

COMBINED STATEMENTS OF CASH FLOWS                                               
[IN THOUSANDS]                                                                  
--------------------------------------------------------------------------------

                                                        [Enlarge/Download Table]


                                               Nine months ended                        Years  ended                 
                                                 September 30,                           December 31,                
                                               1998            1997           1997             1996            1995  
                                               ----            ----           ----             ----            ----  
                                          [Unaudited]      [Unaudited]                                               
                                                                                                                     
Operating Activities:                                                                                                
   Net income [Loss]                   $         2,438  $       1,552  $       1,729   $         (28) $         (376)
   Adjustments to Reconcile Net                                                                                      
     Income to Net Cash Provided by                                                                                  
     Operating Activities:                                                                                           
     Depreciation and Amortization                                                                                   
       Expense                                   1,181            834          1,246             966             751 
     Loss on Disposal of Assets                     --             --             --              12             284 
     Writeoff of Financing Fees                     --             --             44              --              -- 

   Changes in Assets and Liabilities:                                                                                
     Accounts Receivable                          (238)          (385)          (203)            105            (226)
     Prepaid Expenses and Other                                                                                      
       Assets                                      (45)           (79)           (28)            (28)             39 
     Accounts Payable and Accrued                                                                                    
       Expenses                                   (499)            84            584             241             293 
     Other Liabilities                             (97)          (199)           (78)             79             129 
                                       ---------------  -------------  -------------   -------------  -------------- 

   Net Cash - Operating Activities               2,740          1,807          3,294           1,347             894 
                                       ---------------  -------------  -------------   -------------  -------------- 

Investing Activities:                                                                                                
   Improvements and Additions to                                                                                     
     Hotel Properties                           (2,553)        (9,748)       (12,821)         (5,601)         (5,086)
   Payment for Intangibles                          --           (156)          (166)           (117)           (925)
   Advances to Related Parties                    (501)           (50)          (268)            (99)           (576)
   Repayment of Advances to                                                                                          
     Related Parties                               198            107            107             584              62 
   Proceeds from Sale of Assets                     --             --             --             129              -- 
                                       ---------------  -------------  -------------   -------------  -------------- 

   Net Cash - Investing Activities              (2,856)        (9,847)       (13,148)         (5,104)         (6,525)
                                       ---------------  -------------  -------------   -------------  -------------- 

Financing Activities:                                                                                                
   Proceeds from Mortgages and                                                                                       
     Notes Payable                               5,639          6,409          9,526           3,631           4,615 
   Principal Payments on Mortgages                                                                                   
     and Notes Payable                            (552)        (3,304)        (3,383)           (612)         (1,143)
   Advances from Related Parties                 2,420         10,356         14,378           2,756             809 
   Repayments of Advances from                                                                                       
     Related Parties                            (7,711)        (4,950)        (9,445)         (1,915)         (1,065)
   Capital Contributions                         1,156              9             59             470           2,287 
   Distributions Paid                             (272)          (341)          (824)           (470)           (466)
                                       ---------------  -------------  -------------   -------------  -------------- 

   Net Cash - Financing Activities                 680          8,179         10,311           3,860           5,037 
                                       ---------------  -------------  -------------   -------------  -------------- 

   Net Increase in Cash and Cash                                                                                     
     Equivalents - Forward             $           564  $         139  $         457   $         103  $         (594)

The Accompanying Notes Are an Integral Part of These Combined Financial         
Statements.                                                                     

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COMBINED ENTITIES - INITIAL HOTELS                                              
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COMBINED STATEMENTS OF CASH FLOWS                                               
[IN THOUSANDS]                                                                  
--------------------------------------------------------------------------------

                                                        [Enlarge/Download Table]


                                                    Nine months ended                       Years  ended                
                                                      September 30,                          December 31,               
                                                   1998            1997         1997          1996             1995     
                                                 -------          -------      -------       -------          -------   
                                               [Unaudited]      [Unaudited]                                             
                                                                                                                        

   Net Increase in Cash and Cash                                                                                        
     Equivalents - Forwarded              $          564    $         139  $         457  $         103  $         (594)

Cash and Cash Equivalents at                                                                                            
   Beginning of Periods                              694              237            237            134             728 
                                          --------------    -------------  -------------  -------------  -------------- 

   Cash and Cash Equivalents at                                                                                         
     End of Periods                       $        1,258    $         376  $         694  $         237  $          134 
                                          ==============    =============  =============  =============  ============== 

Supplemental Disclosures of Cash Flow Information:                                                                      
   Cash paid during the periods for:                                                                                    
     Interest [Net of Amounts                                                                                           
     Capitalized]                         $        1,497    $         953  $       1,133  $         903  $          591 

The Accompanying Notes Are an Integral Part of These Combined Financial         
Statements.                                                                     

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COMBINED ENTITIES - INITIAL HOTELS                                              
NOTES TO FINANCIAL STATEMENTS                                                   
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]   
[AMOUNTS IN THOUSANDS]                                                          
--------------------------------------------------------------------------------

[1] Organization, Proposed Initial Public Offering and Basis of Presentation    

Organization - Hersha  Hospitality Trust [the "Company"] has been established to
own initially ten existing  hotels  [collectively  the "Initial  Hotels"] and to
continue the hotel  acquisition  and  operating  strategies of Mr. Hasu P. Shah,
Chairman of the Board of Trustees  and  President  of the  Company.  The Company
intends to qualify as a real estate  investment  trust [REIT] under the Internal
Revenue  Code of 1986,  as amended,  [the "Code"] . The Initial  Hotels  include
three  hotels  operated as Holiday Inn  Express(R)  hotels,  two Hampton  Inn(R)
hotels,  two Holiday Inn(R) hotels,  two Comfort Inn(R) hotels,  one of which is
under  construction,  and one Clarion  Suites(R)  hotel with an aggregate of 989
rooms and are located in  Pennsylvania.  Upon completion of the proposed initial
public  offering [see below],  the Company will own an  approximate  32% general
partnership interest in Hersha Hospitality Limited  Partnership,  a Pennsylvania
limited  partnership [the  "Partnership"].  The Company will be the sole general
partner of the  Partnership.  The  Partnership  will own the Initial  Hotels and
lease them to Hersha Hospitality  Management,  L.P.  ["Lessee"] under Percentage
Leases, each having a 5 year term with two 5 year renewals,  which shall provide
for rent equal to the greater of (i) fixed base rent, or (ii)  percentage  rents
based upon specific percentages of room and other revenue of each of the Initial
Hotels.  The  Company  will enter  into  management  agreements  with the Lessee
whereby  the  Lessee  will be  required  to  perform  all  management  functions
necessary  to operate  the Initial  Hotels.  Under the  administrative  services
agreement, the Lessee will be paid a fee equal to $55 plus $10 per hotel or $155
per year based on the ten initial hotels.                                       

Basis of Presentation - The combined  financial  statements include the accounts
of various partnerships,  individuals, certain other corporations and Subchapter
S  corporations  which  perform  property  management  services and own property
improvements and furniture and fixtures  [collectively the "Combined  Entities"]
[See  Note 5] using  their  historical  cost  basis.  No  adjustments  have been
reflected in these combined financial  statements to give effect to the purchase
of the Initial Hotels by the Partnership.                                       

The Combined Entities are owned by Mr. Hasu P. Shah his wife, two sons and seven
other  unrelated  individuals  for all periods  presented [the  individuals  and
Combined Entities are collectively referred to as the "Hersha Affiliates"].  The
aforementioned  eleven  individuals in their capacities as owners,  partners and
stockholders  have  delegated  management of all of the entities to a management
control group  consisting  of seven of the eleven  individuals.  The  management
control group has complete day to day  administrative  and managerial  authority
and responsibility over the portfolio of hotels. Due to common management of the
Combined  Entities,  the  historical  combined  financial  statements  have been
accounted  for as a group of entities  under  common  control.  All  significant
intercompany  transactions  and balances  have been  eliminated  in the combined
presentation.                                                                   

Proposed  Initial Public  Offering - The Company  expects to file a registration
statement  with the  Securities  and Exchange  Commission  pursuant to which the
Company expects to offer 1,833,334 Class A Common Shares of beneficial  interest
to the public and 166,666 Class A Common  Shares of  beneficial  interest to Mr.
Hasu P. Shah and certain  affiliates of Mr. Hasu P. Shah [the  "Offering"].  The
Company  expects to qualify as a real estate  investment  trust  under  Sections
856-860 of the Code. Under the proposed  structure,  the Company will become the
sole general partner in the  Partnership  and the Hersha  Affiliates will be the
limited partners.                                                               

Upon completion of the Offering,  the Company will contribute  substantially all
of the net  proceeds of the  offering  to the  Partnership  in  exchange  for an
approximate 32% general partnership interest in the Partnership. The Partnership
will use the  proceeds  from the Company to acquire the Initial  Hotels from the
Combined  Entities and to repay certain  outstanding  indebtedness.  Rather than
receiving cash for their interests in the Combined Entities upon the sale of the
Initial  Hotels,   the  Hersha   Affiliates  have  elected  to  receive  limited
partnership  interests  in  the  Partnership   aggregating  an  approximate  68%
ownership interest in the Partnership.                                          

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COMBINED ENTITIES - INITIAL HOTELS                                              
NOTES TO FINANCIAL STATEMENTS                                                   
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]   
[AMOUNTS IN THOUSANDS]                                                          
--------------------------------------------------------------------------------

[1] Organization, Proposed Initial Public Offering and Basis of Presentation    
[Continued]                                                             

Proposed  Initial  Public  Offering  [Continued]  -  After  consummation  of the
Offering,  the Company's  acquisition of an interest in the  Partnership and the
Partnership's  acquisition  of the  Initial  Hotels,  (a) the  Company  will own
approximately  32% of the  Partnership,  (b) the Hersha  Affiliates  will own an
aggregate of approximately 68% of the Partnership,  and (c) the Partnership will
own 100% of the equity interest in the Initial Hotels.                          

[2] Summary of Significant Accounting Policies                                  

Nature of Operations - Operations consist of hotel room rental, conferences room
rental  and the  associated  sales  of food  and  beverages  principally  in the
Harrisburg and central Pennsylvania area.                                       

Investment in Hotel  Properties - Investment in hotel  properties  are stated at
cost.  Depreciation for financial  reporting  purposes is principally based upon
the straight-line  method for buildings and improvements and accelerated methods
for furniture and equipment  acquired  prior to the year ended December 31, 1997
and the straight-line method thereafter.                                        

The estimated  lives used to  depreciate  the Initial  Hotel  properties  are as
follows:                                                                        

                                                                 Years
                                                                --------
Building and Improvements                                           15 to 40    
Furniture and Equipment                                              5 to 7     

Maintenance  and repairs are charged to operations as incurred;  major  renewals
and betterments are capitalized.  Upon the sale or disposition of a fixed asset,
the asset and related  accumulated  depreciation  are removed from the accounts,
and the gain or loss is included in income from operations.                     

Depreciation  expense was $1,076, $819 and $624 for the years ended December 31,
1997, 1996 and 1995, respectively.                                              

Room linens and restaurant  supplies are capitalized and amortized utilizing the
straight-line method over periods of three and two years, respectively,  and are
charged to Hotel Operating Expenses.  Amortization  expense was $57, $42 and $40
for the years ended December 31, 1997, 1996 and 1995, respectively.             

Impairment of Long-Lived  Assets - Long-lived assets are reviewed for impairment
whenever events or changes in business  circumstances indicate that the carrying
amount  of the  assets  may  not be  fully  recoverable.  The  Company  performs
undiscounted  cash flow  analyses to determine if an  impairment  exists.  If an
impairment  is determined to exist,  any related  impairment  loss is calculated
based on fair value.                                                            

Cash and Cash  Equivalents - Cash and cash  equivalents are comprised of certain
highly  liquid  investments  with a  maturity  of  three  months  or  less  when
purchased.                                                                      

Inventories - Inventories,  consisting primarily of food and beverages and which
are included in prepaid  expenses and other  assets,  are stated at the lower of
cost [generally, first-in, first-out] or market.                                

Deferred Offering Cost - Costs of $106 at September 30, 1998 associated with the
anticipated  public  offering  are  deferred  and will be  charged  against  the
proceeds of the Offering. If the Offering is not consummated,  the costs will be
charged to operations.                                                          

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COMBINED ENTITIES - INITIAL HOTELS                                              
NOTES TO FINANCIAL STATEMENTS                                                   
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]   
[AMOUNTS IN THOUSANDS]                                                          
--------------------------------------------------------------------------------

[2] Summary of Significant Accounting Policies [Continued]                      

Intangible Assets - Intangible assets are carried at cost and consist of initial
franchise fees, loan  acquisition  costs and goodwill.  Amortization is computed
using the  straight-line  method based upon the terms of the  franchise and loan
agreements  which  range  from 5 to 30  years,  and  over a 15 year  period  for
goodwill.                                                                       

Income  Taxes - The Combined  Entities are not a legal entity  subject to income
taxes. Hersha Enterprises,  Ltd., an entity included in these combined financial
statements,  is a  taxable  corporate  entity  [See  Note 5].  Income  taxes are
provided  for  the  tax  effects  of  transactions  reported  in  the  financial
statements and consist of taxes currently due plus deferred taxes resulting from
temporary differences. Such temporary differences result from differences in the
carrying  value  of  assets  and  liabilities  for tax and  financial  reporting
purposes.  The  deferred  tax assets and  liabilities  represent  the future tax
consequences  of those  differences,  which will either be taxable or deductible
when the assets and  liabilities  are recovered or settled.  Deferred  taxes are
also recognized for operating losses that are available to offset future taxable
income.  Valuation  allowances are  established to reduce deferred tax assets to
the amount expected to be realized. The Combined Partnerships and S corporations
are not  subject to  federal  or state  income  taxes;  however,  they must file
informational  income tax returns and the  partners  must take income or loss of
the  Combined  Entities  into  consideration  when filing their  respective  tax
returns.  The cumulative  difference between the book basis and tax basis of the
Combined  Entities'  assets and  liabilities is  approximately  $3.8 million due
primarily to depreciation and amortization expense on the tax basis in excess of
the book basis.                                                                 

Revenue  Recognition - Revenue is recognized as earned which is generally when a
guest occupies a room and utilizes the hotel's services.                        

Concentration of Credit Risk - Financial  instruments  that potentially  subject
the Company to  concentrations  of credit risk include cash and cash equivalents
and accounts receivable arising from its normal business activities. The Company
places its cash with high credit  quality  financial  institutions.  The Company
does not require collateral to support its financial instruments.               

The Company periodically has money in financial  institutions that is subject to
normal credit risk beyond insured  amounts.  This credit risk,  representing the
excess of the bank's deposit  liabilities  reported by the bank over the amounts
that would have been covered by federal insurance, amounted to approximately $71
and $-0- at December 31, 1997 and 1996, respectively.                           

The  Company's  extension  of  credit  to  its  customers  results  in  accounts
receivable  arising from its normal  business  activities.  The Company does not
require  collateral  from its  customers,  but routinely  assesses the financial
strength of its customers. Based upon factors surrounding the credit risk of its
customers and the Company's historical collection  experience,  no allowance for
uncollectible  accounts  has been  established  at  December  31, 1997 and 1996,
respectively.  The Company  believes  that its accounts  receivable  credit risk
exposure is limited. Such assessment may be subject to change in the near term. 

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that 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  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.             

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COMBINED ENTITIES - INITIAL HOTELS                                              
NOTES TO FINANCIAL STATEMENTS                                                   
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]   
[AMOUNTS IN THOUSANDS]                                                          
--------------------------------------------------------------------------------

[2] Summary of Significant Accounting Policies [Continued]                      

Advertising  and  Marketing -  Advertising  costs are  expensed as incurred  and
totaled  $370,  $418 and $185 for the years ended  December 31,  1997,  1996 and
1995,  respectively.  In connection with its franchise agreements,  a portion of
the  franchise  fees  paid  is for  marketing  services.  Payments  under  these
agreements  related to marketing services amounted to $201, $114 and $78 for the
years ended December 31, 1997, 1996 and 1995, respectively,  and are included in
Hotel Operating Expenses.                                                       

[3] Intangible Assets                                                           

At December 31, 1997 and 1996, intangibles consisted of the following:          

                                                                [Download Table]


                                         Accumulated              
December 31, 1997:           Cost       Amortization        Net   
                             ----       ------------        ---   
                                                                  
   Goodwill               $      1,168  $        216  $        952
   Franchise Fees                  342            46           296
   Loan Acquisition Fees           196            17           179
                          ------------  ------------  ------------

   Totals                 $      1,706  $        279  $      1,427
   ------                 ============  ============  ============

                                         Accumulated              
December 31, 1996:           Cost       Amortization        Net   
                             ----       ------------        ---   

   Goodwill               $      1,168  $        138  $      1,030
   Franchise Fees                  296            56           240
   Loan Acquisition Fees           166            18           148
                          ------------  ------------  ------------

   Totals                 $      1,630  $        212  $      1,418
   ------                 ============  ============  ============

Amortization  expense was $113,  $105 and $87 for the years ended  December  31,
1997, 1996 and 1995, respectively.                                              

[4] Mortgages Payable                                                           

                                                        [Enlarge/Download Table]


                                                                                                December 31,        
                                                                                           1997             1996    
                                                                                           ----             ----    
                                                                                                                    
Holiday Inn, Harrisburg, Pennsylvania:                                                                              
Note payable  to bank  dated  August  19,  1997  with  monthly  payments  of $34                                    
   including  interest at 8.45% until  November 1, 2002.  Thereafter the rate is                                    
   negotiated or the bank's prime rate plus 1/4%.  Final payment is due November                                    
   1, 2012.  The property  previously was financed by a bank with a note payable                                    
   with monthly payments of $27 including interest at the prime rate plus 1-1/2%                                    
   maturing  March 2, 2010 and another note payable with monthly  payments of $7                                    
   plus interest at 8-1/2% maturing January 5, 2001.                              $       3,500     $      3,096    

Holiday Inn, Milesburg, Pennsylvania:                                                                               
Note payable to bank dated June 2, 1977 with monthly payments of                                                    
   $11 including interest at 8% until June 6, 1999                                          914              970    
                                                                                  ----------------  ----------------

   Totals - Forward                                                               $       4,414     $      4,066    

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COMBINED ENTITIES - INITIAL HOTELS                                              
NOTES TO FINANCIAL STATEMENTS                                                   
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]   
[AMOUNTS IN THOUSANDS]                                                          
--------------------------------------------------------------------------------

[4] Mortgages Payable [Continued]                                               

                                                        [Enlarge/Download Table]

                                                                                                December 31,        
                                                                                          1997              1996    
                                                                                          ----              ----    
                                                                                                                    
   Totals - Forwarded                                                             $          4,414  $          4,066

Clarion Suites, Philadelphia, Pennsylvania:                                                                         
Note payable to a bank dated June 21, 1995 with monthly payments of                                                 
   $16 as adjusted for interest at the prime rate plus 1.25% until                                                  
   July 1, 2010.  Guaranteed by PIDC Local Development Corporation                                                  
   and the Small Business Administration.                                                    1,195             1,245

Note payable to a bank  dated June 21,  1995 with  monthly  payments  of $3 plus                                    
   interest at the prime rate plus .5%. Principal balance is                                                        
   due July 1, 2002.                                                                           419               453

Hampton Inn, Selinsgrove, Pennsylvania:                                                                             
Note  payable  to a bank  dated  April 3,  1996  with  monthly  payments  of $24                                    
   including interest at 8-1/4% until October 3, 2011, includes                                                     
   personal guarantees.                                                                      2,385             2,476

Hampton Inn, Carlisle, Pennsylvania:                                                                                
Note payable to a bank dated  September  6, 1996 with  monthly  payments  of $28                                    
   including  interest  at 8%  until  March  6,  2001.  Thereafter,  the rate is                                    
   negotiated or prime rate plus 1%. Final payment is due June 6, 2012.                      2,848               331

Holiday Inn Express, New Columbia, Pennsylvania:                                                                    
Note payable to a bank dated August 28, 1997 with monthly payments                                                  
   of $27 including interest at 8-1/2% until February 1, 2003.                                                      
   Thereafter interest will be at the prime rate plus 1/4% as of January 1,                                         
   2003 and January 1, 2008.  Final payment is due January 1, 2013.                          1,000                --

Holiday Inn Express, Harrisburg, Pennsylvania:                                                                      
Note payable to a bank dated September 26, 1997 with monthly payments                                               
   of $11 including interest at 8.35% until October 1, 2000.                                                        
   Thereafter, the rate is as negotiated or at prime plus 1%.  Final                                                
   payment is due October 1, 2012.                                                           1,110                --

Holiday Inn Express, Hershey, Pennsylvania:                                                                         
Note payable to a bank dated December 30, 1996 with monthly                                                         
   payments  of $27  including  interest  at  8.15%  until  December  31,  2001.                                    
   Thereafter, the rate is as negotiated or prime plus 3/4%.                                                        
   Final payment is due January 1, 2013.                                                     1,342                --
                                                                                  ----------------  ----------------

   Totals                                                                         $         14,713  $          8,571
   ------                                                                         ================  ================

Substantially all the Combined Entities' mortgage indebtedness is collateralized
by property  and  equipment  and is  personally  guaranteed  by the partners and
stockholders  of  the  Combined  Entities.  One  of the  hotel  properties  also
collateralizes a $500 line of credit of a related party.                        

At December 31, 1997, the prime rate was 8.5%.                                  

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COMBINED ENTITIES - INITIAL HOTELS                                              
NOTES TO FINANCIAL STATEMENTS                                                   
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]   
[AMOUNTS IN THOUSANDS]                                                          
--------------------------------------------------------------------------------

[4] Mortgages Payable [Continued]                                               

As of December 31, 1997,  aggregate annual principal payments for the five years
following December 31, 1997, and thereafter are as follows:                     

Year ending                                                                     
December 31,                                                                    
------------                                                                    
1998                                $            730                      
1999                                           1,572                      
2000                                             787                      
2001                                             856                      
2002                                             932                      
Thereafter                                     9,836                      
              ----------------

Total                               $         14,713                      
-----                               ================                      

[5] Owners' Equity                                                              

The owners' equity [deficit] of the Combined Entities by entity is as follows:  

                                              December 31,
                                               1997           1996
                                               ----           ----
Hasu P. Shah/Bharat C. Mehta                      $        --   $       269     
244 Associates                                            542            --     
844 Associates                                            285            27     
944 Associates                                             29            75     
1244 Associates                                           373           196     
1444 Associates                                           829           432     
1644 Associates                                           (72)           --     
2144 Associates                                           833           863     
2244 Associates                                           (54)           --     
2544 Associates                                           (60)           --     
Colonial Care Inns, Ltd.                                   --           308     
Hersha Enterprises                                        267           (57)    
Harrisburg Lodging, Inc.                                   --           (21)    
MEPS Associates                                           170           (32)    
Philadelphia Lodging, Inc.                                 --             2     
Sajneim Motel, Inc.                                        --           127     
Shree Associates                                           11            --     
                                             -----------   -----------

Totals                                         $     3,153   $     2,189  
------                                         ===========   ===========  

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COMBINED ENTITIES - INITIAL HOTELS                                              
NOTES TO FINANCIAL STATEMENTS                                                   
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]   
[AMOUNTS IN THOUSANDS]                                                          
--------------------------------------------------------------------------------

[6] Income Taxes                                                                

Included in the Combined  Entities for the years ended  December 31, 1997,  1996
and 1995 is a corporation  which computed its income taxes pursuant to Statement
of  Financial  Accounting  Standards  No. 109,  "Accounting  for Income  Taxes."
Deferred  income taxes at December  31, 1997 and 1996 was  comprised of deferred
tax assets of $-0- and $56,  respectively,  representing  financial reporting to
tax basis differences, and $20 and $8, respectively,  representing net operating
loss  carryforwards,  offset  by  full  valuation  allowances  of $20  and  $64,
respectively. Under the transaction contemplated in connection with the proposed
initial  public  offering,  the net  operating  loss  carryforwards  will not be
available to the Company.                                                       

The  Combined  Entities  neither  incurred  nor paid any income taxes during the
periods presented.                                                              

[7] Related Party Transactions                                                  

At December  31, 1997 and 1996,  the  Combined  Entities are indebted to various
related entities, partners, and stockholders in the amount of $9,169 and $4,236,
respectively.  The loans carry interest ranging from 8.5% on short-term loans to
10.5%  on  longer  term  loans.  Accrued  interest  payable  was $153 and $11 at
December 31, 1997 and 1996,  respectively,  and interest  expense was $533, $316
and $200 for the years ended December 31, 1997, 1996 and 1995, respectively.    

At  December  31,  1997  and  1996,  various  related  entities,   partners  and
stockholders  are  indebted to the  Combined  Entities in the amount of $268 and
$107, respectively. The loans carry interest ranging from 0% on short-term loans
to 9% on  longer  term  loans.  Accrued  interest  receivable  was  $1 and $1 at
December 31, 1997 and 1996, respectively,  and interest income was $9, $1 and $1
for the years ended December 31, 1997, 1996 and 1995, respectively.             

The  Combined  Entities  have paid or accrued  $9,433,  $856 and $-0- during the
years ended  December  31, 1997,  1996 and 1995 to related  entities for various
hotel construction projects and interest costs during construction.  Capitalized
interest  amounted to $183,  $10 and $-0- for the years ended December 31, 1997,
1996 and 1995, respectively.                                                    

Certain  properties  are managed by  individual  partners  or related  entities.
Management fees paid to these individuals or related entities were $272, $97 and
$72 during the years ended December 31, 1997, 1996 and 1995, respectively.      

A related entity rents office space in a hotel owned by the Combined Entities on
a month to month basis. The Combined  Entities received rent of $30 for the year
ended  December  31, 1997.  The rent amount  includes an  allocation  of certain
related expenses.                                                               

During the year ended  December 31, 1996,  the Combined  Entities sold for $129,
the book value of the  assets,  certain  leasehold  improvements  to Mr. Hasu P.
Shah.                                                                           

On September 26, 1997, the Combined Entities acquired from Mr. Hasu P. Shah, the
Holiday  Inn  Express  in  Harrisburg,  Pennsylvania  by paying  off the  $1,106
indebtedness  on the  property.  Prior to the sale,  the  Combined  Entities had
rented the property  from Mr. Hasu P. Shah under an informal  rent  arrangement.
Rent paid to Mr. Hasu P. Shah was $48, $267 and $70 for the years ended December
31, 1997, 1996 and 1995, respectively. Mr. Hasu P. Shah owns a parcel of land on
which a hotel is situated for which no land rent is charged.                    

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COMBINED ENTITIES - INITIAL HOTELS                                              
NOTES TO FINANCIAL STATEMENTS                                                   
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]   
[AMOUNTS IN THOUSANDS]                                                          
--------------------------------------------------------------------------------

[8] Commitments                                                                 

Franchise  Agreements - The Initial  Hotels have executed  franchise  agreements
that have initial  lives  ranging from 10 to 20 years but may be  terminated  by
either  party on certain  anniversary  dates  specified  in the  agreements.  In
addition to initial  fees  totaling  $342,  which are being  amortized  over the
franchise lives, the agreements require annual payments for franchise royalties,
reservation,  and advertising services which are based upon percentages of gross
room revenue.  Such fees were  approximately  $779,  $524 and $368 for the years
ended December 31, 1997,  1996 and 1995,  respectively.  The Initial Hotels will
continue to be operated under the franchise agreements.                         

Construction  in Progress - At December  31,  1997,  the  Combined  Entities had
future  obligations  under various hotel  construction  project in the amount of
$255.  Through December 31, 1997, the Combined Entities had incurred expenses of
$1,412 in connection with the  construction of a hotel property in West Hanover,
Pennsylvania.  The construction is being contracted and funded through a related
party and the total  construction  cost is expected to be approximately  $3,100.
The Combined  Entities have obtained a  construction/term  loan in the amount of
$2,500 under which no borrowings are  outstanding at December 31, 1997. The loan
bears  interest at 8% for 5 years and 9 months and the Wall Street Journal prime
rate thereafter through maturity 10 years and 9 months from inception.  The loan
is  collateralized  by the  property  and is  guaranteed  by  certain  partners,
stockholders, Combined Entities and related parties.                            

[9] Fair Value of Financial Instruments                                         

At  December  31,  1997 and 1996  financial  instruments  include  cash and cash
equivalents,  accounts receivable,  accounts payable,  loans to and from related
parties and mortgage payables.  The fair values of cash, accounts receivable and
accounts payable approximate  carrying value because of the short-term nature of
these  instruments.  Loans to and from related  parties carry  interest at rates
that  approximate  the  Combined  Entities'  borrowing  cost.  The fair value of
mortgages  payable   approximates   carrying  value  since  the  interest  rates
approximate the interest rates  currently  offered for similar debt with similar
maturities.                                                                     

[10] Unaudited Interim Statements                                               

The financial  statements as of September 30, 1998 and for the nine months ended
September 30, 1998 and 1997 are unaudited; however, in the opinion of management
all adjustments  [consisting solely of normal recurring  adjustments]  necessary
for a fair presentation of the financial  statements for the interim period have
been made. The results of the interim periods are not necessarily  indicative of
the results to be obtained for a full fiscal year.                              

 . . . . . . . .

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COMBINED ENTITIES - INITIAL HOTELS                                              
--------------------------------------------------------------------------------

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997.
[IN THOUSANDS]                                                                  
--------------------------------------------------------------------------------

                                                        [Enlarge/Download Table]

                                                                    Cost Capitalized         Gross Amounts at          
                                                                      Subsequent to          Which Carried at          
                                           Initial Cost                Acquisition            Close of Period          
                                      ----------------------   ----------------------    ---------------------------   
                                               Buildings and           Buildings and           Buildings and           
                                               -------------           -------------           -------------           
   Description        Encumbrances     Land    Improvements    Land    Improvements    Land    Improvements     Total  
   -----------        ------------     ----    ------------    ----    ------------    ----    ------------     -----  
                                                                                                                       
Holiday Inn,                                                                                                           
   Harrisburg, PA      $   3,500    $     412   $   1,234   $      --     $  1,518   $    412    $  2,752    $    3,164
Holiday Inn,                                                                                                           
   Milesburg, PA             914           42       1,158          --          681         42       1,839         1,881
Holiday Inn Express,                                                                                                   
   New Columbia, PA        1,000           94       2,510          --           --         94       2,510         2,604
Holiday Inn Express,                                                                                                   
   Harrisburg, PA          1,110          256         850          --          120        256         970         1,226
Holiday Inn Express,                                                                                                   
   Hershey, PA             1,342          426       2,645          --           --        426       2,645         3,071
Clarion Suites,                                                                                                        
   Philadelphia, PA        1,614          262       1,049         150          776        412       1,825         2,237
Comfort Inn,                                                                                                           
   Denver, PA                434           --         782          --          327         --       1,109         1,109
Hampton Inn,                                                                                                           
   Selinsgrove, PA         2,385          157       2,511          --            6        157       2,517         2,674
Hampton Inn,                                                                                                           
   Carlisle, PA            2,848          300       3,109          --           --        300       3,109         3,409
                       ---------    ---------   ---------   ---------     --------   --------    --------    ----------

                       $  15,147    $   1,949   $  15,848   $     150     $  3,428   $  2,099    $ 19,276    $   21,375
                       =========    =========   =========   =========     ========   ========    ========    ==========

                                                                [Download Table]


                                                                   Life     
                       Accumulated         Net                  Upon Which  
                      Depreciation     Book Value              Latest Income
                      ------------     ----------              -------------
                      Buildings and  Buildings and    Date of   Statement is
                      -------------  -------------    -------   ------------
   Description        Improvements   Improvements   Acquisition   Computed  
   -----------        -------------   ------------   -----------   -------- 
                                                                            
Holiday Inn,                                                                
   Harrisburg, PA        $     204   $    2,960       12/15/94     15 to 40 
Holiday Inn,                                                                
   Milesburg, PA               439        1,442       08/15/85     15 to 40 
Holiday Inn Express,                                                        
   New Columbia, PA              6        2,598       12/01/97     15 to 40 
Holiday Inn Express,                                                        
   Harrisburg, PA                9        1,217       06/15/85     15 to 40 
Holiday Inn Express,                                                        
   Hershey, PA                  17        3,054       10/01/97     15 to 40 
Clarion Suites,                                                             
   Philadelphia, PA            135        2,102       06/30/95     15 to 40 
Comfort Inn,                                                                
   Denver, PA                  200          909       01/01/88     15 to 40 
Hampton Inn,                                                                
   Selinsgrove, PA              86        2,588       09/12/96     15 to 40 
Hampton Inn,                                                                
   Carlisle, PA                 45        3,364       06/01/97     15 to 40 
                         ---------   ----------                             

                         $   1,141   $   20,234                             
                         =========   ==========                             

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COMBINED ENTITIES - INITIAL HOTELS                                              
NOTES TO SCHEDULE III                                                           
[IN THOUSANDS]                                                                  
--------------------------------------------------------------------------------

[A]    Reconciliation of Real Estate:                                           

                                                        [Enlarge/Download Table]


                                                          1997              1996             1995       
                                                          ----              ----             ----       
                                                                                                        
     Balance at Beginning of Year                 $            9,950   $        6,354   $         3,785 

     Additions During Year                                     9,369            3,725             2,907 

     Deletions During Year                                       (43)            (129)             (338)
                                                  ------------------   --------------   --------------- 

     Balance at End of Year                       $           19,276   $        9,950   $         6,354 
                                                  ==================   ==============   =============== 

[B]  Reconciliation of Accumulated Depreciation:                                                        

     Balance at Beginning of Year                 $              834   $          614   $           546 
     Depreciation for the Year                                   307              220               139 
     Accumulated Depreciation on Deletions                        --               --               (71)
                                                  ------------------   --------------   --------------- 

     Balance at End of Year                       $            1,141   $          834   $           614 
                                                  ==================   ==============   =============== 

[C]    The aggregate cost of land, buildings and improvements for federal income
tax purposes is approximately $19,758.                            

[D]    Depreciation is computed based upon the following useful lives:          
      Buildings and Improvements                                15 to 40 years

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

     No dealer,  salesperson or other individual has been authorized to give any
information or to make any  representations  other than those  contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized  by the  Company  or  the  Underwriters.  This  Prospectus  does  not
constitute an offer to sell or a solicitation  of an offer to buy any securities
in any  jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this  Prospectus  nor any sale made hereunder  shall,  under any
circumstances,  create  any  implication  that  there  has been no change in the
affairs of the Company or that information contained herein is correct as of any
time subsequent to the date hereof.                                             
 TABLE OF CONTENTS
                                                                            page
PROSPECTUS SUMMARY...........................................................  1
RISK FACTORS................................................................. 16
THE COMPANY.................................................................. 26
GROWTH STRATEGY.............................................................. 28
USE OF PROCEEDS.............................................................. 30
FORECASTED DISTRIBUTIONS..................................................... 31
PRO FORMA CAPITALIZATION..................................................... 34
DILUTION..................................................................... 35
SELECTED FINANCIAL INFORMATION............................................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS                                            
OF FINANCIAL CONDITION AND RESULTS                                          
  OF OPERATIONS.............................................................. 39
BUSINESS AND PROPERTIES...................................................... 42
POLICIES AND OBJECTIVES WITH RESPECT                                            

  TO CERTAIN ACTIVITIES...................................................... 53

FORMATION TRANSACTIONS......................................................  56
MANAGEMENT..................................................................  58
CERTAIN RELATIONSHIPS AND TRANSACTIONS......................................  64
THE LESSEE..................................................................  65
PRINCIPAL SHAREHOLDERS......................................................  67

DESCRIPTION OF SHARES OF BENEFICIAL                                             
  INTEREST..................................................................  68

CERTAIN PROVISIONS OF MARYLAND LAW                                              
AND OF THE COMPANY'S DECLARATION OF                                         

  TRUST AND BYLAWS..........................................................  75
SHARES AVAILABLE FOR FUTURE SALE............................................  79
PARTNERSHIP AGREEMENT.......................................................  81
FEDERAL INCOME TAX CONSEQUENCES.............................................  84
UNDERWRITING................................................................  99
EXPERTS..................................................................... 100
REPORTS TO SHAREHOLDERS..................................................... 100
LEGAL MATTERS............................................................... 100
ADDITIONAL INFORMATION...................................................... 100
GLOSSARY.................................................................... 102
INDEX TO FINANCIAL STATEMENTS ...............................................F-1

Until February 14, 1999 (25 days after the date of this                   
Prospectus), all dealers effecting transactions in the registered               
securities, whether or not participating in this distribution,                  
may be required to deliver a prospectus.  This is in addition to                
the obligation of dealers to deliver a Prospectus when acting as                
underwriters and with respect to their unsold allotment or                      
subscriptions.                                                                  
--------------------------------------------------------------                  

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

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

2,000,000 Shares

HERSHA HOSPITALITY
 TRUST

Priority Class A Common Shares
of Beneficial Interest

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

PROSPECTUS
--------------

ANDERSON & STRUDWICK
INCORPORATED

January 20, 1999

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

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