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

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

DECLARATION OF WILLIAM Q. DERROUGH IN SUPPORT OF DEBTORS MOTION FOR ENTRY OF AN ORDER EXTENDING THE EXCLUSIVE PERIODS DURING WHICH ONLY THE DEBTORS MAY FILE A CHAPTER 11 PLAN AND SOLICIT ACCEPTANCES THEREOF AND OMNIBUS OBJECTION TO MOTIONS TO TERMINATE EXCLUSIVITY1 I, William Q. Derrough, declare as follows: 1. I am over the age of 18 and competent to testify. I am a Managing Director of

Moelis & Company LLC (Moelis), resident in Moeliss New York office, located at 399 Park Avenue, 5th Floor, New York, New York 10022. If called and sworn as a witness, I could and would testify competently to the matters set forth herein. 2. I submit this declaration (this Declaration) in accordance with Rule 1007-2 of

the Local Bankruptcy Rules for the Southern District of New York (the Local Bankruptcy Rules) in support of the Debtors Motion for Entry of an Order Extending the Exclusive Periods During Which Only the Debtors May File a Chapter 11 Plan and Solicit Acceptances Thereof and Omnibus Objection to Motions to Terminate Exclusivity. Prior to the date hereof, Midland Loan Services, Inc. (Midland) and Wells Fargo Bank, N.A. and U.S. Bank National

The list of Debtors in these Chapter 11 Cases along with the last four digits of each Debtors federal tax identification number can be found by visiting the Debtors restructuring website at www.omnimgt.com/innkeepers or by contacting Omni Management Group, LLC at Innkeepers USA Trust c/o Omni Management Group, LLC, 16161 Ventura Boulevard, Suite C, PMB 606, Encino, California 91436. The location of the Debtors corporate headquarters and the service address for their affiliates is: c/o Innkeepers USA, 340 Royal Poinciana Way, Suite 306, Palm Beach, Florida 33480.

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Association (collectively, Wells Fargo) each filed motions to terminate exclusivity [Docket Nos. 348 and 437] and C-III Asset Management (C-III) and CWCapital Asset Management, LLC (CW Capital and together with Midland, Wells Fargo, and C-III, the Lenders Seeking to Terminate Exclusivity) each filed responses and joinders to the motions of Midland and Wells Fargo [Docket Nos. 455 and 456] (collectively, the Motions to Terminate Exclusivity). 3. The facts set forth in this Declaration are based upon my personal knowledge,

upon information and belief, or upon client matter records kept in the ordinary course of business that were reviewed by me or other employees of Moelis under my supervision and direction. 4. As of approximately March 24, 2010, the Debtors engaged Moelis to provide

general investment banking and financial advice in connection with the Debtors attempts to complete a strategic restructuring, reorganization, and/or recapitalization of all or a significant portion of the Debtors outstanding indebtedness, as well as to prepare for the potential commencement of chapter 11 cases. A. Moelis Has Engaged In Discussions With The Debtors Stakeholders And Parties In Interest To Solicit Their Input And Engage In A Collaborative Restructuring Process. Since the plan support agreement terminated, Moelis, in conjunction with the

5.

Debtors management and other advisors, engaged all key stakeholders to solicit input regarding restructuring alternatives with the goal of promoting the Debtors reorganization process. As part of this process, the Debtors and their advisors have been: (a) actively engaged in

discussions with all of the Debtors key stakeholders, including the Debtors secured lenders, the official committee of unsecured creditors (the Creditors Committee), the ad hoc committee of preferred shareholders, and Five Mile Capital Partners LLC (Five Mile), to develop a path forward that maximizes the value of the entire enterprise and takes into account the diverse 2
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views of their many stakeholders; (b) evaluating the Five Mile proposal; (c) analyzing various alternatives to pursue a plan of reorganization; and (d) providing the Debtors key stakeholders and certain other parties with access to the Debtors online data room and actively facilitating due diligence. The Debtors have designated Moelis as primarily responsible for coordinating and negotiating with key stakeholders regarding all plan-related financial and business inquiries, while the Debtors outside counsel, Kirkland & Ellis LLP, is primarily responsible for the coordination of all restructuring related legal inquiries. 6. In consultation with the board of trustees of Innkeepers USA Trust (the Board)

and management, Moelis contacted and scheduled meetings with all of the key parties in interest in the Chapter 11 Cases. On September 9, 2010, I sent a letter to the Debtors special servicers, Lehman ALI Inc. (Lehman), the Creditors Committee, the ad hoc committee of preferred shareholders, and Five Mile, inviting them to in-person meetings with the Debtors and their advisors to discuss the process of developing a plan of reorganization and to solicit their input and ideas. At the meetings, Moelis provided an outline of the Debtors enterprise-level,

multi-party plan development process to each of these parties and solicited their views. 7. The Debtors and their advisors have participated in additional discussions with

these parties to maintain an ongoing dialogue, including an all-hands telephone conference on October 20, 2010, to discuss the status of the Debtors restructuring initiatives. During the meeting with Five Mile and its advisors on September 14, 2010, the parties discussed the plan structure Five Mile negotiated with Midland and Five Miles due diligence of the Debtors business.2 Moelis has spoken with Five Mile numerous times since the September 14, 2010

Five Mile has signed a confidentiality agreement and has been granted access to the Debtors data room.

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meeting to answer questions, discuss Moeliss financial model of the Debtors, coordinate a series of on-site property visits for Five Mile, and facilitate discussions with hotel general managers. B. 8. Moelis Has Worked With Interested Parties To Assist In Their Due Diligence of The Debtors Business. The Debtors also have established a data room in anticipation of multiple parties

performing due diligence and participating in the development of a plan. At this time, the Debtors have provided 86 individuals access to the data room, including all of the Debtors special servicers, Lehman, the Creditors Committee, the ad hoc committee of preferred shareholders, and certain other interested third parties, as well as their legal and financial advisors. To date, these parties have viewed or downloaded over 3,000 documents. The

available data includes information about the Debtors entire enterprise, including information regarding all collateral pools. The Debtors are updating the data room with additional

information and analyses (including revised budgets, actual results, and forecasts) as those materials become available. Among the specific information currently in the data room is: property, title, and other insurance documentation; organizational charts; employment agreements; franchise agreements; franchise default notices; management agreements; lockbox agreements; cash management agreements; comfort letters and other miscellaneous agreements; historical capital expenditures; profit and loss reports; appraisals and property-specific valuations; Smith Travel Reports, which provide certain competitive market information regarding the Debtors properties; hotel quality assurance reports; historical data with up to four years of information on the average daily income generated by occupied rooms, occupancy, and revenue per available room for the Debtors properties; the financial model prepared by Moelis with three years of historical financial information on a hotel-by-hotel basis; and budgets. In addition to information in the data room, the Debtors filed almost 7,000 pages of schedules and 4
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statements on or about September 1, 2010 that provide supplemental information about the Debtors business. The Debtors are providing (and will continue to provide) information to their key stakeholders and other parties to facilitate the plan process. The Debtors continue to update their financial and business forecasts in order to assist with plan discussions, support various related valuation analyses, and use in the evaluation of plan proposals from outside parties. The Debtors are willing to provide additional parties access to relevant information, as necessary and appropriate, about the Debtors business and assets so that negotiations can proceed as productively as practicable. The Debtors have also facilitated discussions among certain of their key stakeholders and hotel general managers. At this time, Five Mile has completed its visits to the Debtors properties, which included more than 50 sites. 9. In addition, on October 21 and 22, 2010, Moelis met with members of the

Debtors senior management team to discuss an update of the 2011-2015 financial model to reflect managements updated views in light of 2010 performance, the current market environment, and the updated PIP schedule. Moelis expects to distribute the updated

information to key constituencies in the near future. Moelis has also been developing materials that will be used in connection with the process to solicit a plan sponsor. These materials include a document describing the plan sponsorship opportunity and another document that highlights the key quantitative and qualitative features of the Debtors assets and business. Following the completion of the re-forecasting process for 2010 and an update of the 2011-2015 projections, the Board has asked Moelis to provide its view on valuation of the Debtors business. C. 10. The Debtors Have Instructed Moelis To Consider Certain Restructuring Alternatives To Maximize Benefits To The Debtors Estates. In addition to facilitating and participating in substantive discussions with the

Debtors stakeholders, the Debtors and their advisors are: (a) developing new plan concepts 5
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related to the solicitation of interest for a potential plan sponsor; (b) facilitating due diligence by interested parties; and (c) advising the Debtors Board, the committee of independent trustees of the Board (the Independent Committee), and management on views of valuation and debt capacity. The Board has also asked Moelis and the Debtors management to continue

discussions with key stakeholders in an effort to reach a consensual reorganization, if possible, and to evaluate all possible alternatives to maximize the value of the Debtors estates. 11. On September 21, 2010 and October 19, 2010, the Board held comprehensive

meetings to consider the views of the stakeholders and the appropriate path forward. At the meetings, Moelis discussed a broad range of options for the Board to consider, from a potential recapitalization of the Debtors reorganized enterprise to transactions involving the sale of hotels on a property-by-property basis. Following these deliberations, the Board directed Moelis and management to pursue a process focused on soliciting interest from parties to become a plan sponsor for an enterprise-based reorganization. I believe that this process will provide the greatest benefits to the Debtors estates, but the Debtors will consider other structures that maximize value. 12. Moelis has identified a list of parties that are being considered as potential

stalking horses as a plan sponsor, including Five Mile. 13. Moelis continues to consider the plan structure contemplated by the Lenders

Seeking to Terminate Exclusivity, which does not provide for an enterprise-level restructuring as it grants creditors a right to withdraw their collateral from the enterprise. It is my belief that using such a transaction structure as a basis for a plan of reorganization does not provide the same benefits as an enterprise-level restructuring.

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D. 14.

Plan Sponsorship Will Provide Substantial Benefits To The Debtors Estates. I believe, based on numerous internal discussions at Moelis, conversations with

parties that have inquired about the Debtors, and work in other matters, that a process that seeks a plan sponsor for an enterprise-based restructuring will provide substantial benefits to the Debtors estates. The Debtors scale, geographic diversity, and inherent features of the

enterprise provide a number of benefits that should maximize value, including: (a) relatively lower cost of capital due to the Debtors size and the diversity of their assets; (b) the ability to take advantage of tax and cost of capital benefits of the public REIT status of a reorganized enterprise; (c) economies of scale for corporate and management functions; (d) operational and management benefits of brand and geographic diversity; (e) the relationships with key franchisors; and (f) avoiding additional incremental costs associated with a disparate marketing process with multiple transactions, including likely higher administrative and transaction costs. 15. The Debtors, in consultation with Moelis, believe that soliciting interest in plan

sponsorship for an enterprise-based restructuring is in the best interests of the Debtors estates at this time, but they will consider other plan structures that maximize value. To accomplish this, the Debtors and their advisors recognize that they will need to address various issues, including, among other things, an appropriate allocation of value among their stakeholders and the preparation of materials to solicit interest in plan sponsorship. Accordingly, the Board directed Moelis and management to take a number of additional steps related to the plan process. Moelis and management intend to, within the next month: (a) facilitate further due diligence by the Debtors key stakeholders and certain parties who may have an interest in pursuing a transaction with the Debtors, as appropriate; (b) continue to perform valuation, debt capacity, and allocation analyses to facilitate negotiations; and (c) identify and select a plan sponsor, which is all being

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conducted in consultation with the Debtors and their other advisors at the direction and with the input of the Board and the Independent Committee. E. The Debtors Have Not Had Sufficient Time To Permit Them To Negotiate A Plan Of Reorganization And Prepare Adequate Information To Allow Creditors To Determine Whether To Accept Such Plan, And The Debtors Have Demonstrated Reasonable Prospects For Filing A Viable Plan. As discussed above, the Debtors and Moelis have held numerous meetings and

16.

telephone conferences with the Debtors key stakeholders. Discussions with the Debtors key stakeholders have been productive to date. This, coupled with the fact that the Debtors

properties are operating profitably, supports the Debtors goal of developing a successful plan of reorganization. Progress to date represents the first step in a comprehensive plan process. Key stakeholders will need additional time to complete their due diligence, and the Debtors require time to evaluate the views of relevant parties and move towards the structuring of an appropriate plan of reorganization. F. 17. The Debtors Are Paying Their Bills As They Come Due. At the Debtors first day hearing, the Bankruptcy Court approved the Debtors On September 1, 2010, the

use of cash collateral on an interim basis [Docket No. 54].

Bankruptcy Court approved the use of cash collateral on a final basis [Docket No. 402].3 Consistent with those orders, the Debtors have used cash collateral to operate their business as anticipated and have provided substantial reporting at regular intervals to the Adequate Protection Parties. And although the Final Cash Collateral Order authorizes the Debtors to use intercompany loans if necessary, the Debtors have not done so to date, as expected.

Capitalized terms used, but not defined, in this section F shall have the meanings ascribed to them in the Final Order Authorizing the Debtors to (i) Use the Adequate Protection Parties Cash Collateral and (ii) Provide Adequate Protection to the Adequate Protection Parties Pursuant to 11 U.S.C. 361, 362, and 363 [Docket No. 402] (as amended, the Final Cash Collateral Order).

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18.

The Debtors are paying their bills as they come due. The Debtors are operating in

accordance with their rolling thirteen-week consolidated cash flow forecasts (the 13-Week Forecast) and have exceeded their initial revenue projections and disbursed less in operating and overhead expenses than projected under the circumstances. Consequently, the Debtors have generated more net cash than initially projected. 19. As documented by the Application Reports for the periods July 19, 2010 to July

31, 2010 and August 1, 2010 to August 31, 2010, which have been delivered to the Debtors Adequate Protection Parties in addition to other reports required under the Final Cash Collateral Order, the Debtors cash flows from operations have been sufficient to pay operating expenses, overhead expenses, and outstanding amounts relating to the fees and expenses of the Adequate Protection Parties advisors, and the Debtors have established appropriate reserves to ensure sufficient cash on-hand to pay accrued expenses payable in future periods (in accordance with the Final Cash Collateral Order). After funding the reserve and paying these expenses, there remained excess cash. Consistent with the final cash collateral order, the Debtors estates paid the excess cash to the Representatives, in the amounts set forth in the Application Report, totaling payments of more than $20 million.

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Pursuant to 28 U.S.C. 1746, I declare under penalty of perjury that the foregoing is true and correct. Dated: October 27, 201 0 Respectfully submitted,

William Q. rrough Managing Director, Moelis & Company LLC