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

SUPPLEMENTAL 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, OMNIBUS REPLY IN SUPPORT THEREOF, AND OMNIBUS RESPONSE TO OBJECTIONS THERETO1 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. I have over 20 years of investment banking experience, having begun my career in 1988 at Salomon Brothers. During my career, I have worked on a number of transactions in the hotel, leisure and real estate industries, ranging from debt and equity financings, to mergers, acquisitions and restructurings. In the past 15 months, my current employer, Moelis & Company has completed or is engaged in a number of large real estate transactions (financings, restructurings and M+A) representing approximately $100 billion in value. These include transactions involving Fleet Street (CMBS vehicle restructuring), GGP (chapter 11), Chrysler Corp HQ building (mortgage financing), Centro Properties Group

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.

(corporate restructuring), Stuyvesant Town / Peter Cooper Village (CMBS restructuring), Xanadu (restructuring; equity financing), Fiddlers Creek (chapter 11 debtor advisory), LNR (corporate restructuring), Dubai World Holdings (advisor to government of Dubai), Fontainebleau Resorts (restructuring, sale). Moelis was the advisor to Hilton Hotels in its $26.5 billion sale to Blackstone Group in 2007. Our real estate group, led by Alex Rubin, has completed numerous transactions for REITs over the span of his career, including for Simon Properties, Diamond Rock Hospitality Company, Starwood Financial Group, Istar Financial. If called and sworn as a witness, I could and would testify competently to the matters set forth herein. 2. I submit this supplemental declaration (this Supplemental 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 Omnibus Reply 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 Response to Objections Thereto (the Reply). 3. The facts set forth in this Supplemental 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. 5. The Debtors Have Established a Plan Process and an Aggressive (but Achievable) Timeline for Achieving a Value-Maximizing Transaction. Following a meeting of the Board on October 19, 2010, where a number of

possible restructuring alternatives were discussed, reviewed, and considered, the Board requested that Moelis consider and propose a process to explore an enterprise-level restructuring (while not foreclosing other potential alternatives, including certain of the sale options set forth in the Objections). On October 26, 2010, the Board held another meeting to discuss the plan process going forward. At the meeting, Moelis proposed an aggressive and detailed timeline with the goal of selecting a stalking horse for plan sponsorship for an enterprise-level restructuring transaction within four weeks and selecting the winning bidder within approximately 14 weeks. After discussion and input, the Board approved the timeline and tasked Moelis, Kirkland & Ellis LLP (Kirkland), and the Debtors management with executing the process and meeting the various milestones set forth therein. 6. In the next several weeks, the Debtors intend to select a stalking horse plan

sponsor with a view towards an enterprise-level restructuring, which the Debtors and Moelis believe will maximize benefits to the reorganized estates. However, the Debtors remain open to all offers and concepts from key constituents to the extent those proposals maximize benefits to the estates with a goal towards filing a consensual plan of reorganization. 7. The Debtors decision to focus their plan process on achieving an

enterprise-based reorganization was based on a conclusion by the Board, after considerable deliberation by the Board and input from their advisors, that such a reorganization would maximize value. This decision was based on, among other things: the relatively lower cost of 3

capital given the Debtors size and the diversity of their assets; the ability to take advantage of tax and cost of capital benefits of the public REIT status of a reorganized enterprise; economies of scale for corporate and management functions; and operational and management benefits of brand and geographic diversity. 8. I have reviewed the Declaration of Ronen Bojmel2 and do not agree with his

statements about the benefits of a reorganization involving the piecemeal sale of individual assets. First, the piecemeal approach advocated by Mr. Bojmel would have a chilling effect on attracting parties interested in being a plan sponsor. This cluster approach would signal uncertainty to the marketplace and would lead to numerous issues related to franchisor relationships and how to group assets according to brand, geographic, or generational diversity. This approach may also leave the Debtors enterprise with a set of remaining assets that would languish potentially for an extended time and may result in value destruction, rather than value maximization. The bifurcation of transferred assets from those that remain may jeopardize the Debtors franchisor relationships by requiring additional licensing transactions, causing additional loss of value. Second, Mr. Bojmels approach would likely discourage or limit favorable financing because restructuring the existing debt structure on an enterprise-based level would provide for more flexibility and, in effect, offer attractive stapled financing to a potential plan sponsor. Third, I disagree that a cluster approach would attract a broader

universe of potential investors; indeed, to date the overwhelming interest from potential buyers

Declaration of Ronen Bojmel in Support of Objection of Wells Fargo Bank, N.A., as Trustee for the Registered Holders of Credit Suisse First Boston Mortgage Securities Corp. Commercial Mortgage Pass-Through Certificates, Series 2007-C1 and U.S. Bank National Association, as Successor to Lasalle Bank N.A., Formerly Known as Lasalle National Bank, as Trustee for the Registered Holders of ML-CFC Commercial Mortgage Trust 2006-4, Commercial Mortgage Pass-Through Certificates, Series 2006-4, Commercial Mortgage PassThrough Certificates, Series 2006-4 to 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 [Docket No. 676].

has been to discuss an enterprise-level transaction. The Bojmel Declaration has failed to identify a logical cluster approach that will address the sale of the Debtors hotels in a holistic manner. Fourth, contrary to Mr. Bojmels assertion, the Debtors relationships with their franchisors are strong and provide significant value to the overall enterprise. Finally, and as discussed below, the Debtors management team provides significant value to the overall enterprise, as evidenced by critical operational milestones and achievements since filing for chapter 11. 9. For the time being, the Board has decided not to focus the plan process on sales of

less than the whole enterprise given, among other reasons, (a) important considerations regarding transaction costs and distraction associated with having multiple, concurrent sale processes running for overlapping assets, (b) concern regarding the impact numerous smaller sales may have on franchisor relationships, and (c) the difficulties of attempting to close numerous sales simultaneously in order to avoid leaving behind a subset of assets. 10. It must be emphasized, however, that the Debtors remain willing to consider all

plan structures that may be value maximizing and continue to re-evaluate their strategy, as appropriate, based on new information, receipt of attractive proposals, or other changes in circumstances. The Debtors plan process is evolving based on input from constituencies, feedback from potential plan sponsors, and new information As ideas and proposals are

expressed, or additional analyses are performed, the Debtors will modify their plan process as appropriate. For instance, the Debtors look forward to receiving an enterprise-based proposal from Five Mile and will consider its implications on the restructuring. Nothing in the plan process has foreclosed the Debtors ability to consider alternatives. The Debtors, with their advisors, have simply determined that, until circumstances dictate otherwise, pursuing an

enterprise-level restructuring at this time will obtain the highest and best value and are expediently proceeding toward accomplishing such a transaction. 11. Indeed, if not for the manner in which the Debtors engaged with Five Mile,

arranging in-person meetings, site visits, and conversations with the Debtors personnel as well as providing certain documents to the data room, Midland would not be in the position it is to propose a deal as Midland suggests in the Midland Objection. The fact that Five Mile may be close to submitting a proposal for the Debtors to evaluate is an indication that the Debtors process is working as intended by providing parties that are capable and interested in formulating a restructuring proposal with the information, access, and structure necessary to do so. By giving the Debtors the opportunity to continue their multi-step process and foster competition amongst potential plan sponsors, the Debtors are confident that the highest and best value for their estates will be obtained. 12. The Debtors believe that their plan process provides the framework to achieve a

value-maximizing transaction and are optimistic about their ability to build consensus around the Debtors structure given a fair opportunity to do so; however, they remain open to considering and facilitating other viable alternatives that may arise. 13. As set forth in the general timeline described in the Board presentations attached

to the Reply, the Debtors and their advisors are in the process of taking key steps with the goal of selecting a stalking horse and ultimately a winning bid for a plan sponsorship. 14. First, Moelis will continue interacting and negotiating with Five Mile on the terms

of a potential proposal, as appropriate. Second, Moelis will continue working to develop other stalking horse candidates. The Debtors and their advisors have completed the development and refinement of a list of suitable plan-sponsor, stalking-horse candidates and have narrowed that

list to five parties (including Five Mile). Currently, the Debtors and their advisors are engaged in discussions with stalking horse candidates. All five candidates have signed confidentiality agreements. Moelis has granted access to the electronic data room to stalking horse candidates that have executed confidentiality agreements to conduct due diligence and is engaging with these candidates about their initial interest. Following the hearing on the Motion, Moelis will facilitate additional due diligence by these stalking horse candidates and solicit proposals; the timeline provides for the selection of the stalking horse candidate in the next several weeks. Apollo Investment Corporation, the ultimate non-Debtor parent of the Debtors, has not sought to be, and is not being considered as, a stalking horse to serve as the plan sponsor. 15. Third, Moelis will conduct discussions with key constituents over the next several

weeks regarding valuation and work towards finalizing value allocations. On October 28, 2010 Moelis provided to key stakeholders managements 2010 reforecast budget. On November 8, 2010, Moelis provided managements updated 2011-2015 projections. Moelis will provide its initial view on valuation to the Board, followed by further discussions with constituents about valuation, with a view towards finalizing value allocations over the next several weeks. In addition, the Debtors, with the assistance of their advisors, are developing their detailed 2011 hotel-by-hotel budgets, which will be completed in the normal course in mid-January. 16. Fourth, the Board has directed Moelis to prepare materials for a broader

marketing process. This will include the preparation of a set of teaser documents, refinement of the information in the data room for a broader marketing process, the development of additional marketing materials, and the finalization of a comprehensive potential buyers list. 17. Following this critical several week period, Moelis will begin a detailed, staged

marketing process to occur over a ten to twelve week period. During that process, the Debtors

will facilitate due diligence, engage in negotiations, and solicit proposals and final bids with the goal of selecting a winning bidder in the next several months. 18. This proposed timeline for the selection of a stalking horse and for conducting a

marketing process has been communicated to potential plan sponsors, as well as the Debtors constituents since the filing of my initial Declaration.3 19. This marketing process is achievable and will proceed in a deliberate and efficient

manner with ongoing communications with stakeholders. However, such processes take time and must be staged appropriately to allow interested parties the ability to conduct thorough due diligence, to formulate the most advantageous proposals, and to allow for fruitful negotiations between key stakeholders and third parties. 20. I understand that certain constituents have suggested that an extension of the

exclusivity period for some amount of time less than 120 days is appropriate, with some even suggesting that only a 30-day extension would be appropriate. I believe a shorter extension of time would undermine the plan process and would send a signal to the market that the Debtors reorganization will be inherently uncertain and unpredictable, such that it would discourage potential buyers from engaging in a marketing process. While the Debtors efforts to select a stalking horse plan sponsor, to discuss value allocation with key constituents, and to engage in a thorough marketing process will proceed deliberately and expeditiously, such a process will take time and will be best served by a 120-day extension of the exclusivity period. 21. Such an extension will signal certainty and credibility to the marketplace and will

significantly increase the chances that a value-maximizing, consensual plan of reorganization can

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 Exclusivity (the Declaration) [Docket No. 611]

be filed. Moreover, formulating a plan requires adequate time for due diligence, development of proposals, evaluation of proposals, negotiations with plan sponsors and the Debtors constituencies, and execution of appropriate agreements. It is imperative that these steps occur without the fear of the process being truncated by competing plans or concerns that exclusivity could be terminated at any time, otherwise potential parties may simply sit on the sidelines. The Debtors will, of course, continue to communicate with their stakeholders throughout the plan process and seek their input with the goal of obtaining broad support for a value-maximizing restructuring transaction. 22. Moreover, a shorter extension of the exclusivity period could potentially create a

chaotic, contentious plan process. A shorter extension will chill the Debtors marketing process and discourage participation from parties that are not current holders of the Debtors debt or equity (who are at an informational disadvantage relative to the Debtors constituencies because of the access to information the Debtors have provided to the constituencies) to the detriment of the Debtors estates. The Debtors have received views on competing plan structures and plan philosophies from various key constituents. It is clear that there is no consensus among key stakeholders at this stage as to what type of plan structure will be most preferable. This disagreement and lack of consensus is inherent in any reorganization process and is precisely why the Debtors exclusivity period should be extended such that a deliberate and ordered plan process can occur and so that consensus may be built. I believe that the plan process

embodying an enterprise-based restructuring with the flexibility to assess proposals for less than the whole enterpriseattempts to bridge the gap between the varying interests. In addition, I believe that a shorter extension of the exclusivity period will ensure that secured creditors focus only on their positions without sufficient motivation to come to the negotiating table.

B.

Moelis Has Continued To Engage In Discussions With The Debtors Stakeholders And Parties In Interest To Solicit Their Input And To Engage In A Collaborative Restructuring Process. As noted in my initial Declaration, since the plan support agreement terminated,

23.

Moelis, in conjunction with the Debtors management and other advisors, engaged all key stakeholders to solicit input regarding restructuring alternatives with the goal of promoting the Debtors reorganization process to file a consensual plan of reorganization. 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, to develop a path forward that maximizes the value of the entire enterprise and takes into account the diverse views of the 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. 24. In consultation with the Board and management, Moelis has continued to engage

with key stakeholders to facilitate the plan process since the filing of my initial Declaration on October 27. For instance, Moelis has established and made contact with an initial and realistic list of five potential plan sponsors (including Five Mile). I believe it was appropriate to

approach this number of parties initially to expedite the process and to encourage parties to commit resources by providing assurances that they will have reasonable access to information and the Debtors personnel and advisors, as well as a higher likelihood of being chosen as the 10

stalking horse. The potential parties were selected based on a number of relevant criteria, including whether they had sufficient financial resources to consummate a transaction, familiarity with the hospitality industry and the bankruptcy process, and sophistication necessary to act decisively on the timeline that the Debtors have established. Following that initial contact, the Debtors have negotiated and executed five confidentiality agreements with potential plan sponsors to allow such parties to conduct the due diligence necessary to formulate a restructuring proposal. I expect the pace of this external process to increase considerably now that initial contact has been established and certain parties have had an opportunity to proceed with their diligence. 25. The Debtors have also continued to load additional information to the electronic

data room established specifically for the plan process, including updated financial projection for 2010 (provided to major constituencies on October 28). The electronic data room contains over 3,000 documents and permits multiple parties to conduct necessary due diligence. Since my initial Declaration, additional users have been granted access to the data room, bringing the total users to 100. In addition, the additional materials loaded to the data room include the September 2010 P&L reports, the 2010 reforecast, the November 1, 2010 13-week cash budget, the Flash Report for October 16 - October 31, and other information. Two hundred forty-nine additional documents have been downloaded by parties from the data room, bringing the overall number of downloads to over 45,000 since the data room was established. The constituencies are accessing this information; Midland and one of its advisors, FTI, in particular have viewed/downloaded more than 1,300 documents since the data room was established, while the ad hoc committee of preferred shareholders has viewed/downloaded more than 200 documents.

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26.

The Debtors and Moelis have also continued their frequent contact and

engagement with various stakeholders. For example, on November 1, Moelis held discussions with representatives from Jefferies, Miller Buckfire, and FTI (financial advisors to the Creditors Committee, Wells Fargo, and Midland, respectively) regarding the Debtors 2010 reforecast. Then, on November 4, 2010, Moelis met with Jefferies regarding the current plan process and next steps. Moelis has also continued discussions with Midland, FTI, Wells Fargo, and other constituents, including multiple telephone calls and emails regarding topics like the plan process, selection of a stalking horse, and the 2010 reforecast. 27. In addition, the Debtors, with assistance from Moelis, facilitated a number of

additional site visits to the Debtors properties by interested parties and arranged telephone calls between Five Mile and certain sales personnel and managers of the Debtors to allow Five Mile to conduct additional diligence. For example, the Debtors and Moelis have continued to facilitate site visits by Five Mile, assisting in coordinating approximately 53 hotel property visits to date. The Debtors and Moelis have also been working with Five Mile to facilitate meetings with Island Hospitality and Innkeepers franchisors. 28. This cooperation and process with constituents was established to allow

stakeholders to conduct thorough due diligence, to exchange views on plan concepts and philosophies, and to begin the process of building consensus. Moelis has documented numerous communications between the Debtors professionals and certain representatives of the Debtors constituencies since the filing of the Motion. And, Moelis has spoken with more than 30 third parties interested in facilitating a restructuring. 29. While progress continues to be made, the plan process remains dynamic, as many

key stakeholders have differing views and philosophies on the type of plan that should be

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proposed. As a result, there is disagreement both among key constituencies and between certain constituencies and the Debtors on the process and type of plan that should be proposed. Such disagreements are to be expected in any chapter 11 restructuring process. The Debtors plan process has facilitated discussions among all constituencies; the continuation of this process in conjunction with the proposed plan timeframe (described above) will allow for the Debtors and constituents to build agreement around a consensual plan of reorganization. C. 30. The Debtors Financial Operations Are Exceeding Expectations. The Debtors business is operating well and exceeding certain expectations. The

Debtors recently provided their key stakeholders with a 2010 financial reforecast showing improvement in key performance metrics over calendar 2009 and the Debtors prior budget, consistent with the hospitality industrys generally improved performance. The Debtors have delivered Application Reports for the period September 1, 2010 to September 30, 2010 to the Debtors prepetition lenders or their agents, as well as other reports required under 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]. The Application Reports continue to show that the Debtors cash flows from operations have been sufficient to pay ordinary course expenses. Since the Petition Date, the Debtors have returned approximately $20 million of excess cash to their secured lenders in accordance with the Final Cash Collateral Order. There has been no

intercompany tranche borrowing since the Petition Date and the Court has not been asked to resolve any issues relating to the Debtors use of cash collateral or the allocation of receipts and disbursements contained in the Application Reports. 31. The Debtors have also closed on their two debtor in possession financing facilities

and begun putting the funds obtained to work on property improvement plans. For instance, I 13

understand that the Debtors have spent or committed to spend approximately $14 million for furniture, fixtures, and equipment orders and labor related to the property improvement plan process. The Debtors have substantially completed their property improvement plan obligations for one of the hotels covered under the Marriott Adequate Assurance Agreement and are in the process of satisfying all other requirements for the first phase of their obligations under the Marriott Adequate Assurance Agreement. Further, the Debtors are preparing to place orders for approximately $7.5 million of furniture, fixtures, and equipment for hotels covered under the second phase of the Marriott Adequate Assurance Agreement. Since the Petition Date, the Debtors have continued to plan and oversee other capital expenditures at their hotels

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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: November 9, 2010 Respectfully submitted,

WillialilQ. Derrougb Managing Director, Moelis & Company LLC

K&E 17974431