Apple Reit Seven, Inc. 2005 Non-Employee Directors Stock Option Plan Effective March 2, 2006

Exhibit 10.4

APPLE REIT SEVEN, INC.

2005 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN

EFFECTIVE MARCH 2, 2006


APPLE REIT SEVEN, INC.

2005 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN

EFFECTIVE MARCH 2, 2006

1. Purpose. The purpose of this Apple REIT Seven, Inc. 2005 Non-Employee Directors Stock Option Plan (the “Plan”) isto encourage ownership in Apple REIT Seven, Inc. (the “Company) by non-employee members of the Board, in order to promote long-term stockholder value and to provide non-employee members of the Board with an incentive to continue as directors ofthe Company.

2. Definitions. As used in the Plan, the following terms have the meanings indicated:

(a) “Act” means the Securities Exchange Act of 1934, as amended.

(b) “Board” means the board of directors of the Company.

(c) “Code” means the Internal Revenue Code of 1986, as amended.

(d) “Company” means Apple REIT Seven, Inc., a Virginia corporation.

(e) “Date of Grant” means the date as of which an Eligible Director is automatically awarded an Option pursuant toSection 7.

(f) “Disability” or “Disabled” means that the participant (i) is unable to engagein any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, byreason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12


months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Employer.

(g) “Eligible Director” means a director described in Section 4.

(h) “Employer” means the Company.

(i) “Fair Market Value” means, on any given date, (i) if the Units are traded on an exchange, the closing registered sales prices of the Company Stock on such day on the exchange on which it generallyhas the greatest trading volume, (ii) if the Units are traded on the over-the-counter market, the average between the closing bid and asked prices on such day as reported by NASDAQ, or (iii) if the Units are not traded on any exchange orover-the-counter market, the fair market value shall be determined by the Board using any reasonable method in good faith.

(j) “Initial Closing” means the first closing of the Offering that will occur after the Minimum Offering is achieved.

(k) “Insider” means a person subject to Section 16(b) of the Act.

(l)“Minimum Offering” means the sale of 4,761,905 Units pursuant to the Offering.

(m) “Offering” means,collectively, (1) the sale of up to $1,000,000,000 in Units to the public and the registration of such shares with the Securities and Exchange Commission, as authorized by resolutions of the Board dated May 20, 2005 (the “InitialOffering”), and (2) the issuance of any additional Units as authorized by resolutions of the Board from time to time, which issuance occurs before the termination of this Plan (the “Additional Offerings”).

 

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(n) “Option” means a right to acquire Units granted under the Plan, at a pricedetermined in accordance with the Plan.

(o) “Unit” means one common share and one Series A preferred share, nopar value, of the Company. If the par value of the common shares or Series A preferred shares is changed, or in the event of a change in the capital structure of the Company (as provided in Section 12), the Units resulting from such a changeshall be deemed to be Units within the meaning of the Plan.

3. Administration. The Plan shall be administered by the Board. Optionsshall be granted as described in Section 7. However, the Board shall have all powers vested in it by the terms of the Plan, including, without limitation, the authority (within the limitations described herein) to prescribe the form of theagreement embodying the grant of Options, to construe the Plan, to determine all questions arising under the Plan, and to adopt and amend rules and regulations for the administration of the Plan as it may deem desirable. Any decision of the Board inthe administration of the Plan, as described herein, shall be final and conclusive. The Board may act only by a majority of its members in office, except that members thereof may authorize any one or more of their number or any officer of theCompany to execute and deliver documents on behalf of the Board. No member of the Board shall be liable for anything done or omitted to be done by him or any other member of the Board in connection with the Plan, except for his own willfulmisconduct or as expressly provided by statue.

4. Participation in the Plan. Each director of the Company who is not otherwise anemployee of the Employer or any subsidiary of the Company and was not an employee of the Employer or subsidiary for a period of at least one year before the Date of Grant shall be eligible to participate in the Plan.

 

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5. Securities Subject to the Plan. Subject to Section 12 of the Plan, there shall be reservedfor issuance under the Plan an aggregate of 45,000 Units plus 1.8% of the total number of Units issued in the Offering in excess of the Minimum Offering, which shall be authorized, but unissued Units. Units allocable to Options or portions thereofgranted under the Plan that expire or otherwise terminate unexercised may again be subjected to an Option under the Plan.

6.Non-Statutory Stock Options. All options granted under the Plan shall be non-statutory in nature and shall not be entitled to special tax treatment under Code section 422.

7. Award, Terms, Conditions and Form of Options. Each Option shall be evidenced by a written agreement in such form as the Board shall from timeto time approve, which agreement shall comply with and be subject to the following terms and conditions:

(a) AutomaticAward of Option.

(i) As of the Initial Closing, each Eligible Director shall automatically receive an Option to purchase5,500 Units plus 0.0125% of the number of Units in excess of the Minimum Offering sold by the Initial Closing.

(ii) As ofeach June 1 during the years 2006 and ending upon the termination of the Plan, each Eligible Director shall automatically receive an Option to purchase 0.02% of the total number of Units issued and outstanding on that date.

(iii) As of the election as a director of any new person who qualifies as an Eligible Director, such Eligible Director shall automaticallyreceive an Option to purchase 5,500 Units.

(iv) If at any time under the Plan there are not sufficient Units available tofully permit the automatic Option grants described in this paragraph, the Option

 

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grants shall be reduced pro rata (to zero if necessary) so as not to exceed the number of Units available.

(b) Option Exercise Price. The Option exercise price shall be the Fair Market Value of the Units subject to the Option on the Dateof Grant.

(c) Options Not Transferable. An Option shall not be transferable by the optionee otherwise than by will,or by the laws of descent and distribution, and shall be exercised during the lifetime of the optionee only by him. An Option transferred by will or by the laws of descent and distribution may be exercised by the optionee’s personalrepresentative within one year of the date of the optionee’s death to the extent the optionee could have exercised the Option on the date of his death. No Option or interest therein may be transferred, assigned, pledged or hypothecated by theoptionee during his lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process.

(d) Exercise of Options. In no event shall an Option be exercisable earlier than six months from the later of the Date of Grant or the date of approval of the Plan by shareholders of the Company. Furthermore,no Option may be exercised:

(i) Before any amendment or restatement that requires shareholder approval pursuant toSection 13 of the Plan, is approved by shareholders of the Company;

(ii) Unless at such time the optionee is adirector of the Company, except that he may exercise the Option within three years of the date he ceases to be a director of the Company if he ceased to be a director more than six months after the Date of Grant of the Option;

 

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(iii) After the expiration of ten years from the Date of Grant; and

(iv) Except by written notice to the Company at its principal office, stating the number of Units the optionee has elected to purchase,accompanied by payment in cash and/or by delivery to the Company of the Units (valued at Fair Market Value on the date of exercise) in the amount of the full Option exercise price for the shares of Units being acquired thereunder.

8. Withholding. If the Company is required by law to withhold federal or state income taxes when an Option is exercised, the Company shall havethe right to retain or sell without notice Units having a Fair Market Value sufficient on such date or dates as may be determined by the Board (but not more than five business days prior to the date on which such Units would otherwise have beendelivered) to cover the amount of any federal or state income tax required to be withheld or otherwise deducted and paid with respect to such payment and the exercise of the Option, remitting any balance to the optionee; provided, however, that theoptionee shall have the right to make other arrangements satisfactory to the Company or to provide the Company with the funds to enable it to pay such tax. Notwithstanding the foregoing, the Company shall not sell Units if the Optionee is an Insiderand such sale will cause the Optionee to incur a liability under Section 16(b) of the Act.

9. Modification, Extension and Renewalof Options. To the extent permitted under Code section 409A, the Board shall have the power to modify, extend or renew outstanding Options and to authorize the grant of new options in substitution therefor, provided that any such action may notenhance the rights of the optionee without shareholder approval or have the effect of altering, enhancing or impairing any rights or obligations of any person under any Option previously granted without the consent of the optionee.

 

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10. Termination. The Plan shall terminate upon the earlier of:

(a) The adoption of a resolution of the Board terminating the Plan; or

(b) The date on which the Company’s existence terminates (provided, however, that if the existence of the Company is reinstated aspermitted by law, the Plan shall continue during the effective period of any reinstatement, subject to earlier termination pursuant to Section 10(a) above).

No termination of the Plan shall without his consent materially and adversely affect any of the rights or obligations of any person under any Option previously granted under the Plan.

11. Limitation of Rights.

(a) No Right to Continue as a Director. Neither the Plan nor any action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain any person as adirector for any period of time.

(b) No Shareholders Rights Under Options. An optionee shall have no rights as ashareholder with respect to Units covered by his Option until the date of exercise of the Option, and, except as provided in Section 12, no adjustment will be made for dividends or other rights for which the record date is prior to the date ofsuch exercise.

12. Changes in Capital Structure.

(a) In the event of a stock dividend, stock split or combination of stock, recapitalization or merger in which the Company is thesurviving corporation or other change in the Company’s capital stock (including, but not limited to, the creation or issuance to shareholders generally of rights, options or warrants for the purchase of common shares or preferred shares of theCompany), the number of units to be subject to

 

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the Plan and to Options then outstanding or to be granted thereunder, the maximum number of units or securities which may be delivered under the Plan, theexercise price and other relevant provisions shall be appropriately adjusted by the Board, whose determination shall be binding on all persons. If the adjustment would produce fractional units with respect to any unexercised Option, the Board mayadjust appropriately the number of units covered by the Option so as to eliminate the fractional units.

(b) If the Companyis a party to a consolidation or a merger in which the Company is not the surviving corporation, a transaction that results in the acquisition of substantially all of the Company’s outstanding stock by a single person or entity, or a sale ortransfer of substantially all of the Company’s assets, the Board may take such actions with respect to outstanding Options as the Board deems appropriate; provided, however, that any such action must comply with Code section 409A.

(c) Notwithstanding anything in the Plan to the contrary, the Board may take the foregoing actions without the consent of any optioneeand the Board’s determination shall be conclusive and binding on all persons for all purposes.

13. Amendment of the Plan. TheBoard (except as provided below) may suspend or discontinue the Plan or revise or amend the Plan in any respect; provided, however, that without approval of the shareholders of the Company no revision or amendment shall increase the number of sharessubject to the Plan (except as provided in Section 12) or materially increase the benefits accruing to participants under the Plan. The Plan shall not be amended more than once every six months other than an amendment required to comply withchanges in the Internal Revenue Code or regulations thereunder. Notwithstanding the foregoing, the Board may unilaterally amend the Plan and the terms of Options granted hereunder to ensure compliance

 

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with Rule 16b-3 of the Securities and Exchange Commission promulgated under the Act or Code section 409A.

14. Notice. All notices and other communications required or permitted to be given under this Plan shall be in writing and shall be deemed to havebeen duly given if delivered personally or mailed first class, postage prepaid, as follows: (a) if the Company – at its principal business address to the attention of the President; (b) if to any participant – at the last addressof the participant know to the sender at the time the notice or other communication is sent.

15. Governing Law. The terms of thisPlan shall be governed by the laws of the Commonwealth of Virginia without regard to conflicts of law. Anything in this Plan to the contrary notwithstanding, the Plan shall be interpreted and administered at all times to comply with the applicablerequirements of Code section 409A and any guidance promulgated thereunder.

IN WITNESS WHEREOF, the Company has caused this Plan to beexecuted this 2nd day of March, 2006.

 

APPLE REIT SEVEN, INC.
By:  

/s/ Glade M. Knight

 

Glade M. Knight,

 

Chairman of the Board

 

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