SecProbe.io

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May 27, 2005

Ms. Linda Van Doorn
Senior Assistant Chief Accountant
U.S. Securities and Exchange Commission
Division of Corporation Finance
Washington, D.C. 20549

RE:      ARLINGTON HOSPITALITY, INC.
         FORM 10-K:  FOR THE YEAR ENDED DECEMBER 31, 2004
         FILE NO. 0-15291

Dear Ms. Van Doorn,

We are pleased to provide the following responses to the staff comment letter
dated May 13, 2005. For convenience of reference, our responses are organized
using the same headings and numbered captions as your letter. Additionally, we
have reproduced your comments in this letter and included our responses directly
below each comment.

Note 12 - Sale of Hotels and Plan for Future Hotel Disposition, page F-29:

1.    Staff Comment:

      Please clarify to us why you have reported as revenues the proceeds from
      the sale of hotels and as expense the carrying value of those hotels
      rather than reporting a gain or loss on the sale of the hotels as an
      element of non-operating income in the statement of operations.

      Response:

      One of the company's core strengths and income streams is the turnkey
      development and construction of limited service hotels. The company may
      realize this income by developing a hotel for its own account and then
      selling the hotel to a third party or by performing the development and
      construction services for others pursuant to a contract. In addition to
      the profit from the sale of an AmeriHost Inn hotel, the company earns
      further revenues from Cendant Corporation (NYSE: CD) in the form of a
      development incentive fee and a long-term ongoing revenue stream from a
      royalty sharing agreement with Cendant Corporation.

      As disclosed throughout the Company's periodic financial reports filed
      with the SEC,

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      the Company sells existing hotels and builds hotels with the intention to
      sell them in the ordinary course of its ongoing business and as part of
      its strategic growth plan. Since this activity is considered an ongoing,
      central operation of the Company, we believe that it is appropriate to
      record operating revenue and expenses in connection with the sale of
      consolidated AmeriHost Inn hotels, in accordance with FASB Statement of
      Concepts No. 6. The Company will record the sale price (net of closing
      costs) as hotel sale revenue and write off the net cost basis as hotel
      sale expense, above the operating income line. The revenue and expense is
      recorded as of the date the sale transaction is consummated.

      The gain or loss from the sale of all other hotels over the past several
      years has been included in equity income in unconsolidated joint ventures
      (the Company's share from the sale of unconsolidated hotels) or
      discontinued operations (from the sale of consolidated non-AmeriHost Inn
      hotels).

2.    Staff Comment:

      Since the Company is obligated to pay PMC the difference between the
      Assigned Value and the sale proceeds PMC receives upon the ultimate sale
      of a hotel, it appears that this mechanism serves to guarantee PMC a
      return of its investment. What consideration was given to accounting for
      the sales to PMC, in 1998 and 1999, as a financing based on the guidance
      of paragraph 28 of SFAS 66?

      Response:

      As part of the original sale/leaseback transaction between the Company and
      PMC in 1998 and 1999, the lease agreements with PMC did not contain any
      purchase options by the Company or contain any provisions related to the
      subsequent sale of the hotels. The leases were originally for an
      approximate 10-year period, and were accounted for as operating leases in
      accordance with SFAS 13.

      In January 2001, the lease agreements were amended to provide for the sale
      by PMC of up to eight hotels, as chosen by both PMC and the Company. The
      obligation to pay PMC the difference between the Assigned Value (i.e., the
      values from the original sale leaseback transactions in 1998 and 1999) and
      the net sale proceeds, if any, was contemplated by the January 2001
      amendment, however this obligation was contingent since the Company had
      the option to pay higher rent rather than pay PMC the Assigned Value
      shortfall, if any, upon the sale of a hotel pursuant to this amendment.
      Since the obligation was contingent under this amendment, the leases
      continued to be accounted for as operating leases.

      In October 2004, the lease agreements were modified to provide for a
      reduced rent payment, subject to certain conditions, and the sale of all
      the remaining hotels over a four-year period. This modification obligated
      the Company to guarantee PMC the Assigned Value shortfall, if any, upon
      sale. Due to the significance of this modification, the leases were
      considered new leases in accordance with SFAS 13 and capital lease
      accounting was appropriate in 17 of the 20 leases, as the present value of
      the minimum lease payments, including the Assigned Value guarantee, was
      greater than 90% of the fair market value.

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3.    Staff Comment:

      Please provide us with a schedule showing the original deferred gain on
      the sale of the 30 AmeriHost Inn hotels to PMC in 1998 and 1999 and the
      subsequent activity in the account by year. Also show the effect on each
      line item in the statement of operations by year.

      Response:

      The attached schedule shows the activity in the deferred gain account on
      the Company's balance sheet and the effect on the statement of operations
      from 1998 through December 2004, as it relates to the PMC sale/leaseback
      transaction. The amortization of the deferred gain in all years was
      recorded as a reduction to "leasehold rent - hotels" expense on the
      statement of operations.

      Prior to the October 1, 2004 lease modification, when a PMC leased hotel
      was sold, the unamortized balance of the deferred gain related to that
      specific hotel was recorded as a component of "gain on sale of fixed
      assets" in the statement of operations.

      As of October 1, 2004, pursuant to the lease modification, the unamortized
      balance of the deferred gain related to the 17 hotels reclassified as
      capital leases was reclassified from deferred gain to the capital lease
      asset balances (see Comment 5 below).

      As of December 31, 2004, the deferred gain from the original
      sale/leaseback transaction related only to the three PMC hotels remaining
      under operating leases.

Note 14 - Commitments, Contingencies and Other Matters, page F-33:

4.    Staff Comment:

      We understand from the information in the penultimate paragraph on page 44
      and elsewhere that the modification of certain leases with PMC resulted in
      a 19% permanent reduction in monthly lease payments but apparently the
      lease obligation still exceeds the operating cash flows from these hotels
      before the lease payments. In addition, we understand that as a result of
      the modification of the lease, the leases for 17 of the 20 hotels were
      converted to capital leases from operating leases. Since the reduction in
      the lease rates implies a possible reduction in the fair value of the
      hotels subject to the sale-leaseback, please clarify to us what
      consideration was given to the need to recognize a loss based on the
      guidance of paragraph 33(c) of SFAS 13 or SFAS 144.

      Response:

      There has been a reduction in the fair market value of the hotels as
      compared to the original sales prices in the sale-leaseback transaction in
      1998 and 1999 (i.e., the original Assigned Values). In connection with the
      capital lease accounting pursuant to the October 1, 2004 modification,
      this reduction in fair market value was considered in the recordation of
      the capital leases. The present value of the minimum lease payments
      (including the Assigned Value shortfall guarantee) was in excess of the
      fair market values (as of October 2004, concurrent with the lease rate
      adjustment), for each of the 17 hotels reclassified to capital

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      leases and as such, the capital lease assets were recorded at the fair
      market value, in accordance with paragraph 10 of SFAS 13. Furthermore,
      there have been no events or changes in circumstances since October 2004
      which would indicate that the carrying value may not be recoverable and
      therefore require a test of recoverability under SFAS 144.

5.    Staff Comment:

      Further we understand that the capital lease property and equipment were
      recorded at $32.3 million and a $37.8 million capital lease obligation was
      recognized. Clarify to us the basis for amortizing the difference over the
      remaining lease term as lease expense.

      Response:

      As described in our response to Comment No. 4, the capital leases were
      initially recorded at fair market value plus the balance of the
      unamortized deferred gain for each hotel as of October 1, 2004.
      Simultaneously, the balance of the unamortized deferred gain for each
      hotel was reclassified as a reduction in the asset basis of each capital
      lease hotel, resulting in the fair market values of the hotels as the
      initial capital lease asset basis. The fair market values were recorded
      since the fair market values were lower than the net present value of the
      minimum lease payments for each hotel.

      The capital lease obligations were recorded initially based on the fair
      market values of the hotels, as adjusted for the reclassification of the
      unamortized deferred gain as described above. Since the capital lease
      obligations recorded were less than the Assigned Value guarantees,
      "negative" amortization of the capital lease obligation (based on the
      interest method) is being recorded so that it will result in a balance of
      the capital lease obligation at the end of the lease term (4 years, as
      modified) equal to the amount of the Assigned Value guarantee. If a hotel
      is sold prior to the lease expiration date (i.e., prior to October 1,
      2008), the difference between the capital lease obligation balance and the
      Assigned Value guarantee, if any, will be recognized at the time of sale
      as leasehold termination expense (a component of operating income).

6.    Staff Comment:

      Clarify to us how the Arlington Fee and the Proceeds Deficit Notes are
      considered in the Company's determination of the gain or loss realized on
      each hotel sale to PMC. What consideration did you give to treating these
      as downward adjustments to the sales price of the hotels in the Company's
      determination of the gain or loss to be recognized from the sales of the
      hotels?

      Response:

      The Arlington Fee and the Proceeds Deficit Notes do not affect the
      determination of the income or loss realized on each hotel sale. The
      hotels accounted for as capital leases were initially recorded at
      estimated fair market value. Therefore, the operating revenues and expense
      expected to be recognized upon the ultimate sale of the hotel is
      determined based on the actual sale price versus the carrying value. The
      Company reviews the carrying value of the capital lease assets at least
      quarterly to determine if an impairment exists.

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      In addition, as discussed in question (5) above, a "leasehold termination
      expense" (income) will be recognized upon sale when the balance in the
      capital lease obligation is less than (greater than) the Assigned Value
      guarantee. The Proceeds Deficit Note will increase (or decrease) on a
      cumulative basis as the hotels are sold, based on the difference between a
      leased hotel's net sales price and its original Assigned Value. The
      Arlington Fee is computed based on the hotel's most recent annual revenue
      and is due to PMC within 45 days of the sale. The Arlington fee is applied
      as a payment on the Deficit Note balance. In the case where the net sale
      proceeds plus the Arlington Fee is greater than the Assigned Value, the
      excess will be first applied to the existing Proceeds Deficit Note. If
      there is no amount due on the Proceeds Deficit Note, this excess will be
      applied as a reduction to the Assigned Values on the remaining properties,
      on a pro-rata basis (using Assigned Values prior to the reduction).

7.    Staff Comment:

      Refer to the disclosures on page 61 and elsewhere. In a supplemental
      response, please clarify to us the rationale for reducing the lease
      payments effective October 1, 2004 by 19% for the hotels sold and leased
      back from PMC with the provisions that the hotels be sold within a four
      year period. Secondly, clarify the rationale for having the lease payments
      revert to the pre October 1, 2004 level in the event the hotels are not
      sold within the prescribed time frame. Your response should address
      whether the lease rate after the 19% reduction represents a market rate.
      If not, tell us what consideration you gave to viewing the "Arlington Fee"
      as a means to adjust the lease rate to market and therefore reflect the
      fee as an additional lease payment to be recognized on a straight line
      basis.

      Response:

      Due to numerous economic and market driven factors relating to these
      leased hotels, the aggregate operating cash flow continues to be
      insufficient to meet the lease obligations. As such, the Company's
      objective in pursuing the October 2004 lease modification was to reduce
      the current cash payments and exit the leases prior to the anticipated
      maturity in 2013 and 2014, thereby significantly limiting the negative
      cash flow (after the lease rent payment) from operating the hotels. In
      addition, the sale of AmeriHost Inn hotels to third party operators who
      maintain the AmeriHost Inn franchise affiliation is part of the Company's
      strategic plan.

      PMC, as landlord, was willing to reduce the lease payment and sell the
      hotels over a four-year period, only if the Company provided a guarantee
      of the Assigned Values. Since PMC was foregoing the higher lease payment,
      they wanted the hotels sold as quickly as possible (subject to the
      Assigned Value guarantee), and therefore the modification contained a
      provision that if the hotels were not being sold as quickly as
      anticipated, the lease rate reverts to the pre-modification terms.

      The pre-modification lease rate was approximately 10.5% of the Assigned
      Values. As discussed earlier, the values have declined since the inception
      of those leases. The October 2004 lease modification reduced the rent to
      8.5% of the Assigned Values. Although the

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      rate was reduced 19%, it is still based on hotel values from 1998 and
      1999, and is therefore considered an above market rate. Nevertheless, the
      company continues to accrue the rent at the pre-modification rate (i.e.
      approximately 10.5% of Assigned Values). Although the pay rate is 8.5%,
      the original contractual rate is being accrued since the reduced rate is
      contingent upon the sale of the hotels. Upon the sale of an individual
      hotel, the accrual of the rate differential is