THE CORPORATE LIBRARY

Related Party Transactions and Outside Related Director Information

Sunstone Hotel Investors, Inc. (SHO)

3/31/2006 Proxy Information

Contributing Entities

Messrs. Alter, Kline and Stougaard directly or indirectly own interests in Sunstone Hotel Investors, L.L.C., WB Hotel Investors, LLC, Sunstone/WB Hotel Investors IV, LLC and Sunstone/WB Manhattan Beach, LLC (the “Contributing Entities”). As a result of holding these interests, these individuals received or will receive cash when the Contributing Entities sell shares of the Company’s common stock and distribute the proceeds to their investors. The Contributing Entities sold all of their remaining shares of the Company’s common stock in 2005.

Mr. Alter directly and indirectly owns 100% of Alter SHP LLC, which owns 0.66% of the outstanding Class B membership units, 57.9% of the outstanding Class C membership units and 50.1% of the outstanding Class D membership units of Sunstone Hotel Investors, L.L.C. Mr. Stougaard owns 3.1% of the outstanding Class C membership units, 3.0% of the outstanding Class D membership units and an economic interest equivalent to 0.04% of the outstanding Class B membership units in Sunstone Hotel Investors, L.L.C. Class B unit holders receive a first priority distribution equal to a specified return on initial capital contributions, then distributions equal to their initial contributions. It is not expected that the Class C and Class D membership units will receive any distributions. In addition, pursuant to Sunstone Hotel Investors, L.L.C.’s disposition fee incentive plan, Messrs. Alter, Kline and Stougaard received disposition fees in connection with the initial public offering and are entitled to receive disposition fees upon a sale of the JW Marriott, Cherry Creek, Colorado and a sale of the properties described below under “—Other Properties.” Pursuant to the terms of his previous employment agreement, Mr. Kline has an economic interest in Sunstone Hotel Investors, L.L.C. which entitles him to receive 2.0% of any increase in value of Sunstone Hotel Investors, L.L.C. above a specified amount as of the disposition date for the entity.

Mr. Alter owns a 48.9% interest and Mr. Stougaard owns a 10.708% interest in L/S Investors, LLC, which owns a 5.0% interest in WB Hotel Investors, LLC. L/S Investors, LLC receives its pro rata share of all distributions until all contributed capital has been returned and specified returns have been achieved, at which point it then receives 12.5% of the distributions of WB Hotel Investors, LLC with the remainder distributed to all of the members on a pro rata basis until the other members have achieved specified returns, at which point L/S Investors, LLC receives 20% of the distributions of WB Hotel Investors, LLC with the remainder being distributed pro rata among all of the members of WB Hotel Investors, LLC. Pursuant to the terms of his previous employment agreement, Mr. Kline has an economic interest in WB Hotel Investors, LLC which entitles him to receive 2.0% of any increase in value of WB Hotel Investors, LLC above a specified amount as of the disposition date for the entity. Together with his economic interests in Sunstone Hotel Investors, L.L.C., Mr. Kline’s economic interests in WB Hotel Investors, LLC are currently capped at an aggregate amount of $1.5 million, with the cap increasing by a fixed amount each year until it reaches a maximum of $3.0 million in 2006. In January 2005, WB Hotel Investors, LLC made a cash payment to Mr. Kline for this economic interest, which together with a similar payment by Sunstone Hotel Investors, L.L.C., was $200,000. Messrs. Alter and Stougaard incurred debt to Westbrook Real Estate Fund III, L.P. and Westbrook Real Estate Co-Investment Partnership III, L.P., in connection with their purchases of interests in WB Hotel Investors, LLC. As of June 30, 2004, the principal amount outstanding for Mr. Alter was $563,816 and for Mr. Stougaard was $269,779. Those notes had an interest rate of 8.5% and were to mature on August 31, 2007. A portion of the distributions paid to Messrs. Alter and Stougaard at the time of the Company’s initial public offering was used to repay a portion of the notes. The balance of these notes were repaid in 2005.

Mr. Alter owns a 45.004% interest, Mr. Kline owns a 9.0454% interest and Mr. Stougaard owns a 9.0454% interest in Fund IV Sun Investors, LLC, which holds a 1.5% interest in Sunstone/WB Hotel Investors IV, LLC. Fund IV Sun Investors, LLC receives its pro rata share of all distributions until all contributed capital has been returned and specified returns have been achieved, at which point it then receives 12.5% of the distributions of Sunstone/WB Hotel Investors IV, LLC with the remainder distributed to all of the members on a pro rata basis until the other members have achieved specified returns, at which point Fund IV Sun Investors, LLC receives 20% of the distributions of Sunstone/WB Hotel Investors IV, LLC with the remainder being distributed pro rata among all of the members of Sunstone/WB Hotel Investors IV, LLC. Mr. Stougaard incurred debt to Westbrook Real Estate Fund IV, L.P. and Westbrook Real Estate Co-Investment Partnership IV, L.P. in connection with his purchase of interests in Sunstone/WB Hotel Investors IV, LLC. As of June 30, 2004, the principal amount outstanding was $165,244. This note had an interest rate of 6.0% per annum and was to mature on September 15, 2008. A portion of the distributions paid to Mr. Stougaard at the time of the Company’s initial public offering was used to repay a portion of the note. The balance of this note was repaid in 2005.

Mr. Alter owns a 50.0% interest and Mr. Kline owns a 25.0% interest in AKM Investment, LLC, which owns an 8.5% interest in Sunstone/WB Manhattan Beach, LLC. AKM Investment, LLC receives its pro rata share of all distributions until all contributed capital has been returned and specified returns have been achieved, at which point it then receives 7.5% of the distributions of Sunstone/WB Manhattan Beach, LLC, with the remainder distributed to all of the members on a pro rata basis until the other members have achieved specified returns, at which point AKM Investments, LLC receives 10% of the distributions of Sunstone/WB Manhattan Beach, LLC with the remainder being distributed pro rata among all of the members of Sunstone/WB Manhattan Beach, LLC. As described above, Messrs. Alter, Kline and Stougaard each indirectly own an interest in Sunstone/WB Hotel Investors IV, LLC, the other member of Sunstone/WB Manhattan Beach, LLC.

Excluded Properties

Two hotels included in continuing operations in our historical financial information, the JW Marriott, Cherry Creek, Colorado and the Embassy Suites Hotel, Los Angeles, California, were not contributed to us in connection with the Company’s initial public offering. At the time of our initial public offering, the JW Marriott, Cherry Creek, Colorado continued to be owned primarily by an entity owned by Sunstone/WB Hotel Investors IV, LLC, with a minority interest in such entity owned by ABM Investment, LLC, an entity in which Mr. Alter continues to have an indirect interest, although he resigned as a managing member, director and officer of both that entity and ABM Investment, LLC. Messrs. Alter, Kline and Stougaard have interests in an entity that owns a minority interest in Sunstone/WB Hotel Investors IV, LLC. ABM Investment, LLC purchased the JW Marriott, Cherry Creek, Colorado for $51.0 million in June 2005. Mr. Alter was not involved in the decision by ABM Investment, LLC to proceed with the purchase and will not use any of his funds for the purchase. The Embassy Suites Hotel, Los Angeles, California was distributed to an entity controlled by Robert A. Alter. Both of these properties are managed by the third party management company that manages most of our hotels. Set forth below is information about these properties. (See page 29 of proxy).

Other Properties

The Company’s executive officers and affiliates of the Contributing Entities also own interests in other hotels that are not included in the Company’s historical financial information, other than to the extent of acquisition or asset management fees paid to the Company, and that were not contributed to the Company in connection with the Company’s initial public offering. For example:

• Messrs. Alter, Kline and Stougaard own a minority interest in the entity that owns the 338 room Doubletree, Nashville, Tennessee, the remainder of which is owned by an entity affiliated with Rockpoint Group, L.L.C., of which one of the Company’s former directors is a Managing Principal.

• Messrs. Alter, Kline and Stougaard own a minority interest in the entity that owns the 186 room Residence Inn by Marriott, Beverly Hills, California, the remainder of which is owned by an unaffiliated third party.

Investors Agreement

We entered into an investors agreement with the Contributing Entities at the time of our initial public offering. This agreement provided that the Contributing Entities, acting as a group, would have the right to require our Board of Directors and nominating and corporate governance committee to nominate their designees to our board of directors, based upon their ownership interest in us at that time on a fully converted basis (i.e., the total number of shares of our common stock held by the Contributing Entities, assuming full conversion of all of their membership units in the operating partnership) as follows: (1) one of the nine directors so long as the Contributing Entities held a more than 5% but less than 20% ownership interest in us; or (2) two of the nine directors so long as the Contributing Entities held a 20% or greater ownership interest in us. If the number of directors on our board of directors increased, the number of directors that the Contributing Entities would have the right to require us to nominate would also proportionately increase. These calculations would not include any shares of our common stock or membership units in our operating partnership acquired by any of the Contributing Entities after our initial public offering. We agreed to solicit proxies and the Contributing Entities agreed to vote in favor of the nominees pursuant to this agreement.

This agreement also provided for a waiver of the common stock ownership limit for the Contributing Entities and other limited information and other rights in accordance with applicable ERISA regulations, subject to tax laws applicable to REITs.

The investors agreement terminated in November 2005 as the result of the sale by the Contributing Entities of all of the remaining shares of our common stock owned by them.

Registration Rights Agreement with Contributing Entities

We entered into a registration rights agreement with the Contributing Entities at the time of our initial public offering. The aggregate number of shares of our common stock and securities convertible into or exchangeable into shares of our common stock subject to the registration rights agreement was 13,690,504.

Prior to the first anniversary of our initial public offering and for such additional periods during which we fail to file or maintain a shelf registration statement, the Contributing Entities, acting as a group, had the right, subject to limitations, on one occasion, to request that we effect a registration of our shares of common stock owned by them. We may postpone the initial filing of that registration for up to 90 days if our independent directors believe that filing would jeopardize a material financing, acquisition or similar transaction. Upon receipt of a request to register shares, we would have a 30-day option to acquire the shares sought to be registered at the then fair market value thereof subject to the right of the requesting party to withdraw its request for registration and our acquisition rights.

Beginning on the first anniversary of our initial public offering, we were required to use our reasonable efforts to file and maintain a registration statement for the resale of shares owned by the Contributing Entities, subject to certain limitations. Each stockholder eligible to have shares registered under the shelf registration statement would be entitled to resell shares pursuant to that registration statement, subject to availability. We could postpone a filing of a registration statement or a proposed sale under a shelf registration for up to 90 days if our independent directors believed such registration would adversely affect a material financing, acquisition or similar transaction. We could only exercise our right to postpone an offering pursuant to a demand or shelf registration on two occasions during any twelve month period.

The Contributing Entities had the right to include their shares in two underwritten offerings of shares by us, subject to availability. We could grant holders of our shares piggy-back registration rights permitting them, subject to availability, to participate in the demand and shelf registrations described above.

If the managing underwriter for an underwritten offering advised us that the number of shares sought to be included in such registration would create a substantial risk that the sale of some or all of the shares sought to be sold will substantially reduce the proceeds or price per share, then the number of securities to be registered by the investors participating in such registration would be reduced to the number of shares recommended by the managing underwriter.

During 2005, we included shares of our common stock owned by the Contributing Entities in one of our registration statements pursuant to the piggy-back registration rights granted to them. We also filed a shelf registration statement to register for resale all of the then-remaining shares of the Company’s common stock owned by the Contributing Entities. The Contributing Entities sold all of their remaining shares of the Company’s common stock pursuant to this shelf registration statement in November 2005. The Company incurred expenses of $213,480 in connection with such registrations.

Registration Rights Agreement with Other Entities

In 2005, we entered into registration rights agreements with SGP/SHO Hotel Trust and Security Capital Preferred Growth Incorporated in connection with the sale to them by us of shares of our common stock and/or Series C Preferred Stock. Pursuant to these agreements, we granted these entities demand and shelf registration rights with respect to the shares of our common stock owned by them. Pursuant to these agreements, we filed a shelf registration statement in November 2005 to register for resale the shares of our common stock beneficially owned by them. The expenses incurred by the Company in connection with such registrations is reflected in the amount shown above under “—Registration Rights Agreement with Contributing Entities.”

Participation Rights

In connection with the sale by the Company of shares of its Series C Preferred Stock to Security Capital Preferred Growth Incorporated, the Company granted Security Capital Preferred Growth Incorporated the right during a specified time period to purchase additional securities of the Company if the Company directly or indirectly granted, issued, sold or agreed to grant, issue or sell, any equity securities or any security that was convertible into or exchangeable for equity securities of the Company for cash consideration (“Participation Securities”), subject to certain exceptions. Pursuant to this participation right, Security Capital Preferred Growth Incorporated could purchase up to 10% of the aggregate amount of Participation Securities to be issued at a price equal to the price to be paid by the other purchasers, minus the amount of any underwriting discounts, commissions, placement fees or similar discounts, commissions or fees paid by the Company. Pursuant to these rights, Security Capital Preferred Growth Incorporated purchased 300,000 shares of common stock of the Company on June 28, 2005 at $22.347 per share, or an aggregate purchase price of $6,704,100, and an additional 599,355 shares of common stock of the Company on December 28, 2005 at $23.85 per share, or an aggregate purchase price of $14,294,617.

In addition, in connection with the sale by the Company of shares of its common stock to BIP REIT Private Ltd. (“BIP REIT”) pursuant to a Stock Purchase Agreement dated as of April 27, 2005, the Company agreed that, if the Company were to offer to sell common stock prior to the consummation of the acquisition of certain hotel properties, the Company would offer to sell to BIP REIT additional shares of common stock up to such amount as would permit BIP REIT’s percentage ownership of the outstanding shares of the common stock to equal BIP REIT’s percentage ownership of the outstanding shares of common stock immediately following the closing under the Stock Purchase Agreement at a purchase price of 95% of the average daily closing price for the 10 business days immediately preceding the closing of such offering and otherwise on the same terms of such offering. Pursuant to this right, SGP/SHO Hotel Trust, as assignee of BIP REIT, purchased 294,000 shares of common stock of the Company on June 23, 2005 at $21.97 per share, or an aggregate purchase price of $6,459,180.

Insurance Arrangements

We participate in insurance arrangements with affiliates of Westbrook Real Estate Partners, L.L.C. These arrangements include our environmental policies, which also cover the hotels not contributed to us at the time of our initial public offering and the other hotels in which our executive officers and affiliates of the Contributing Entities own interests. We did not make any payments in 2005 to the insurance companies in connection with these arrangements. We obtained our own insurance following the initial public offering.

Transactions with Others

We purchase telecommunications equipment from Gemini Telemanagement Systems, or GTS, a telecommunications equipment provider based in Redwood City, California. Robert A. Alter’s brother, Richard Alter, is the majority stockholder in GTS, and Robert A. Alter is a 5.2% stockholder in GTS. We paid GTS $393,000 in 2005, $747,000 in 2004 and $482,000 in 2003 for equipment provided in the ordinary course of business on arm’s length terms.

Other Reimbursements

From time to time, we pay for certain expenses such as payroll, insurance and other costs on behalf of certain affiliates. The affiliates generally reimburse such amounts on a monthly basis. At December 31, 2005, the Contributing Entities owed us $2.0 million.