EMPLOYMENT AGREEMENT

Exhibit 10.20

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (the “Agreement”), is dated as of the 9th day of January 2006, between MHI Hospitality Corporation, a Maryland corporation (the “Company” or “Employer”), and David R. Folsom (the “Executive”).

RECITALS:

WHEREAS, the Company is in the business of owning and developing hotels (“the Company’s Business”); and

WHEREAS, the Company seeks to enter into an agreement with Executive to engage him to serve as Executive Vice President and Chief Operating Officer of the Company on the terms and conditions stated herein; and

WHEREAS, Executive seeks to enter into an agreement to take on such responsibilities under the terms and conditions stated herein; and

WHEREAS, the Company desires to employ the Executive on the terms and conditions set forth herein.

NOW, THEREFORE, on the basis of the foregoing premises and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows:

Section 1. Employment . The Company hereby agrees to employ the Executive and the Executive hereby accepts such employment with the Company, on the terms and subject to the conditions hereinafter set forth. Subject to the terms and conditions contained herein, the Executive shall serve as Executive Vice President and Chief Operating Officer of the Company and shall have such duties as are typically performed by a chief operating officer of a corporation of similar size and type as the Company. The Executive shall render his services at the direction of and shall report solely to, the Chief Executive Officer of the Company. The Executive agrees to use best efforts to promote and further the business, reputation and good name of the Company. The Executive’s primary place of employment shall be in the Williamsburg, Virginia area, or such other location as determined by the Board of Directors of the Company.

Section 2. Commencement Date; Term . Unless terminated pursuant to Section 6 hereof the Executive’s employment hereunder shall commence on the date first written above (“Commencement Date”), and shall continue during the period ending on December 31, 2010. Thereafter, the term of the Agreement shall be extended for an additional year, on each anniversary of the Commencement Date, unless either party gives 180 days prior written notice that the term will not be extended (the “Employment Term”). The Employment Term shall terminate upon any termination of the Executive’s employment pursuant to Section 6.

Section 3. Compensation and Benefits During the Employment Term . The Executive shall be entitled to the following compensation and benefits:

(a) Salary . As compensation for the performance of the Executive’s services hereunder, the Company shall pay to the Executive a salary (the “Salary”) of One Hundred Fifty Thousand Dollars ($150,000) per annum. The Salary shall be payable in arrears in approximately equal

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semi monthly installments (except that the first and last such semi monthly installments may he prorated if necessary) on the Company’s regularly scheduled payroll dates, minus such deductions as may be required by law or reasonably requested by the Executive. The Nominating, Corporate Governance and Compensation Committee of the Company’s board of directors (the “Committee”) shall review Executive’s Salary annually beginning with the 2007 fiscal year in conjunction with its regular review of employee salaries and may increase his Salary as in effect from time to time as the Committee shall deem appropriate it being understood and agreed that the intent of the parties is, subject to the satisfactory performance of Executive, to increase the Executive’s Salary over the first three years of the Employment Term to a level commensurate with salaries of executives with comparable duties for comparable entities in the Company’s industry as such entities and comparable salaries may be determined in the sole discretion of the Committee.

(b) Annual Performance Bonus . The Executive shall be eligible to receive, in respect of each calendar year during the Employment Term beginning with 2006, an annual cash performance bonus (the “Annual Performance Bonus”) in an amount consistent with the bonus program in place to compensate other members of the senior management team for that calendar year, based upon (other than as noted below) the attainment of quantitative performance goals set forth in a performance plan established by the Committee by January 31 of each year (the “Performance Plan”). The Annual Performance Bonus shall he paid to the Executive within thirty (30) days following the receipt of the audited results of the Company for the plan year, but in no event later than sixty (60) days after the close of the plan year. If necessary, the Annual Performance Bonus shall be granted under a performance based plan that meets the requirements under Section 162(m) of the Internal Revenue Code (the “Code”).

(c) Stock Options . The Company may grant to Executive stock options, performance shares, performance units, deferred shares or restricted stock from time to time under the terms of a separate agreement, and consistent with the terms of any stock incentive plan which may be created by the Company.

(d) Deferred Stock Grant . Conditioned upon and in consideration of Executive’s employment through the dates set forth immediately below, and subject to the provisions regarding termination payments in Section 6(g), the following shares of fully vested and transferable stock will be issued to Executive pursuant to the Company’s 2004 Long-Term Incentive under the following schedule:

Subject to section 6, provided Executive is employed by Company on December 31, 2010, the final grant of 30,000 shares of stock set forth in 3(d)(e) will be granted regardless of whether this Agreement is renewed. Stock, once granted, will accrue and pay dividends.

(e) Benefits . In addition to the Salary and the Annual Performance Bonus, the Executive shall be eligible to participate in the Company’s health, insurance, retirement, and other benefit plans and programs. The Executive shall also be entitled to three (3) weeks of paid vacation for the first three (3) years of the Employment term and four (4) weeks beginning the fourth year and every year thereafter of the Employment Term. Additionally, the Executive will

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be entitled to two (2) weeks paid time for illness and personal leave, and all Company holidays. The Executive shall be entitled to all other benefits as are generally allowed to other senior executives of the Company, in accordance with the Company’s policies in effect from time to time.

(f) Directors and Officers Liability Insurance . The Company will, at its expense, provide the Executive with Directors and Officers Liability’ Insurance, subject to the provisions governing such insurance and on such terms as the Board may from time to time decide. The Company will indemnify Executive and hold Executive harmless, to the maximum extent permitted by applicable law, against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or proceeding to which he may be made a party by reason of his being an officer, director or employee of the Company or of any subsidiary or affiliate of the Company at any time.

(g) Insurance and Other Related Benefits . Company shall pay for one hundred percent (100%) of all health insurance premiums under a policy covering Executive and his immediate family. During the Employment Term, the Company shall maintain on the life of Executive, provided he is insurable, at standard rates a term life insurance policy in the amount of One Million Dollars ($1,000,000.00). Executive shall have the right to designate the beneficiary or beneficiaries of such policy . In the event that Executive is not insurable during the term of this Agreement due to illness, accident, injury or other similar event, the Company shall maintain the term life insurance policy in the amount of One Million Dollars ($1,000,000.00), but Executive agrees to pay the difference between the normal standard rate premium for an equivalent insurable person and the non-standard rate which is quoted given the circumstances surrounding Executive’s reduced insurability. During the Employment Term, the Company shall also maintain for the benefit of the Executive disability insurance such that Executive will be entitled to receive monthly payments not less than the monthly payments made pursuant to Section 3(a) hereof at the time of any event causing his complete or partial disability. In addition to the foregoing, Executive will be entitled to other executive benefits on the same basis as the Company provides to its other executives and customary fringe benefits and privileges that the Company makes generally available to executives.

(h) Other Benefits . Executive is entitled to visit the hotels in the Company’s portfolio and utilize same for Executive’s conduct of Company business or for leisure on a space available basis at no cost to Executive. The Company agrees to pay for relocation expenses, grossed up for the appropriate State and Federal Tax liability. Relocation expenses will include moving of household goods by recognized reputable carrier from Richmond, Virginia, to Williamsburg, Virginia, and reasonable per diem costs (lodging, meals, misc. out-of-pocket expenses).

(i) Retirement . To the extent a retirement or profit sharing plan is created, Executive shall be entitled to participate in said plan pursuant to applicable law.

(j) No Other Compensation . Except as otherwise expressly provided herein, or in any other written document executed by the Company and the Executive, no other compensation or other consideration shall become due or payable to the Executive on account of the services rendered hereunder.

(k) Taxation and Withholding . The compensation and benefits provided for in this Section 3 (as well as the Termination Payments provided for in section 6(g)) shall be reported as income to Executive and subjected to tax withholding as required under applicable Federal, state, and local laws.

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Section 4. Exclusivity . During the Employment Term, the Executive shall devote his full time to the business of the Company, shall faithfully serve the Company, shall in all respects conform to and comply with the lawful and reasonable directions and instructions given to him by the Board. The Executive shall use reasonable efforts to promote and serve the interests of the Company and shall not engage in any other business activity, whether or not such activity shall be engaged in for pecuniary profit, except that the Executive may participate in the activities of professional trade organizations and, engage in personal investing activities, provided that such activities do not interfere in any material respect with the services to be provided by the Executive hereunder and are not in companies that compete with the Company.

Section 5. Reimbursement for Expenses . In addition to, but without duplication of the expenses described in Section 3(f), the Executive is authorized to incur reasonable expenses in the discharge of the services to be performed hereunder, including, without limitation, expenses for travel, entertainment, maintaining professional licenses and certifications, trade association fees, attendance at association meetings and conferences, lodging and similar items in accordance with the Company’s expense reimbursement policy, as the same may be modified by the Company from time to time. The Company shall reimburse the Executive for all such proper expenses upon presentation by the Executive of itemized accounts of such expenditures in accordance with the financial policy of the Company, as in effect from time to time.

Section 6. Termination and Default .

(a) Death . The Executive’s employment shall automatically terminate upon his death and upon such event, the Executive’s estate shall be entitled to receive only the Accrued Compensation (as hereinafter defined) pursuant to Section 6(g)(ii) hereof and no other severance compensation.

(b) Disability . If the Executive is unable to perform the duties required of him under this Agreement because of illness, incapacity, or physical or mental disability, the Employment Term shall continue and the Company shall pay all compensation required to be paid to the Executive hereunder, unless the Executive is unable to perform the duties required of him under this Agreement for an aggregate of 120 days (whether or not consecutive) during any 12 month period during the term of this Agreement (a “Disability”), in which event the Executive’s employment shall terminate and Executive shall be entitled to receive only the Accrued Compensation pursuant to Section 6(g)(ii) hereof and no other severance compensation.

(c) Cause . The Company may terminate the Executive’s employment at any time, with or without Cause. For purposes of this Agreement, “Cause” shall mean the occurrence of any of the following: (i) the Executive’s failure (except where due to a disability contemplated by subsection (b) hereof), neglect or refusal to perform his duties hereunder, (ii) any breach of this Agreement by the Executive (or any grossly negligent, willful or intentional act of the Executive) that injures the reputation or business of the Company or its affiliates in any material respect; (iii) material breach by the Executive of his obligations under this Agreement; (iv) Executive’s gross negligence in the performance or intentional, material nonperformance (continuing for ten (10) days after receipt of written notice of need to cure) of any of Executive’s material duties and responsibilities hereunder; (v) Executive’s dishonesty, fraud or misconduct with respect to the business or affairs of the Company; (vi) the Executive’s indictment of conviction of or pleading of no contest to a felony or any misdemeanor involving fraud; (vii) the commission by the Executive of an act of fraud or embezzlement, or any other act involving the misappropriation of funds or assets; or (viii) chronic alcohol abuse or illegal drug use by Executive. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or

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based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. Cause shall not exist pursuant to clause (i), (ii), (iii) or (iv) of this Section 6(c) unless the Executive has failed to correct the activity alleged to constitute “Cause” within twenty (20) days following written notice from the Company of such activity, which notice shall specifically set forth the nature of such activity and the corrective action reasonably sought by the Company. Notwithstanding the foregoing, the termination of the Executive’s employment for Cause shall be pursuant to the action of the Board, taken in conformity with the Bylaws of the Company. In the event of Executive’s termination for Cause as set forth above, Executive shall not be entitled to any severance compensation.

(d) Without Cause . The Company may terminate the Executive’s employment during the Employment Term without Cause at any time by giving written notice to the Executive. A termination of the Executive’s employment without Cause shall mean a termination initiated by the Company for any reason other than Cause or on account of death or Disability. A termination without Cause shall be effective immediately upon notice given by the Company to the Executive, or such later date as may be mutually agreed between the Executive and the Company. Upon a termination of employment without cause, Executive shall be entitled to the compensation payments provided in Section 6(g).

(e) Resignation/Termination for Good Reason . The Executive shall have the right to terminate his employment for Good Reason under any of the following circumstances: (i) the failure by the Company to pay to the Executive the compensation and benefits, or expense reimbursement in accordance with Sections 3 and 5 herein; (ii) a material diminution in the Executive’s responsibilities or authority, or diminution of the Executive’s title; (iii) any material breach of this Agreement by the Company; (iv) the failure of Mr. Andrew M. Sims, Chief Executive Officer, to be nominated to the Board of Directors or his removal by the Board of Directors as a result of shareholder vote; or (v) following a Change in Control (as defined below) of Employer followed by a termination of Executive’s employment within (12) months of such Change in Control; provided, however, that Good Reason shall not exist upon a termination of employment described in Section 6(b), (c) or (d) herein; provided, further, that the Executive must provide written notice of termination of employment for Good Reason within thirty (30) days following the Executive’s knowledge of an event constituting Good Reason or such event shall not constitute Good Reason hereunder. Upon termination pursuant to this Section 6(e), Executive shall be entitled to the compensation payments provided in Section 6(g).

Notwithstanding the foregoing, Good Reason shall not be deemed to exist unless the Company fails to cure the event giving rise to Good Reason within thirty (30) days after receipt of written notice thereof given by the Executive. For purposes of this Agreement, “Change in Control” shall mean the following events or circumstances that occur after the Effective Date:

(A) The ownership or acquisition (whether by a me