Mermaid Inn is a cheap motel, used by Newport's wealthy as a rendezvous spot for their illicit affairs, and by the visiting non-wealthy as an inexpensive place to stay.
Beginning in Episode 20 (Season 1), "The Telenovela", the motel was used by Luke (Marissa's ex-boyfriend) and Julie (Marissa's mother) when they had a brief tryst there (in room # 205). Theresa (Ryan's ex girlfriend) stayed right next door (in room # 204).
The Mermaid Inn popped up again in Episode 21, "The Goodbye Girl" when Theresa & Ryan ended up sleeping together at the motel. The Inn was seen again in Episode 22, "The L.A.", when Julie was spotted kissing Luke there.
And the motel showed up once again Season 3 in Episode 5, "The Perfect Storm", when Seth & Summer used a fake text message to lure Taylor into a pretend rendezvous with Dean in room 7 of the Mermaid Inn, and then blackmailed her into telling the truth about the illicit affair she was having with the Dean. Sandy then used the info to force the Dean into reinstating Ryan at the school.