Attached files

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EX-31.1 - CERTIFICATION OF CEO - SEC 302 - PACIFIC OFFICE PROPERTIES TRUST, INC.exh31_1.htm
EX-31.2 - CERTIFICATION OF CFO - SEC 302 - PACIFIC OFFICE PROPERTIES TRUST, INC.exh31_2.htm
EX-32.1 - CERTIFICATION OF CEO - SEC 906 - PACIFIC OFFICE PROPERTIES TRUST, INC.exh32_1.htm
EX-23.1 - CONSENT OF ERNST & YOUNG LLP - PACIFIC OFFICE PROPERTIES TRUST, INC.exh23_1.htm
EX-21.1 - SUBSIDIARIES OF PACIFIC OFFICE PROPERTIES TRUST, INC. - PACIFIC OFFICE PROPERTIES TRUST, INC.exh21_1.htm
EX-23.2 - CONSENT OF PRICEWATERHOUSECOOPERS LLP - PACIFIC OFFICE PROPERTIES TRUST, INC.exh23_2.htm
EX-32.2 - CERTIFICATION OF CFO - SEC 906 - PACIFIC OFFICE PROPERTIES TRUST, INC.exh32_2.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K

þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from               to

Commission file number: 1-9900

PACIFIC OFFICE PROPERTIES TRUST, INC.
(Exact name of registrant as specified in its charter)

Maryland
86-0602478
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

233 Wilshire Boulevard, Suite 310
Santa Monica, CA 90401
(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code): (310) 395-2083

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of exchange on which registered
Common Stock, par value $0.0001 per share
NYSE Amex

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Exchange Act.  Yes o     No þ

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) .  Yes o     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o               Accelerated filer o                Non-accelerated filer o              Smaller reporting company þ
                              (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

The aggregate market value of Common Stock held by non-affiliates of the registrant computed by reference to the closing price of the registrant’s Common Stock on the NYSE Amex Stock Exchange (formerly the American Stock Exchange) on June 30, 2009 was $7,555,785.

As of March 22, 2010, there were 3,850,420 shares of Common Stock, par value $0.0001 per share, and 100 shares of Class B Common Stock, par value $0.0001 per share, issued and outstanding.
 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be issued in conjunction with the registrant’s annual meeting of stockholders to be held in 2010 are incorporated by reference in Part III of this Annual Report on Form 10-K. The proxy statement will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s fiscal year ended December 31, 2009.

 
 

 


PACIFIC OFFICE PROPERTIES TRUST, INC.

TABLE OF CONTENTS

FORM 10-K

 
 
 
Page
 
Explanatory Note                                                                                                                                  
 
ii
 
PART I
 
Item 1.
Business                                                                                                                 
    1  
Item 1A.
Risk Factors                                                                                                                 
    4  
Item 1B.
Unresolved Staff Comments                                                                                                                 
    20  
Item 2.
Properties                                                                                                                 
    20  
Item 3.
Legal Proceedings                                                                                                                 
    32  
Item 4.
(Removed and Reserved)                                                                                                                 
    32  
PART II
 
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities                                                                                                                 
    33  
Item 6.
Selected Financial Data                                                                                                                 
    34  
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    34  
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk                                                                                                                 
    48  
Item 8.
Financial Statements and Supplementary Data                                                                                                                 
    48  
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    48  
Item 9A(T).
Controls and Procedures                                                                                                                 
    49  
Item 9B.
Other Information                                                                                                                 
    49  
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance                                                                                                                 
    50  
Item 11.
Executive Compensation                                                                                                                 
    50  
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    50  
Item 13.
Certain Relationships and Related Transactions, and Director Independence
    50  
Item 14.
Principal Accountant Fees and Services                                                                                                                 
    50  
PART IV
 
Item 15.
Exhibits and Financial Statement Schedules                                                                                                                 
    51  
Signatures                                                                                                                                  
    55  
 
 

 
 

 


PACIFIC OFFICE PROPERTIES TRUST, INC.

FORM 10-K

Explanatory Note

On March 19, 2008 (the “Effective Date”), Arizona Land Income Corporation, an Arizona corporation (“AZL”), and POP Venture, LLC, a Delaware limited liability company (“Venture”), consummated the transactions (the “Transactions”) contemplated by a Master Formation and Contribution Agreement, dated as of October 3, 2006, as amended (the “Master Agreement”). As part of the Transactions, AZL merged with and into its wholly-owned subsidiary, Pacific Office Properties Trust, Inc., a Maryland corporation (the “Company”), with the Company being the surviving corporation. Substantially all of the assets and certain liabilities of AZL and substantially all of the commercial real estate assets and related liabilities of Venture were contributed to a newly formed Delaware limited partnership, Pacific Office Properties, L.P. (the “Operating Partnership” or “UPREIT”), in which the Company became the sole general partner and Venture became a limited partner. The commercial real estate assets of Venture contributed to the UPREIT consisted of eight office properties and a 7.5% joint venture interest in one office property, comprising approximately 2.4 million square feet of rentable area in the Honolulu, San Diego and Phoenix metropolitan areas (the “Contributed Properties”).

Waterfront Partners OP, LLC (“Waterfront”), which had the largest interest in Venture, was designated as the acquiring entity in the business combination for financial accounting purposes. Accordingly, historical financial information for Waterfront has also been presented in this Annual Report on Form 10-K for the period from January 1, 2008 through the Effective Date. Additional explanatory notations are contained in this Annual Report on Form 10-K to distinguish the historical financial information of Waterfront from that of the Company.

Unless the context otherwise requires, the terms “us”, “we”, “our”, “Company” and “registrant” as used in this Annual Report on Form 10-K refer to Pacific Office Properties Trust, Inc. and its subsidiaries (including the Operating Partnership) subsequent to the Transactions consummated on March 19, 2008.

 
ii 

 




PART I

ITEM 1.  -  BUSINESS

Pacific Office Properties Trust, Inc. is a Maryland corporation which has elected to be treated as a real estate investment trust (a “REIT”) under the Internal Revenue Code of 1986 (the “Code”). We are primarily focused on acquiring, owning and operating office properties in selected submarkets of long term growth markets in Honolulu and the western United States, including southern California and the greater Phoenix metropolitan area. For a detailed discussion of our geographic segments, see Note 15 to the combined consolidated financial statements included in this Annual Report on Form 10-K.

Through our Operating Partnership, we own whole interests in eight fee simple and leasehold office properties (comprising 11 office buildings) and we own interests in seven joint ventures (including managing ownership interests in six of those seven) holding 16 office properties (comprising 34 office buildings). Our property portfolio, or “Property Portfolio”, is approximately 4.7 million rentable square feet. The portion of our Property Portfolio that is effectively owned by us (representing leasable square feet of our wholly owned properties and our respective ownership interests in our unconsolidated joint venture properties), which we refer to as our “Effective Portfolio”, comprised approximately 2.5 million leasable square feet as of December 31, 2009.  Our unconsolidated joint ventures are accounted for under the equity method of accounting.

We are externally advised by Pacific Office Management, Inc., a Delaware corporation (the “Advisor”), an entity owned and controlled by Jay H. Shidler, our Chairman of the Board, and certain related parties of The Shidler Group, which is a business name utilized by a number of affiliates controlled by Jay H. Shidler, pursuant to an Amended and Restated Advisory Agreement dated as of March 3, 2009, entered into by us, the Operating Partnership and the Advisor (as amended, the “Advisory Agreement”).  The Advisor is responsible for the day-to-day operation and management of the Company.

We operate in a manner that permits us to satisfy the requirements for taxation as a REIT under the Code. As a REIT, we generally are not subject to federal income tax on our taxable income that is distributed to our stockholders and are required to distribute to our stockholders at least 90% of our annual REIT taxable income (excluding net capital gains).

Our corporate headquarters office and that of our Advisor are located at 233 Wilshire Blvd., Suite 310, Santa Monica, California 90401, and our telephone number is (310) 395-2083.

Business Objectives and Growth Strategies

Our primary business objectives are to achieve sustainable long-term growth in funds from operations (“FFO”) per share and dividends per share and to maximize long-term stockholder value. We intend to achieve these objectives primarily through external growth and through internal growth as we improve the operations of our properties. Our external growth will be focused upon the acquisition and operation of “value-added” office properties located in the western United States.

Key elements of our business objectives and growth strategies include:

External Growth

Our external growth strategy is based on the following:

 
Opportunistic Acquisition and Repositioning.  We intend to selectively acquire existing office properties at significant discounts to replacement cost, that are under-managed or under-leased, and which are best positioned to benefit from improving office market fundamentals;
 
 
1

 
 
 
Co-investment Strategy.  We believe that the acquisition of commercial properties in partnership with institutional co-investors provides us the opportunity to earn greater returns on invested equity through incentive participations and management fees; and

 
Recycling of Capital.  We intend to seek opportunities to sell stabilized properties and reinvest proceeds into new “value-added” office acquisition opportunities.

Internal Growth

The majority of our existing properties are located in what we believe are some of the healthiest office markets in the United States, including southern California and Honolulu. These markets are characterized by office employment growth, low office vacancy and low office construction starts. Over the long term, we expect to utilize our in-depth local market knowledge and managerial expertise to execute on our leasing and management initiatives as follows:

 
Tenant Retention and Lease-up.  We expect to realize increased rental income by focusing on our strategic leasing initiatives, including focusing on near-term expiring leases and aggressively marketing available space to prospective tenants;

 
Contractual Rent Increases.  We expect to realize increased rental income through scheduled increases of rental rates included in the majority of our lease agreements with tenants; and

 
Operational Leverage.  We seek increased operating efficiencies through greater economies of scale as a result of future property acquisitions in our existing markets, and through the reduction of operating expenses on an incremental basis.

Our Structure


As part of the formation transactions, POP Venture, LLC, a Delaware limited liability company, which we refer to as Venture, contributed to our Operating Partnership ownership interests in eight wholly-owned properties and one property in which it held a 7.5% managing ownership interest. We refer to these properties as the Contributed Properties.  In exchange for its contribution to the Operating Partnership of the Contributed Properties, Venture received 13,576,165 common units in our Operating Partnership, referred to as Common Units, together with 4,545,300 Class A convertible preferred units in our Operating Partnership, referred to as Preferred Units, and $16,695,000 in promissory notes.

The Common Units held by Venture are redeemable by Venture on a one-for-one basis for shares of our common stock listed on the NYSE Amex, referred to as our Listed Common Stock, or a new class of common units without redemption rights, as elected by a majority of our independent directors. Each Preferred Unit is initially convertible into 7.1717 Common Units, but such conversion may not occur before the date we consummate an underwritten public offering (of at least $75 million) of our Listed Common Stock. Upon conversion of the Preferred Units to Common Units, such Common Units will be redeemable by Venture on a one-for-one basis for shares of our Listed Common Stock or a new class of common units without redemption rights, as elected by a majority of our independent directors, but no earlier than one year after the date of their conversion from Preferred Units to Common Units.

2

As part of our formation transactions, we issued to our Advisor one share of proportionate voting preferred stock, which we refer to as the Proportionate Voting Preferred Stock. The Proportionate Voting Preferred Stock has no dividend rights and minimal rights to distributions in the event of liquidation, but it entitles our Advisor to vote on all matters for which the holders of Listed Common Stock are entitled to vote. Our Advisor has agreed to cast its Proportionate Voting Preferred Stock votes on any matter in direct proportion to votes that are cast by limited partners of our Operating Partnership holding the Common Units and Preferred Units issued in the formation transactions. The number of votes that our Advisor is entitled to cast equals the total number of shares of Listed Common Stock issuable upon redemption for shares of the Common Units and Preferred Units (representing 46,173,693 common share equivalents) issued in connection with the formation transactions, notwithstanding any restrictions on redemption of the Operating Partnership units. This number will decrease to the extent that these Operating Partnership units are redeemed in the future. The number will not increase in the event of subsequent unit issuances by our Operating Partnership. As of December 31, 2009, that share of Proportionate Voting Preferred Stock represented approximately 92.3% of our voting power.

In connection with these transactions, Venture also granted us options to acquire managing ownership interests in five joint ventures holding 14 additional office properties. We exercised those options in multiple transactions. The acquisition price for one of the joint ventures was funded by issuing a total of 723,102 Common Units.  These Common Units are redeemable by the holders on a one-for-one basis for shares of our Listed Common Stock or cash, as elected by a majority of our independent directors.

On January 12, 2010, we commenced a registered continuous public offering of up to 40,000,000 shares of our Senior Common Stock, which ranks senior to our Listed Common Stock and Class B Common Stock with respect to dividends and distribution of amounts upon liquidation.  The Senior Common Stock has a $10.00 per share (plus accrued and unpaid dividends) liquidation preference.  Subject to the preferential rights of any future series of preferred shares, holders of Senior Common Stock will be entitled to receive, when and as declared by our Board of Directors, cumulative cash dividends in an amount per share equal to a minimum of $0.725 per share per annum, payable monthly.  Should the dividend payable on our Listed Common Stock exceed its current rate of $0.20 per share per annum, the Senior Common Stock dividend would increase by 25% of the amount by which the Listed Common Stock dividend exceeds $0.20 per share per annum.  Holders of Senior Common Stock have the right to vote on all matters presented to stockholders as a single class with holders of the Listed Common Stock, the Class B Common Stock and the Proportionate Voting Preferred Stock.  Each share of Senior Common Stock is entitled to one vote on each matter to be voted upon by our stockholders.  Shares of Senior Common Stock may be exchanged, at the option of the holder, for shares of Listed Common Stock after the fifth anniversary of the issuance of such shares of Senior Common Stock.

Regulation

Our properties are subject to various covenants, laws, ordinances and regulations, including for example regulations relating to common areas, fire and safety requirements, various environmental laws, and the Americans with Disabilities Act of 1990 (ADA). Various environmental laws impose liability for release, disposal or exposure to various hazardous materials, including for example asbestos-containing materials, a substance known to be present in a number of our buildings. Such laws could impose liability on us even if we neither knew about nor were responsible for the contamination. Under the ADA, we must meet federal requirements related to access and use by disabled persons to the extent that our properties are “public accommodations”. The costs of our on-going efforts to comply with these laws are substantial. Moreover, as we have not conducted a comprehensive audit or investigation of all of our properties to determine our compliance with applicable laws, we may be liable for investigation and remediation costs, penalties, and/or damages, which could be substantial and could adversely affect our ability to sell or rent our property or to borrow using such property as collateral.

Competitive Factors

We compete with a number of developers, owners and operators of office and commercial real estate, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire. In that case, our financial condition, results of operations, cash flow, per share trading price of our Listed Common Stock and ability to satisfy our debt service obligations and to pay dividends to you may be adversely affected.

 

 


Employment

We do not have any employees. We are externally advised by our Advisor, an entity owned and controlled by Mr. Shidler and by its directors and officers, certain of whom are also our executive officers and who own substantial beneficial interests in our Company. In accordance with our Advisory Agreement, our Advisor manages, operates and administers our day-to-day operations, business and affairs. Our Advisor employs approximately 70 executives and staff members. This same management team has overseen the acquisition, leasing and operations of many of our existing assets since their original acquisition by entities affiliated with The Shidler Group, and prior to our formation transactions.

Available Information

Our corporate headquarters office and that of our Advisor are located at 233 Wilshire Boulevard, Suite 310, Santa Monica, CA 90401. Our website is located at http://www.pacificofficeproperties.com. We make available free of charge, on or through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). You can also read and copy any materials we file with the SEC at its Public Reference Room at 100 F Street, NE, Washington, DC 20549 (1-800-SEC-0330), on official business days during the hours of 10:00 am to 3:00 pm. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

ITEM 1A.  -  RISK FACTORS

The following section sets forth material factors that may adversely affect our business and operations.  This is not an exhaustive list, and additional factors could adversely affect our business and financial performance.  Moreover, we operate in a very competitive and rapidly changing environment.  New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  This discussion of risk factors includes many forward-looking statements.  For cautions about relying on forward-looking statements, please refer to the section entitled “Note Regarding Forward Looking Statements” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. “

Risks Related To Our Business And Properties
 

We need to raise additional capital, which may not be available to us and may limit our growth and profitability.
 
        Our business is capital intensive and our ability to maintain our operations and acquire additional properties depends on our cash flow from operations and our ability to raise additional capital on acceptable terms. We have not achieved positive cash flow since our formation transactions were consummated in March 2008. We expect that our funds from operations will be insufficient to fund expected capital expenditures and future acquisition costs. Accordingly, we expect that we will need to raise additional capital, either from debt or equity, or the sale of existing properties to meet these needs. We cannot be certain that we will be able to raise additional capital on acceptable terms or at all. If we are unable to raise needed capital, our ability to operate our properties may suffer and our ability to grow the Company will be impaired.
 
The current volatility in the credit markets could limit demand for our office properties and affect the overall availability and cost of credit.

The current volatility in the credit markets could limit demand for our office properties and affect the overall availability and cost of credit. At this time, there can be no assurance that the actions taken by the U.S. government, Federal Reserve or other government and regulatory bodies for the reported purpose of stabilizing the economy or financial markets will achieve their intended effect. The impact of the current credit environment on our ability to obtain financing in the future and the costs and terms of the same is unclear. No assurances can be given that the effects of the current crisis will not have a material adverse effect on our business, financial condition, results of operations or trading price of our Listed Common Stock.

4


In addition, given these current conditions, the Company’s business and results of operations could be adversely affected as follows:

 
Our tenants may experience deterioration in their sales or other revenue, or experience a constraint on the availability of credit necessary to fund operations, which in turn may adversely impact those tenants’ ability to pay contractual base rents and tenant recoveries. Some tenants may terminate their occupancy due to an inability to operate profitably for an extended period of time, impacting our ability to maintain occupancy levels.

 
Constraints on the availability of credit to tenants, necessary to purchase and install improvements, fixtures and equipment and to fund start-up business expenses, could impact our ability to procure new tenants for spaces currently vacant in existing operating properties or properties under development.

 
The prolonged economic slowdown has resulted in, and may continue to result in, decreased demand for office space, forcing us, in some cases, to offer rent concessions, fund greater tenant improvement allowances and provide other concessions or additional services to attract tenants.

 
Our co-investment partners could experience difficulty obtaining financing in the future for the same reasons discussed above. Their inability to obtain financing on acceptable terms, or at all, could negatively impact our ability to acquire additional properties.

 
Further deterioration in the real estate market after we acquire properties may result in a decline in the market value of our properties or cause us to experience other losses related to our assets, which may adversely affect our results of operations, the availability and cost of credit and our ability to make distributions to our stockholders.
 
  We have a substantial amount of indebtedness outstanding on a consolidated basis, which may affect our ability to pay dividends, may expose us to interest rate fluctuation risk and may expose us to the risk of default under our debt obligations.

As of December 31, 2009, our total consolidated indebtedness was approximately $427.5 million. Our joint venture properties are also leveraged and we may incur significant additional debt for various purposes, including the funding of future acquisitions of property.

We have $66.4 million in aggregate principal indebtedness maturing in 2010.  We have initiated discussions with the servicers for each of these non-recourse loans regarding an agreement to extend the maturity date of the loans and to make certain other modifications to the terms of the loans.  If we are unable to extend the maturity date of any of the loans, we may attempt to refinance the indebtedness or utilize a combination of cash on hand, available borrowings under our credit facility and any available proceeds from our continuous offering of Senior Common Stock to repay the loan.  If we are unable to repay any loan at maturity, we may not be able to retain our equity in the properties in question.

Payments of principal and interest on borrowings may leave our property-owning entities with insufficient cash resources to operate our properties and/or pay distributions to us so that we can make distributions to stockholders currently contemplated or necessary to maintain our REIT qualification. Our substantial outstanding indebtedness, and the limitations imposed on us by our debt agreements, could have significant other adverse consequences, including the following:

 
our cash flow may be insufficient to meet our required principal and interest payments;

 
we may be unable to borrow additional funds as needed or on favorable terms, which could adversely affect our liquidity for acquisitions or operations;

5


 
we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 
we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;

 
we will be exposed to interest and future interest rate volatility with respect to indebtedness that is variable rate; and

 
any property-owning entity may default on its obligations and the lenders or mortgagees may foreclose on our properties and execute on any collateral that secures their loans.

If any one of these events were to occur, our financial condition, results of operations, cash flow, per share trading price of our Listed Common Stock and our ability to satisfy our debt service obligations and to pay dividends to you could be adversely affected. In addition, any foreclosure on our properties could create taxable income without accompanying cash proceeds, which could adversely affect our ability to meet the REIT distribution requirements imposed by the Code.
 
  Our organizational documents have no limitation on the amount of indebtedness that we may incur. As a result, we may become more highly leveraged in the future, which could adversely affect our financial condition.

Our organizational documents contain no limitations regarding the maximum level of indebtedness that we may incur. Accordingly, we could, without stockholder approval, become more highly leveraged, which could result in an increase in our debt service, could materially adversely affect our cash flow and our ability to make distributions to our stockholders and/or the distributions required to maintain our REIT qualification, and could harm our financial condition. Higher leverage will also increase the risk of default on our obligations.

All of our properties are located in southern California, Phoenix and Honolulu. We are dependent on the southern California, Phoenix and Honolulu office markets and economies, and are therefore susceptible to risks of events in those markets that could adversely affect our business, such as adverse market conditions, changes in local laws or regulations, and natural disasters.

Because all of our properties are concentrated in southern California, Phoenix and Honolulu, we are exposed to greater economic risks than if we owned a more geographically dispersed portfolio. We are susceptible to adverse developments in the southern California, Phoenix and Honolulu economic and regulatory environments (such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation and other factors) as well as natural disasters that occur in these areas (such as earthquakes, floods and other events). In addition, the State of California is also regarded as more litigious and more highly regulated and taxed than many states, which may reduce demand for office space in California. Any adverse developments in the economy or real estate markets in southern California, Phoenix or Honolulu, or any decrease in demand for office space resulting from the southern California, Phoenix or Honolulu regulatory or business environments, could adversely impact our financial condition, results of operations and cash flow, the per share trading price of our Listed Common Stock and our ability to satisfy our debt service obligations and to pay dividends to you.

We are prohibited from disposing of or refinancing the Contributed Properties under certain circumstances until March 2018.

A sale of any of the Contributed Properties that would not provide continued tax deferral to POP Venture, LLC, which we refer to as Venture, is prohibited under the Master Agreement and the contribution agreements for such properties for ten years after the closing of the transactions related to such properties. These restrictions on the sale of such properties may prevent us from selling the properties or may adversely impact the terms available to us upon a disposition. In addition, we have agreed that, during such ten-year period, we will not prepay or defease any mortgage indebtedness of such properties, other than in connection with a concurrent refinancing with non-recourse mortgage debt of an equal or greater amount and subject to certain other restrictions. These restrictions limit our ability to refinance indebtedness on those properties and to manage our debt structure. As a result, we may be unable to access certain capital resources that would otherwise be available to us. Furthermore, if any such sale or defeasance is foreseeable, we are required to notify Venture and to cooperate with it in considering strategies to defer or mitigate the recognition of gain under the Code. These contractual obligations may limit our future operating flexibility and compel us to take actions or enter into transactions that we otherwise would not undertake. If we fail to comply with any of these requirements, we will be liable for a make-whole cash payment to Venture, the cost of which could be material and could adversely affect our liquidity.

6


The illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Real estate investments, especially office properties like the properties we currently own and intend to acquire, are relatively illiquid and may become even more illiquid during periods of economic downturn. In particular, these risks could arise from weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions and changes in laws, regulations or fiscal policies of jurisdictions in which the property is located. As a result, we may not be able to sell a property or properties quickly or on favorable terms and realize our investment objectives, or otherwise promptly modify our portfolio, in response to changing economic, financial and investment conditions when it otherwise may be prudent to do so. This inability to respond quickly to changes in the performance of our properties and sell an unprofitable property could adversely affect our cash flows and results of operations, thereby limiting our ability to make distributions to our stockholders. Our financial condition could also be adversely affected if we were, for example, unable to sell one or more of our properties in order to meet our debt obligations upon maturity.

The Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms, which may adversely affect our cash flows, financial condition, results of operations, and our ability to pay distributions on, and the market price of, our Listed Common Stock.
 
In addition, our ability to dispose of some of our properties could be constrained by their tax attributes. Properties which we own for a significant period of time or which we acquire through tax deferred contribution transactions in exchange for units in our Operating Partnership may have low tax bases. If we dispose of these properties outright in taxable transactions, we may need to distribute a significant amount of the taxable gain to our stockholders under the requirements of the Code for REITs or pay federal income tax at regular corporate rates on the amount of any gain, which in turn would impact our cash flow and increase our leverage. To dispose of low basis or tax-protected properties efficiently, we may from time to time use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the property for which the disposed assets are exchanged inheriting their low tax bases and other tax attributes (including tax protection covenants).

Our operating performance is subject to risks associated with the real estate industry.

Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease cash available for dividends, as well as the value of our properties. These events include, but are not limited to:

 
adverse changes in economic and demographic conditions;

 
vacancies or our inability to rent space on favorable terms;

 
adverse changes in financial conditions of buyers, sellers and tenants of properties;

 
inability to collect rent from tenants;

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competition from other real estate investors with significant capital, including other real estate operating companies, publicly-traded REITs and institutional investment funds;

 
reductions in the level of demand for office space and changes in the relative popularity of properties;

 
increases in the supply of office space;

 
fluctuations in interest rates, which could adversely affect our ability, or the ability of buyers and tenants of properties, to obtain financing on favorable terms or at all;

 
increases in expenses, including insurance costs, labor costs, energy prices, real estate assessments and other taxes and costs of compliance with laws, regulations and governmental policies, and our inability to pass on some or all of these increases to our tenants; and

 
changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies and the Americans with Disabilities Act of 1990, which we call the ADA.
 
In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases without a corresponding decrease in expenses. Costs associated with real estate investments, such as real estate taxes, insurance, loan payments and maintenance, generally will not be reduced even if the vacancy rate at a property increases or rental rates decrease. If we cannot operate our properties so as to meet our financial expectations, our financial condition, results of operations, cash flow, per share trading price of our Listed Common Stock and ability to satisfy our debt service obligations and to pay dividends to you could be adversely affected. There can be no assurance that we can achieve our economic objectives.
 
We may not be able to control our operating costs or our expenses may remain constant or increase, even if our revenues do not increase, causing our results of operations to be adversely affected.

Factors that may adversely affect our ability to control operating costs include the need to pay for insurance and other operating costs, including real estate taxes, which could increase over time, the need periodically to repair, renovate and re-lease space, the cost of compliance with governmental regulation, including zoning and tax laws, the potential for liability under applicable laws, interest rate levels and the availability of financing. If our operating costs increase as a result of any of the foregoing factors, our results of operations may be adversely affected.

The expense of owning and operating a property is not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property. As a result, if revenues decline, we may not be able to reduce our expenses accordingly. If a property is mortgaged and we are unable to meet the mortgage payments, the lender could foreclose on the mortgage and take possession of the property, resulting in a further reduction in net income.
 
  We are subject to risks and liabilities unique to joint venture relationships.

We own properties through “joint venture” investments in which we co-invest with another investor. Our business plan contemplates further acquisitions of office properties through joint ventures and sales to institutions of partial ownership of properties that we wholly own. Joint venture investments involve certain risks, including:

 
co-investment partners may control or share certain approval rights over major decisions;

 
co-investment partners may fail to fund their share of any required capital commitments;

 
co-investment partners might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the property;

 
co-investment partners may have the power to act contrary to our instructions and policies, including our current policy with respect to maintaining our REIT qualification;

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joint venture agreements often restrict the transfer of a member’s or co-investment partner’s interest or “buy-sell” or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms;

 
disputes between us and our co-investment partners may result in litigation or arbitration that would increase our expenses and divert attention from other elements of our business and result in subjecting the properties owned by the applicable joint venture to additional risk; and

 
we may in certain circumstances be liable for the actions of our co-investment partners.

The occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flow and our ability to pay dividends.

Adverse market and economic conditions could cause us to recognize impairment charges.

We regularly review our real estate assets for impairment indicators, such as a decline in a property’s occupancy rate. If we determine that indicators of impairment are present, we review the properties affected by these indicators to determine whether an impairment charge is required. We use considerable judgment in making determinations about impairments, from analyzing whether there are indicators of impairment to the assumptions used in calculating the fair value of the investment. Accordingly, our subjective estimates and evaluations may not be accurate, and such estimates and evaluations are subject to change or revision.
 
Ongoing adverse market and economic conditions and market volatility will likely continue to make it difficult to value the real estate assets owned by us as well as the value of our interests in unconsolidated joint ventures. There may be significant uncertainty in the valuation, or in the stability of the cash flows, discount rates and other factors related to such assets due to the adverse market and economic conditions that could result in a substantial decrease in their value. We may be required to recognize additional asset and goodwill impairment charges in the future, which could materially and adversely affect our business, financial condition and results of operations.

If we are deemed an “investment company” under the Investment Company Act of 1940, it could have a material adverse effect on our business.

We do not expect to operate as an “investment company” under the Investment Company Act. However, the analysis relating to whether a company qualifies as an investment company can involve technical and complex rules and regulations. If we own assets that qualify as “investment securities” as such term is defined under this Act and the value of such assets exceeds 40% of the value of our total assets, we could be deemed to be an investment company and be required to register under the Act. Registered investment companies are subject to a variety of substantial requirements that could significantly impact our operations. The costs and expenses we would incur to register and operate as an investment company, as well as the limitations placed on our operations, could have a material adverse impact on our operations and your investment return. In order to operate in a manner to avoid being required to register as an investment company we may be unable to sell assets we would otherwise want to sell or we may need to sell assets we would otherwise wish to retain. In addition, we may also have to forgo opportunities to acquire interests in companies or entities that we would otherwise want to acquire.

Our success depends on the ability of our Advisor to operate properties, and our Advisor’s failure to operate our properties in a sufficient manner could have a material adverse effect on the value of our real estate investments and results of operations.

We presently have no employees. Our officers are employees of our Advisor. We depend on the ability of our Advisor to operate our properties and manage our other investments in a manner sufficient to maintain or increase revenues and to generate sufficient revenues in excess of our operating and other expenses. Our Advisor is not required to dedicate any particular number of employees or employee hours to our business in order to fulfill its obligations under the Advisory Agreement. We are subject to the risk that our Advisor will terminate the Advisory Agreement and that no suitable replacement will be found to manage us. We believe that our success depends to a significant extent upon the experience of our Advisor’s executive officers, whose continued service is not guaranteed. If our Advisor terminates the Advisory Agreement, we may not be able to execute our business plan and may suffer losses, which could have a material adverse effect on our ability to make distributions to our stockholders. The failure of our Advisor to operate our properties and manage our other investments will adversely affect the underlying value of our real estate investments, the results of our operations and our ability to make distributions to our stockholders and to pay amounts due on our indebtedness.

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We depend on the experience and expertise of our and our Advisor’s senior management team, and the loss of the services of our key personnel could have a material adverse effect on our business strategy, financial condition and results of operations.

We are dependent on the efforts, diligence, skill, network of business contacts and close supervision of all aspects of our business by our Advisor. Our continued success will depend on the continued service of our and our Advisor’s senior management team. The loss of their services could harm our business strategy, financial condition and results of operations, which would adversely affect the value of our Listed Common Stock.

Our Advisor’s corporate management fee is payable regardless of our performance, which may reduce its incentive to devote time and resources to our portfolio.

Our Advisor is entitled to receive a corporate management fee of $1.5 million per year, less direct expenses incurred by us, as defined, up to a maximum reduction of $750,000, regardless of the performance of our portfolio. Our Advisor’s entitlement to substantial non-performance based compensation might reduce its incentive to devote its time and effort to seeking profitable opportunities for our portfolio. This in turn could hurt our ability to make distributions to our stockholders.

The actual rents we receive for the properties in our portfolio may be less than our asking rents, and we may experience lease roll down from time to time.

We may be unable to realize our asking rents across the properties in our portfolio because of:

 
competitive pricing pressure in our submarkets;

 
adverse conditions in the southern California, Phoenix or Honolulu real estate markets;

 
general economic downturn; and

 
the desirability of our properties compared to other properties in our submarkets.

In addition, the degree of discrepancy between our asking rents and the actual rents we are able to obtain may vary both from property to property and among different leased spaces within a single property. If we are unable to achieve our asking rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted. In addition, depending on asking rental rates at any given time as compared to expiring leases in our portfolio, from time to time rental rates for expiring leases may be higher than starting rental rates for new leases.

We may be unable to renew leases or lease vacant space.

As of December 31, 2009, leases representing approximately 12.5% of the 4,682,698 rentable square feet of our total portfolio were scheduled to expire in 2010, and an additional 14.8% of the square footage of our total portfolio was available for lease. These leases may not be renewed, or may be re-leased at rental rates equal to or below existing rental rates. Substantial rent abatements, tenant improvements, early termination rights or below-market renewal options may be offered to attract new tenants or retain existing tenants. Accordingly, portions of our properties may remain vacant for extended periods of time. In addition, some existing leases currently provide tenants with options to renew the terms of their leases at rates that are less than the current market rate or to terminate their leases prior to the expiration date thereof. If we are unable to obtain rental rates that are on average comparable to our asking rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted.

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We may be required to make significant capital expenditures to improve our properties in order to retain and attract tenants, causing a decline in operating revenues and reducing cash available for debt service and distributions to stockholders.

To the extent adverse economic conditions continue in the real estate market and demand for office space remains low, we expect that, upon expiration of leases at our properties, we will be required to make rent or other concessions to tenants, accommodate requests for renovations, build-to-suit remodeling and other improvements or provide additional services to our tenants. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose leases expire and to attract new tenants in sufficient numbers. Additionally, we may need to raise capital to make such expenditures. If we are unable to do so or capital is otherwise unavailable, we may be unable to make the required expenditures. This could result in non-renewals by tenants upon expiration of their leases, which would result in declines in revenues from operations and reduce cash available for debt service and distributions to stockholders.

We may face potential adverse effects from bankruptcies or insolvencies of our tenants, which could decrease our cash flow and revenues.

The bankruptcy or insolvency of one or more of our tenants may adversely affect the income produced by our properties. Our tenants could file for bankruptcy protection or become insolvent in the future. In the event a tenant that is in default under its lease files for bankruptcy protection, we may experience delays in recapturing the leased premises and incur substantial costs in enforcing our rights. Once a tenant files for bankruptcy, we are prohibited from evicting the tenant or obtaining damages without bankruptcy court approval. A bankruptcy court, however, could authorize a tenant to reject and terminate its lease with us. In such case, our claim against the bankrupt tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. Under any circumstances, it is unlikely that a bankrupt tenant will pay, in full, amounts owed to us under a lease. Any such shortfalls could adversely affect our cash flow and results of operations.

Potential losses may not be covered by insurance.

Our business operations in southern California, Phoenix and Honolulu are susceptible to, and could be significantly affected by, adverse weather conditions and natural disasters such as earthquakes, tsunamis, hurricanes, volcanoes, wind, floods, landslides, drought and fires. These adverse weather conditions and natural disasters could cause significant damage to the properties in our portfolio, the risk of which is enhanced by the concentration of our properties’ locations. Our insurance may not be adequate to cover business interruption or losses resulting from adverse weather or natural disasters. In addition, our insurance policies include customary deductibles and limitations on recovery. As a result, we may be required to incur significant costs in the event of adverse weather conditions and natural disasters. We may discontinue earthquake or any other insurance coverage on some or all of our properties in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage discounted for the risk of loss.

Furthermore, we do not carry insurance for certain losses, including, but not limited to, losses caused by war or by certain environmental conditions, such as mold or asbestos. In addition, our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our portfolio increases. As a result, we may not have sufficient coverage against all losses that we may experience, including from adverse title claims. If we experience a loss that is uninsured or that exceeds policy limits, we could incur significant costs and lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties.

In addition, our properties may not be able to be rebuilt to their existing height or size at their existing location under current land-use laws and policies. In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications and otherwise may have to upgrade such property to meet current code requirements.

We face possible risks associated with climate change.
 
We cannot predict with certainty whether global warming or cooling is occurring and, if so, at what rate. However, the physical effects of climate change could have a material adverse effect on our properties, operations and business. All of our properties are concentrated in southern California, Phoenix and Honolulu. To the extent climate change causes changes in weather patterns, our markets could experience increases in storm intensity and rising sea-levels. Over time, these conditions could result in declining demand for office space in our buildings or the inability of us to operate the buildings at all. Climate change may also have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable and increasing the cost of energy at our properties. Moreover, compliance with new laws or regulations related to climate change, including compliance with “green” building codes, may require us to make improvements to our existing properties or increase taxes and fees assessed on us or our properties. There can be no assurance that climate change will not have a material adverse effect on our properties, operations or business.

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Terrorism and other factors affecting demand for our properties could harm our operating results.

The strength and profitability of our business depends on demand for and the value of our properties. Future terrorist attacks in the United States, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of terrorism or war may have a negative impact on our operations. Such terrorist attacks could have an adverse impact on our business even if they are not directed at our properties. In addition, the terrorist attacks of September 11, 2001 have substantially affected the availability and price of insurance coverage for certain types of damages or occurrences, and our insurance policies for terrorism include large deductibles and co-payments. Although we maintain terrorism insurance coverage on our portfolio, the lack of sufficient insurance for these types of acts could expose us to significant losses and could have a negative impact on our operations.

We face intense competition, which may decrease, or prevent increases of, the occupancy and rental rates of our properties.

We compete with a number of developers, owners and operators of office real estate, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire. In that case, our financial condition, results of operations, cash flow, per share trading price of our Listed Common Stock and ability to satisfy our debt service obligations and to pay dividends to you may be adversely affected.

Because we own real property, we will be subject to extensive environmental regulation which creates uncertainty regarding future environmental expenditures and liabilities.

Environmental laws regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under some of these laws, an owner or operator of real estate may be liable for costs related to soil or groundwater contamination on or migrating to or from its property. In addition, persons who arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at the disposal site.

These laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of the hazardous or toxic substances that caused the contamination. Contamination resulting from any of these substances or the failure to properly remediate them, may adversely affect our ability to sell or rent our property or to borrow using the property as collateral. In addition, persons exposed to hazardous or toxic substances may sue for personal injury damages. For example, some laws impose liability for release of or exposure to asbestos-containing materials, a substance known to be present in a number of our buildings. In other cases, some of our properties may have been impacted by contamination from past operations or from off-site sources. As a result, we may be potentially liable for investigation and cleanup costs, penalties and damages under environmental laws.

Although most of our properties have been subjected to preliminary environmental assessments, known as Phase I assessments, by independent environmental consultants that identify certain liabilities, Phase I assessments are limited in scope, and may not include or identify all potential environmental liabilities or risks associated with the property. Unless required by applicable law, we may decide not to further investigate, remedy or ameliorate the liabilities disclosed in the Phase I assessments. Further, these or other environmental studies may not identify all potential environmental liabilities or accurately assess whether we will incur material environmental liabilities in the future. If we do incur material environmental liabilities in the future, we may face significant remediation costs, and we may find it difficult to sell any affected properties.

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Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unanticipated expenditures that could significantly reduce the cash available for distribution to our stockholders.

Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Although we believe that our properties substantially comply with present requirements of the ADA, we have not conducted an audit or investigation of all of our properties to determine our compliance. If one or more of our properties or future properties is not in compliance with the ADA, then we would be required to incur additional costs to bring the property into compliance. Additional federal, state and local laws also may require modifications to our properties, or restrict our ability to renovate our properties. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation.

In addition, our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we were to fail to comply with these various requirements, we might incur governmental fines or private damage awards. If we incur substantial costs to comply with the ADA or any other regulatory requirements, our financial condition, results of operations, cash flow, market price of our Listed Common Stock and our ability to satisfy our debt service obligations and to pay distributions to our stockholders could be adversely affected. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties.

We may be unable to complete acquisitions that would grow our business and, even if consummated, we may fail to successfully integrate and operate acquired properties.

We plan to acquire additional properties as opportunities arise. Our ability to acquire properties on favorable terms and successfully integrate and operate them is subject to the following significant risks:

 
we may be unable to acquire desired properties because of competition from other real estate investors with better access to less expensive capital, including other real estate operating companies, publicly-traded REITs and investment funds;

 
we may acquire properties that are not accretive to our results upon acquisition, and we may not successfully manage and lease those properties to meet our expectations;

 
competition from other potential acquirers may significantly increase purchase prices;

 
we may be unable to generate sufficient cash from operations or obtain the necessary debt or equity financing to consummate an acquisition on favorable terms or at all;

 
we may need to spend more than anticipated amounts to make necessary improvements or renovations to acquired properties;

 
we may spend significant time and money on potential acquisitions that we do not consummate;

 
we may be unable to quickly and efficiently integrate new acquisitions into our existing operations;

 
we may suffer higher than expected vacancy rates and/or lower than expected rental rates; and

 
we may acquire properties without any recourse, or with only limited recourse, for liabilities against the former owners of the properties.

If we cannot complete property acquisitions on favorable terms, or operate acquired properties to meet our goals or expectations, our financial condition, results of operations, cash flow, per share trading price of our Listed Common Stock and ability to satisfy our debt service obligations and to pay dividends to you could be adversely affected.

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We may be unable to successfully expand our operations into new markets in the western United States.

Each of the risks applicable to our ability to acquire and successfully integrate and operate properties in the markets in which our properties are located are also applicable to our ability to acquire and successfully integrate and operate properties in new markets. In addition to these risks, we may not possess the same level of familiarity with the dynamics and market conditions of certain new markets that we may enter, which could adversely affect our ability to expand into those markets. We may be unable to build a significant market share or achieve a desired return on our investments in new markets. If we are unsuccessful in expanding into new markets, it could adversely affect our financial condition, results of operations, cash flow, per share trading price of our Listed Common Stock and ability to satisfy our debt service obligations and to pay dividends to you.

If we default on the ground leases to which two of our properties are subject, our business could be adversely affected.

Our interests in two of our properties are ground leasehold interests. If we default under the terms of these leases, we may be liable for damages and could lose our leasehold interest in the property. If any of these events were to occur, our business and results of operations would be adversely affected.

Our property taxes could increase due to property tax rate changes or reassessment, which would impact our cash flows.

We will be required to pay some state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially and we may be unable to fully recover these increased costs from our tenants. If the property taxes we pay increase and we are unable to fully recover these increased costs from our tenants, our cash flow would be impacted, and our ability to pay expected dividends to our stockholders could be adversely affected.

We may become subject to litigation, which could have a material adverse effect on our financial condition.

In the future, we may become subject to litigation, including claims relating to our operations, offerings and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We generally intend to vigorously defend ourselves; however, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby impacting our ability to service debt and make distributions to our stockholders. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.

Risks Related to Conflicts of Interest and Certain Relationships

There may be various conflicts of interest resulting from the relationships among us, our management, our Advisor, our dealer manager and other parties.

There may be conflicts of interest among us, our management, our Advisor and our affiliated dealer manager of our continuous offering of Senior Common Stock. These potential conflicts of interest include the following:

 
Certain of our officers are also officers, directors and stockholders of our Advisor and may, therefore, benefit from the compensation arrangements relating to our Advisor under the Advisory Agreement, which were not the result of arm’s-length negotiations.

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Certain of our directors and officers may engage in the management of other business entities and properties in other business entities, which may result in a potential conflict with respect to the allocation of time of such key personnel.

 
The dealer manager of our continuous offering of Senior Common Stock is owned in part and controlled by Mr. Shidler and therefore is affiliated with us. As a result, the fees paid to the dealer manager for the services provided to us in connection with that offering were determined without the benefit of arm’s-length negotiations of the type normally conducted between unrelated parties and may be in excess of amounts that we would otherwise pay to third parties for such services.

 
In the event that the sale by us of any of the Contributed Properties would be beneficial to us but would negatively impact the tax treatment of Venture, it is possible that any of our directors or officers with a financial interest in Venture may experience a conflict of interest.

 
In the registration rights agreement we entered into with Venture, we retained certain rights to defer registration in circumstances where such registration would be detrimental to us. It is possible that any of our directors or officers having a financial interest in Venture or its affiliates may experience a conflict of interest in circumstances where a registration would be advantageous to such persons, but detrimental to us.

 
Certain entities affiliated with us hold promissory notes payable by our Operating Partnership. Those entities have rights under the promissory notes, and their exercise of these rights and pursuit of remedies may be affected by their relationship with each other.

 
In connection with our formation transactions, certain Contributed Properties were encumbered by debt or, in the case of one Contributed Property, which we refer to as “Clifford Center,” obligations under the ground lease. These encumbrances are secured, in part, by certain guaranty and indemnity obligations of Mr. Shidler and James C. Reynolds and entities wholly-owned or controlled by them, or the Indemnitees. Our Operating Partnership entered into certain indemnity agreements with the Indemnitees on March 19, 2008, referred to as the Indemnity Agreements, in order to indemnify the Indemnitees under these guaranties and indemnities. Our Operating Partnership’s specific indemnity obligations in each Indemnity Agreement are basically to defend, indemnify and hold harmless the Indemnitee from and against any and all demands, claims, causes of action, judgments, losses, costs, damages and expenses, including attorneys’ fees and costs of litigation arising from or relating to any or all of the guaranty or indemnity obligations of the Indemnitee following formation.

 
An entity controlled by Mr. Shidler has pledged a certificate of deposit in the amount of $15 million as security for our Operating Partnership’s credit agreement with First Hawaiian Bank, for which the Operating Partnership has agreed to pay certain fees and provide certain indemnification rights.

These conflicts may result in terms that are more favorable to our management, our Advisor and/or our other affiliates than would have been obtained on an arm’s-length basis, and may operate to the detriment of our stockholders.

We are controlled by Jay H. Shidler.

Jay H. Shidler is the Chairman of our board of directors, controls Venture and is a stockholder and a director of our Advisor. As part of our formation transactions, we issued to our Advisor one share of Proportionate Voting Preferred Stock, which is entitled to cast a number of votes equal to the total number of shares of Listed Common Stock issuable upon redemption for shares of the Common Units and Preferred Units that we issued in connection with the formation transactions. Our Advisor has agreed to cast its Proportionate Voting Preferred Stock votes on any matter in direct proportion to votes that are cast by limited partners of our Operating Partnership holding the Common Units and Preferred Units issued in the formation transactions. Venture holds those Common Units and Preferred Units and is controlled by Mr. Shidler. As of December 31, 2009, the one share of Proportionate Voting Preferred Stock represented approximately 92% of our voting power. In addition, under the Advisory Agreement, our Advisor effectively controls our operations and management and that of our Operating Partnership. Therefore, because of his position with us, Venture and our Advisor, and the additional shares of our Listed Common Stock that he holds, Mr. Shidler has the ability to effectively vote approximately 94% of our currently outstanding voting securities and has significant influence over our policies and strategy and the operations and control of our business and the business of our Operating Partnership. The interests of Mr. Shidler in these matters may conflict with the interests of our other stockholders. As a result, Mr. Shidler could cause us or our Operating Partnership to take actions that our other stockholders do not support.

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Jay H. Shidler may compete with us and, therefore, may have conflicts of interest with us.

We have entered into a Noncompetition Agreement with Jay H. Shidler, who is the Chairman of our board of directors. The Noncompetition Agreement with Mr. Shidler prohibits, without our prior written consent, Mr. Shidler from investing in certain office properties in any county in which we own an office property or in our targeted geographic operating region. However, this covenant not to compete does not restrict:

 
business conducted on our behalf;

 
investments in which Mr. Shidler obtained an interest prior to our formation transactions;

 
investments in areas in which we do not own office property at the time of such investment;

 
activities of First Industrial Realty Trust, Inc., Corporate Office Properties Trust and their respective affiliates;

 
investment opportunities considered and rejected by us; and

 
investments in any entity as long as Mr. Shidler does not own more than 4.9% of the entity and is not actively engaged in the management of such entity.

It is therefore possible, despite the limitations imposed by his Noncompetition Agreement that a property in which Mr. Shidler or an affiliate of Mr. Shidler has an interest may compete with us in the future if we were to invest in a property similar in type and in close proximity to that property.

Risks Related to our Capital Stock, our Corporate Structure and our Status as a REIT

Unless our Listed Common Stock meets all applicable listing standards, it could be suspended or delisted from the NYSE Amex, which may decrease the liquidity of our Listed Common Stock, make capital raising efforts more difficult and harm our financial condition and business.

Our Listed Common Stock is listed and traded on the NYSE Amex under the symbol “PCE.”  If we were to fail to meet any of the continued listing standards of the NYSE Amex, our Listed Common Stock could be suspended or delisted from the exchange.  The NYSE Amex will consider the suspension or removal of a listed security when, in the opinion of the NYSE Amex:

 
the financial condition and/or operating results of the issuer appear to be unsatisfactory,

 
it appears that the extent of public distribution or the aggregate market value of the security has become so reduced as to make further dealings on the NYSE Amex inadvisable,

 
the issuer has sold or otherwise disposed of its principal operating assets or has ceased to be an operating company,

 
the issuer has failed to comply with its listing agreements with the NYSE Amex, or

 
any other event occurs or any condition exists which makes further dealings on the NYSE Amex unwarranted.

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As of December 31, 2009, our stockholders’ equity, which on a GAAP basis does not include the value of non-controlling interests (namely, the Common Units and Preferred Units of our Operating Partnership), was below the exchange’s minimum threshold for that specific metric under the NYSE Amex’s continued listing standards.  While our total equity, which includes the value of non-controlling interests, substantially exceeds the minimum threshold for stockholders’ equity, we have not determined the exchange’s view of these circumstances.  Because we are not currently in technical compliance with the exchange’s minimum threshold for stockholders’ equity, there can be no assurance that the NYSE Amex will not consider initiating suspension or delisting procedures.  In the event that we were to receive a formal deficiency notice, we would be required to issue a press release and to file the appropriate report with the SEC. We would then expect to have an opportunity to regain compliance within a specified period of time or to provide the exchange with a plan to regain compliance with the appropriate listing standard or, if the exchange were to fail to accept such a plan, appeal any decision by the exchange to delist our Listed Common Stock. There can be no assurance that the exchange would accept such a plan, that such a plan would be successful, or that any appeals by us to the exchange would be successful.  Any suspension or delisting could adversely affect the market price and the liquidity of our Listed Common Stock and negatively impact our financial condition and business.

The partnership units of our Operating Partnership, future offerings of debt, securities and preferred stock may dilute the holdings of our existing stockholders.

We may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium term notes, senior or subordinated notes and classes of preferred stock, convertible preferred units or common stock. Upon liquidation, holders of our debt securities, holders of our Senior Common Stock or any preferred stock we may issue and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our Listed Common Stock. Future equity offerings and the issuance of Listed Common Stock in exchange for partnership units of our Operating Partnership may dilute the holdings of our existing stockholders. If we decide to issue preferred stock in addition to our Proportionate Voting Preferred Stock already issued, it could have a preference on liquidation distributions or a preference on dividend payments that could limit our ability to make a dividend distribution to our existing stockholders.

If we fail to remain qualified as a REIT in any taxable year, our operations and ability to make distributions will be adversely affected because we will be subject to U.S. federal income tax on our taxable income at regular corporate rates with no deduction for distributions made to stockholders.

We believe that we are organized and operate in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our method of operation enables us to continue to meet the requirements for qualification and taxation as a REIT under the Code.  However, qualification as a REIT requires us to satisfy highly technical and complex Code provisions for which only limited judicial and administrative authorities exist, and which are subject to change, potentially with retroactive effect. Even a technical or inadvertent mistake could jeopardize our REIT status. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In particular, our ability to qualify as a REIT depends on the relative values of our common stock and our other classes of equity, which are susceptible to fluctuations, and on the actions of third parties in which we may own an interest but over which we have no control or limited influence.

If we were to fail to qualify as a REIT in any tax year, then:

 
we would not be required to make distributions to our stockholders;

 
we would not be allowed to deduct distributions to our stockholders in computing our taxable income;

 
we would be subject to federal income tax, including any applicable alternative minimum tax, at regular corporate rates; and

 
any resulting tax liability could be substantial and could require us to borrow money or sell assets to pay such liability, and would reduce the amount of cash available for distribution to stockholders. Unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year during which we lost our qualification, and thus, our cash available for distribution to stockholders would be reduced for each of the years during which we did not qualify as a REIT.

17



In connection with our formation transactions, we received a representation from our predecessor, AZL, that it qualified as a REIT under the provisions of the Code. However, during 2009 we became aware that AZL historically invested excess cash from time to time in money market funds that, in turn, were invested exclusively or primarily in short-term federal government securities.  Additionally, during 2009 we became aware that AZL made two investments in local government obligations.  Our predecessor, AZL, with no objection from outside advisors, treated these investments as qualifying assets for purposes of the 75% gross asset test.  However, if these investments were not qualifying assets for purposes of the 75% gross asset test, then AZL may not have satisfied the REIT gross asset tests for certain quarters, in part, because they may have exceeded 5% of the gross value of AZL’s assets.  If these investments resulted in AZL’s noncompliance with the REIT gross asset tests, however, we and our predecessor, AZL, would retain qualification as a REIT pursuant to certain mitigation provisions of the Code, which provide that so long as any noncompliance was due to reasonable cause and not due to willful neglect, and certain other requirements are met, qualification as a REIT may be retained but a penalty tax would be owed.  Any potential noncompliance with the gross asset tests would be due to reasonable cause and not due to willful neglect so long as ordinary business care and prudence were exercised in attempting to satisfy such tests.  Based on our review of the circumstances surrounding the investments, we believe that any noncompliance was due to reasonable cause and not due to willful neglect.  Additionally, we believe that we have complied with the other requirements of the mitigation provisions of the Code with respect to such potential noncompliance with the gross asset tests (and have paid the appropriate penalty tax), and, therefore, our qualification, and that of our predecessor, AZL, as a REIT should not be affected.  The Internal Revenue Service is not bound by our determination, however, and no assurance can be provided that the Internal Revenue Service will not assert that AZL failed to comply with the REIT gross asset tests as a result of the money market fund investments and the local government securities investments and that such failures were not due to reasonable cause.  If the Internal Revenue Service were to successfully challenge this position, then it could determine that we and AZL failed to qualify as a REIT in one or more of our taxable years.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income. Any of these taxes would decrease the amount of cash available for distribution to our stockholders. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may in the future hold some of our assets through taxable subsidiary corporations, which (unlike REITs) are taxed on their taxable income, whether or not distributed.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates has been reduced by legislation to 15% (through 2010). Dividends payable by REITs, however, generally are not eligible for the reduced tax rates. Although this legislation does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the market price of the stock of REITs, including our Listed Common Stock.

Complying with REIT requirements may force us to borrow to make distributions to stockholders.

As a REIT, we must generally distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders. If we satisfy the REIT distribution requirement but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws.

18



From time to time, we may generate taxable income greater than our cash flow available for distribution to stockholders (for example, due to substantial non-deductible cash outlays, such as capital expenditures or principal payments on debt). If we do not have other funds available in these situations, we could be required to borrow funds, sell investments at disadvantageous prices or find alternative sources of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid income and excise taxes in a particular year. These alternatives could increase our operating costs or diminish our levels of growth.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

At any time, the federal income tax laws governing REITs, or the administrative interpretations of those laws, may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a stockholder. REIT dividends, with only very limited exceptions, do not qualify for preferential tax rates, which might cause shares of common stock in non-REIT corporations to be a more attractive investment to individual investors than shares in REITs and could have an adverse effect on the value of our common stock.

REIT restrictions on ownership of our capital stock may delay or prevent our acquisition by a third party, even if an acquisition is in the best interests of our stockholders.

In order for us to qualify as a REIT, not more than 50% of the value of our capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any taxable year.

Our charter provides that, subject to certain exceptions, no person, including entities, may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 4.9% in economic value of the aggregate of the outstanding shares of capital stock, or more than 4.9% in economic value or number of shares, whichever is more restrictive, of our outstanding shares of common stock. While these restrictions may prevent any five individuals from owning more than 50% of the shares, they could also discourage a change in control of our company. These restrictions may also deter tender offers that may be attractive to stockholders or limit the opportunity for stockholders to receive a premium for their shares if an investor seeks to acquire a block of shares of our capital stock.

Provisions in our charter, bylaws and Maryland law may delay or prevent our acquisition by a third party, even if such acquisition were in the best interests of our stockholders.

Certain provisions of Maryland law and our charter and bylaws could have the effect of discouraging, delaying or preventing transactions that involve an actual or threatened change in control of us, and may have the effect of entrenching our management and members of our board of directors, regardless of their performance.  These provisions cover, among other topics, the following:

 
removal of directors;

 
limitation on stockholder-requested special meetings;

 
advance notice provisions for stockholder nominations and proposals;

 
exclusive power of our board to amend our bylaws;

 
issuance of preferred stock;

 
duties of directors with respect to unsolicited takeovers;

 
restrictions on transfer and ownership of shares of our stock;

 
restrictions of the Maryland Business Combination Act; and

 
power of our board to subject us to statutory provisions related to unsolicited takeovers without a stockholder vote.

19



Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with priority as to distributions and amounts payable upon liquidation over the rights of our existing stockholders. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to our existing stockholders.  Our board of directors may also, without stockholder approval, amend our charter to increase or decrease the aggregate number of shares of our stock or the number of shares of stock of any class or series that we have authority to issue.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to liquidate otherwise attractive investments.

To qualify as a REIT we must ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, U.S. government securities and qualified REIT real estate assets. The remainder of our investment in securities generally cannot comprise more than 10% of the outstanding voting power, or more than 10% of the total value of the outstanding securities, of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than assets which qualify for purposes of the 75% asset test) may consist of the securities of any one issuer, and no more than 25% of the value of our total assets may be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we generally must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments.

Liquidation of collateral may jeopardize our REIT status.

To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our status as a REIT.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Code may limit our ability to hedge our operations. Under current law, any income that we generate from derivatives or other transactions intended to hedge our interest rate risks, or any income from foreign currency or other hedges, will generally be treated as nonqualifying income for purposes of the REIT 75% and 95% gross income tests unless specified requirements are met. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.

ITEM 1B.  -  UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.  -  PROPERTIES

Our property portfolio is comprised of quality office buildings located in selected submarkets of long-term growth of Honolulu and the western United States, including southern California and the greater Phoenix metropolitan area. Each property is owned either through entities wholly-owned by us or through joint ventures.  We hold managing ownership interests in six of our seven joint ventures.

20



As of December 31, 2009, our Property Portfolio consisted of 24 institutional quality office properties, including co-owned properties, comprising 4.7 million rentable square feet in 45 separate buildings. Each of our properties is suitable and adequate for its intended use. Currently, approximately half of our Property Portfolio, on a rentable area basis, is owned in partnership with institutional investors. The following tables contain descriptive information about all of our properties as of December 31, 2009.


PROPERTY
 
NO. OF
BUILDINGS
   
YEAR BUILT/
RENOVATED
   
RENTABLE
SQ. FT.
   
PERCENTAGE
OWNERSHIP
   
ANNUALIZED
RENT(1)(2)
 
Consolidated Properties
                             
Waterfront Plaza
                             
500 Ala Moana Blvd.
    1       1988/2006       534,475       100.0 %   $ 17,092,221  
Honolulu, HI 96813
                                       
                                         
Davies Pacific Center
                                       
841 Bishop Street
    1       1972/2006       353,224       100.0 %     10,648,452  
Honolulu, HI 96813
                                       
                                         
Pan Am Building
                                       
1600 Kapiolani Blvd.
    1       1969/2005       209,889       100.0 %     7,542,984  
Honolulu, HI 96814
                                       
                                         
First Insurance Center
                                       
1100 Ward Avenue
    1       1960       202,992       100.0 %     6,959,220  
Honolulu, HI 96814
                                       
                                         
PBN Building
                                       
1833 Kalakaua Avenue
    1       1964/2006       90,559       100.0 %     2,121,576  
Honolulu, HI 96815
                                       
                                         
Clifford Center
                                       
810 Richards Street
    1       1964/2005       72,415       100.0 %     1,679,772  
Honolulu, HI 96813
                                       
                                         
Sorrento Technology Center
                                       
10140 Barnes Canyon Rd.
    2       1985       63,363       100.0 %     1,550,568  
10180 Barnes Canyon Rd.
                                       
San Diego, CA 92121
                                       
                                         
City Square
                                       
3800 N. Central Ave.
    3       1961/1988       738,422       100.0 %     10,954,716  
3838 N. Central Ave.
            1971/1994                          
4000 N. Central Ave.
            1965/2000                          
Phoenix, AZ 85012
                                       
                                         
Total Consolidated  Properties
    11               2,265,339             $ 58,549,509  
 

21

 

PROPERTY
 
NO. OF
BUILDINGS
   
YEAR BUILT/
RENOVATED
   
RENTABLE
SQ. FT.
   
PERCENTAGE
OWNERSHIP
   
ANNUALIZED
RENT(1)(2)
 
Joint Venture Properties
                             
Torrey Hills Corp. Center
                             
11250 El Camino Real
    1       1998       24,066       32.2 %   $ 893,796  
San Diego, CA 92130
                                       
                                         
Palomar Heights Plaza
                                       
5860 Owens Avenue
    3       2001       45,538       32.2 %     740,436  
5868 Owens Avenue
                                       
5876 Owens Avenue
                                       
Carlsbad, CA 92008
                                       
                                         
Palomar Heights Corp. Center
                                       
5857 Owens Avenue
    1       1999       64,812       32.2 %     1,617,564  
Carlsbad, CA 92008
                                       
                                         
Scripps Ranch Bus. Park
                                       
9775 Business Park Ave.
    2       1984/2006       47,248       32.2 %     545,988  
10021 Willow Creek Rd.
                                       
San Diego, CA 92131
                                       
                                         
Via Frontera Bus. Park
                                       
10965 Via Frontera Dr.
    2       1979/1996       78,819       10.0 %     1,472,388  
10993 Via Frontera Dr.
                                       
San Diego, CA 92127
                                       
                                         
Poway Flex
                                       
13550 Stowe Drive
    1       1991       112,000       10.0 %     1,048,320  
Poway, CA 92064
                                       
                                         
Carlsbad Corp. Center.
                                       
1950 Camino Vida Roble
    1       1996       121,528       10.0 %     1,836,816  
Carlsbad, CA 92008
                                       
                                         
Savi Tech Center
                                       
22705 Savi Ranch Pkwy.
    4       1989       372,327       10.0 %     6,953,748  
22715 Savi Ranch Pkwy.
                                       
22725 Savi Ranch Pkwy.
                                       
22745 Savi Ranch Pkwy.
                                       
Yorba Linda, CA 92887
                                       
                                         
Yorba Linda Bus. Park
                                       
22833 La Palma Ave.
    5       1988       166,042       10.0 %     1,817,652  
22343 La Palma Ave.
                                       
22345 La Palma Ave.
                                       
22347 La Palma Ave.
                                       
22349 La Palma Ave.
                                       
Yorba Linda, CA 92887
                                       
                                         
South Coast Exec. Center
                                       
1503 South Coast Dr.
    1       1980/1997       61,025       10.0 %     807,036  
Costa Mesa, CA 92626
                                       
                                         
Gateway Corp. Center
                                       
1370 Valley Vista Dr.
    1       1987       85,216       10.0 %     2,009,940  
Diamond Bar, CA 91765
                                       

 
22

 

PROPERTY
 
NO. OF
BUILDINGS
   
YEAR BUILT/
RENOVATED
   
RENTABLE
SQ. FT.
   
PERCENTAGE
OWNERSHIP
   
ANNUALIZED
RENT(1)(2)
 
Black Canyon Corp. Ctr.
                             
16404 N. Black Canyon Hwy.
    1       1980/2006       218,694       17.5 %     2,524,680  
Phoenix, AZ 85053
                                       
                                         
Bank of Hawaii Waikiki Center
                                       
2155 Kalakaua Avenue
    1       1980/1989       152,288       17.5 %     6,809,940  
Honolulu, HI 96815
                                       
                                         
Seville Plaza
                                       
5469 Kearny Villa Rd.
    3       1976/2002       138,576       7.5 %     2,819,796  
5471 Kearny Villa Rd.
                                       
5473 Kearny Villa Rd.
                                       
San Diego, CA 92123
                                       
                                         
U.S. Bank Center
                                       
101 North First Ave.
    2       1976/2000-05       372,676       7.5 %     6,610,941  
21 West Van Buren St.
            1954                          
Phoenix, AZ 85003
                                       
                                         
Seaview Corporate Center
    5       1983-2001/       356,504       5.0 %     10,015,356  
10180 Telesis Court
            2005                          
10190 Telesis Court
                                       
10182 Telesis Court
                                       
10188 Telesis Court
                                       
San Diego, CA 92121
                                       
                                         
Total Joint Venture Properties
    34               2,417,359             $ 48,524,397  
Total Property Portfolio (3)
    45               4,682,698             $ 107,073,906  
Total Effective Portfolio (4)
                    2,544,562             $ 64,207,364  
 
(1)
Represents annualized monthly contractual rent under existing leases as of December 31, 2009. This amount reflects total rent before abatements and includes expense reimbursements, some of which are estimated. Total abatements committed to as of December 31, 2009 for the twelve months ended December 31, 2010 were approximately $0.213 million for our consolidated properties and $0.068 million for our unconsolidated joint venture properties.  Annualized rent for the unconsolidated joint venture properties are reported with respect to each property in its entirety, rather than the portion of the property represented by our ownership interest.
 
Existing net rents are converted to gross rents by adding estimated annualized operating expense reimbursements to base rents.
 
(3)
Rentable square feet and annualized rent for the Total Property Portfolio are reported as the sum of the amounts reported for each property in its entirety, rather than the portion of the property represented by our ownership interest.
 
(4)
Rentable square feet and annualized rent for the Total Effective Portfolio are reported with respect to the portion of our properties represented by our ownership interest.
 

 
23 

 

Occupancy Rates and Annualized Rents

The following table sets forth the occupancy rate and average annualized rent per square foot for each of our properties at December 31st of each of the past five years commencing with the year of the property’s acquisition by either the Company or affiliates of The Shidler Group.

Consolidated Properties

 
 
OCCUPANCY RATES(1)
   
ANNUALIZED RENT PER LEASED SF(2) (3)
 
Property
 
2005
   
2006
   
2007
   
2008
   
2009
   
2005
   
2006
   
2007
   
2008
   
2009
 
Waterfront Plaza
    85 %     94 %     91 %     86 %     94 %   $ 29.52     $ 29.41     $ 31.37     $ 33.95     $ 37.12  
Davies Pacific Center
    89 %     90 %     85 %     87 %     86 %     27.25       30.10       31.54       35.93       35.12  
Pan Am Building
    93 %     93 %     98 %     97 %     93 %     28.77       31.60       31.73       38.83       38.57  
First Insurance Center
    97 %     97 %     97 %     97 %     99 %     24.54       30.59       33.07       35.82       34.61  
PBN Building
    81 %     75 %     72 %     73 %     73 %     24.66       27.92       29.06       31.36       32.33  
Clifford Center
    69 %     79 %     79 %     81 %     83 %     20.46       24.36       27.18       29.39       31.95  
Sorrento Tech. Center
    100 %     100 %     100 %     100 %     100 %     24.90       21.41       22.14       23.70       24.47  
City Square
    63 %     73 %     77 %     77 %     72 %     17.11       18.39       18.29       20.35       20.64  
Total/Weighted Average
    80 %     86 %     86 %     85 %     85 %   $ 24.71     $ 26.33     $ 27.27     $ 30.39     $ 31.26  


Joint Venture Properties

   
OCCUPANCY RATES(1)
   
ANNUALIZED RENT PER LEASED SF(2)(3)
 
PROPERTY
 
2005
   
2006
   
2007
   
2008
   
2009
   
2005
   
2006
   
2007
   
2008
   
2009
 
Torrey Hills Corp. Center
                      100 %     89 %    $      $      $     $ 40.00     $ 41.81  
Palomar Heights Plaza
                      88 %     70 %                       25.08       23.07  
Palomar Heights Corp. Center
                      90 %     87 %                       27.67       28.85  
Scripps Ranch Business Park
                      85 %     44 %                       18.89       26.20  
Via Frontera Bus. Park
          70 %     93 %     93 %     100 %           17.21       16.47       19.39       18.68  
Poway Flex
          100 %     100 %     100 %     100 %           8.40       9.49       9.00       9.36  
Carlsbad Corp. Center
          44 %     44 %     67 %     95 %           15.15       15.42       16.47       17.60  
Savi Tech Center
          97 %     97 %     97 %     97 %           16.87       18.39       18.80       19.26  
Yorba Linda Bus. Park
          94 %     95 %     87 %     94 %           9.99       10.79       11.65       11.66  
South Coast Exec. Center
          100 %     80 %     60 %     51 %           24.34       24.10       25.43       25.82  
Gateway Corp. Center
          84 %     94 %     94 %     91 %           24.62       25.90       27.45       26.65  
Black Canyon Corp. Center
                65 %     65 %     65 %                 15.60       16.43       17.85  
Bank of Hawaii Waikiki Center
                88 %     87 %     86 %                 38.90       54.05       52.25  
Seville Plaza
    94 %     90 %     92 %     77 %     75 %     21.54       24.93       26.94       26.84       27.04  
U.S. Bank Center
          77 %     79 %     80 %     80 %           18.64       20.53       22.37       22.26  
Seaview Corporate Center
                            92 %                             31.05  
Total/Weighted Average
    94 %     85 %     84 %     84 %     85 %   $ 21.54     $ 17.21     $ 19.95     $ 22.39     $ 23.73  
 
Portfolio Totals
    81 %     85 %     85 %     85 %     85 %   $ 24.50     $ 22.70     $ 23.98     $ 26.60     $ 27.33  



 
(1)  Based on leases commenced as of December 31st of each historical year.
 
(2)  Annualized Rent Per SF represents annualized gross rent divided by total occupied square feet.
 
(3)  Annualized rent for existing net rents are converted to gross rent by adding estimated expense reimbursements to base rents.

 
24 

 

 Tenant Diversification

The following tables provide information on the largest tenants, by annualized rental revenue, in our properties as a portfolio as of December 31, 2009. No single tenant accounts for 10% or more of our total consolidated revenues.

Consolidated Properties
 

 
 
 
Tenant
 
 
Lease
Expiration
Market
Rentable
Square
Feet
   
Annualized
Rental
Revenue(1)
   
% of Total
Annualized
Rent
 
 
 
 
Property
 
 
 
Industry
First Insurance Company of Hawaii Ltd.
02/28/18
    109,755     $ 3,976,236       6.79 %  
First Insurance Ctr.
Insurance
Hawaii InsuranceConsultants, Ltd.
12/31/12
    79,159       3,230,859       5.52 %  
Waterfront Plaza
Insurance
AZ Dept. of Economic Security.
12/31/12
    104,059       1,974,852       3.37 %  
City Square
Government
Straub Clinic & Hospital
01/31/13
    55,986       1,727,376       2.95 %  
First Insurance Ctr.
Healthcare
AT&T Corp.
06/30/10
    26,160       1,097,040       1.87 %  
Waterfront Plaza
Communications
Mc Corriston, Miho, Miller, Mukai, LLP
12/31/11
    35,828       1,025,508       1.75 %  
Waterfront Plaza
Legal Services
Oahu Publications, Inc.
01/31/13
    25,691       1,006,716       1.72 %  
Waterfront Plaza
Journalism
Fujitsu Transaction Solutions, Inc.
12/31/10
    37,886       912,024       1.56 %  
Sorrento Technology Ctr.
Technology
Royal State Financial Corp.
10/31/11
    22,119       855,096       1.46 %  
Pan Am Building
Insurance
AZ DES-Social Security
05/31/14
    39,524       820,908       1.41 %  
City Square
Government
Total Annualized Rental Revenue for Top Ten Tenants
            $