THOMAS PROPERTIES GROUP INC - FORM 10-Q

Attached files

file	filename
EX-31.2 - SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER - THOMAS PROPERTIES GROUP INC	dex312.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - THOMAS PROPERTIES GROUP INC	dex321.htm
EX-32.2 - SECTION 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER - THOMAS PROPERTIES GROUP INC	dex322.htm
EX-10.66 - CONTRIBUTION AGREEMENT - TWO COMMERCE SQUARE - THOMAS PROPERTIES GROUP INC	dex1066.htm
EX-10.65 - CONTRIBUTION AGREEMENT - ONE COMMERCE SQUARE - THOMAS PROPERTIES GROUP INC	dex1065.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - THOMAS PROPERTIES GROUP INC	dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010.

¨	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 0-50854

THOMAS PROPERTIES GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware		20-0852352
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)

515 South Flower Street, Sixth Floor Los Angeles, CA		90071
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (213) 613-1900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 x No ¨

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 ¨ No ¨

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. (Check one):


Large Accelerated Filer ¨		Accelerated Filer ¨		Non-accelerated Filer x		Smaller reporting company ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class				Outstanding at November 11, 2010
Common Stock, $.01 par value per share				35,443,394

THOMAS PROPERTIES GROUP, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS


		PAGE NO.
PART I. FINANCIAL INFORMATION

ITEM 1.	Consolidated Financial Statements of Thomas Properties Group, Inc. and Subsidiaries
	Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009 (audited)		3

	Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)		4

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)		5

	Notes to Consolidated Financial Statements (unaudited)		6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

ITEM 3.	Quantitative and Qualitative Disclosure about Market Risk		35

ITEM 4.	Controls and Procedures		35

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings		36

ITEM 1A.	Risk Factors		36

ITEM 6.	Exhibits		48

Signatures			49

PART I. FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	September 30, 2010			December 31, 2009
	(unaudited)			(audited)
ASSETS
Investments in real estate:
Operating properties, net of accumulated depreciation of $103,032 and $95,561 as of September 30, 2010 and December 31, 2009, respectively	$	269,217		$	276,603
Land improvements – development properties		94,906			95,558

		364,123			372,161

Condominium units held for sale		54,600			64,101
Improved land held for sale		4,571			4,508
Investments in unconsolidated real estate entities		17,124			14,458
Cash and cash equivalents, unrestricted		43,167			35,935
Restricted cash		9,006			12,071
Rents and other receivables, net		1,794			2,073
Receivables from unconsolidated real estate entities		2,068			2,010
Deferred rents		14,167			12,954
Deferred leasing and loan costs, net		13,343			15,375
Other assets, net		19,730			23,757

Total assets	$	543,693		$	559,403

LIABILITIES AND EQUITY
Liabilities:
Mortgage loans	$	254,737		$	255,104
Other secured loans		47,220			63,132
Accounts payable and other liabilities, net		27,556			35,573
Prepaid rent and deferred revenue		3,125			3,249

Total liabilities		332,638			357,058


Commitments and Contingencies

Equity:
Stockholders’ equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued or outstanding as of September 30, 2010 and December 31, 2009		—			—
Common stock, $.01 par value, 225,000,000 shares authorized, 35,394,894 and 30,878,621 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively		354			308
Limited voting stock, $.01 par value, 20,000,000 shares authorized, 13,813,331 shares issued and outstanding as of September 30, 2010 and December 31, 2009		138			138
Additional paid-in capital		200,833			185,344
Retained deficit and dividends including $35 and $74 of other comprehensive loss as of September 30, 2010 and December 31, 2009, respectively		(54,676	)		(49,394	)

Total stockholders’ equity		146,649			136,396

Noncontrolling interests:
Unitholders in the Operating Partnership		61,033			63,042
Partners in consolidated real estate entities		3,373			2,907

Total noncontrolling interests		64,406			65,949

Total equity		211,055			202,345

Total liabilities and equity	$	543,693		$	559,403

See accompanying notes to consolidated financial statements.

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Revenues:
Rental	$	7,330		$	7,385		$	21,818		$	22,499
Tenant reimbursements		4,976			4,566			15,476			16,151
Parking and other		853			571			2,651			2,156
Investment advisory, management, leasing and development services		1,645			2,622			5,594			7,158
Investment advisory, management, leasing and development services – unconsolidated real estate entities		3,673			3,388			11,126			11,229
Reimbursement of property personnel costs		1,403			1,425			4,213			4,213
Condominium sales		5,237			22,927			14,559			22,927

Total revenues		25,117			42,884			75,437			86,333

Expenses:
Property operating and maintenance		5,948			5,936			18,659			18,439
Real estate taxes		1,745			1,943			5,221			5,427
Investment advisory, management, leasing and development services		2,953			2,799			7,987			8,638
Reimbursable property personnel costs		1,403			1,425			4,213			4,213
Cost of condominium sales		3,858			20,892			10,655			20,892
Interest		4,820			6,787			14,368			20,415
Depreciation and amortization		3,432			3,008			10,405			9,373
General and administrative		3,365			3,907			9,861			12,280
Impairment loss		—			8,600			—			8,600

Total expenses		27,524			55,297			81,369			108,277

Gain on early extinguishment of debt		—			—			—			509
Interest income		17			34			55			287
Equity in net income (loss) of unconsolidated real estate entities		538			(3,103	)		(938	)		(595	)

Loss before income taxes and noncontrolling interests		(1,852	)		(15,482	)		(6,815	)		(21,743	)
Provision for income taxes		(62	)		(242	)		(417	)		(480	)

Net loss		(1,914	)		(15,724	)		(7,232	)		(22,223	)
Noncontrolling interests’ share of net loss:
Unitholders in the Operating Partnership		530			6,007			2,039			7,456
Partners in consolidated real estate entities		(51	)		(1,195	)		(128	)		934

		479			4,812			1,911			8,390

TPGI share of net loss	$	(1,435	)	$	(10,912	)	$	(5,321	)	$	(13,833	)

Loss per share-basic and diluted	$	(0.04	)	$	(0.43	)	$	(0.16	)	$	(0.56	)
Weighted average common shares-basic and diluted		34,910,415			25,212,319			33,218,238			24,978,388

See accompanying notes to consolidated financial statements.

THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine months ended September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(7,232	)	$	(22,223	)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on early extinguishment of debt		—			(509	)
Gain on sale of condominiums		(3,904	)		(2,035	)
Equity in net loss of unconsolidated real estate entities		938			595
Deferred rents		(1,067	)		(762	)
Deferred taxes and interest on unrecognized benefits		278			(309	)
Depreciation and amortization expense		10,405			9,373
Bad debt expense		76			119
Amortization of loan costs		694			372
Amortization of above and below market leases, net		1			23
Vesting of stock options, restricted stock and incentive units		467			2,258
Distributions from operations of unconsolidated real estate entities		—			24
Impairment loss		—			8,600
Changes in operating assets and liabilities:
Rents and other receivables		242			(204	)
Receivables – unconsolidated real estate entities		(58	)		2,198
Deferred leasing and loan costs		(1,393	)		(1,415	)
Other assets		(143	)		(2,250	)
Deferred interest payable		736			3,587
Accounts payable and other liabilities		(1,627	)		(2,529	)
Prepaid rent and deferred revenue		(119	)		(1,250	)

Net cash used in operating activities		(1,706	)		(6,337	)

Cash flows from investing activities:
Expenditures for improvements to real estate		(2,790	)		(13,903	)
Reimbursement of development costs		500			—
Proceeds from sale of condominiums, net of closing costs		13,555			29,710
Return of capital from unconsolidated real estate entities		10,017			3,734
Contributions to unconsolidated real estate entities		(13,575	)		(4,600	)

Net cash provided by investing activities		7,707			14,941

Cash flows from financing activities:
Proceeds from equity offering, net		15,133			—
Payment of dividends to common stockholders and distributions to limited partners of the Operating Partnership		—			(3,378	)
Proceeds from mortgage and other secured loans		261			7,130
Principal payments of mortgage and other secured loans		(17,280	)		(32,764	)
Noncontrolling interest contributions		338			1,543
Noncontrolling interest distributions		—			(14	)
Change in restricted cash		2,779			438

Net cash provided by (used in) financing activities		1,231			(27,045	)

Net increase (decrease) in cash and cash equivalents		7,232			(18,441	)
Cash and cash equivalents at beginning of period		35,935			69,023

Cash and cash equivalents at end of period	$	43,167		$	50,582

Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	12,962		$	20,757
Supplemental disclosure of non-cash investing and financing activities:
Accrual for declaration of dividends to common shareholders and distributions to limited partners of the Operating Partnership	$	—		$	(1,877	)
Investments in real estate included in accounts payable and other liabilities	$	(959	)	$	(9,245	)
Decrease in investments in real estate and accumulated depreciation for write-off of fully depreciated improvements.	$	644		$	15,318
Decrease in leasing costs and accumulated amortization for removal of fully amortized leasing costs	$	1,014		$	1,214
Reclassification of noncontrolling interests for limited partnership units in the Operating Partnership from additional paid in capital	$	—		$	7,576
Receivables from condominium units under contract	$	—		$	8,699
Other comprehensive income	$	(55	)	$	(68	)

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements (unaudited)

1. Organization and Description of Business

The terms “Thomas Properties”, “the Company”, “us”, “we” and “our” as used in this report refer to Thomas Properties Group, Inc. (“TPGI”) together with our Operating Partnership, Thomas Properties Group, L.P. (“TPG”).

We own, manage, lease, acquire and develop real estate, consisting primarily of office properties and related parking garages, located in Southern California; Sacramento, California; Philadelphia, Pennsylvania; Northern Virginia; Houston, Texas; and Austin, Texas.

Our operations are carried on through our Operating Partnership. We are the sole general partner in the Operating Partnership. Mr. James A. Thomas, our Chairman, Chief Executive Officer and President, and affiliates of Mr. Thomas hold limited partnership units in the Operating Partnership. As of September 30, 2010, we held a 71.6% interest in the Operating Partnership which we consolidate, as we have control over the major decisions of the Operating Partnership.

As of September 30, 2010, we were invested in the following real estate properties:


Property	Type	Location
Consolidated properties:
One Commerce Square	High-rise office	Philadelphia Central Business District, Pennsylvania (“PCBD”)
Two Commerce Square	High-rise office	PCBD
Murano	Residential condominiums held for sale	PCBD
2100 JFK Boulevard	Undeveloped land; Residential/Office/Retail	PCBD
Four Points Centre	Suburban office; Undeveloped land; Office/Retail/Research and Development/Hotel	Austin, Texas
Campus El Segundo	Developable land and land held for sale; Site infrastructure complete; Office/Retail/ Research and Development/Hotel	El Segundo, California
Metro Studio@Lankershim	Entitlements and pre-development in progress; Office/Studio/Production/Retail	Los Angeles, California
Unconsolidated properties:
2121 Market Street	Residential and Retail	PCBD
TPG/CalSTRS, LLC (“TPG/CalSTRS”):
City National Plaza	High-rise office	Los Angeles Central Business District, California
Reflections I	Suburban office—single tenancy	Reston, Virginia
Reflections II	Suburban office—single tenancy	Reston, Virginia
Four Falls Corporate Center (1)	Suburban office	Conshohocken, Pennsylvania
Oak Hill Plaza (1)	Suburban office	King of Prussia, Pennsylvania
Walnut Hill Plaza (1)	Suburban office	King of Prussia, Pennsylvania
San Felipe Plaza	High-rise office	Houston, Texas
2500 City West	Suburban office	Houston, Texas
Brookhollow Central I - III	Suburban office	Houston, Texas
CityWestPlace	Suburban office and undeveloped land	Houston, Texas
Centerpointe I & II	Suburban office	Fairfax, Virginia
Fair Oaks Plaza	Suburban office	Fairfax, Virginia
TPG-Austin Portfolio Syndication Partners JV, LP (“Austin Portfolio Joint Venture”):
San Jacinto Center	High-rise office	Austin Central Business District, Texas, (“ACBD”)
Frost Bank Tower	High-rise office	ACBD
One Congress Plaza	High-rise office	ACBD
One American Center	High-rise office	ACBD
300 West 6^thStreet	High-rise office	ACBD
Research Park Plaza I & II	Suburban Office	Austin, Texas
Park Centre	Suburban Office	Austin, Texas
Great Hills Plaza	Suburban Office	Austin, Texas
Stonebridge Plaza II	Suburban Office	Austin, Texas
Westech 360 I-IV	Suburban Office	Austin, Texas

(1)	Properties controlled by a Special Servicer.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements of our company include all the accounts of Thomas Properties Group, Inc., the Operating Partnership and the subsidiaries of the Operating Partnership.

The real estate entities included in the consolidated financial statements have been consolidated only for the periods that such entities were under control by us or in which we were considered to be the primary beneficiary of an entity that we determined to be a variable interest entity. The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 810, “Consolidation”, which provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIE (the “primary beneficiary”). The equity method of accounting is utilized to account for investments in real estate entities over which we have significant influence, but not control over major decisions, including the decision to sell or refinance the properties owned by such entities. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

We have a $29.1 million preferred equity interest in Murano, an investment which we consolidate. In addition to our preferred equity, there is a priority interest of $8.5 million of which $7.3 million is due to us and $1.2 million is due to our partner. Excluding our preferred equity interest and the priority interest, our partner has a 27.0% ownership interest in Murano which we record as a noncontrolling interest (partners in consolidated real estate entities).

Income (Loss) Per Share

The computation of basic income (loss) per share is based on net income (loss) and the weighted average number of shares of our common stock outstanding during the period. The computation of diluted income (loss) per share includes the assumed exercise of outstanding stock options and the effect of the vesting of restricted stock and incentive units that have been granted to employees in connection with stock based compensation, all calculated using the treasury stock method. In accordance with FASB ASC 260-10-45, “Earnings Per Share”, the Company’s unvested restricted stock and unvested incentive units are considered to be participating securities and are included in the computation of earnings per share to calculate a two class earnings per share. We only present the earnings per share attributable to the common shareholders. See Note 5 – Income (Loss) Per Share and Dividends Declared.

Development Activities

Project costs associated with the development and construction of a real estate project are capitalized on our balance sheet. In addition, interest, loan fees, real estate taxes, and general and administrative expenses that are directly associated with and incremental to our development activities and other costs are capitalized during the period in which activities necessary to get the property ready for its intended use are in progress, including the pre-development and lease-up phases. Once the development and construction of the building shell of a real estate project is completed, the costs capitalized to construction in progress are transferred to operating properties, in the case of Murano, the costs capitalized are transferred to condominium units held for sale. Capitalized interest as of September 30, 2010 and December 31, 2009, is $19.1 million and $19.6 million, respectively. No interest was capitalized for the nine months ended September 30, 2010.

Revenue Recognition - Condominium Sales

We have one high-rise condominium project for which we used the percentage of completion accounting method to recognize costs and sales during the construction period, up through and including June 30, 2009. Commencing with the third quarter of 2009, we applied the deposit method of accounting to recognize costs and sales. Under the provisions of FASB ASC 360-20, “Property, Plant and Equipment” subsection “Real Estate and Sales”, revenue and costs for projects are recognized when all parties are bound by the terms of the contract, all consideration has been exchanged, any permanent financing for which the seller is responsible has been arranged and all conditions precedent to closing have been performed. This results in profit from the sale of condominium units recognized at the point of settlement as compared to the point of sale. Revenue is recognized on the contract price of individual units. Total estimated costs, net of impairment charges, are allocated to individual units which have closed on a relative value basis. Total estimated revenue and construction costs are reviewed periodically, and any change is applied to current and future periods.

Forfeited customer deposits are recognized as revenue in the period in which we determine that the customer will not complete the purchase of the condominium unit and when we determine we have the right to keep the deposit. No forfeitures were recognized in the nine months ended September 30, 2010 while we recognized forfeiture revenue of $56,000 and $397,000 for the three and nine months ended September 30, 2009, respectively.

Impairment of Long-Lived Assets

We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets held for sale are reported at the lower of the carrying amount or fair value, less costs to sell. We record the Murano condominium units at the lower of cost or estimated fair value as the condominium units meet the held for sale criteria of FASB ASC 360, “Property, Plant, and Equipment.” Included in Equity in net loss of unconsolidated real estate entities for the three and nine months ended September 30, 2009, is a pre-tax, non-cash impairment charge of $2.0 million related to our joint venture investments. There was no corresponding charge for the three or nine months ended September 30, 2010. We recorded our share of the impairment loss at the joint venture level as these investments met the other-than-temporary impairment criteria of FASB ASC 323, “Investments – Equity Method and Joint Ventures.”

Recent Accounting Pronouncements

Changes to U.S. generally accepted accounting principles (“GAAP”) are established by the FASB in the form of accounting standards updates (ASUs) to the FASB’s Accounting Standards Codification. We consider the applicability and impact of all ASUs. Newly issued ASUs not listed below are expected to have no impact on our consolidated financial position and results of operations, because either the ASU is not applicable or the impact is expected to be immaterial.

In January 2010, the Company adopted FASB ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. The adoption of this accounting update did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the Company adopted FASB ASC 810, “Consolidation.” FASB ASC 810 revises the approach to determining the primary beneficiary of a variable interest entity to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE. The amended VIE provisions of FASB ASC 810 are effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of this accounting standard did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events” (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This standard amends the authoritative guidance for subsequent events that was previously issued and, among other things, exempts SEC registrants from the requirement to disclose the date through which it has evaluated subsequent events for either original or restated financial statements. This standard does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provides different guidance on the accounting treatment for subsequent events or transactions. The adoption of this ASU did not have a material effect on our financial position and results of operations as it only addresses disclosures.

Interim Financial Data

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and our subsequent Form 10-Q quarterly reports, each of which is filed with the SEC.

The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions. These estimates and assumptions are subjective and affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Subsequent Events

We have evaluated subsequent events through the date of this report, which is concurrent with the date we filed this report with the SEC. See Note 9 for details of subsequent events.

3. Unconsolidated Real Estate Entities

The unconsolidated real estate entities include our share of the entities that own 2121 Market Street, the TPG/CalSTRS properties and the Austin Portfolio Joint Venture properties. TPG/CalSTRS owns the following properties:

•

City National Plaza (acquired January 2003)

•

Reflections I (acquired October 2004)

•

Reflections II (acquired October 2004)

•

Four Falls Corporate Center (acquired March 2005) (1)

•

Oak Hill Plaza (acquired March 2005) (1)

•

Walnut Hill Plaza (acquired March 2005) (1)

•

San Felipe Plaza (acquired August 2005)

•

2500 City West (acquired August 2005)

•

Brookhollow Central I, II and III (acquired August 2005)

•

CityWestPlace land (acquired December 2005)

•

CityWestPlace (acquired June 2006)

•

Centerpointe I and II (acquired January 2007)

•

Fair Oaks Plaza (acquired January 2007)

The following investment entity that holds a mortgage loan receivable related to Brookhollow Central is accounted for using the equity method of accounting. The note receivable held by this subsidiary was paid off during the quarter and this entity will be subsequently dissolved:

•

BH Note B Lender, LLC (formed in October 2008)

TPG/CalSTRS also owns a 25% interest in the Austin Portfolio Joint Venture which owns the following properties that were acquired in June 2007:

•

San Jacinto Center

•

Frost Bank Tower

•

One Congress Plaza

•

One American Center

•

300 West 6th Street

•

Research Park Plaza I & II

•

Park Centre

•

Great Hills Plaza

•

Stonebridge Plaza II

•

Westech 360 I-IV

(1)	Properties controlled by a Special Servicer.

Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements. Following are the stated ownership percentages, prior to any preferred or special allocations, as of September 30, 2010.


2121 Market Street	50.0	%
TPG/CalSTRS:
Austin Portfolio Joint Venture	6.25	%
City National Plaza	7.94	%
All properties, excluding the Austin Portfolio Joint Venture and City National Plaza	25.0	%

Investments in unconsolidated real estate entities as of September 30, 2010 and December 31, 2009 are as follows:


	September 30, 2010			December 31, 2009
TPG/CalSTRS	$	8,826		$	4,278
Austin Portfolio Joint Venture		10,713			12,072

Subtotal – TPG/CalSTRS and Austin Portfolio Joint Venture		19,539			16,350
2121 Market Street		(2,415	)		(1,892	)

	$	17,124		$	14,458

The following is a summary of the investments in unconsolidated real estate entities for the nine months ended September 30, 2010:


Investment balance, December 31, 2009	$	14,458
Contributions		13,575
Other comprehensive income		55
Equity in net loss		(938	)
Distributions		(10,017	)
Other		(9	)

Investment balance, September 30, 2010	$	17,124

TPG/CalSTRS, a joint venture with the California State Teachers’ Retirement System (“CalSTRS”), was formed to acquire office properties on a nationwide basis classified as moderate risk (core plus) and high risk (value add) properties. Core plus properties consist of under-performing properties that we believe can be brought to market potential through improved management. Value-add properties are characterized by unstable net operating income for an extended period of time, occupancy less than 90% and/or physical or management problems which we believe can be positively impacted by introduction of new capital and/or management. We are required to use diligent efforts to sell each joint venture property within five years of that property reaching stabilization, except for certain stabilized properties, as to which we are required to perform a hold/sell analysis at least annually and make a recommendation to the TPG/CalSTRS’ management committee regarding the appropriate holding period.

The total capital commitment to the joint venture was $511.7 million, of which approximately $24.8 million and $19.0 million is currently unfunded by CalSTRS and us, respectively.

A buy-sell provision may be exercised by either CalSTRS or us. Under this provision, the initiating party sets a price for its interest in the joint venture, and the other party has a specified time to elect to either buy the initiating party’s interest or to sell its own interest to the initiating party. Upon the occurrence of certain events, CalSTRS also has a buy-out option to purchase our interest in the joint venture. The buyout price is based upon a 3% discount to the appraised fair market value.

During the second quarter of 2009, TPG/CalSTRS redeemed a 15% membership interest held by a noncontrolling owner in the City National Plaza (“CNP”) partnership. The redemption price of $19.8 million was financed with a promissory note due in 2012.

During the first quarter of 2010, CalSTRS, our partner in CNP, acquired all of the property’s mezzanine debt. On July 6, 2010, CalSTRS contributed this debt to the equity in TPG/CalSTRS, reducing the leverage on CNP by the full $219.1 million balance on the mezzanine loans. Solely with respect to the interest of TPG/CalSTRS in CNP, CalSTRS’ percentage interest increased from 75% to 92.1% and TPG’s percentage interest decreased from 25% to 7.9%. We are in discussions with CalSTRS to obtain an option to participate in up to an additional 17.1% interest in CNP through TPG/CalSTRS. On July 6, 2010, a subsidiary of TPG/CalSTRS that owns CNP entered into a new non-recourse first mortgage loan in the amount of $350.0 million. The loan bears interest at a fixed rate of 5.9% and is for a term of ten years, to mature on July 1, 2020.

On October 19, 2010, TPG/CalSTRS invested $40.0 million as new equity in our Centerpointe partnership, which was used to retire $46.6 million of mezzanine debt, realizing a 14.2% discount from the face amount of the debt which included releasing loan reserves of approximately $11.7 million held by the lenders to TPG/CalSTRS to use for capital needs at the property. This new equity, of which the Company contributed $2.0 million or 5%, will be treated as preferred equity. Prior to February 9, 2012, we have the right to increase our interest percentage in preferred equity to 25%, and commensurately reduce CalSTRS’ interest percentage in preferred equity to 75%, by contributing to the Centerpointe partnership an amount equal to 20% of the face amount of the retired debt, equal to approximately $9.3 million. The contribution to increase our interest percentage would be distributed to CalSTRS.

As of January 1, 2010, in connection with the adoption of the updated provisions of ASC 810, pursuant to FASB No. 167, which amends FIN 46(R), TPG/CalSTRS and the Austin Portfolio Joint Venture were deemed to be variable interest entities for which we were not considered to be the primary beneficiary. In connection with the TPG/CalSTRS joint venture, CalSTRS and TPG acting together are considered to have the power to direct the activities of the joint venture that most significantly impact the joint venture economic performance and therefore neither TPG nor CalSTRS is considered to be the primary beneficiary. We determined the key activities that drive the economic performance of the joint venture to be (1) the acquisition and development of real estate (including capital improvements), (2) financing, and (3) leasing. In connection with these key activities, the TPG/CalSTRS venture agreement requires unanimous approval by the two members.

In connection with the Austin Portfolio Joint Venture, TPG/CalSTRS was not considered to be the primary beneficiary due to the fact that the power to direct the activities of the joint venture is shared among multiple unrelated parties such that no one party has the power to direct the activities of the joint venture that most significantly impact the joint venture’s economic performance. In connection with the Austin Portfolio Joint Venture, we determined the key activities that drive the economic performance of the joint venture to be (1) the acquisition and development of real estate (including capital improvements), (2) financing, and (3) leasing. In connection with these key activities, the Austin Portfolio Joint Venture partnership agreement requires either unanimous or majority approval of decisions by the respective partners. We therefore determined the power to direct the activities to be shared amongst the Partners so that no one Partner has the power to direct the activities that most significantly impact the partnership’s economic performance. As of September 30, 2010, our total maximum exposure to loss to TPG/CalSTRS and the Austin Portfolio Joint Venture is:

(1)

Our equity investment in the various properties controlled by TPG/CalSTRS and the Austin Portfolio Joint Venture as of September 30, 2010, which was $19.5 million, as presented earlier in this note.

(2)

The potential loss of future fee revenues which we earn in connection with the management and leasing agreements with the various properties controlled by the respective joint ventures. We earn fee revenues in connection with those management and leasing agreements for services such as property management, leasing, asset management and property development. The management and leasing agreements with the various properties generally expire on an annual basis and are automatically renewed for successive periods of one year each, unless we elect not to renew the agreements. As of September 30, 2010, we had total receivables of $1.3 million and $0.7 million related to TPG/CalSTRS and the Austin Portfolio Joint Venture, respectively.

(3)

Unfunded capital commitments to the TPG/CalSTRS joint venture was $21.0 million as of September 30, 2010, which was subsequently reduced to $19.0 million. There were no unfunded capital commitments to the Austin Portfolio Joint Venture as of September 30, 2010, however, TPG has committed to advance funds to the Austin Portfolio Joint Venture under a senior secured priority facility established and funded on a pro rata basis by all of the Austin Portfolio Joint Venture partners, of which our unfunded share is $1.7 million. To date, approximately $33.0 million of the senior secured priority facility has been advanced by the partners, of which the Company has advanced $2.1 million. The funds advanced under the senior secured priority facility are a first priority mortgage lien on three of the Austin buildings and a first priority right to payment on a pledge of the equity interests in the other seven Austin buildings owned by the Austin Partnership.

On March 6, 2010, an aggregate of $96.5 million in mortgage loans owed by subsidiaries of TPG/CalSTRS (the “borrowers”) on unconsolidated properties at Four Falls Corporate Center, Oak Hill Plaza, and Walnut Hill Plaza matured and became due in full. The borrowers under these loans have not made payment on these loans and they are currently in default. These loans are non-recourse to the borrowers and the Company, both of which do not anticipate making any payments or equity contributions to support the repayment or refinancing of these loans. The borrowers are currently in discussions with the lenders to restructure the debt or facilitate a sale or other liquidation of these properties. We do not believe that the loss of our equity interests in these properties will have a material effect on our business or results of operations.

Following is summarized financial information for the unconsolidated real estate entities as of September 30, 2010 and December 31, 2009:

Summarized Balance Sheets


	September 30, 2010		December 31, 2009
	(unaudited)
ASSETS
Investments in real estate, net	$	2,175,052	$	2,224,709
Land held for sale		3,888		3,853
Receivables including deferred rents, net		91,616		83,506
Deferred leasing and loan costs, net		133,366		144,287
Other assets		102,214		127,727

Total assets	$	2,506,136	$	2,584,082

LIABILITIES AND EQUITY
Mortgage and other secured loans	$	1,967,544	$	2,217,118
Other liabilities		90,435		98,401
Below market rents, net		51,652		62,527

Total liabilities		2,109,631		2,378,046

Owner’s equity:
Thomas Properties, including $78 and $133 of other comprehensive loss as of September 30, 2010 and December 31, 2009, respectively		25,308		21,242
Other owners, including $263 and $1,171 of other comprehensive loss as of September 30, 2010 and December 31, 2009, respectively		371,197		184,794

Total owners’ equity		396,505		206,036

Total liabilities and owners’ equity	$	2,506,136	$	2,584,082

Summarized Statements of Operations

(unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Revenues	$	79,826		$	79,373		$	238,113		$	243,637

Expenses:
Operating and other		42,027			40,846			123,241			122,493
Interest		28,222			24,959			79,937			77,925
Depreciation and amortization		27,956			29,251			85,769			90,749
Impairment loss		—			8,049			—			8,049

Total expenses		98,205			103,105			288,947			299,216

Loss from continuing operations		(18,379	)		(23,732	)		(50,834	)		(55,579	)
Gain on early extinguishment of debt		5,176			—			5,176			67,017
Loss from discontinued operations		—			(86	)		—			(83	)

Net (loss) income	$	(13,203	)	$	(23,818	)	$	(45,658	)	$	11,355

Thomas Properties’ share of net (loss) income	$	(133	)	$	(3,993	)	$	(3,770	)	$	(3,314	)
Intercompany eliminations		671			890			2,832			2,719

Equity in net income (loss) of unconsolidated real estate entities	$	538		$	(3,103	)	$	(938	)	$	(595	)

Included in the preceding summarized balance sheets as of September 30, 2010 and December 31, 2009, are the following balance sheets of TPG/CalSTRS, LLC:


	September 30, 2010		December 31, 2009
	(unaudited)
ASSETS
Investments in real estate, net	$	1,117,216	$	1,145,163
Land held for sale		3,888		3,853
Receivables including deferred rents, net		75,034		70,237
Investments in unconsolidated real estate entities		46,197		50,844
Deferred leasing and loan costs, net		77,861		79,640
Other assets		83,474		98,293

Total assets	$	1,403,670	$	1,448,030

LIABILITIES AND EQUITY
Mortgage and other secured loans	$	1,087,249	$	1,346,319
Other liabilities		64,486		59,843

Total liabilities		1,151,735		1,406,162

Members’ equity:
Thomas Properties, including $78 and $133 of other comprehensive loss as of September 30, 2010 and December 31, 2009, respectively		24,657		22,193
CalSTRS, including $233 and $397 of other comprehensive loss as of September 30, 2010 and December 31, 2009, respectively		227,278		19,675

Total members’ equity		251,935		41,868

Total liabilities and members’ equity	$	1,403,670	$	1,448,030

Following is summarized financial information by real estate entity for the unconsolidated real estate entities for the three months ended September 30, 2010 and 2009:


	Three months ended September 30, 2010
	2121 Market Street		TPG/CalSTRS, LLC			Austin Portfolio Joint Venture			Eliminations		Total
Revenues	$	934	$	52,199		$	26,693		$	—	$	79,826

Expenses:
Operating and other		377		28,499			13,151			—		42,027
Interest		300		15,479			12,443			—		28,222
Depreciation and amortization		226		15,846			11,884			—		27,956

Total expenses		903		59,824			37,478			—		98,205

Income (loss) from continuing operations		31		(7,625	)		(10,785	)		—		(18,379	)
Gain on early extinguishment of debt		—		5,176			—			—		5,176
Equity in net (loss) income of unconsolidated real estate entities		—		(2,076	)		—			2,076		—

Net income (loss)	$	31	$	(4,525	)	$	(10,785	)	$	2,076	$	(13,203	)

Thomas Properties’ share of net income (loss)	$	16	$	525		$	(674	)	$	—	$	(133	)

Intercompany eliminations												671

Equity in net income of unconsolidated real estate entities											$	538


	Three months ended September 30, 2009
	2121 Market Street			TPG/CalSTRS, LLC			Austin Portfolio Joint Venture			Eliminations		Total
Revenues	$	871		$	49,943		$	28,559		$	—	$	79,373

Expenses:
Operating and other		349			27,569			12,928			—		40,846
Interest		288			12,159			12,512			—		24,959
Depreciation and amortization		246			16,056			12,949			—		29,251
Impairment loss		—			8,049			—			—		8,049

Total expenses		883			63,833			38,389			—		103,105

Loss from continuing operations		(12	)		(13,890	)		(9,830	)		—		(23,732	)
Equity in net (loss) income of unconsolidated real estate entities		—			(2,320	)		—			2,320		—
Loss from discontinued operations		—			(86	)		—			—		(86	)

Net (loss) income	$	(12	)	$	(16,296	)	$	(9,830	)	$	2,320	$	(23,818	)

Thomas Properties’ share of net (loss) income	$	(7	)	$	(3,373	)	$	(613	)	$	—	$	(3,993	)

Intercompany eliminations													890

Equity in net loss of unconsolidated real estate entities												$	(3,103	)

Following is summarized financial information by real estate entity for the unconsolidated real estate entities for the nine months ended September 30, 2010 and 2009:


	Nine months ended September 30, 2010
	2121 Market Street		TPG/CalSTRS, LLC			Austin Portfolio Joint Venture			Eliminations		Total
Revenues	$	2,738	$	154,024		$	81,351		$	—	$	238,113

Expenses:
Operating and other		1,123		82,520			39,598			—		123,241
Interest		869		41,342			37,726			—		79,937
Depreciation and amortization		703		47,849			37,217			—		85,769

Total expenses		2,695		171,711			114,541			—		288,947

Income (loss) from continuing operations		43		(17,687	)		(33,190	)		—		(50,834	)
Gain on early extinguishment of debt		—		5,176			—			—		5,176
Equity in net (loss) income of unconsolidated real estate entities		—		(6,929	)		—			6,929		—

Net income (loss)	$	43	$	(19,440	)	$	(33,190	)	$	6,929	$	(45,658	)

Thomas Properties’ share of net income (loss)	$	22	$	(1,717	)	$	(2,075	)	$	—	$	(3,770	)

Intercompany eliminations												2,832

Equity in net loss of unconsolidated real estate entities											$	(938	)


	Nine months ended September 30, 2009
	2121 Market Street		TPG/CalSTRS, LLC			Austin Portfolio Joint Venture			Eliminations			Total
Revenues	$	2,733	$	152,512		$	88,392		$	—		$	243,637

Expenses:
Operating and other		1,057		82,336			39,100			—			122,493
Interest		867		36,625			40,433			—			77,925
Depreciation and amortization		728		48,627			41,394			—			90,749
Impairment loss		—		8,049			—			—			8,049

Total expenses		2,652		175,637			120,927			—			299,216

Income (loss) from continuing operations		81		(23,125	)		(32,535	)		—			(55,579	)
Gain on early extinguishment of debt		—		—			67,017			—			67,017
Equity in net income (loss) of unconsolidated real estate entities		—		8,958			—			(8,958	)		—
Loss from discontinued operations		—		(83	)		—			—			(83	)

Net income (loss)	$	81	$	(14,250	)	$	34,482		$	(8,958	)	$	11,355

Thomas Properties’ share of net income (loss)	$	40	$	(5,509	)	$	2,155		$	—		$	(3,314	)

Intercompany eliminations													2,719

Equity in net loss of unconsolidated real estate entities												$	(595	)

Following is a reconciliation of our share of owners’ equity of the unconsolidated real estate entities as shown above to amounts recorded by us as of September 30, 2010 and December 31, 2009:


	September 30, 2010			December 31, 2009
Our share of owner’s equity recorded by unconsolidated real estate entities	$	25,308		$	21,242
Intercompany eliminations and other adjustments		(8,184	)		(6,784	)

Investments in unconsolidated real estate entities	$	17,124		$	14,458

4. Mortgage and Other Secured Loans

A summary of the consolidated properties’ outstanding mortgage and other secured loans as of September 30, 2010 and December 31, 2009 is as follows:

Interest Rate at
September 30, 2010

Outstanding Debt

Maturity Date

Maturity Date
at End of
Extension
Options

Secured debt

As of
September 30, 2010

As of
December 31, 2009

One Commerce Square mortgage loan (1)

5.67%

130,000

1/6/2016

Two Commerce Square mortgage loan (2)

6.30%

107,737

108,104

5/9/2013

Campus El Segundo mortgage loan (3)

LIBOR + 3.75%

17,000

7/31/2011

7/31/2014

Four Points Centre construction loan (4)

LIBOR + 3.50%

24,591

26,177

7/31/2012

7/31/2014

Murano construction loan (5)

9.50% or 3 month LIBOR + 3.25%

22,629

36,955

7/31/2011

7/31/2012

Total secured debt

301,957

318,236

(1)	The mortgage loan is subject to interest only payments through January 2011, and thereafter, principal and interest payments are due based on a thirty-year amortization schedule. The loan may be defeased, and is subject to yield maintenance payments for any prepayments prior to October 2015.

(2)	The mortgage loan may be defeased, and beginning February 2012, may be prepaid.

(3)

The interest rate as of September 30, 2010 was 4.1% per annum. The loan is scheduled to mature on July 31, 2011 with three one-year extension options, at our election, subject to us complying with certain covenants, with a final maturity date of July 31, 2014 if all extension options are exercised. The lender has the option to require a principal payment of $2.5 million at the time of each extension. We have guaranteed 100% of the principal, interest and any other sum payable under this loan. We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance with as of September 30, 2010.

(4)

The loan has an unfunded commitment of $9.4 million which is available to fund any remaining project costs. The interest rate as of September 30, 2010 was 3.8% per annum. The loan is scheduled to mature on July 31, 2012 with two one-year extension options at our election subject to certain conditions. We have provided a repayment and completion guaranty up to 46.5% of the balance of the outstanding principal, interest and any other sum payable under this loan. We have also provided collateral of approximately 62.4 acres of fully entitled unimproved land, which is immediately adjacent to our Four Points Centre office buildings located in Austin, Texas. We have also committed to pay down the principal amount of the loan by $1.3 million in December, 2010. We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance with as of September 30, 2010. As of January 31, 2011, if the Four Points office buildings are not at least 65% leased on terms consistent with the appraisal pro forma, we must pre-fund 18 months of interest into a restricted cash account with the lender; if the buildings are less than 35% leased at that time, we will also have to pay $2.0 million as a principal reduction of the loan.

(5)

On July 26, 2010, the Company extended the Murano condominium construction loan with Corus Construction Venture, LLC, for one year to July 31, 2011, with the right to two six-month extensions. The loan will bear interest at the greater of 9.5% or three month LIBOR plus 3.25%. Subsequent to September 30, 2010, we sold one additional unit, which, upon closing, will reduce the principal balance by approximately $0.4 million.

The loan agreements for One Commerce Square and Two Commerce Square require that all receipts collected from these properties be deposited in lockbox accounts under the control of the lenders to fund reserves such as capital improvements, taxes, insurance, leasing commissions, debt service and operating expenditures. Included in restricted cash on our consolidated balance sheet at September 30, 2010, are lockbox, reserve funds and/or security deposits as follows (in thousands):


Property	Amount
One Commerce Square	$	4,588
Two Commerce Square		4,324
Murano		94


Restricted cash – consolidated properties	$	9,006

As of September 30, 2010, subject to certain extension options exercisable by the Company, principal payments due for the mortgages and other secured loans are as follows (in thousands):


	Amount Due Based on Originally Scheduled Maturity Date		Amount Due at Final Maturity Date at End of Extension Options
2010	$	1,425	$	1,425
2011		41,600		1,971
2012		25,451		24,789
2013		108,392		108,392
2014		1,884		42,175
Thereafter		123,205		123,205

	$	301,957	$	301,957

5. Income (Loss) Per Share and Dividends Declared

In calculating basic and diluted earnings per share, the Company includes restricted stock and incentive units granted to employees as we consider these share-based instruments to be participating securities because they have non-forfeitable rights to dividends.

Basic earnings per share is calculated based on dividends declared on common shares and other participating securities (“distributed earnings”) and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends accruing during the respective period. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding securities. Basic earnings per common share and participating security represent the summation of the distributed and undistributed earnings per common share and participating security divided by the total weighted average number of common shares outstanding and the total weighted average number of participating securities outstanding during the respective years. We only present the earnings per share attributable to the common shareholders.

For the three and nine months ended September 30, 2009, the Company incurred losses and paid dividends. The net losses, after deducting the dividends to participating securities (restricted stock and incentive partnership units), are allocated in full to the common shares since the participating security holders do not have an obligation to share in the losses, based on the contractual rights and obligations of the participating securities. In December 2009, our board of directors suspended its quarterly dividends to common stockholders. Because we incurred losses for the three and nine months ended September 30, 2010 and 2009, all potentially dilutive instruments are anti-dilutive and have been excluded from our computation of weighted average dilutive shares outstanding.

The following is a summary of the components used in calculating basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009 (in thousands, except share data):


	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Net loss attributable to common shares	$	(1,435	)	$	(10,912	)	$	(5,321	)	$	(13,833	)
Dividends to participating securities		—			(11	)		—			(33	)

Net loss attributable to common shares, net of dividends to participating securities	$	(1,435	)	$	(10,923	)	$	(5,321	)	$	(13,866	)

Weighted average common shares outstanding—basic and diluted		34,910,415			25,212,319			33,218,238			24,978,388

Loss per share—basic and diluted	$	(0.04	)	$	(0.43	)	$	(0.16	)	$	(0.56	)

Dividends declared per share	$	—		$	0.0125		$	—		$	0.0375

As of September 30, 2010, approximately 569,000 nonvested restricted stock units, 196,000 vested incentive units and 90,000 nonvested incentive units were excluded from the calculation of diluted earnings per share because they were anti-dilutive due to our net loss position. As of September 30, 2009, 610,000 nonvested restricted stock units, 234,000 incentive units and 278,000 nonvested incentive units were excluded from the calculation of diluted earnings per share because they were anti-dilutive due to our net loss position.

6. Equity

Common Stock and Operating Partnership Units

The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of our common stock vote together as a single class with holders of our limited voting stock on those matters upon which the holders of limited voting stock are entitled to vote. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably any dividends when, if, and as may be declared by the board of directors out of funds legally available for dividend payments. A Unit and a share of our common stock have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership. A Unit may be redeemed by the holder in exchange for cash or shares of common stock at our election, on a one-for-one basis. As of September 30, 2010 and December 31, 2009, we held a 71.6% and 68.8% interest in the Operating Partnership, respectively.

Issuances of Common Stock

On December 23, 2009, the Company completed the sale of 5.1 million shares through a registered direct offering of common stock at $2.55 per share. The net proceeds after deducting offering expenses were $13.1 million. We used the net proceeds to fund a portion of the discounted payoff of $25.2 million for the nonrecourse senior and junior mezzanine loans on Two Commerce Square, which had a balance of $36.6 million and were scheduled to mature in January 2010.

During the second quarter of 2010, we sold 4.2 million shares of common stock at prices ranging from $3.67 to $5.03 per share in our “at- the-market” equity offering program. These sales resulted in net proceeds to the Company of $15.2 million, to be used for general corporate purposes.

Subsequent to September 30, 2010, we sold 48,500 shares of common stock at prices ranging from $3.77 to $3.80 per share in our “at-the-market” equity offering program. These sales resulted in net proceeds to the Company of approximately $179,000, to be used for general corporate purposes.

Limited Voting Stock

Each operating partnership unit issued in connection with the formation of our operating partnership at the time of our initial public offering in 2004 was paired with one share of limited voting stock. Operating partnership units issued under other circumstances, including upon the conversion of incentive units granted under the Incentive Plan, are not paired with shares of limited voting stock. These shares of limited voting stock are not transferable separate from the limited partnership units they are paired with, and each operating partnership unit is redeemable together with one share of limited voting stock by its holder for cash, or, at our election, one share of our common stock. Each share of limited voting stock entitles its holder to one vote on the election of directors, certain extraordinary transactions, including a merger or sale of our company, and amendments to our certificate of incorporation. Shares of limited voting stock are not entitled to any regular or special dividend payments or other distributions, including any dividends or other distributions declared or paid with respect to shares of our common stock or any other class or series of our stock, and are not entitled to receive any distributions in the event of liquidation or dissolution of our company.

Incentive Partnership Units

We have issued a total of 1,303,336 incentive units as of September 30, 2010 to certain employees. Incentive units represent a profit interest in the Operating Partnership and generally will be treated as regular limited partnership units in the Operating Partnership and rank pari passu with the limited partnership units as to payment of distributions, including distribution of assets upon liquidation. Incentive units are subject to vesting, forfeiture and additional restrictions on transfer as may be determined by us as general partner of the Operating Partnership. The holder of an incentive unit has the right to convert all or a part of his vested incentive units into limited partnership units, but only to the extent of the incentive units’ economic capital account balance. As of September 30, 2010, we had 35,394,894 shares of common stock, 13,813,331 Operating Partnership units and 285,556 incentive units outstanding. The share of the Company owned by the Operating Partnership unit holders is reflected as a separate component called noncontrolling interests in the equity section of our consolidated balance sheets.

Stock Compensation

We adopted the 2004 Equity Incentive Plan of Thomas Properties Group, Inc., as amended (the “Incentive Plan”), effective upon the closing of our initial public offering and amended it in May 2007 and June 2008 to increase the shares reserved under the plan. The Incentive Plan provides incentives to our employees and is designed to attract, reward and retain personnel. Our Incentive Plan permits the granting of awards in the form of options to purchase common stock, restricted shares of common stock and restricted incentive units in our Operating Partnership. We may issue up to 3,361,906 shares as either stock option awards, restricted stock awards or incentive unit awards of which 580,714 remain available for grant as of September 30, 2010. Shares of newly issued common stock will be issued upon exercise of stock options. In addition, under our Non-Employee Directors Restricted Stock Plan (“the Non-Employee Directors Plan”) a total of 60,000 shares are reserved for grant, of which 29,065 remain available for grant.

For more information on our stock incentive plan, please refer to the notes to the consolidated financial statements in our 2009 Annual Report on Form 10-K, which was filed with the SEC on March 22, 2010, and our proxy statement, which was filed with the SEC on April 28, 2010.

During the first quarter of 2010, we granted 100,000 of restricted stock shares with a total fair market value of approximately $0.3 million. During the first quarter of 2009, we granted 410,000 restricted stock shares with a total fair market value of $0.5 million. Both the 2010 and 2009 grants are subject to vesting.

We recognized non-cash compensation expense and the related income tax benefit for the vesting of stock grants for the three and nine months ended September 30, 2010 and 2009 as follows (in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2010		2009		2010		2009
Compensation expense	$	289	$	653	$	467	$	2,257
Income tax benefit	$	69	$	143	$	182	$	451

Noncontrolling Interests

Noncontrolling interests on our consolidated balance sheets relate primarily to the partnership and incentive units in the Operating Partnership (collectively, the “Units”) that are not owned by the Company. In conjunction with the formation of the Company, certain persons and entities contributing interests in properties to the Operating Partnership received partnership units. In addition, certain employees of the Operating Partnership have received incentive units in connection with services rendered or to be rendered to the Operating Partnership. Limited partners who have been issued incentive units have the right to require the Operating Partnership to redeem part or all of their incentive units upon vesting of the incentive units, if applicable. The Company may elect to acquire those incentive units in exchange for shares of the Company’s common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events, or pay cash based upon the fair market value of an equivalent number of shares of the Company’s common stock at the time of redemption.

The Company periodically evaluates individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity in the consolidated balance sheets. Any noncontrolling interest that fails to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.

The redemption value of the 285,556 outstanding incentive units not owned by the Company at September 30, 2010 was approximately $1,019,000 based on the closing price of the Company’s common stock of $3.57 per share as of September 30, 2010.

A charge is recorded each period to the consolidated statements of income (loss) for the noncontrolling interests’ proportionate share of the Company’s net income (loss).

Equity is allocated between controlling and noncontrolling interests as follows (in thousands) :


	Stockholders’ Equity			Noncontrolling Interests			Total Equity
Balance at December 31, 2009	$	136,396		$	65,949		$	202,345
Net loss		(5,321	)		(1,911	)		(7,232	)
Vesting of stock compensation		456			12			468
Proceeds from sale of common stock, net		15,133			—			15,133
Contributions		—			338			338
Other comprehensive income		37			18			55
Book-tax difference related to vesting of restricted stock		(52	)		—			(52	)

Balance at September 30, 2010	$	146,649		$	64,406		$	211,055

7. Income Taxes

All operations are carried on through the Operating Partnership and its subsidiaries. The Operating Partnership is not subject to income tax, and all of the taxable income, gains, losses, deductions and credits are passed through to its partners. However, the Operating Partnership and some of its subsidiaries are subject to income taxes in the state of Texas. We are responsible for our share of taxable income or loss of the Operating Partnership allocated to us in accordance with the Operating Partnership’s limited partnership agreement. As of September 30, 2010, we held a 71.6% capital interest in the Operating Partnership. For the three and nine months ended September 30, 2010, we were allocated a weighted average of 70.9% of the income and losses from the Operating Partnership.

Our effective tax rate for the three and nine months ended September 30, 2010, was (3.4)% and (6.1)%, respectively, compared to the federal statutory rate of 35%. The difference from the statutory rate is due primarily to income attributable to the noncontrolling interests, and the valuation allowance related to the Company’s deferred tax assets for which no benefit could be provided due to the realization not meeting the “more-likely-than-not” threshold.

A net deferred tax asset is included in “other assets” on the Company’s balance sheet. The Company’s existing federal and state net operating loss carryforwards, which existed as of a deemed ownership change in 2007 is subject to the gross annual limitation under Internal Revenue Code Section 382 (“Section 382”), which is $9.9 million per year. The net operating loss carryforwards generated subsequent to the 2007 ownership change are not subject to the Section 382 limitation. As of the year ended December 31, 2009, the Company had net operating loss carryforwards of $31.6 million for federal purposes and $23.9 million for state purposes. The Company’s net operating loss carryforwards are subject to varying expirations from 2015 through 2029.

FASB ASC 740-10-30-17 “Accounting for Income Taxes,” requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. Future realization of the deferred tax asset is dependent on the reversal of existing taxable temporary differences, carryback potential, tax-planning strategies and on us generating sufficient taxable income in future years as the deferred income tax charges become currently deductible for tax reporting purposes. We have recorded a valuation allowance on the net deferred tax assets in excess of their liability for unrecognized tax benefits discussed below, due to uncertainty of future realization.

FASB ASC 740-10-15, clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense, which for the three and nine months ended September 30, 2010 was $146,000 and $469,000. We have not recorded any penalties with respect to unrecognized tax benefits. For the nine months ended September 30, 2010, the Company has recorded a decrease of $3.9 million to our unrecognized tax benefits. We do not anticipate any significant increases or decreases to the remaining amounts of the existing unrecognized tax benefits within the next twelve months.

8. Fair Value of Financial Instruments

FASB ASC 825-10-50-8, “Financial Instruments,” requires us to disclose fair value information about all financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate fair value. Our estimates of the fair value of financial instruments as of September 30, 2010 were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. The carrying amounts for cash and cash equivalents, restricted cash, rent and other receivables, accounts payable and other liabilities approximate fair value due to the short-term nature of these instruments. As of September 30, 2010, the fair value of our consolidated mortgage and other secured loans aggregates $281.1 million, compared to the aggregate carrying value of $301.96 million on our consolidated balance sheet.

9. Subsequent Events

During October 2010, we sold 48,500 shares of common stock at prices ranging from $3.77 to $3.80 per share in our “at-the-market” equity offering program. These sales resulted in net proceeds to the Company of approximately $179,000, to be used for general corporate purposes.

On October 12, 2010, TPG/CalSTRS closed a new non-recourse first mortgage loan for CityWestPlace Buildings III and IV, two buildings located in Houston, Texas. The new mortgage loan in the amount of $95 million was provided by The Northwestern Mutual Life Insurance Company. The loan bears interest at a fixed rate of 5.03% and will mature in March 2020. It replaces a floating rate loan in the amount of $92.4 million, which was scheduled to mature in July 2011.

On October 19, 2010, TPG/CalSTRS restructured the debt and equity capital in our Centerpointe partnership by acquiring the mezzanine A and B notes for approximately $40 million, at a discount to par of approximately $6.6 million or 14%. In addition, the mezzanine C loan was modified to provide us with the right to prepay the loan equal to a 50% discount on the principal plus a participation feature for the lender. The mezzanine C loan was also extended through February 9, 2012 with one additional year of extension available up to February 9, 2013. CalSTRS contributed 95% and TPG contributed 5% of the $40 million, which will be treated as preferred equity.

During the third quarter, TPG and Brandywine Realty Trust (“BDN”) entered into contribution agreements whereby BDN agreed to invest in partnerships with TPG that own Commerce Square, which have been heretofore wholly-owned by TPG. BDN will contribute a total of $25 million of preferred equity to the partnerships, and will become a 25% limited partner. The transaction closed on November 10, 2010, and BDN’s preferred equity of $5 million was contributed at closing with the balance to be contributed by December 31, 2012. The preferred equity will be invested in a value-enhancement program designed to increase rental rates and occupancy at Commerce Square.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This report includes statements that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled “Forward-Looking Statements.” Certain risks may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risks, see the section in this report entitled “Risk Factors.”

When you read the financial statements and the information included in this report, you should be aware that our operations are significantly affected by both macro and micro economic forces. Our operations are directly affected by actual and perceived trends in various national and regional economic conditions that affect national and regional markets for commercial real estate services, including interest rates, the availability of credit to finance commercial real estate transactions, and the impact of tax laws affecting real estate. Periods of economic slowdown or recession, rising interest rates, tightening of the credit markets, declining demand for or increased supply of real estate, or the public perception that any of these events may occur can adversely affect our business. These conditions could result in a general decline in rents, which in turn would reduce revenue from property management fees and brokerage commissions derived from leases. In addition, these conditions could lead to a decline in property values as well as a decline in funds invested in commercial real estate and related assets, which in turn may reduce revenues from investment advisory, property management, leasing and development fees.

Forward-Looking Statements

Forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated and you should not rely on them as predictions of future events. Although information is based on our current estimates, forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise. You are cautioned not to place undue reliance on this information as we cannot guarantee that any future expectations and events described will happen as described or that they will happen at all. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Overview and Background

We are a full-service real estate operating company that owns, acquires, develops and manages primarily office, as well as mixed-use and residential properties on a nationwide basis. We conduct our business through our Operating Partnership, of which we own 71.6% as of September 30, 2010 and have control over the major decisions of the Operating Partnership.

Results of Operations

The results of operations reflect the consolidation of the affiliates that own One Commerce Square, Two Commerce Square, Murano, 2100 JFK Boulevard, Four Points Centre, Campus El Segundo and our investment advisory, property management, leasing and development services operations. Included in our investment advisory, property management, leasing and development services operations are development fees we earn from unaffiliated third parties related to two separate entitlement projects – Universal Village and Wilshire Grand. The following properties are accounted for using the equity method of accounting:

•

2121 Market Street

•

City National Plaza (as of January 2003, the date of acquisition)

•

Reflections I (as of October 2004, the date of acquisition)

•

Reflections II (as of October 2004, the date of acquisition)

•

Four Falls Corporate Center (as of March 2005, the date of acquisition) (1)

•

Oak Hill Plaza (as of March 2005, the date of acquisition) (1)

•

Walnut Hill Plaza (as of March 2005, the date of acquisition) (1)

•

San Felipe Plaza (as of August 2005, the date of acquisition)

•

2500 City West (as of August 2005, the date of acquisition)

•

Brookhollow Central I, II, and III (as of August 2005, the date of acquisition)

•

2500 City West land (as of December 2005, the date of acquisition)

•

CityWestPlace (as of June 2006, the date of acquisition)

•

CityWestPlace land (as of June 2006, the date of acquisition)

•

Centerpointe I & II (as of January 2007, the date of acquisition)

•

Fair Oaks Plaza (as of January 2007, the date of acquisition)

•

BH Note B Lender, LLC (as of October 2008, the date of formation)

TPG/CalSTRS, LLC also owns a 25% interest in the Austin Portfolio Joint Venture which owns the following properties that were acquired in June 2007:

•

San Jacinto Center

•

Frost Bank Tower

•

One Congress Plaza

•

One American Center

•

300 West 6th Street

•

Research Park Plaza I & II

•

Park Centre

•

Great Hills Plaza

•

Stonebridge Plaza II

•

Westech 360 I-IV

(1)	Properties controlled by a Special Servicer.

Comparison of three months ended September 30, 2010 to three months ended September 30, 2009

Total revenues. Total revenues decreased by $17.8 million, or 41.5%, to $25.1 million for the three months ended September 30, 2010 compared to $42.9 million for the three months ended September 30, 2009. The significant components of revenue are discussed below.

Rental revenues. Rental revenue remained consistent for each of the three month periods ended September 30, 2010 and 2009.

Tenant reimbursements. Tenant reimbursements increased by $0.4 million, or 8.7%, to $5.0 million for the three months ended September 30, 2010 compared to $4.6 million for the three months ended September 30, 2009. The increase was primarily due to higher recoverable operating expenses in 2010 as compared to 2009.

Parking and other revenues. Parking and other revenues increased by $0.3 million or 50.0%, to $0.9 million for the three months ended September 30, 2010 compared to $0.6 million for the three months ended September 30, 2009. The increase was primarily related to lease termination fees recognized at One Commerce Square, which are classified as other revenues.

Investment advisory, management, leasing and development services revenues. This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services decreased by $1.0 million, or 38.5%, from $2.6 million for the three months ended September 30, 2009 to $1.6 million for the three months ended September 30, 2010. The decrease was primarily due to lower leasing activity in addition to decreased construction management activity.

Investment advisory, management, leasing and development services revenues – unconsolidated real estate entities. This caption represents revenues earned from services provided to entities for which we use the equity method to account for our ownership interest. Revenues from these services from unconsolidated real estate entities increased $0.3 million or 8.8%, from $3.4 million for the three months ended September 30, 2009 to $3.7 million for the three months ended September 30, 2010 primarily due to higher management and advisor fees in connection with our decreased ownership interest in City National Plaza. Because we eliminate fee revenue paid to us equal to our ownership share, the amount of eliminated revenue related to City National Plaza has decreased with the corresponding decrease in our ownership share.

Reimbursement of property personnel costs. This caption represents the reimbursement for property personnel salary, payroll taxes and benefits. Reimbursements remained consistent for each of the three month periods ended September 30, 2010 and 2009.

Condominium sales. This caption represents revenue recognized for the Murano condominium units and parking spaces which closed during the three months ended September 30, 2010. Sales decreased by $17.7 million, or 77.3%, to $5.2 million for the three months ended September 30, 2010, compared to $22.9 million for the three months ended September 30, 2009 as a result of closing nine units this quarter as compared to 56 units during the corresponding quarter of 2009.

Total expenses. Total expenses decreased by $27.8 million, or 50.3%, to $27.5 million for the three months ended September 30, 2010, compared to $55.3 million for the three months ended September 30, 2009. The significant components of expense are discussed below.

Property operating and maintenance expense. Property operating and maintenance expenses remained consistent for each of the three month periods ended September 30, 2010 and 2009.

Real estate taxes. Real estate taxes decreased by $0.2 million, or 10.5%, to $1.7 million for the three months ended September 30, 2010, compared to $1.9 million for the three months ended September 30, 2009, primarily due to a tax adjustment of $0.3 million occurring in 2009 as a result of an increase in property assessed value in connection with the completion of construction of two office buildings at our Four Points development site.

Investment advisory, management, leasing and development services expenses. Expenses for these services increased by $0.2 million, or 7.1%, to $3.0 million for the three months ended September 30, 2010, compared to $2.8 million for the three months ended September 30, 2009, primarily due to an increase in professional fees partially offset by a decrease in employee compensation.

Reimbursable property personnel costs. This caption represents the reimbursement of property personnel salary, payroll taxes and benefits. Reimbursable personnel costs remained consistent for each of the three month periods ended September 30, 2010 and 2009.

Cost of condominium sales. The decrease of $17.0 million, or 81.3% to $3.9 million for the three months ended September 30, 2010 compared to $20.9 million for the three months ended September 30, 2009 is due to the settlement of nine units at the Murano as compared to 56 in the corresponding three month period ending September 30, 2009.

Interest expense. Interest expense decreased by $2.0 million, or 29.4%, to $4.8 million for the three month period ended September 30, 2010 from $6.8 million for the three month period ended September 30, 2009. The decrease in interest expense is primarily attributable to the payoff of mezzanine debt at Two Commerce Square in December 2009, which resulted in a decrease of $1.7 million compared to the prior period. Also, interest incurred on our Murano loan decreased by $0.5 million as compared to the prior period due to a reduced principal balance, which is amortized with proceeds from each unit sale.

Depreciation and amortization expense. Depreciation and amortization increased $0.4 million, or 13.3%, to $3.4 million for the three months ended September 30, 2010 compared to $3.0 million for the three months ended September 30, 2009. This increase was primarily attributable to assets associated with our Four Points office buildings, which were placed in service in 2010.

General and administrative. General and administrative expense decreased by $0.5 million, or 12.8%, to $3.4 million for the three months ended September 30, 2010 compared to $3.9 million for the three months ended September 30, 2009. This was primarily due to a reduction in compensation expense of $0.7 million as a result of cost saving measures, partially offset by an increase in professional fees.

Impairment loss. For the three months ended September 30, 2009, we recognized a non-cash impairment charge of $8.6 million related to our Murano condominium project whose units are held for sale. The charge was recorded to reflect the units at their estimated fair value. There was no corresponding impairment charge for the three months ended September 30, 2010.

Equity in net income (loss) of unconsolidated real estate entities. Set forth below is a summary of the condensed financial information for the unconsolidated real estate entities and our share of net income (loss) for the three months ended September 30, 2010 and 2009 (in thousands):


	Three months ended September 30,
	2010			2009
Revenues	$	79,826		$	79,373

Expenses:
Operating and other		42,027			40,846
Interest		28,222			24,959
Depreciation and amortization		27,956			29,251
Impairment loss		—			8,049

Total expenses		98,205			103,105

Loss from continuing operations		(18,379	)		(23,732	)
Gain on extinguishment of debt		5,176			—
Loss from discontinued operations		—			(86	)

Net loss	$	(13,203	)	$	(23,818	)

Thomas Properties’ share of net loss	$	(133	)	$	(3,993	)
Intercompany eliminations		671			890

Equity in net income (loss) of unconsolidated real estate entities	$	538		$	(3,103	)

Aggregate revenues for the three months ended September 30, 2010 increased approximately $0.4 million, or 0.5%, to $79.8 million compared to $79.4 million for the three months ended September 30, 2009. The increase is primarily due to increased tenant reimbursement revenue. Aggregate operating and other expenses for unconsolidated real estate entities for the three months ended September 30, 2010 increased approximately $1.2 million, or 2.9%, to $42.0 million compared to $40.8 million for the three months ended September 30, 2009 primarily due to increased utility expenses and lower real estate taxes included in the three months ended September 30, 2009. Interest expense increased approximately $3.2 million, or 12.8%, to $28.2 million for the three months ended September 30, 2010 compared to $25.0 million for the three months ended September 30, 2009. The increase was primarily the result of interest accrued at the default rate for Four Falls, Oak Hill and Walnut Hill whose loans are in a maturity default, as well as the refinance of City National Plaza during the three months ended September 30, 2010. Depreciation and amortization expense decreased approximately $1.3 million, or 4.4%, to $28.0 million for the three months ended September 30, 2010 compared to $29.3 million for the three months ended September 30, 2009. The decrease was primarily due to the early write-offs of lease-related assets in 2009 due to tenant defaults and early lease terminations coupled with reduced capital spending in 2010. For the three months ended September 30, 2009, we recognized an $8.0 million impairment loss related to our Four Falls and Walnut Hill properties. There was no corresponding impairment loss in 2010. Gain on extinguishment of debt increased $5.2 million during the three months ended September 30, 2010 compared to no gain during the three months ended September 30, 2009. The increase was due to the refinancing of the debt at City National Plaza, 2500 City West and San Felipe Plaza.

Provision for income taxes. Provision for income taxes decreased by $0.1 million to a provision of $0.1 million for the three months ended September 30, 2010 compared to a provision of $0.2 million for the three months ended September 30, 2009. The decrease was primarily due to the Company reconciling the provision upon completion and filing of the 2009 tax returns.

Comparison of nine months ended September 30, 2010 to nine months ended September 30, 2009

Total revenues. Total revenues decreased by $10.9 million, or 12.6%, to $75.4 million for the nine months ended September 30, 2010 compared to $86.3 million for the nine months ended September 30, 2009. The significant components of revenue are discussed below.

Rental revenues. Rental revenue decreased by $0.7 million, or 3.1%, to $21.8 million for the nine month period ended September 30, 2010 compared to $22.5 million for the nine month period ended September 30, 2009. The decrease was primarily related to a scheduled lease expiration in June of 2009 of a significant tenant at Two Commerce Square representing approximately 375,000 rentable square feet, offset by revenues from former subtenants or new tenants that are now direct tenants.

Tenant reimbursements. Tenant reimbursements decreased by $0.7 million, or 4.3%, to $15.5 million for the nine months ended September 30, 2010 compared to $16.2 million for the nine months ended September 30, 2009. The decrease was primarily related to a scheduled lease expiration in June 2009 of a significant tenant at Two Commerce Square representing approximately 375,000 rentable square feet, offset by a decrease in refunds to tenants in 2010 as compared to 2009 related to their share of operating expenses and by revenues from former subtenants or new tenants that are now direct tenants.

Parking and other revenues. Parking and other revenues increased by $0.5 million, or 22.7%, to $2.7 million for the nine months ended September 30, 2010 from $2.2 million for the nine months ended September 30, 2009. The increase was primarily related to lease termination fees recognized at One Commerce Square, which are classified as other revenues.

Investment advisory, management, leasing and development services revenues. This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services decreased by $1.6 million, or 22.2%, from $7.2 million for the nine months ended September 30, 2009, to $5.6 million for the nine months ended September 30, 2010 primarily due to less leasing activity resulting in lower commissions of $1.5 million relative to the prior period, partially offset by an increase in development fees related to our Wilshire Grand project with Korean Airlines, which we began earning in April of 2009.

Reimbursement of property personnel costs. This caption represents the reimbursement for property personnel salary, payroll taxes and benefits. Reimbursements revenue was consistent for each of the nine month periods ended September 30, 2010 and 2009.

Condominium sales. The decrease of $8.3 million, or 36.2%, to $14.6 million for the nine months ended September 30, 2010 compared to $22.9 million for the nine months ended September 30, 2009 is due to the settlement of 28 units as compared to 60 units for the corresponding period in 2009.

Total expenses. Total expenses decreased by $26.9 million, or 24.8%, to $81.4 million for the nine months ended September 30, 2010 compared to $108.3 million for the nine months ended September 30, 2009. The significant components of expense are discussed below.

Property operating and maintenance expense. Property operating and maintenance expenses increased by $0.3 million, or 1.6% to $18.7 million for the nine months ended September 30, 2010 compared to $18.4 million for the nine months ended September 30, 2009. The increase was primarily attributable to an increase in contract cleaning expenses.

Real estate taxes. Expenses for taxes decreased by $0.2 million, or 3.7%, to $5.2 million for the nine months ended September 30, 2010, compared to $5.4 million for the nine months ended September 30, 2009, primarily due to 2009 special taxes associated with the Murano recorded in 2009 with no comparable expense recorded in 2010.

Investment advisory, management, leasing and development services expenses. Expenses for these services decreased by $0.6 million, or 7.0%, to $8.0 million for the nine months ended September 30, 2010, compared to $8.6 million for the nine months ended September 30, 2009, primarily due to employee compensation reductions related to cost saving measures.

Reimbursable property personnel costs. This caption represents the reimbursement of property personnel salary, payroll taxes and benefits. Reimbursable expenses remained consistent for each of the nine month periods ended September 30, 2010 and 2009.

Cost of condominium sales. The decrease of $10.2 million or 48.8%, to $10.7 million for the nine months ended September 30, 2010 compared to $20.9 million for the nine months ended September 30, 2009 is due to the settlement of 28 units at the Murano as compared to 60 units in the corresponding period in 2009.

Interest expense. Interest expense decreased by $6.0 million, or 29.4%, to $14.4 million for the nine month period ended September 30, 2010 from $20.4 million for the nine month period ended September 30, 2009. The decrease in interest expense is primarily attributable to the payoff of mezzanine debt at Two Commerce Square in December 2009, which resulted in a decrease of $5.1 million compared to the prior period. Also, interest incurred on our Murano loan decreased by $1.6 million as compared to the prior period due to a reduced principal balance, which is amortized with proceeds from each unit sale.

Depreciation and amortization expense. Depreciation and amortization increased $1.0 million, or 10.6%, to $10.4 million for the nine months ended September 30, 2010 compared to $9.4 million for the nine months ended September 30, 2009. This increase was primarily attributable to assets associated with our Four Points office buildings, which were placed in service in 2010.

General and administrative. General and administrative expense decreased by $2.4 million, or 19.5%, to $9.9 million for the nine months ended September 30, 2010 compared to $12.3 million for the nine months ended September 30, 2009. This was primarily due to a reduction in compensation expense as a result of cost saving measures.

Impairment loss. For the nine months ended September 30, 2009, we recognized a non-cash impairment charge of $8.6 million related to our Murano condominium project whose units are held for sale. The charge was recorded to reflect the units at their estimated fair value. There was no corresponding impairment charge for the nine months ended September 30, 2010.

Interest Income. Interest income decreased by $0.2 million, or 66.7%, to $0.1 million, for the nine months ended September 30, 2010 compared to $0.3 million for the nine months ended September 30, 2009. The decrease was primarily attributable to lower average cash balances combined with a decrease in interest rates earned.

Equity in net (loss) income of unconsolidated real estate entities. Set forth below is a summary of the condensed financial information for the unconsolidated real estate entities and our share of net (loss) income for the nine months ended September 30, 2010 and 2009 (in thousands):


	Nine months ended September 30,
	2010			2009
Revenues	$	238,113		$	243,637
Expenses:
Operating and other		123,241			122,493
Interest		79,937			77,925
Depreciation and amortization		85,769			90,749
Impairment loss		—			8,049

Total expenses		288,947			299,216

Loss from continuing operations		(50,834	)		(55,579	)
Gain on early extinguishment of debt		5,176			67,017
Loss from discontinued operations		—			(83	)

Net (loss) income	$	(45,658	)	$	11,355

Thomas Properties’ share of net (loss) income	$	(3,770	)	$	(3,314	)
Intercompany eliminations		2,832			2,719

Equity in net loss of unconsolidated real estate entities	$	(938	)	$	(595	)

Aggregate revenues for the nine months ended September 30, 2010 decreased approximately $5.5 million or 2.3% to $238.1 million compared to $243.6 million for the nine months ended September 30, 2009. The decrease is primarily due to lower occupancy at our Austin Portfolio Joint Venture downtown properties. Aggregate operating and other expenses for unconsolidated real estate entities for the nine months ended September 30, 2010 increased approximately $0.7 million or 0.6% to $123.2 million compared to $122.5 million for the nine months ended September 30, 2009 primarily due to an increase in insurance expense. Interest expense increased approximately $2.0 million or 2.6% to $79.9 million for the nine months ended September 30, 2010 compared to $77.9 million for the nine months ended September 30, 2009. The increase was primarily due to the interest accrued at the default rate for Four Falls, Oak Hill and Walnut Hill whose loans are in a maturity default, as well as the refinance of City National Plaza, partially offset by the write-off of deferred financing costs associated with the Austin Portfolio Joint Venture debt restructure in March 2009. Depreciation and amortization expense decreased approximately $4.9 million or 5.4%, to $85.8 million for the nine months ended September 30, 2010 compared to $90.7 million for the nine months ended September 30, 2009. The decrease was primarily due to the early write-offs of lease-related assets during 2009 due to tenant defaults and early lease terminations, coupled with reduced capital spending in 2010. For the nine months ended September 30, 2009, we recognized an $8.0 million impairment loss related to our Four Falls and Walnut Hill properties. There was no corresponding impairment in 2010. A gain of $67.0 million on early extinguishment of debt recorded for the nine months ended September 30, 2009 was related to our Austin Portfolio Joint Venture debt restructure and recapitalization. We recorded similar gains in connection with the refinancing of the debt for City National Plaza, 2500 City West and San Felipe Plaza during the nine months ended September 30, 2010.

Gain on early extinguishment of debt. In October 2005, we purchased the entire interest of our unaffiliated partner in the venture which owns our Campus El Segundo development project, of which $3.9 million was financed with an unsecured loan from the former partner. Principal and accrued interest on this loan had a scheduled maturity of October 12, 2009. The final installment of principal and interest was paid early on April 3, 2009, and therefore, we recognized a gain on early extinguishment of debt of $0.5 million related to this loan in the nine months ended September 30, 2009. There was no corresponding gain recognized in the nine months ended September 30, 2010.

Provision for income taxes. Provision for income taxes of $0.4 million for the nine months ended September 30, 2010 is consistent with the provision for income taxes recorded for the nine months ended September 30, 2009 of $0.5 million.

Liquidity and Capital Resources

Analysis of liquidity and capital resources

As of September 30, 2010, we have unrestricted cash and cash equivalents of $43.2 million. We believe that we will have sufficient capital to satisfy our liquidity needs over the next 12 months through working capital. We expect to meet our long-term liquidity requirements, including debt service, property acquisitions and additional future development and redevelopment activity, through cash flow from operations, additional secured and unsecured long-term borrowings, dispositions of non-strategic assets, and the potential issuance of additional debt, or common or preferred equity securities, including convertible securities. Additionally, as noted elsewhere herein, on December 23, 2009, the Company completed the sale of 5.1 million shares through a registered direct offering of common stock at $2.55 per share. The net proceeds after deducting offering expenses were $13.1 million. We used the net proceeds to fund a portion of the discounted payoff of $25.2 million for the nonrecourse senior and junior mezzanine loans on Two Commerce Square, which had a balance of $36.6 million and were scheduled to mature in January 2010. During the second quarter of 2010, we sold 4.2 million shares of common stock at prices ranging from $3.67 to $5.03 per share in our “at-the-market” equity offering program. These sales resulted in net proceeds of $15.2 million, which are being used for general corporate purposes. Subsequent to the third quarter, we sold 48,500 shares of common stock at prices ranging from $3.77 to $3.80 per share in our “at-the-market” equity offering program. These sales resulted in net proceeds to the Company of approximately $179,000, to be used for general corporate purposes.

Assuming the exercise of extension options available to us, there is no debt maturing in our portfolio until 2012. With respect to debt maturing in 2012 and thereafter, we will seek to refinance this debt at maturity or retire it through the issuance of securities, as market conditions permit. There can be no assurances that such debt refinancing will be available at the time of such maturities on acceptable terms, if at all, and our cost of capital could increase as a result of any such debt refinancing. If we are unable to obtain debt refinancing for properties in which we own an interest at maturity, we may lose some or all of our equity interests in such properties. Additionally, existing stockholders could experience substantial dilution in the event we are required to issue additional equity capital.

As indicated in the Contractual Obligations table on page 30, we have $1.43 million of scheduled principal payments on consolidated debt remaining in 2010 and $1.97 million in 2011. We believe that we have sufficient capital to satisfy these payments. Refer to this table and the corresponding notes for further detail. With respect to the debt owed by our unconsolidated real estate entities, the table beginning on page 32 and the notes thereto indicate that there are no remaining maturity dates in 2010 and no additional principal payments due in 2010. Subsequent to September 30, 2010, we refinanced the mortgage loan on our CityWestPlace property Buildings III and IV resulting in no remaining maturity dates in 2011 and no additional principal payments due in 2011.

On March 6, 2010, an aggregate of $96.5 million in mortgage loans owed by subsidiaries of TPG/CalSTRS (the “borrowers”) on unconsolidated properties at Four Falls Corporate Center, Oak Hill Plaza and Walnut Hill Plaza matured and became due in full. The borrowers under these loans have not made payment on these loans and they are currently in default. These loans are non-recourse to the borrowers and the Company, both of which do not anticipate making any payments or equity contributions to support the repayment or refinancing of these loans. The borrowers are currently in discussions with the lenders to restructure the debt or facilitate a sale or other liquidation of these properties. We do not believe that the loss of our equity interests in these properties will have a material effect on our business or results of operations.

As of September 30, 2010, we have unfunded capital commitments to (1) our joint venture with CalSTRS of $21.0 million (subsequently reduced to $19.0 million); and (2) the Thomas High Performance Green Fund (the “Green Fund”), an investment fund formed by us, CalSTRS and other institutional investors, of $50.0 million. With respect to our joint venture with CalSTRS, we are not obligated to fund our share of the capital commitment for the acquisition of any new project, but we are obligated to fund tenant improvements and other capital improvements for projects that were acquired prior to June 1, 2007. We estimate we will fund $3.6 million in 2010 and $1.3 million in 2011 to cover our share of contractual obligations existing at September 30, 2010, for capital improvements, tenant improvements and leasing commissions. Our requirement to fund all or a portion of our commitments to the Green Fund is subject to our identifying properties to acquire at our discretion. Our cash requirements for the Green Fund could be reduced by contributions by us to the fund of assets in which we have an interest. The Green Fund’s investment period is scheduled to expire on December 31, 2010.

In December 2009, our board of directors suspended its quarterly dividends to common stockholders. The availability of funds to pay dividends is impacted by property-level restrictions on cash flows. With respect to our joint venture properties, we do not solely control decision making with respect to these properties, and may not be able to obtain monies from these properties even if funds are available for distribution to us. In addition, we may enter future financing arrangements that contain restrictions on our use of cash generated from our properties. The payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition, and any other factors deemed relevant by our board of directors.

Development and Redevelopment Projects

We own interests in four development projects, and our joint venture with CalSTRS includes four redevelopment properties and two development sites.

We anticipate seeking to mitigate our development risk on all of our development projects by obtaining significant pre-leasing and guaranteed maximum cost construction contracts. There can be no assurance we will be able to successfully implement these risk mitigation measures.

We have completed construction of the Murano, a 302-unit high-rise residential condominium project in downtown Philadelphia. We have closed sales on 219 units as of September 30, 2010. During the three months ended September 30, 2010, we contracted for the sale of five units and closed on the sale of nine units resulting in a gain on sale of approximately $1.4 million. Murano is classified as condominium units held for sale on our balance sheet.

The amount and timing of costs associated with our development and redevelopment projects is inherently uncertain due to market and economic conditions. We presently intend to fund development and redevelopment expenditures primarily through construction or refurbishment financing.

•

Construction of the Murano was financed in part with a construction loan up to $142.5 million. Repayment of this loan is being made with proceeds from the sales of condominium units. The loan has a balance of $22.6 million as of September 30, 2010. Subsequent to September 30, 2010, we sold one additional unit, which, upon closing, will reduce the principal balance by approximately $0.4 million. On July 26, 2010, the Company extended the Murano construction loan with Corus Construction Venture, LLC, for one year to July 31, 2011, with the right to two six-month extensions. The loan will bear interest at the greater of 9.5% or three month LIBOR plus 3.25%. We have no guarantees on this debt other than the payment of interest through the maturity date.

•

The completed core and shell construction of two office buildings at our development site at Four Points Centre was financed in part with a construction loan, which has an outstanding balance as of September 30, 2010 of $24.6 million with additional borrowing capacity of $9.4 million to fund tenant improvements and other project costs. The Four Points Centre construction loan has a maturity date of July 31, 2012 with two one-year extension options subject to certain conditions. We have committed to pay down the principal amount of the loan by $1.3 million in December 2010. The interest rate on the loan is LIBOR plus 3.5% per annum. Additionally, we have guaranteed 46.5% of the balance of the outstanding principal, interest and any other sum payable under this loan, which after the $1.3 million principal payment results in a maximum guarantee amount of $10.8 million. We also provided collateral of approximately 62.4 acres of fully entitled unimproved land, which is immediately adjacent to our Four Points Centre office buildings. As of January 31, 2011, if the Four Points office buildings are not at least 65% leased on terms consistent with the appraisal pro forma, we must pre-fund 18 months of interest into a restricted cash account with the lender; if the buildings are less than 35% leased at that time, we will also have to pay $2.0 million as a principal reduction of the loan.

•

Presently, we have not obtained construction financing for the development at Campus El Segundo.

If we finance development projects through construction loans and are unable to obtain permanent financing on advantageous terms or at all, we would need to fund these obligations from cash flow from operations or seek alternative capital sources. If unsuccessful, this could adversely impact our financial condition and results of operations and impair our ability to satisfy our debt service obligations. If we are successful in obtaining construction or refurbishment financing and permanent financing, we anticipate that the corresponding interest costs would represent both a significant use of our cash flow and a material component of our results of operations.

We are also involved in managing the following three entitlement projects:

•

We are presently entitling approximately 14.4 acres in Los Angeles, California, for office, production facility, residential and retail uses. The project, called Metro Studio@Lankershim, will include up to approximately 1.5 million square feet. Upon completion of entitlements, we expect to enter into a long-term ground lease with the Los Angeles County Metropolitan Transportation Authority, which owns the land.

•

We have been engaged by NBC/Universal to entitle, master plan and develop (subject to our right of first offer) 124 acres located adjacent to Universal City in Los Angeles for the development of a residential and retail town center commonly referred to as Universal Village. We anticipate completing the development of these projects as market feasibility permits.

•

Korean Air, a subsidiary of Hanjin Group, has retained us as fee developer for the entitlement, design and redevelopment of the 2.7 acre Wilshire Grand property in downtown Los Angeles. The Wilshire Grand project envisions the development of two buildings, one approximately 65 stories and the other approximately 45 stories, to include approximately 1.5 million square feet of office, 560 hotel rooms, and up to 100 residential condominiums, with supporting retail and restaurant uses, for a total project size of up to approximately 2.5 million gross square feet.

Leasing, Tenant Improvement and Capital Needs

In addition to our development and redevelopment projects, our One Commerce Square and Two Commerce Square properties require capital maintenance and expenditures for leasing commissions and tenant improvement costs. The level of these expenditures varies from year to year based on several factors, including lease expirations. We are contractually committed to incur expenditures of approximately $6.2 million in capital improvements, tenant improvements, and leasing commissions for the One Commerce Square and Two Commerce Square properties, collectively, during 2010 through 2013. Additionally, we expect to expend additional amounts in connection with a value-enhancement program at Commerce Square. The funding for both the $6.2 million of existing commitments and future expenditures under the value-enhancement program are discussed in the paragraph below.

During the third quarter, TPG and Brandywine Realty Trust ("BDN") entered into contribution agreements whereby BDN agreed to invest in partnerships with TPG that own Commerce Square, which have been heretofore wholly-owned by TPG. BDN will contribute a total of $25 million of preferred equity to the partnerships, and will become a 25% limited partner. The transaction closed on November 10, 2010, and BDN’s preferred equity of $5 million was contributed at closing with the balance to be contributed by December 31, 2012. The preferred equity will be invested in a value-enhancement program designed to increase rental rates and occupancy at Commerce Square.

Annual capital expenditures may fluctuate in response to the nature, extent and timing of improvements required to maintain our properties. Tenant improvements and leasing costs may also fluctuate depending upon other factors, including the type of property involved, the existing tenant base, terms of leases, types of leases, the involvement of leasing agents and overall market conditions.

Contractual Obligations

A summary of our contractual obligations at September 30, 2010 is as follows (in thousands):


	2010		2011		2012		2013		2014		Thereafter		Total
Regularly scheduled principal payments (1)	$	1,425	$	1,971	$	2,160	$	1,946	$	1,884	$	1,996	$	11,382
Balloon payments due at maturity (1)(2)		—		39,629		23,291		106,446		—		121,209		290,575
Interest payments – fixed rate debt (3)		3,577		14,290		14,205		10,055		7,135		7,615		56,877
Interest payments – variable rate debt (3)		—		—		—		—		—		—		—
Capital commitments (4)		6,228		4,663		40		235		21		—		11,187
Operating lease (5)		74		310		322		335		122		—		1,163
Obligations associated with uncertain tax positions (6)		—		—		—		—		—		—		—

Total	$	11,304	$	60,863	$	40,018	$	119,017	$	9,162	$	130,820	$	371,184

(1)

Included within these regularly scheduled principal payments and balloon payments are amounts due under the Four Points Centre construction loan, which matures on July 31, 2012 with two one-year extension options subject to certain conditions. We have provided a guarantee for a portion of principal and interest payable. We have also provided collateral of approximately 62.4 acres of fully entitled unimproved land, which is immediately adjacent to our Four Points Centre office buildings. We have committed to pay down the principal amount of the loan by $1.3 million in December, 2010. The loan has an unfunded balance of $9.4 million which is available to fund any remaining project costs. The interest rate on the loan is LIBOR plus 3.50% per annum. The balance of the loan as of September 30, 2010 was $24.6 million.

(2)

The Murano construction loan has a balance of $22.6 million as of September 30, 2010. On July 26, 2010, the Company extended the loan with Corus Construction Venture, LLC, for one year to July 31, 2011, with the right to two six-month extensions. The loan will bear interest at the greater of 9.5% or three month LIBOR plus 3.25%. This loan is nonrecourse to the Company, but the Company guarantees the payment of interest during the term of the loan. We amortize the principal balance of the loan with approximately 93% of the sales proceeds as we close on the sale of condominium units. Subsequent to September 30, 2010, we sold one additional unit, which, upon closing, will reduce the principal balance by approximately $0.4 million.

(3)

As of September 30, 2010, 78.7% of our debt was at contractually fixed rates. The information in the table above reflects our projected interest obligations for the fixed-rate payments based on the contractual interest rates and scheduled maturity dates. The remaining 21.3% of our debt bears interest at variable rates based on LIBOR plus a spread that ranges from 3.25% to 3.75%. The interest payments on the variable rate debt have not been reported in the table above because we cannot reasonably determine the future interest obligations on our variable rate debt as we cannot predict what LIBOR rates will be in the future. As of September 30, 2010, one-month LIBOR was 0.26%.

(4)

Capital commitments of our company and consolidated subsidiaries include approximately $6.2 million of tenant improvements and leasing commissions for certain tenants in One Commerce Square and Two Commerce Square. We have an unfunded capital commitment of $21.0 million to our TPG/CalSTRS joint venture, of which we estimate we will fund $3.6 million in 2010 for contractual obligations existing as of September 30, 2010. We are not obligated to fund our share for the acquisition of any new project, but we are obligated to fund tenant improvements and other capital improvements for projects that were acquired prior to June 1, 2007.

(5)	Represents the future minimum lease payments on our operating lease for our corporate office at City National Plaza. The table does not reflect available extension options.

(6)

The obligations associated with uncertain tax provisions in the table above should represent amounts associated with uncertain tax positions related to temporary book-tax differences. However, reasonable estimates cannot be made about the amount and timing of payment, if any, for these obligations. As of September 30, 2010, $16.4 million of unrecognized tax benefits have been recorded as liabilities on our consolidated balance sheet, and we are uncertain as to if and when such amounts may be settled. Included within the unrecognized tax benefits is $2.6 million of accrued interest. We have not recorded any penalties with respect to unrecognized tax benefits.

Off-Balance Sheet Arrangements – Indebtedness of Unconsolidated Real Estate Entities

As of September 30, 2010, our company had investments in entities owning unconsolidated properties with stated ownership percentages ranging from 6.25% to 50.0%. We account for these investments using the equity method of accounting. The table below summarizes the outstanding debt for these properties as of September 30, 2010 (in thousands). For loans which had maturity dates extended subsequent to September 30, 2010, the new maturity date is not reflected in the Maturity Date column, but is described in the notes thereto. None of these loans are recourse to us other than as noted in footnote 7 below. Some of the loans listed in the table below subject TPG/CalSTRS to customary non-recourse carve out obligations.

Interest Rate at
September 30, 2010

Principal
Amount

Maturity
Date

Maturity
Date at End of
Extension Options

City National Plaza (1)

Mortgage loan

5.90%

350,000

7/1/2020

Note payable to former partner

5.75%

19,758

7/1/2012

CityWestPlace

Fixed

6.16%

121,000

7/6/2016

Floating (2) (3)

LIBOR + 1.25%

92,400

7/1/2011

San Felipe Plaza

Mortgage loan (4)

4.78%

110,000

12/1/2018

2500 City West

Mortgage loan(5)

5.53%

65,000

12/5/2019

Brookhollow Central I, II and III

Mortgage loan (2) (6)

LIBOR +2.63%

37,000

7/21/2013

7/21/2015

2121 Market Street mortgage loan (7)

6.05%

18,253

8/1/2033

Reflections I mortgage loan

5.23%

21,490

4/1/2015

Reflections II mortgage loan

5.22%

8,953

4/1/2015

Centerpointe I & II (8)

Senior mortgage loan (2)

LIBOR + 0.60%

55,000

2/9/2011

2/9/2012

Mezzanine loan-Note A (2)

LIBOR + 1.51%

25,000

2/9/2011

(8)

—

Mezzanine loan-Note B (2)

LIBOR + 2.49%

21,618

2/9/2011

(8)

—

Mezzanine loan-Note C (2)

LIBOR + 3.26%

22,162

2/9/2011

(8)

2/9/2012

(8)

Fair Oaks Plaza

5.52%

44,300

2/9/2017

Austin Portfolio Joint Venture Properties:

San Jacinto Center

Mortgage loan-Note A

6.05%

43,000

6/11/2017

Mortgage loan-Note B

6.05%

58,000

6/11/2017

Frost Bank Tower

Mortgage loan-Note A

6.06%

61,300

6/11/2017

Mortgage loan-Note B

6.06%

88,700

6/11/2017

One Congress Plaza

Mortgage loan-Note A

6.08%

57,000

6/11/2017

Mortgage loan-Note B

6.08%

71,000

6/11/2017

One American Center

Mortgage loan-Note A

6.03%

50,900

6/11/2017

Mortgage loan-Note B

6.03%

69,100

6/11/2017

300 West 6th Street

6.01%

127,000

6/11/2017

Research Park Plaza I & II

Senior mortgage loan (2)(9)

LIBOR + 0.55%

23,560

6/9/2011

6/9/2012

Mezzanine loan (2)(9)

LIBOR + 2.01%

27,940

6/9/2011

6/9/2012

Stonebridge Plaza II

Senior mortgage loan (2)(9)

LIBOR + 0.63%

19,800

6/9/2011

6/9/2012

Mezzanine loan (2)(9)

LIBOR + 1.76%

17,700

6/9/2011

6/9/2012

Austin Portfolio Bank Term Loan (9)(10)

LIBOR + 3.25%

118,808

6/1/2013

6/1/2014

Austin Senior Secured Priority Facility (11)

10% - 20%

37,644

6/1/2012

Total outstanding debt of unconsolidated properties, excluding loans controlled by a special servicer

1,883,386

Loans on Properties Controlled by a Special Servicer (12):

Four Falls Corporate Center

Mortgage loan-Note A

5.31%

42,200

3/6/2010

Mortgage loan-Note B (13)(14)

LIBOR + 3.25%

9,867

3/6/2010

Oak Hill Plaza/Walnut Hill Plaza

Mortgage loan-Note A

5.31%

35,300

3/6/2010

Mortgage loan-Note B (13)(15)

LIBOR + 3.25%

9,152

3/6/2010

Total outstanding debt of unconsolidated properties controlled by a special servicer

96,519

Total outstanding debt of all unconsolidated properties

1,979,905

The 30 day LIBOR rate for the loans above was 0.26% at September 30, 2010, except for the Austin Bank Term Loan, which is based on the Eurodollar LIBOR rate of 0.61%.

(1)

During the first quarter of 2010, CalSTRS, our partner in City National Plaza, acquired all of the property’s mezzanine debt. On July 6, 2010, CalSTRS contributed this debt to the equity in TPG/CalSTRS, reducing the leverage on CNP by the full $219.1 million balance on the mezzanine loans. Solely with respect to the interest of TPG/CalSTRS in CNP, CalSTRS’ percentage interest increased from 75% to 92.1% and TPG’s percentage interest decreased from 25% to 7.9%. We are in discussions with CalSTRS to obtain an option to participate in up to an additional 17.1% interest in CNP acquired by CalSTRS through TPG/CalSTRS. On July 6, 2010, a subsidiary of TPG/CalSTRS that owns CNP entered into a new non-recourse first mortgage loan in the amount of $350.0 million. The loan bears interest at a fixed rate of 5.9% and is for a term of ten years, to mature on July 1, 2020.

(2)	The partnership that owns each property has purchased interest rate cap agreements for the funded portion of these loans.

(3)

On October 12, 2010, a subsidiary of TPG/CalSTRS that owns CityWestPlace Buildings III and IV closed a new non-recourse first mortgage loan in the amount of $95 million. The loan bears interest at a fixed rate of 5.03% and will mature in March 2020. It replaces a floating rate loan in the amount of $92.4 million, which was scheduled to mature in July 2011.

(4)

On July 21, 2010, a subsidiary of TPG/CalSTRS that owns San Felipe Plaza entered into a new mortgage loan in the amount of $110.0 million. The loan bears interest at a fixed rate of 4.8% and is for a term of 8.3 years, to mature in December 2018. This loan replaces the prior $117.7 million mortgage loans, which were retired for $116.0 million pursuant to a discounted payoff agreement.

(5)

On July 21, 2010, a subsidiary of TPG/CalSTRS that owns 2500 City West entered into a new mortgage loan in the amount of $65.0 million. The loan bears interest at a fixed rate of 5.5% and is for a term of 9.3 years, to mature in December 2019. This mortgage loan replaces the prior $84.1 million mortgage loans, which were retired for $81.0 million pursuant to a discounted payoff agreement.

(6)

On July 21, 2010, a subsidiary of TPG/CalSTRS that owns Brookhollow Central entered into a new mortgage loan in the amount of $55.0 million. At closing, $37.0 million of the loan was funded, with an additional $3.0 million to be funded over three years and $15.0 million available for future funding of construction costs related to the redevelopment of Brookhollow Central I. The loan bears interest at LIBOR plus 2.6% and is for a three-year term plus two one-year extensions, subject to certain conditions, to mature upon final extension in July 2015. The new mortgage loan replaces the prior loans of $48.9 million.

(7)

The 2121 Market Street mortgage loan is prepayable without penalty after May 1, 2013, at which date the outstanding principal amount of this loan will be approximately $17.2 million. The interest rate will increase to the greater of 8.1% or the treasury rate plus 2.0% on August 1, 2013. Any amounts over the initial interest rate may be deferred to the extent excess cash is not available to make such payments. Provided there is no deferred interest, the loan balance will be fully amortized on August 1, 2033, the maturity date of the loan. The loan is guaranteed by our Operating Partnership and our co-general partner in the partnership that owns 2121 Market Street, up to a maximum amount of $3.3 million.

(8)

(9)	These loans have a one-year extension option at our election.

(10)

The margin above LIBOR on the bank term loan is subject to adjustment under certain circumstances. The term loan is secured by mortgages on three of the Austin Portfolio Joint Venture properties and a pledge of equity interests in the remaining seven Austin Portfolio Joint Venture properties. These mortgage liens and equity pledges also secure the Austin senior secured priority facility, which has a priority right to repayment ahead of the Austin Portfolio Bank Term Loan.

(11)

During 2009, the Austin Portfolio Joint Venture entered into agreements pursuant to which (i) an existing $100 million revolving loan was terminated, (ii) a senior secured priority facility of $60 million was established which a subsidiary of TPG/CalSTRS agreed to fund 25% on a pari passu basis with the partners in the Austin Portfolio Joint Venture, and (iii) the venture purchased and retired $80 million of the Austin Portfolio bank term loan at a discount to face value, reducing that loan from $192.5 million to $112.5 million. The new $60 million Austin senior secured priority facility, which has a priority right to repayment ahead of the Austin Portfolio Bank Term Loan, is senior in payment and right to the collateral to the Austin Portfolio Bank Term Loan. The Austin senior secured priority facility bears interest at 10% per annum on the first $24 million, 15% per annum on the next $12 million and 20% per annum on the last $24 million.

(12)

Subsidiaries of TPG/CalSTRS (the “borrowers”) were unable to repay the loans by the maturity date of March 6, 2010 and therefore, the loans are in default. We are in discussions with the special servicer regarding a cooperative resolution on each of these assets, including either through a restructure of the debt, a sale or other transfer of the properties or the appointment of a receiver. Pending a resolution of these loan defaults, we expect that we will continue to manage the properties pursuant to our management agreement with the borrowers. The management and leasing agreements expired on March 1, 2010, and are automatically renewed for successive periods of one year each, unless we elect not to renew the agreements. Due to the maturity date default, the lender has the authority to terminate us as the property manager. If the borrowers are unable to extend or refinance these loans, the lender could repossess the properties through foreclosure, which would result in a loss of fee revenue for us. The borrowers are accruing interest on these loans at a default rate, which ranges from 10.3% to 10.5% per annum beginning on the maturity date of March 6, 2010.

(13)

These loans are subject to exit fees equal to 1% of the loan amounts; however, under certain circumstances the exit fees will be waived. These loans bear interest at the greater of the one month LIBOR or 2.25% per annum, plus the applicable margin. Due to the maturity date default discussed in note 12 above, the borrower is accruing interest at a default rate, which ranges from 10.3% to 10.5% per annum beginning on the maturity date of March 6, 2010.

(14)	This loan is secured by both a subordinate lien on the property and a payment guaranty issued by the special purpose entity which owns Oak Hill Plaza/Walnut Hill Plaza.

(15)	This loan is secured by both a subordinate lien on the property and a payment guaranty issued by the special purpose entity which owns Four Falls Corporate Center.

Cash Flows

Comparison of nine months ended September 30, 2010 to nine months ended September 30, 2009.

Our cash flows from operating activities is primarily dependent upon the occupancy level of our portfolio, the rental rates achieved on our leases, the collectability of rent and recoveries from our tenants, revenues generated and collected from our investment advisory, management, leasing and development services and the level of operating expenses and other general and administrative costs. Net cash used in operating activities decreased by $(4.6) million to $(1.7) million for the nine months ended September 30, 2010, compared to $(6.3) million for the nine months ended September 30, 2009. The decrease is primarily due to an increase in the collection of leasing commission receivables of $0.8 million, a $2.2 million increase in other assets, and a $1.2 million decrease in tenant prepaid rent.

Our net cash related to investing activities is generally impacted by the sale of condominium units at Murano, contributions and distributions related to our investments in unconsolidated real estate entities, the funding of development and redevelopment projects and recurring and non-recurring capital expenditures. Net cash provided by investing activities decreased by $(7.2) million to $7.7 million for the nine months ended September 30, 2010 compared to cash provided of $14.9 million for the nine months ended September 30, 2009. We experienced a decline in expenditures for improvements to real estate in the 2010 period. In 2009, we completed the final wrap-up work on the Murano condominium units. Additionally, we curtailed our construction and development activity during the fourth quarter of 2008, which continued through 2009 and 2010. The decrease in investing cash flows in 2010 was also attributed to a decrease of proceeds related to the sale of fewer Murano condominiums in 2010 as compared to 2009. Finally, we made contributions to our unconsolidated real estate entities in 2010 of $13.6 million primarily in connection with the refinancing of loans for City National Plaza and three Houston projects.

Our net cash related to financing activities is generally impacted by our borrowings, and capital activities net of dividends and distributions paid to common stockholders and non-controlling interests. Cash provided by financing activities for the nine months ended September 30, 2010 increased by $28.2 million to $1.2 million compared to a use of cash of $(27.0) million for the nine months ended September 30, 2009. The increase was primarily due to the receipt of $15.1 million of net proceeds from the sale of shares of common stock in our “at-the-market” equity offering program as well as a $2.4 million increase in restricted cash in lender controlled lockbox accounts. In December 2009, our board of directors suspended our quarterly dividend to operating partnership unitholders and stockholders, which increased our cash flow by $3.4 million when comparing the nine months ended September 30, 2010 to the comparable period of 2009. These increases in cash flow were offset by $17.3 million in loan paydowns on our Four Points Centre and Murano loan in 2010, and a $6.8 million decrease in loan draws as we were drawing on our Murano and Four Points Centre construction loans in the 2009 period. The construction on both projects was completed in 2009.

Inflation

Substantially all of our office leases provide for tenants to reimburse us for increases in real estate taxes and operating expenses related to the leased space at the applicable property. In addition, many of the leases provide for increases in fixed base rent. We believe that inflationary increases in real estate taxes and operating expenses may be partially offset by the contractual rent increases and expense reimbursements as described above. We have one multi-family residential rental property, which is located in the Philadelphia central business district and subject to short-term leases. Inflationary increases can often be offset by increased rental rates; however, a weak economic environment may restrict our ability to raise rental rates.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A primary market risk faced by our company is interest rate risk. Our strategy is to match as closely as possible the expected holding periods and income streams of our assets with the terms of our debt. In general, we use floating rate debt on assets with higher growth prospects and less stability to their income streams. Correspondingly, with respect to stabilized assets with lower growth rates, we will generally use longer-term fixed-rate debt. As of September 30, 2010, our company had $64.2 million of outstanding consolidated floating rate debt, which is not subject to an interest rate cap.

The unconsolidated real estate entities have total debt of $1.98 billion, of which $0.5 billion bears interest at floating rates. As of September 30, 2010, interest rate caps have been purchased for $0.3 billion of the floating rate loans.

Our fixed and variable rate consolidated long-term debt at September 30, 2010 consisted of the following (in thousands):


Year of Maturity	Fixed Rate			Variable Rate			Total
2010	$	125		$	1,300		$	1,425
2011		1,971			39,629			41,600
2012		2,160			23,291			25,451
2013		108,392			—			108,392
2014		1,884			—			1,884
Thereafter		123,205			—			123,205

Total	$	237,737		$	64,220		$	301,957

Weighted average interest rate		5.95	%		5.89	%		5.94	%

We utilize sensitivity analyses to assess the potential effect of our variable rate debt. At September 30, 2010, our variable rate long-term debt represents 21.3% of our total long-term debt. If interest rates were to increase by 75 basis points, or by approximately 12.7% of the weighted average variable rate at September 30, 2010, the net impact would be increased interest costs of $0.5 million per year.

As of September 30, 2010, the fair value of our mortgage and other secured loans and unsecured loan aggregate $281.1 million, compared to the aggregate carrying value of $301.96 million.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b), promulgated by the SEC under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting as defined in Rules 13a-15(f) or 15(d)-15(f) under the Exchange Act that occurred during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are involved in various litigation and other legal matters from time to time, including personal injury claims and administrative proceedings, which we are addressing or defending in the ordinary course of business. Management believes that any liability that may potentially result upon resolution of such matters will not have a material adverse effect on our business, financial condition or results of operations.

ITEM 1A.

RISK FACTORS

Risks Related to Our Business and Our Properties

We generate a significant portion of our revenues from our joint venture and our separate account management agreements with CalSTRS, and if we were to lose these relationships, our financial results would be significantly negatively affected.

Our joint venture and separate account management agreement relationships with CalSTRS provide us with substantial fee revenues. For the three and nine months ended September 30, 2010, approximately 20.8% and 20.9%, respectively, of our revenue has been derived from fees earned from these relationships.

We cannot assure you that our joint venture and separate account management relationships with CalSTRS will continue, and, if they do not, we may not be able to replace these relationships with other strategic alliances that would provide comparable revenues. Our interest in the TPG/CalSTRS joint venture is subject to a buy-sell provision, which permits CalSTRS to purchase our interest in TPG/CalSTRS at any time. Under the buy-sell provision either our Operating Partnership or CalSTRS can initiate a buy-out of the other’s interest at any time by delivering a notice to the other specifying a purchase price for all the joint venture’s assets; the other venture partner then has the option to sell its joint venture interest or purchase the interest of the initiating venture partner. The purchase price is based on what each venture partner would receive on liquidation if the joint venture’s assets were sold for the specified price and the joint venture’s liabilities paid and the remaining assets distributed to the joint venture partners.

In addition, upon the occurrence of certain events of default by the Operating Partnership under the joint venture agreement or related management, development service and leasing agreements, upon bankruptcy of our Operating Partnership, or upon the death or disability of either James A. Thomas, our Chairman, President and CEO, or John R. Sischo, our Co-Chief Operating Officer, or the failure of either of them to devote the necessary time to perform their duties (unless replaced by an individual approved by CalSTRS) (each, a “Buyout Default”), CalSTRS may elect to purchase our joint venture interest based on a three percent discount to the appraised fair market value at the time of the Buyout Default.

The joint venture agreement with CalSTRS also prohibits any transfer of securities of the Company or limited partnership units in our Operating Partnership that would result in Mr. Thomas, his immediate family and any entities controlled thereby owning less than 30% of our securities entitled to vote for the election of directors; provided, that in connection with the issuance of additional Company shares in one or more public offerings, Mr. Thomas, his immediate family and controlled entities may reduce their collective ownership interest to no less than 10% of the total common shares and Operating Partnership units and no less than 15.0 million shares and Operating Partnership units on a collective basis.

Most of our fee arrangements under our separate account relationship with CalSTRS are terminable on 30 days’ notice. Termination of either our joint venture or separate account relationship with CalSTRS would adversely affect our revenue and profitability and our ability to achieve our business plan by reducing our fee income and access to co-investment capital to acquire additional properties.

Our joint venture investments may be adversely affected by our lack of control or input on decisions or shared decision-making authority or disputes with our co-venturers.

Many of our operating properties are owned through a joint venture or partnership with other parties. As a result, we do not exercise sole decision-making authority regarding such joint venture properties, including with respect to cash distributions or the sale of such properties. Furthermore, we may co-invest in the future through other partnerships, joint ventures or other entities, acquiring non-controlling interests or sharing responsibility for managing the affairs of a property, partnership or joint venture. Investments in partnerships, joint ventures, funds or other entities may, under certain circumstances, involve risks, including partners who may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. These investments may also have the risk of impasses on significant decisions, because neither we nor our partner or co-venturer would have full control over the partnership or joint venture. Future disputes between us and our partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their full time and effort on our business. In addition, under the principles of agency and partnership law, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers, such as if a partner or co-venturer became bankrupt and defaulted on its reimbursement and contribution obligations to us, subjecting the property owned by the partnership or joint venture to liabilities in excess of those contemplated by the partnership or joint venture agreement, or incurred debts or liabilities on behalf of the partnership or joint venture in excess of the authority granted by the partnership or joint venture agreement. In some joint ventures or other investments we make, if the entity in which we invest is a limited partnership, we have acquired and may acquire in the future all or a portion of our interest in such partnership as a general partner. In such event, we may be liable for all the liabilities of the partnership, although we attempt to limit such liability to our investment in such partnership by investing through a subsidiary.

Our joint venture partners have rights under our joint venture agreements that could adversely affect us.

As of September 30, 2010, we held interests in 22 of our properties through TPG/CalSTRS, 10 of which are held indirectly through TPG/CalSTRS’ interest in the Austin Portfolio Joint Venture. TPG/CalSTRS requires a unanimous vote of the joint venture’s management committee on certain major decisions, including approval of annual business plans and budgets, financings and refinancings, and additional capital calls not in compliance with an approved annual plan. The management committee currently consists of two members appointed by CalSTRS and one member appointed by the Operating Partnership. All other decisions, including sales of properties, are made based upon a majority decision of the management committee. Thus CalSTRS has the ability to control certain decisions for the joint venture that may result in an outcome contrary to our interests. The Operating Partnership has the responsibility and authority to carry out day to day management of the joint venture and to implement the annual plans approved by the management committee. In addition to CalSTRS’ ability to control certain decisions relating to the joint venture, our joint venture agreement with CalSTRS includes provisions negotiated for the benefit of CalSTRS that could adversely affect us. Unless otherwise determined by the management committee of the joint venture, we are required to use diligent efforts to sell each joint venture property generally within five years of that property reaching stabilization, except that the holding period for Reflections I and Reflections II will be separately determined by the joint venture management committee. With respect to these two properties, we are required to perform a hold/sell analysis at least annually, and make a recommendation to the management committee regarding the appropriate holding period. We have a right of first offer to purchase a joint venture property upon a required sale at a price we propose, and if CalSTRS accepts our offer we must close within 90 days. If we do not exercise the right of first offer and we subsequently fail to effect a sale by the end of the specified holding period, CalSTRS has the right to assume control of the sale process. This may require us to sell one or more of our assets at an inopportune time, or for prices that are lower than could be achieved if we had more flexibility in the timing for effecting sales.

In June 2007, a wholly-owned subsidiary of TPG/CalSTRS, entered into a partnership agreement and syndication agreement with an affiliate of Lehman Brothers, Inc. (“Lehman”) in relation to the Austin Portfolio Joint Venture. As of September 30, 2010, one-third of the Lehman affiliate’s original 75% equity interest in the Austin Portfolio Joint Venture had been sold to an unrelated institutional investor and the Lehman affiliate held 50% of the equity in the Austin Portfolio Joint Venture. The Lehman affiliate has the right to reduce or eliminate certain fees and payments otherwise payable to TPG/CalSTRS under the partnership agreement. The Lehman affiliate has certain approval rights with respect to major decisions of the Austin Portfolio Joint Venture, although the TPG/CalSTRS subsidiary is in charge of operating, leasing and managing the Austin Portfolio Joint Venture assets within approved budgets and guidelines.

The major decision approval rights of the Lehman affiliate include, but are not limited to, the right to approve annual business plans and budgets, financings and refinancings, sales of properties, additional capital calls not in compliance with an approved annual plan, and agreements with affiliates. The other limited partner in the Austin Portfolio Joint Venture also has approval rights over some of these major decisions.

In addition, the Lehman affiliate can require the sale of one Central Business District asset and one suburban asset by the Austin Portfolio Joint Venture at any time after June 1, 2011; further, the Lehman affiliate and its successors and assigns can require the sale of the balance of the Austin Portfolio Joint Venture assets after June 1, 2012, in each case subject to a right of first offer in favor of the other partners in the Austin Portfolio Joint Venture. The limited partners also have the right to remove the general partner under certain circumstances. These rights could adversely affect TPG/CalSTRS and us.

We may not receive funding from our joint venture partners in connection with proposed acquisitions, which could adversely affect our growth.

We have entered into, and may enter into in the future, certain joint venture acquisition arrangements with third parties in which we identify potential acquisition properties on behalf of the joint venture, and a portion (in some cases, a substantial portion) of the capital required for each project would be funded by our joint venture partners. Although our joint venture partners have committed to fund property acquisitions, such joint venture partners may decide not to fund a particular or any potential acquisition properties for any number of reasons, including such entities may not have the capital necessary to fund projects at the time of the proposed acquisition. This may be particularly relevant in light of the liquidity issues that many real estate funding sources have faced during the recent credit crisis. Accordingly, if we identify potential acquisition opportunities in the future for these programs, we may not receive approval and/or funding from joint venture partners, notwithstanding any prior commitments for funding. If we do not make any acquisitions under existing or future joint ventures, it could adversely affect our ability to grow our business in accordance with our business plan.

We depend on significant tenants, and their failure to pay rent could seriously harm our operating results and financial condition.

As of September 30, 2010, the 20 largest tenants for properties in which we held an ownership interest collectively leased 31.5% of the rentable square feet of space at properties in which we hold an ownership interest, representing 38.0% of the total annualized rent generated by these properties.

Any of our tenants may experience a downturn in its business, which may weaken such tenant’s financial condition. As a result, tenants may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent, declare bankruptcy or default under their leases. Certain of our tenants also have termination rights under their leases with us, which they might choose to exercise if they experience a downturn in their business. In addition, current economic and market conditions increase the possibility that one or more of our tenants will become insolvent. Any tenant bankruptcy or insolvency, leasing delay, failure to make rental payments when due, or default under a lease could result in the termination of the tenant’s lease and material losses to our Company.

In particular, if any of our significant tenants becomes insolvent, suffers a downturn in its business and decides not to renew its lease or vacates a property, it may seriously harm our business. Failure on the part of a tenant to comply with the terms of a lease may give us the right to terminate the lease, repossess the applicable property and enforce the payment obligations under the lease. In those circumstances, we would be required to find another tenant. We cannot assure you that we would be able to find another tenant without incurring substantial costs, or at all, or that if another tenant were found, we would be able to enter into a new lease on favorable terms to us or at the same rental rates.

Bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that tenant or their property. A tenant bankruptcy would delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these amounts. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy amounts due under the lease must be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims in the event of the bankruptcy of a large tenant, which would adversely impact our financial condition.

Our operating results depend upon the regional economies in which our properties are located and the demand for office and other mixed-use space, and unique or disproportionate economic downturns or adverse regulatory or taxation policies in any of these regions could harm our operating results.

Our operating and development properties are located in three geographic regions of the United States: the West Coast, Southwest and Mid-Atlantic regions. Historically, the largest part of our revenues has been derived from our ownership and management of properties consisting primarily of office buildings.

A decrease in the demand for office space in these geographic regions, and for Class A office space in particular, may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. We are also susceptible to disproportionate or unique adverse developments in these regions and in the national office market generally, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, terrorist targeting of high-rise structures, infrastructure quality, increases in real estate and other taxes, costs of complying with government regulations or increased regulation, oversupply of or reduced demand for office space, and other factors. Some of the regional issues we face include the more highly regulated and taxed economy of Southern California and high local and municipal taxes for our Philadelphia properties. Any adverse economic or real estate developments in one or more of our regions, or any decrease in demand for office space resulting from the local regulatory environment, business climate or energy or fiscal problems, could adversely impact our revenue and profitability, thereby causing a significant decline in our financial condition, results of operations, cash flow, the trading price of our common stock and impairing our ability to satisfy our debt service obligations.

Our need for additional debt financing, our existing level of debt and the limitations imposed by our debt agreements could have significant adverse consequences on us.

We may seek to incur additional debt to finance future acquisition and development activities; however debt financing may not be available to us on acceptable terms under current market conditions. In addition, it is possible the required payments of principal and interest on borrowings may leave us with insufficient cash to operate our properties profitably. Our need for debt financing, our existing level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

•

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

•

we may be unable to borrow additional funds as needed or on favorable terms;

•

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 unable to distribute funds from a property to our Operating Partnership or apply such funds to cover expenses related to another property;

•

we could be required to dispose of one or more of our properties, possibly on disadvantageous terms and/or at disadvantageous times;

•

we could default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases;

•

we could violate covenants in our loan documents or our joint venture agreements, including provisions that may limit our ability to further mortgage a property, make distributions, acquire additional properties, repay indebtedness prior to a set date without payment of a premium or other pre-payment penalties, all of which would entitle the lenders to accelerate our debt obligations;

•

a default under any one of our mortgage loans with cross default provisions could result in a default on other of our indebtedness; and

•

because we have agreed to use commercially reasonable efforts to maintain certain debt levels to provide the ability for Mr. Thomas and entities controlled by him to guarantee debt of $210 million, including $11 million of debt available for guarantee by Mr. Edward Fox, one of our non-employee directors, and by Mr. Richard Gilchrist, an individual formerly affiliated with Maguire Thomas Partners, we may not be able to refinance our debt when it would otherwise be advantageous to do so or to reduce our indebtedness when our board of directors determines it is prudent.

If any one or more of these events were to occur, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock, and could impair our ability to satisfy our debt service obligations.

Because we have a substantial amount of debt at our unconsolidated properties which bears interest at variable rates, our failure to hedge effectively against interest rate changes may adversely affect our results of operations.

As of September 30, 2010, $0.5 billion of our unconsolidated debt was at variable interest rates for which we had purchased interest rate caps covering $0.3 billion of the unconsolidated floating rate loans. The interest rate hedging arrangements we enter into to cap our interest rate exposure involve risks, including that our hedging transactions might not achieve the desired effect in eliminating the impact of interest rate fluctuations, or that counterparties may fail to honor their obligations under these arrangements. As a result, these arrangements may not be effective in reducing our exposure to interest rate fluctuations and this could reduce our revenue, require us to modify our leverage strategy, and adversely affect our expected investment returns.

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

Our planned growth strategy includes the acquisition of additional properties as opportunities arise. We regularly evaluate approximately 20 markets in the United States for strategic opportunities to acquire office, mixed-use and other properties. Our ability to acquire properties on favorable terms and successfully operate them is subject to the following significant risks:

•

we may be unable to generate sufficient cash from operations, or obtain the necessary debt or equity to consummate an acquisition or, if obtainable, such financing may not be on favorable terms;

•

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

•

we may be unable to acquire a desired property because of competition from other real estate investors with more available capital, including other real estate operating companies, real estate investment trusts and investment funds;

•

competition from other potential acquirers may significantly increase the purchase price, even if we are able to acquire a desired property;

•

agreements for the acquisition of office properties are typically subject to customary conditions to closing, including satisfactory completion of due diligence investigations, and we may spend significant time and money on a potential acquisition we eventually decide not to pursue;

•

we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations;

•

market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and

•

we may acquire properties subject to liabilities without any recourse, or with only limited recourse, for unknown liabilities such as clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

If we cannot complete property acquisitions on favorable terms or at all, or operate acquired properties to meet our expectations, our revenue and profitability could be adversely impacted.

Any real estate acquisitions that we consummate may result in disruptions to our business as a result of the burden of integrating operations placed on our management.

Our business strategy includes acquisitions and investments in real estate on an ongoing basis as market conditions warrant. These acquisitions may cause disruptions in our operations and divert management’s attention from our other day-to-day operations, which could impair our relationships with our current tenants and employees. If we acquire real estate by acquiring another entity, we may be unable to effectively integrate the operations and personnel of the acquired business. In addition, we may be unable to train, retain and motivate any key personnel from the acquired business. If our management is unable to effectively implement our acquisition strategy, we may experience disruptions to our business, which could harm our results of operations.

We may be unable to successfully complete and operate properties under development, which would impair our financial condition and operating results.

Part of our business is devoted to the development of office, mixed-use and other properties, and the redevelopment of core plus and value-add properties. Our development and redevelopment activities involve the following significant risks:

•

we may be unable to obtain financing on favorable terms or at all;

•

if we finance projects through construction loans, we may be unable to obtain permanent financing at all or on advantageous terms;

•

we may not complete projects on schedule or within budgeted amounts;

•

we may underestimate the expected costs and time necessary to achieve the desired result with a redevelopment project;

•

we may discover structural, environmental or other feasibility issues with properties acquired as redevelopment projects following our acquisition, which may render the redevelopment as planned not possible;

•

we may encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy, and other required governmental permits and authorizations;

•

occupancy rates and rents, or condominium prices and absorption rates in the case of the Murano, may fluctuate depending on a number of factors, including market and economic conditions, and may result in our investment not being profitable;

•

adverse weather that damages the project or causes delays;

•

unanticipated changes to the plans or specifications;

•

unanticipated shortages of materials and skilled labor;

•

unanticipated increases in material and labor costs; and

•

fire, flooding and other natural disasters.

If we are not successful in our property development initiatives, it could adversely impact our revenue and profitability, causing a significant downturn in our business, including our financial condition, results of operations, and the trading price of our common stock.

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

We face significant competition from other managers and owners of office and mixed-use real estate, many of which own or manage properties similar to ours in the same regional markets in which our properties are located. We also compete with other diversified real estate companies and companies focused solely on offering property investment management and brokerage services. A number of our competitors are larger and better able to take advantage of efficiencies created by size, have better financial resources, or increased access to capital at lower costs, and may be better known in regional markets in which we compete. Our smaller size as compared to some of our competition may increase our susceptibility to economic downturns and pressures on rents. Our failure to compete successfully in our industry would materially affect our business prospects and operating results.

We may be unable to renew leases, lease vacant space or re-lease space as leases expire resulting in increased vacancy rates, lower revenue and an adverse effect on our operating results.

As of September 30, 2010, leases representing 3.4% and 3.2% of the rentable square feet of the office and mixed-use properties in which we held an ownership interest will expire in 2010 and 2011, respectively. Further, an additional 16.1% of the square feet of these properties was available for lease as of September 30, 2010. Current economic and real estate market conditions have resulted in depressed leasing activity recently as a result of tenant unwillingness to make long term leasing commitments given recent upheaval in the financial markets, and it is unclear how long this market condition may continue. If the rental rates for our properties decrease, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock and impairing our ability to satisfy our debt service obligations.

Our growth depends on external sources of capital, some of which are outside of our control. If we are unable to access capital from external sources, we may not be able to implement our business strategy.

Our business strategy requires us to rely significantly on third-party sources to fund our capital needs. We may not be able to obtain debt or equity on favorable terms or at all. As a result of the recent downturn in the financial markets, we may experience difficulty refinancing some of our existing debt or obtaining new debt to complete acquisitions. Any additional debt we incur will increase our leverage and may impose operating restrictions on us. Any issuance of equity by our company to fund our portion of equity capital requirements could be dilutive to our existing stockholders, and could have a negative impact on our stock price. Our access to third-party sources of capital depends, in part, on:

•

our current debt levels, which were $301.96 million of consolidated debt and $1.98 billion of unconsolidated debt as of September 30, 2010;

•

our current cash flow from operating activities, which resulted in a use of cash of $1.7 million for the nine months ended September 30, 2010;

•

our current and expected future earnings;

•

the market’s perception of our growth potential;

•

the market price of our common stock;

•

the perception of the value of an investment in our common stock; and

•

general market conditions.

If we cannot obtain capital from third-party sources when needed, we may not be able to acquire or develop properties when strategic opportunities exist, or to repay existing debt as it matures.

As a result of the limited time which we have to perform due diligence of many of our acquired properties, we may become subject to significant unexpected liabilities and our properties may not meet projections.

When we enter into an agreement to acquire a property or portfolio of properties, we often have limited time to complete our due diligence prior to acquiring the property. To the extent we underestimate or fail to investigate or identify risks and liabilities associated with the properties we acquire, we may incur unexpected liabilities or the properties may fail to perform as we expected. If we do not accurately assess the liabilities associated with properties prior to their acquisition, we may pay a purchase price that exceeds the current fair value of the net identifiable assets of the acquired property. As a result, intangible assets would be required to be recorded, which could result in significant accounting charges in future periods. These charges, in addition to the financial impact of significant liabilities that we may assume, and any failure of properties to perform as expected, could adversely impact our revenue and profitability, causing a significant downturn in our financial condition, results of operations and the trading price of our common stock and impairing our ability to satisfy our debt service obligations.

Our efforts to expand our geographic presence and diversify into other regional real estate markets may not be successful, thereby constraining our growth to markets in which we currently operate.

We intend to expand our business to new geographic regions where we expect the ownership and management of property to result in favorable risk-adjusted investment returns. In order for us to achieve economies of scale, we generally target ownership of 500,000 or more rentable square feet in a market. It may be difficult for us to achieve this level of ownership and our initial entry into a particular market may result in higher administrative expenses for us initially. Presently, we do not possess the same level of familiarity with the development, ownership and management of properties in locations other than the West Coast, Southwest and Mid-Atlantic regions in the United States, which lack of familiarity could adversely affect our ability to own, manage or develop properties outside these regions successfully or at all or to achieve expected performance.

As the current or previous owner or operator of real property, we could become subject to liability for environmental contamination, regardless of whether we caused such contamination.

Under various federal, state and local environmental laws, regulations and ordinances, a current or previous owner or operator (e.g., tenant or manager) of real property may be liable for the cost to remove or remediate contamination resulting from the presence or discharge of hazardous or toxic substances, wastes or petroleum products on, under, from or in such property. These costs could be substantial and liability under these laws may attach without regard to fault, or whether the owner or operator knew of, or was responsible for, the presence of the contamination. The liability may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs to the extent such contributions are possible to obtain. In addition, the current or previous owner or operator of property may be subject to damage awards for personal injury or property damage resulting from contamination at or migrating from its property. Previous owners used some of our properties for industrial and retail purposes, so those properties may contain some level of environmental contamination. In addition, the presence of contamination, or the failure to properly remediate contamination on a property may limit the ability of the owner or operator to sell, develop or rent that property or to borrow using the property as collateral, and may cause our investment in that property to decline in value.

As the owner of real property, we could become subject to liability for asbestos-containing building materials in the buildings on our property.

Some of our properties may contain asbestos-containing materials. Environmental laws require that owners or operators of buildings with asbestos-containing building materials properly manage and maintain these materials, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements. In addition, these laws may also allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.

We have removed or abated asbestos-containing building materials from certain tenant and common areas at our City National Plaza and Brookhollow properties. We continue to remove or abate asbestos from various areas of the building structures and as of September 30, 2010, had accrued approximately $0.9 million for estimated future costs of such removal or abatement at these properties.

Our properties may contain or develop harmful mold or suffer from other adverse conditions, which could lead to liability for adverse health effects and costs of remediation.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.

As the owner of real property, we could become subject to liability for failure to comply with environmental requirements regarding the handling and disposal of regulated substances and wastes or for non-compliance with health and safety requirements.

Environmental laws and regulations regarding the handling of regulated substances and wastes apply to our properties. The properties in our portfolio are also subject to various federal, state and local health and safety requirements, such as state and local fire requirements. If we or our tenants fail to comply with these various requirements, we might incur governmental fines or private damage awards. Moreover, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will materially adversely impact our financial condition, results of operations, cash flow, cash available for distribution, the per share trading price of our common stock and our ability to satisfy our debt service obligations. Environmental noncompliance liability could also affect a tenant’s ability to make rental payments to us.

Tax indemnification obligations that may arise in the event we or our Operating Partnership sell an interest in either of two of our properties could limit our operating flexibility.

We and our Operating Partnership agreed at the time of our public offering to indemnify Mr. Thomas against adverse direct and indirect tax consequences in the event that our Operating Partnership or the underlying property owner directly or indirectly sells, exchanges or otherwise disposes (including by way of merger, sale of assets or otherwise) of any portion of its interests, in a taxable transaction, in either One Commerce Square or Two Commerce Square. These two properties represented 14.7% of annualized rent for properties in which we held an ownership interest as of September 30, 2010. The indemnification obligation currently expires October 13, 2013, which may be further extended to October 13, 2016 provided Mr. Thomas and his controlled entities collectively retain at least 50% of the Operating Partnership units received by them in connection with our formation transactions at the time of our initial public offering.

We also agreed at the time of the initial public offering to use commercially reasonable efforts to make approximately $210 million of debt available to be guaranteed by entities controlled by Mr. Thomas, by Mr. Fox, a non-employee member of our board of directors, and by Mr. Gilchrist, an individual formerly affiliated with Maguire Thomas Partners. We agreed to make this debt available for guarantee in order to assist Mr. Thomas and these other persons in preserving their tax position after their contributions at the time of our initial public offering.

Risks Related to the Real Estate Industry

The current economic environment for real estate companies and the credit crisis may significantly adversely impact our results of operations and business prospects.

The success of our business and profitability of our operations are dependent on continued investment in the real estate markets and access to capital and debt financing. A long term crisis of confidence in real estate investing and lack of available credit for acquisitions would be likely to constrain our business growth. As part of our business goals, we intend to grow our properties portfolio with strategic acquisitions of core properties at advantageous prices, and core plus and value added properties where we believe we can bring necessary expertise to bear to increase property values. In order to pursue acquisitions, we need access to equity capital and also property-level debt financing. Current conditions in the financial markets may adversely impact our ability to refinance existing debt and the availability and cost of credit in the near future. Presently, access to capital and debt financing options continue to be restricted and it is uncertain how long current economic circumstances may last. Any consideration of sales of existing properties or portfolio interests may be tempered by the depressed nature of property values at present. Our ability to make scheduled payments or to refinance our obligations with respect to indebtedness depends on our operating and financial performance, which in turn is subject to prevailing economic conditions.

Illiquidity of real estate investments and the susceptibility of the real estate industry to economic conditions could significantly impede our ability to respond to adverse changes in the performance of our properties.

Our ability to achieve desired and projected results for growth of our business depends on our ability to generate revenues in excess of expenses, and make scheduled principal payments on debt and fund capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may adversely impact our results of operations and the value of our properties. These events include:

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vacancies or our inability to rent space on favorable terms;

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inability to collect rent from tenants;

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difficulty in accessing credit in the present economic environment, in particular for larger mortgage loans;

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inability to finance property development and acquisitions on favorable terms;

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increased operating costs, including real estate taxes, insurance premiums and utilities;

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local oversupply, increased competition or reduction in demand for office space;

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costs of complying with changes in governmental regulations;

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the relative illiquidity of real estate investments;

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changing submarket demographics; and

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the significant transaction costs related to property sales, including a high transfer tax rate in the City of Philadelphia.

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. If any of these events were to happen, our revenue and profitability could be impaired, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock, and our ability to satisfy our debt service obligations could be impaired.

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our financial condition.

All of our commercial properties are required to comply with the Americans with Disabilities Act, or ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. The obligation to make readily achievable accommodations is an ongoing one, and we assess our properties and make alterations as appropriate. Compliance with the ADA requirements could require removal of access barriers.

If one or more of our properties is not in compliance with the ADA, we would be required to incur additional costs to bring the property or properties into compliance. In addition, non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. Typically, we are responsible for changes to a building structure that are required by the ADA, which can be costly. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations. We may be required to make substantial capital expenditures to comply with these requirements thereby limiting the funds available to operate, develop and redevelop our properties and acquire additional properties. As a result, these expenditures could negatively impact our revenue and profitability.

Potential losses to our properties may not be covered by insurance and may result in our inability to repair damaged properties, as a result we could lose invested capital.

We carry comprehensive liability, fire, flood, extended coverage, wind, earthquake, terrorism, pollution legal liability, business interruption and rental loss insurance under our blanket policy covering all of the properties in which we own an interest in or manage for third parties, including our development properties (although we carry only liability insurance for the California Environmental Protection Agency (“CalEPA”) headquarters building under our blanket policy because the tenant has the right to provide all other forms of coverage it deems necessary, and it has elected to do so). We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice.

We either own or have interests in a number of properties in Southern California, an area especially prone to earthquakes. We carry earthquake insurance on our properties located in seismically active areas, which includes our Southern California properties, wind insurance on our properties located in “tier 1” wind zones, which includes our Houston, Texas properties, and terrorism insurance on all of our properties. Our terrorism insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants, and biological and chemical weapons as more specifically excluded under the actual terrorism policies. Some of our policies, like those covering losses due to earthquakes and terrorism, are subject to limitations involving deductibles and policy limits which may not be sufficient to cover potential losses.

Under their leases, our tenants are generally required to indemnify us from liabilities resulting from injury to persons, air, water, land or property, on or off the premises due to activities conducted by them on our properties. There is an exception for claims arising from the negligence or intentional misconduct by us or our agents. Additionally, tenants are generally required, with the exception of governmental entities and other entities that are self-insured, to obtain and keep in force during the term of the lease liability and property damage insurance policies issued by companies holding ratings at a minimum level at their own expense.

Although we have not experienced such a loss to date, if we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged property as well as the anticipated future cash flows from that property, including lost revenue from unpaid rent from tenants. In addition, if the damaged property is subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if the property was irreparably damaged. In the event of a significant loss at one or more of the properties covered by our blanket policy, the remaining insurance under our policy, if any, could be insufficient to adequately insure our remaining properties. In this event, securing additional insurance, if possible, could be significantly more expensive than our current policy.

Risks Related to Our Organization and Structure

Our senior management has existing conflicts of interest with us and our public stockholders that could result in decisions adverse to our company.

In addition to the common stock owned by Mr. Thomas as of September 30, 2010, he owned or controlled a significant interest in our Operating Partnership consisting of 13,813,331 units, or a 28.0% interest in the Operating Partnership as of such date. In addition, our senior executive officers, excluding Mr. Thomas, collectively held an interest in incentive units (vested and unvested) representing an aggregate 3.7% equity interest in the Operating Partnership.

Members of senior management could make decisions that could have different implications for our Operating Partnership and for us, our stockholders, and our senior executive officers. For example, dispositions of interests in One Commerce Square or Two Commerce Square could trigger our tax indemnification obligations with respect to Mr. Thomas.

Our success depends on key personnel, the loss of whom could impair our ability to operate our business successfully.

We depend on the efforts of key personnel, particularly Mr. Thomas, our Chairman, Chief Executive Officer, and President. Among the reasons that Mr. Thomas is important to our success is that he has an industry reputation developed over more than 30 years in the real estate industry that attracts business and investment opportunities and assists us in negotiations with lenders, existing and potential tenants and industry personnel. If we lost his services, our relationships with these parties could diminish. Mr. Thomas is 74 and, although he has informed us that he does not currently plan to retire, we cannot be certain how long he will continue working on a full-time basis.

Many of our other senior executives also have significant real estate industry experience. Randall L. Scott, our Executive Vice President and Director, has extensive development and management experience on several large-scale projects, including the development, construction and management of One Commerce Square and Two Commerce Square. Mr. Sischo and Mr. Scott are jointly responsible for oversight of our relationship with CalSTRS. Mr. Sischo, in addition to being our co-Chief Operating Officer, is responsible for our investment efforts, including acquisition, financing and capital markets relationships. Thomas S. Ricci, our Executive Vice President, has been extensively involved in the development of large, mixed-use and commercial projects. Diana M. Laing, our Chief Financial Officer and Secretary, has served as chief financial officer of two publicly-traded real estate investment trusts. Paul S. Rutter, our co-Chief Operating Officer & General Counsel, has extensive experience, both as a real estate lawyer and as an executive in commercial real estate, including acquisitions, financing, joint ventures and leasing of office and mixed use projects. Todd L. Merkle, our Chief Investment Officer, has significant experience in real estate investment banking as well as property acquisitions, dispositions and financing. While we believe that we could find acceptable replacements for these executives, the loss of any of their services could materially and adversely affect our operations because of diminished relationships with lenders, existing and prospective tenants and industry personnel. A departure of either Mr. Thomas or Mr. Sischo could also have adverse effects on our joint venture relationship with CalSTRS, including, pursuant to a right granted to CalSTRS in our joint venture agreement with CalSTRS, the possible required sale of our joint venture interest to CalSTRS at 97% of fair value, unless within 180 days the Company names a replacement for such departed executive who is reasonably acceptable to CalSTRS.

We have a holding company structure and rely upon funds received from our Operating Partnership to pay liabilities.

We are a holding company. Our primary asset is our general partnership interest in our Operating Partnership. We have no independent means of generating revenues. To the extent we require funds to pay taxes or other liabilities incurred by us, to pay dividends or for any other purpose, we must rely on funds received from our Operating Partnership. If our Operating Partnership should become unable to distribute funds to us, we would be unable to continue operations after a short period. Most of the properties owned by our subsidiaries and joint ventures are encumbered by loans. These loans generally contain lockbox arrangements and reserve requirements that may affect the amount of cash available for distribution from the subsidiaries that own the properties to the Operating Partnership. Some of the loans include cash sweep and other restrictions and provisions that prior to an event of default may prevent the distribution of funds from the subsidiaries who own these properties to our Operating Partnership. In the event of a default under any of these loans, the defaulting subsidiary or joint venture would be prohibited from distributing cash to our Operating Partnership. As a result, our Operating Partnership may be unable to distribute funds to us and we may be unable to use funds from one property to support the operation of another property. As we acquire new properties and refinance our existing properties, we may finance these properties with new loans that contain similar provisions. Some of the loans to our subsidiaries and joint ventures may contain provisions that restrict us from loaning funds to our other subsidiaries or joint ventures. If we are permitted to loan funds to our subsidiaries or joint ventures, our loans generally will be subordinated to the existing debt on our properties.

Mr. Thomas has a significant vote in certain matters as a result of his control of 100% of our limited voting stock.

Each entity that received Operating Partnership units in our formation transactions received shares of our limited voting stock that are paired with units in our Operating Partnership on a one-for-one basis. All of these entities are directly or indirectly controlled by Mr. Thomas, and, as a result, Mr. Thomas controls 100% of our outstanding limited voting stock, or 31.1% of our outstanding voting stock (including outstanding shares of common stock owned by Mr. Thomas and his affiliates) as of September 30, 2010. These limited voting shares are entitled to vote in the election of directors, for the approval of certain extraordinary transactions including any merger, sale or liquidation of the Company, amendments to our certificate of incorporation and any other matter required to be submitted to a separate class vote under Delaware law. Mr. Thomas may have interests that differ from that of our public stockholders, including by reason of his interests held in Operating Partnership units, and may accordingly vote as a stockholder in ways that may not be consistent with the interests of our public stockholders. This significant voting influence over certain matters may have the effect of delaying, preventing or deterring a change of control of our Company, or could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our Company.

Some provisions of our certificate of incorporation and bylaws may deter takeover attempts, which may limit the opportunity of our stockholders to sell their shares at a favorable price.

Some of the provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders by potentially providing them with the opportunity to sell their shares at a premium over the then market price. Our certificate of incorporation and bylaws contain provisions which may deter takeover attempts, including the following:

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vacancies on our board of directors may only be filled by the remaining directors;

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only the board of directors can change the number of directors;

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there is no provision for cumulative voting for directors;

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directors may only be removed for cause; and

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our stockholders are not permitted to act by written consent.

In addition, our certificate of incorporation authorizes the board of directors to issue up to 25,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which will be determined at the time of issuance by our board of directors without further action by our stockholders. These terms may include voting rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current stockholders’ control of our Company.

Finally, we are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder.

The provisions of our certificate of incorporation and bylaws, described above, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management, even if these events would be in the best interests of our stockholders.

We could authorize and issue stock without stockholder approval, which could cause our stock price to decline and which could dilute the holdings of our existing stockholders.

Our certificate of incorporation authorizes our board of directors to issue authorized but unissued shares of our common stock or preferred stock to classify or reclassify any unissued shares of our preferred stock and to set the preferences, rights and other terms of the classified or unclassified shares. Our board of directors could establish a series of preferred stock that could, depending on the terms of the series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

The payment of dividends on our common stock is at the discretion of our board of directors and subject to various restrictions and considerations and, consequently, may be changed or discontinued at any time.

Although we have historically paid quarterly dividends on our common stock until December 2009, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition, and any other factors deemed relevant by our board of directors. In December 2009, our board of directors suspended the quarterly dividends to common stockholders. If the dividend payments are reinstated, such quarterly dividend payments may be further reduced or stopped again altogether in the future, in which case the only opportunity to achieve a positive return on an investment in our common stock would be if the market price of our common stock appreciates.

ITEM 6.

EXHIBITS

(a)

Exhibits


10.65		One Commerce Square Contribution Agreement^*

10.66		Two Commerce Square Contribution Agreement^*

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Confidential Treatment Requested

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 12, 2010


THOMAS PROPERTIES GROUP, INC.

By:		/s/ James A. Thomas
		James A. Thomas Chief Executive Officer

By:		/s/ Diana M. Laing
		Diana M. Laing Chief Financial Officer

THOMAS PROPERTIES GROUP INC - FORM 10-Q - November 12, 2010

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