UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-31824

FIRST POTOMAC REALTY TRUST

(Exact name of registrant as specified in its charter)

MARYLAND (State or other jurisdiction of incorporation or organization)		37-1470730 (I.R.S. Employer Identification No.)

7600 Wisconsin Avenue, 11^th Floor, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code)

(301) 986-9200
(Registrant’s telephone number, including area code)

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 þ NO o

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

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

o Large Accelerated Filer		þ Accelerated Filer		o Non-Accelerated Filer		o Smaller Reporting Company

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

As of August 8, 2011, there were 50,057,085 common shares, par value $0.001 per share, outstanding.

 

 

FIRST POTOMAC REALTY TRUST
FORM 10-Q

INDEX

		Page
Part I: Financial Information
Item 1. Condensed Consolidated Financial Statements
Consolidated balance sheets as of June 30, 2011 (unaudited) and December 31, 2010			3
Consolidated statements of operations (unaudited) for the three and six months ended June 30, 2011 and 2010			4
Consolidated statements of cash flows (unaudited) for the six months ended June 30, 2011 and 2010			5
Notes to condensed consolidated financial statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures about Market Risk			54
Item 4. Controls and Procedures			55
Part II: Other Information
Item 1. Legal Proceedings			56
Item 1A. Risk Factors			56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			56
Item 3. Defaults Upon Senior Securities			56
Item 4. Submission of Matters to a Vote of Security Holders			56
Item 5. Other Information			56
Item 6. Exhibits			56
Signatures
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

FIRST POTOMAC REALTY TRUST

Consolidated Balance Sheets

(Amounts in thousands, except per share amounts)

		June 30, 2011				December 31, 2010
		(unaudited)
Assets:
Rental property, net		$	1,365,846			$	1,217,897
Cash and cash equivalents			12,715				33,280
Escrows and reserves			29,268				8,070
Accounts and other receivables, net of allowance for doubtful accounts of $3,184 and $3,246, respectively			7,909				7,238
Accrued straight-line rents, net of allowance for doubtful accounts of $325 and $849, respectively			14,484				12,771
Notes receivable, net			54,627				24,750
Investment in affiliates			23,974				23,721
Deferred costs, net			26,128				20,174
Prepaid expenses and other assets			17,343				14,230
Intangible assets, net			56,256				34,551
Total assets		$	1,608,550			$	1,396,682
Liabilities:
Mortgage loans		$	441,966			$	319,096
Exchangeable senior notes, net			30,216				29,936
Senior notes			75,000				75,000
Secured term loans			100,000				110,000
Unsecured revolving credit facility			164,000				191,000
Accounts payable and other liabilities			36,221				16,827
Accrued interest			2,598				2,170
Rents received in advance			6,937				7,049
Tenant security deposits			5,487				5,390
Deferred market rent, net			5,298				6,032
Total liabilities			867,723				762,500
Noncontrolling interests in the Operating Partnership			36,375				16,122
Equity:
Series A Preferred Shares, $25 par value, 50,000 shares authorized: 4,600 and 0 shares issued and outstanding, respectively			115,000				—
Common shares, $0.001 par value, 150,000 common shares authorized: 50,056 and 49,922 shares issued and outstanding, respectively			50				50
Additional paid-in capital			791,641				794,051
Noncontrolling interests in consolidated partnerships			4,079				3,077
Accumulated other comprehensive loss			(808	)			(545	)
Dividends in excess of accumulated earnings			(205,510	)			(178,573	)
Total equity			704,452				618,060
Total liabilities, noncontrolling interests and equity		$	1,608,550			$	1,396,682

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Operations

(unaudited)

(Amounts in thousands, except per share amounts)

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Revenues:
Rental		$	34,983			$	26,606			$	66,904			$	53,145
Tenant reimbursements and other			7,837				5,961				15,783				13,612
Total revenues			42,820				32,567				82,687				66,757
Operating expenses:
Property operating			9,543				6,863				20,265				16,600
Real estate taxes and insurance			4,091				3,131				8,032				6,392
General and administrative			4,185				3,675				8,192				7,384
Acquisition costs			552				1,645				2,737				1,664
Depreciation and amortization			16,691				10,196				29,293				19,879
Contingent consideration related to acquisition of property			—				—				—				710
Total operating expenses			35,062				25,510				68,519				52,629
Operating income			7,758				7,057				14,168				14,128
Other expenses, net:
Interest expense			10,473				8,052				19,100				16,903
Interest and other income			(1,410	)			(87	)			(2,235	)			(197	)
Equity in losses of affiliates			—				20				32				59
Gain on early retirement of debt			—				(164	)			—				(164	)
Total other expenses, net			9,063				7,821				16,897				16,601
Loss from continuing operations before income taxes			(1,305	)			(764	)			(2,729	)			(2,473	)
Benefit from income taxes			148				—				461				—
Loss from continuing operations			(1,157	)			(764	)			(2,268	)			(2,473	)
Discontinued operations:
(Loss) income from operations of disposed properties			(45	)			240				(2,827	)			(258	)
Gain on sale of real estate properties			1,954				557				1,954				557
Income (loss) from discontinued operations			1,909				797				(873	)			299
Net income (loss)			752				33				(3,141	)			(2,174	)
Less: Net loss (income) attributable to noncontrolling interests			65				(1	)			203				48
Net income (loss) attributable to First Potomac Realty Trust			817				32				(2,938	)			(2,126	)
Less: Dividends on preferred shares			(2,228	)			—				(4,010	)			—
Net (loss) income available to common shareholders		$	(1,411	)		$	32			$	(6,948	)		$	(2,126	)
Basic and diluted earnings per share:
Loss from continuing operations		$	(0.07	)		$	(0.02	)		$	(0.13	)		$	(0.08	)
Income (loss) from discontinued operations			0.04				0.02				(0.02	)			0.01
Net loss		$	(0.03	)		$	—			$	(0.15	)		$	(0.07	)
Weighted average common shares outstanding:
Basic and diluted			49,283				36,511				49,259				33,552

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST

Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

		Six Months Ended June 30,
		2011				2010
Cash flows from operating activities:
Net loss		$	(3,141	)		$	(2,174	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Discontinued operations:
Gain on sale of real estate properties			(1,954	)			(557	)
Depreciation and amortization			520				231
Impairment of real estate assets			2,711				565
Depreciation and amortization			29,695				20,882
Stock based compensation			1,387				2,056
Bad debt expense			518				750
Benefit from income taxes			(461	)			—
Amortization of deferred market rent			(502	)			(677	)
Amortization of financing costs and discounts			1,076				348
Amortization of rent abatement			1,384				1,242
Equity in losses of affiliates			32				59
Distributions from investments in affiliates			83				216
Contingent consideration related to acquisition of property			—				710
Gain on early retirement of debt			—				(164	)
Changes in assets and liabilities:
Escrows and reserves			(7,698	)			(1,872	)
Accounts and other receivables			(1,056	)			(874	)
Accrued straight-line rents			(3,208	)			(1,128	)
Prepaid expenses and other assets			1,317				2,548
Tenant security deposits			96				(176	)
Accounts payable and accrued expenses			2,809				(269	)
Accrued interest			427				119
Rents received in advance			(102	)			259
Deferred costs			(7,387	)			(4,146	)
Total adjustments			19,687				20,122
Net cash provided by operating activities			16,546				17,948
Cash flows from investing activities:
Purchase deposit on future acquisitions			(20,319	)			(2,060	)
Change in escrow and reserves			(2,249	)			—
Investment in note receivable			(29,181	)			—
Proceeds from sales of real estate assets			26,883				11,414
Acquisition of rental property and associated intangible assets			(12,513	)			(81,491	)
Additions to rental property			(16,552	)			(5,441	)
Acquisition of land parcel			(7,500	)			—
Additions to construction in progress			(8,879	)			(724	)
Investment in unconsolidated joint ventures			(260	)			—
Deconsolidation of joint venture			—				(896	)
Net cash used in investing activities			(70,570	)			(79,198	)
Cash flows from financing activities:
Financing costs			(2,224	)			(1,220	)
Issuance of debt			78,000				85,000
Issuance of common shares, net			—				86,977
Issuance of preferred shares, net			110,997				—
Contributions from joint venture partner			1,000				—
Repayments of debt			(130,826	)			(93,543	)
Dividends to common shareholders			(19,989	)			(13,526	)
Dividends to preferred shareholders			(2,896	)			—
Distributions to noncontrolling interests			(667	)			(293	)
Stock option exercises			64				16
Net cash provided by financing activities			33,459				63,411
Net (decrease) increase in cash and cash equivalents			(20,565	)			2,161
Cash and cash equivalents, beginning of period			33,280				9,320
Cash and cash equivalents, end of period		$	12,715			$	11,481

See accompanying notes to condensed consolidated financial statements.

FIRST POTOMAC REALTY TRUST
Consolidated Statements of Cash Flows — Continued
(unaudited)

Supplemental disclosures of cash flow information for the six months ended June 30 are as follows (amounts in thousands):

		2011				2010
Cash paid for interest, net		$	17,530			$	16,409
Non-cash investing and financing activities:
Debt assumed in connection with acquisitions of real estate			139,373				—
Contingent consideration recorded at acquisition			9,356				—
Conversion of Operating Partnership units into common shares			19				—
Issuance of Operating Partnership units in connection with acquisitions of real estate			21,721				—

Cash paid for interest on indebtedness is net of capitalized interest of $0.9 million and $0.4 million for the six months ended June 30, 2011 and 2010, respectively.

During the six months ended June 30, 2011, the Company recorded cash payments of $0.2 million for franchise taxes levied by the city of Washington, D.C. The Company acquired its first property in Washington, D.C. on June 30, 2010 and, therefore was not subject to any Washington, D.C. franchise taxes during the six months ended June 30, 2010.

During the six months ended June 30, 2011, 1,300 Operating Partnership units were redeemed for an equivalent number of the Company’s common shares. No Operating Partnership units were redeemed for an equivalent number of the Company’s common shares during the six months ended June 30, 2010.

During the six months ended June 30, 2011 the Company acquired four consolidated properties at an aggregate purchase price of $189.6 million, including the assumption of $139.4 million of mortgage debt and the issuance of 1,418,715 Operating Partnership units valued at $21.7 million on the date of acquisition. The 2011 acquisitions include 840 First Street, NE, which was acquired for an aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration payable upon the terms of a lease renewal by the building’s sole tenant or the re-tenanting of the property. At acquisition, the Company was in active negotiations with the existing tenant to renew its lease through August 2023. As a result, the Company recorded a contingent consideration obligation of $9.4 million at acquisition. In July 2011, the building’s sole tenant renewed its lease. Based on the probability of renewal and lease terms used in the original estimate of fair value, the value of contingent consideration remained unchanged.

FIRST POTOMAC REALTY TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of Business

First Potomac Realty Trust (the “Company”) is a leader in the ownership, management, development and redevelopment of office and industrial properties in the greater Washington, D.C. region. The Company separates its properties into four distinct segments, which it refers to as the Maryland, Washington, D.C., Northern Virginia and Southern Virginia reporting segments. The Company strategically focuses on acquiring and redeveloping properties that it believes can benefit from its intensive property management and seeks to reposition these properties to increase their profitability and value. The Company’s portfolio contains a mix of single-tenant and multi-tenant office and industrial properties as well as business parks. Office properties are single-story and multi-story buildings that are used primarily for office use; business parks contain buildings with office features combined with some industrial property space; and industrial properties generally are used as warehouse, distribution or manufacturing facilities.

References in these unaudited condensed consolidated financial statements to “we,” “our” or “First Potomac,” refer to the Company and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

The Company conducts its business through First Potomac Realty Investment Limited Partnership, the Company’s operating partnership (the “Operating Partnership”). The Company is the sole general partner of, and, as of June 30, 2011, owned a 95.5% interest in, the Operating Partnership. The remaining interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests, some of which are owned by several of the Company’s executive officers and trustees who contributed properties and other assets to the Company upon its formation, and other unrelated parties.

At June 30, 2011, the Company wholly-owned or had a controlling interest in properties totaling 13.7 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.5 million square feet through four unconsolidated joint ventures. The Company also owned land that can accommodate approximately 1.6 million square feet of additional development. The Company derives substantially all of its revenue from leases of space within its properties. As of June 30, 2011, the Company’s largest tenant was the U.S. Government, which along with government contractors, accounted for over 20% of the Company’s total annualized rental revenue. The U.S Government also accounted for approximately a third of the Company’s outstanding accounts receivables at June 30, 2011. The majority of the accounts receivable related to the government was due to the clarification of terms in a specific lease, which has been resolved, and the Company expects to collect the outstanding balance on the specified lease in the third quarter. The Company operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The unaudited condensed consolidated financial statements of the Company include the accounts of the Company, the Operating Partnership, the subsidiaries of the Operating Partnership in which it has a controlling interest and First Potomac Management LLC, a wholly-owned subsidiary that manages the majority of the Company’s properties. All intercompany balances and transactions have been eliminated in consolidation.

The Company has condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”) in the accompanying unaudited condensed consolidated financial statements. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010 and as updated from time to time in other filings with the Securities and Exchange Commission.

In the Company’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals necessary to present fairly the Company’s financial position as of June 30, 2011, the results of its operations for the three and six months ended June 30, 2011 and 2010 and its cash flows for the six months ended June 30, 2011 and 2010. Interim results are not necessarily indicative of full-year performance due, in part, to the timing of transactions and the impact of acquisitions and dispositions throughout the year.

(b) Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Estimates include the amount of accounts receivable that may be uncollectible; recoverability of notes receivable, future cash flows, discount and capitalization rate assumptions used to fair value acquired properties and to test impairment of certain long-lived assets and goodwill; market lease rates, lease-up periods, leasing and tenant improvement costs used to fair value intangible assets acquired and probability weighted cash flow analysis used to fair value contingent liabilities. Actual results could differ from those estimates.

(c) Rental Property

Rental property is carried at initial cost less accumulated depreciation and, when appropriate, impairment losses. Improvements and replacements are capitalized at cost when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the Company’s assets, by class, are as follows:

Buildings		39 years
Building improvements		5 to 20 years
Furniture, fixtures and equipment		5 to 15 years
Tenant improvements		Shorter of the useful lives of the assets or the terms of the related leases

The Company regularly reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of the fair value of a property, an impairment analysis is performed. The Company assesses potential impairments based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the property’s use and eventual disposition. This estimate is based on projections of future revenues, expenses, capital improvement costs, expected holding periods and capitalization rates. These cash flows consider factors such as expected market trends and leasing prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment based on forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The Company is required to make estimates as to whether there are impairments in the carrying values of its investments in real estate. Further, the Company will record an impairment loss if it expects to dispose of a property, in the near term, at a price below carrying value. In such an event, the Company will record an impairment loss based on the difference between a property’s carrying value and its projected sales price less any estimated costs to sell.

The Company will classify a building as held-for-sale in the period in which it has made the decision to dispose of the building, the Company’s Board of Trustees or a designated delegate has approved the sale, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. The Company will classify any impairment loss, together with the building’s operating results, as discontinued operations in its consolidated statements of operations for all periods presented and classify the assets and related liabilities as held-for-sale in its consolidated balance sheets in the period the sale criteria are met. Interest expense is reclassified to discontinued operations only to the extent the held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be secured to another property owned by the Company after the disposition.

The Company recognizes the fair value, if sufficient information exists to reasonably estimate the fair value, of any liability for conditional asset retirement obligations when incurred, which is generally upon acquisition, construction, development or redevelopment and/or through the normal operation of the asset.

The Company capitalizes interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. The Company will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress and the direct compensation costs of the Company’s construction personnel who manage the development and redevelopment projects, but only to the extent the employee’s time can be allocated to a project. For the three and six months ended June 30, 2011, capitalized compensation costs were immaterial. Capitalization of interest will end when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity, if the property is not occupied. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.

(d) Notes Receivable

The Company lends money to the owners of real estate properties, which are collateralized by a direct or indirect interest in the real estate property. The Company records these investments as “Notes receivable, net” in its consolidated balance sheets. The investments are recorded net of any discount or issuance costs, which are amortized over the life of the respective note receivable using the effective interest method. The Company records interest received from notes receivable and amortization of any discount or issuance costs within “Interest and other income” in its consolidated statements of operations.

In December 2010, the Company provided a $25.0 million subordinated loan to the owners of 950 F Street, NW, a 287,000 square-foot office building in Washington, D.C., which is secured by a portion of the owners’ interest in the property. The loan has a fixed interest rate of 12.5% and was initially recorded net of $0.3 million of issuance costs. The loan matures on April 1, 2017 and is repayable in full on or after December 21, 2013. For the three and six months ended June 30, 2011, the Company recorded interest income associated with the loan of $0.8 million and $1.6 million, respectively.

In April 2011, the Company provided a $30.0 million subordinated loan to the owners of America’s Square, a 461,000 square-foot office complex in Washington, D.C., which is secured by a portion of the owners’ interest in the property. The loan has a fixed interest rate of 9.0% and was initially recorded net of $0.1 million of issuance costs. The loan matures on May 1, 2016 and is repayable in full on or after October 16, 2012, subject to yield maintenance. For the three and six months ended June 30, 2011, the Company recorded interest income associated with the loan of $0.6 million.

The Company will establish a provision for anticipated credit losses associated with its notes receivables and debt investments when it anticipates that it may be unable to collect any contractually due amounts. This determination is based on upon such factors as delinquencies, loss experience, collateral quality and current economic or borrower conditions. Estimated losses are recorded as a charge to earnings to establish an allowance for credit losses that the Company estimates to be adequate based on these factors. The Company has not recorded any losses associated with its notes receivable during 2011 and 2010.

(e) Reclassifications

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

(f) Application of New Accounting Standards

In June 2011, new accounting guidance was issued regarding the presentation of other comprehensive income that will eliminate the option of reporting other comprehensive income and its components in the Company’s Statement of Equity. The amendment provides companies the option to present components of net income and comprehensive income as either a single continuous statement or as two separate but consecutive statements. The amendment does not change what items are reported in other comprehensive income or the requirement to report reclassification of items from other comprehensive income to net income. The required disclosures are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2011. Early adoption is permitted. The Company does not believe the implementation of these disclosures will have a material impact on its consolidated financial statements.

(3) Earnings Per Share

Basic earnings or loss per share (“EPS”) is calculated by dividing net income or loss available to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the period, which include stock options, non-vested shares, preferred shares and Exchangeable Senior Notes. The Company applies the two-class method for determining EPS as its outstanding unvested shares with non-forfeitable dividend rights are considered participating securities. The Company’s excess of distributions over earnings related to participating securities are shown as a reduction in total earnings attributable to common shareholders in the Company’s computation of EPS.

The following table sets forth the computation of the Company’s basic and diluted earnings per share (amounts in thousands, except per share amounts):

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Numerator for basic and diluted earnings per share:
Loss from continuing operations		$	(1,157	)		$	(764	)		$	(2,268	)		$	(2,473	)
Income (loss) from discontinued operations			1,909				797				(873	)			299
Net income (loss)			752				33				(3,141	)			(2,174	)
Less: Net loss from continuing operations attributable to noncontrolling interests			151				14				221				52
Less: Net income from discontinued operations attributable to noncontrolling interests			(86	)			(15	)			(18	)			(4	)
Net income (loss) attributable to First Potomac Realty Trust			817				32				(2,938	)			(2,126	)
Less: Dividends on preferred shares			(2,228	)			—				(4,010	)			—
Net (loss) income available to common shareholders			(1,411	)			32				(6,948	)			(2,126	)
Less: Allocation to participating securities			(155	)			(157	)			(292	)			(304	)
Net loss available to common shareholders		$	(1,566	)		$	(125	)		$	(7,240	)		$	(2,430	)
Denominator for basic and diluted earnings per share:
Weighted average shares outstanding — basic and diluted			49,283				36,511				49,259				33,552
Basic and diluted earnings per share:
Loss from continuing operations		$	(0.07	)		$	(0.02	)		$	(0.13	)		$	(0.08	)
Income (loss) from discontinued operations			0.04				0.02				(0.02	)			0.01
Net loss		$	(0.03	)		$	—			$	(0.15	)		$	(0.07	)

In accordance with accounting requirements regarding earnings per share, the Company did not include the following potential common shares in its calculation of diluted earnings per share as they would be anti-dilutive (amounts in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Stock option awards			920				847				911				849
Non-vested share awards			388				310				415				336
Conversion of Exchangeable Senior Notes(1)			854				1,276				854				1,346
Series A Preferred Shares(2)			7,313				—				7,284				—
			9,475				2,433				9,464				2,531

(4) Rental Property

Rental property represents property, net of accumulated depreciation, and developable land that are wholly owned or owned by an entity in which the Company has a controlling interest. All of the Company’s rental properties are located within the greater Washington, D.C. region. Rental property consists of the following (amounts in thousands):

		June 30, 2011				December 31, 2010
Land		$	336,854			$	315,229
Buildings and improvements			1,028,414				930,077
Construction in process			64,558				41,685
Tenant improvements			103,435				92,002
Furniture, fixtures and equipment			9,166				9,894
			1,542,427				1,388,887
Less: accumulated depreciation			(176,581	)			(170,990	)
		$	1,365,846			$	1,217,897

(a) Development and Redevelopment Activity

The Company constructs office, business parks and/or industrial buildings on a build-to-suit basis or with the intent to lease upon completion of construction. Also, the Company owns developable land that can accommodate 1.6 million square feet of additional building space. Below is a summary of the approximate building square footage that can be developed on the Company’s developable land and the Company’s current development and redevelopment activity (amounts in thousands):

						Square Feet				Cost to Date of				Square Feet				Cost to Date of
Reporting		Developable				Under				Development				Under				Redevelopment
Segment		Square Feet				Development				Activities				Redevelopment				Activities
Maryland			150				—			$	—				—			$	—
Northern Virginia			568				—				—				227				10,219
Southern Virginia			841				166				415				—				—
Washington, D.C.			30				—				—				135				726
			1,589				166			$	415				362			$	10,945

The majority of the development and redevelopment costs incurred through the Company’s ongoing projects have taken place at Three Flint Hill in the Company’s Northern Virginia region. Three Flint Hill is a 174,000 square foot, eight-story Class A office building. The Company has incurred approximately $9.9 million in redevelopment costs, which include architectural, and engineering design fees and permit fees as well as demolition, glass, HVAC, electrical, plumbing, and lobby finish work.

The Company anticipates the majority of the development and redevelopment efforts on these projects will continue throughout 2011 and expected to be completed in 2012.

(b) Acquisitions

During the second quarter of 2011, the Company acquired the One Fair Oaks property, which is included in its condensed consolidated financial statements from the date of acquisition (dollars in thousands):

Aggregate

Mortgage

Acquisition

Property

Square

Purchase

Debt

Location

Date

Type

Feet

Price

Assumed(1)

One Fair Oaks

Northern Virginia

4/8/2011

Office

214,214

$

58,036

$

52,909

The fair values of the acquired assets and liabilities are as follows (amounts in thousands):

Land		$	5,688
Acquired tenant improvements			2,309
Building and improvements			43,176
In-place leases			5,753
Acquired leasing commissions			681
Above-market leases acquired			429
Total assets acquired			58,036
Debt assumed			(52,909	)
Net assets acquired		$	5,127

The fair values for the assets and liabilities acquired in 2011 are preliminary as the Company continues to finalize their acquisition date fair value determination.

The weighted average amortization period of the Company’s consolidated intangible assets, which consist of in-place leases, acquired leasing commissions and above market leases, acquired in the second quarter of 2011 is 5.5 years.

(5) Investment in Affiliates

The Company owns an interest in several properties for which it does not control the activities that are most significant to the operations of the properties. As a result, the assets, liabilities and operating results of these noncontrolled properties are not consolidated within the Company’s consolidated financial statements. The Company’s investment in these properties is recorded as “Investment in affiliates” in its consolidated balance sheets.

At January 1, 2010, the Company had a 25% noncontrolling interest in the two separate joint ventures that owned RiversPark I and II. During the fourth quarter of 2010, the Company entered into two separate joint ventures, in which it had a 50% noncontrolling interest, to own 1750 H Street, NW and Aviation Business Park.

The net assets of the Company’s unconsolidated joint ventures consisted of the following (amounts in thousands):

		June 30, 2011				December 31, 2010
Assets:
Rental property, net		$	103,638			$	104,559
Cash and cash equivalents			3,125				1,706
Other assets			9,895				11,442
Total assets			116,658				117,707
Liabilities:
Mortgage loans(1)			59,383				59,914
Other liabilities			3,273				4,316
Total liabilities			62,656				64,230
Net assets		$	54,002			$	53,477

The following table summarizes the results of operations of the Company’s unconsolidated joint ventures. The Company’s share of earnings or losses related to its unconsolidated joint ventures is recorded in its consolidated statements of operations as “Equity in losses of affiliates” (amounts in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Total revenues		$	2,886			$	1,183			$	5,964			$	2,301
Total operating expenses			(786	)			(299	)			(1,922	)			(650	)
Net operating income			2,100				884				4,042				1,651
Depreciation and amortization			(1,259	)			(500	)			(2,561	)			(954	)
Other expenses, net			(852	)			(465	)			(1,575	)			(932	)
Net loss		$	(11	)		$	(81	)		$	(94	)		$	(235	)

(6) Discontinued Operations

On May 27, 2011, the Company sold its Gateway West property for net proceeds of $4.8 million. The property is a four-building, 111,481 square foot office park in Westminster, Maryland, which the Company acquired as part of a portfolio acquisition in 2004. During the first quarter of 2011, the Company recorded a $2.7 million impairment charge based on the difference between the contractual sales price less anticipated selling costs and the carrying value of the property.

On June 22, 2011, the Company sold Aquia Commerce Center I & II, a two building, 64,488 square foot property in Stafford, Virginia, for net proceeds of $11.3 million. The Company reported a gain on the sale of $2.0 million.

The following table is a summary of property dispositions whose operating results, along with Gateway West and Aquia Commerce Center I & II’s operating results, are reflected as discontinued operations in the Company’s condensed consolidated statements of operations:

		Reporting		Disposition				Square
		Segment		Date		Property Type		Feet
Old Courthouse Square		Maryland		2/18/2011		Retail			201,208
7561 Lindbergh Drive		Maryland		6/16/2010		Industrial Park			36,000
Deer Park		Maryland		4/23/2010		Business Park			171,125
									408,333

The Company has had, and will have, no continuing involvement with any of its disposed properties subsequent to their disposal. The disposed properties were not subject to any income taxes. The Company did not dispose of or enter into any binding agreements to sell any other properties during the six months ended June 30, 2011 and 2010.

The following table summarizes the components of net income (loss) from discontinued operations (amounts in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Revenues		$	407			$	1,008			$	1,055			$	2,189
Net (loss) income, before gains or taxes			(45	)			240				(2,827	)			(258	)
Gain on sale of real estate properties			1,954				557				1,954				557

(7) Debt

The Company’s borrowings consisted of the following (amounts in thousands):

		June 30,				December 31,
		2011				2010
Mortgage loans, effective interest rates ranging from 4.40% to 7.29%, maturing at various dates through June 2021		$	441,966			$	319,096
Exchangeable senior notes, net of discounts, effective interest rate of 5.84%, maturing December 2011(1)			30,216				29,936
Series A senior notes, effective interest rate of 6.41%, maturing June 2013			37,500				37,500
Series B senior notes, effective interest rate of 6.55%, maturing June 2016			37,500				37,500
Secured term loan, effective interest rate of LIBOR plus 3.50%, maturing January 2014(2)			30,000				40,000
Secured term loan, effective interest rate of LIBOR plus 2.50%, maturing August 2011			20,000				20,000
Secured term loan, effective interest rate of LIBOR plus 3.50%, maturing August 2011(3)			50,000				50,000
Unsecured revolving credit facility, effective interest rate of LIBOR plus 2.50%, maturing January 2015(3)			164,000				191,000
		$	811,182			$	725,032

(a) Mortgage Loans

The following table provides a summary of the Company’s mortgage debt at June 30, 2011 and December 31, 2010 (dollars in thousands):

						Effective
		Contractual				Interest				Maturity				June 30,				December 31,
Encumbered Property		Interest Rate				Rate				Date				2011				2010
Indian Creek Court (1)			7.80	%			5.90	%		January 2011				$	—			$	11,982
403/405 Glenn Drive (2)			7.60	%			5.50	%		July 2011					7,807				7,960
4612 Navistar Drive (2)			7.48	%			5.20	%		July 2011					11,941				12,189
Campus at Metro Park (3)			7.11	%			5.25	%		February 2012					22,134				22,556
One Fair Oaks			6.31	%			6.72	%		June 2012					52,807				—
1434 Crossways Blvd Building II			7.05	%			5.38	%		August 2012					9,292				9,484
Crossways Commerce Center			6.70	%			6.70	%		October 2012					23,951				24,179
Newington Business Park Center			6.70	%			6.70	%		October 2012					15,108				15,252
Prosperity Business Center			6.25	%			5.75	%		January 2013					3,446				3,502
Aquia Commerce Center I(4)			7.28	%			7.28	%		February 2013					—				353
Cedar Hill			6.00	%			6.58	%		February 2013					16,046				—
Merrill Lynch Building			6.00	%			7.29	%		February 2013					13,704				—
1434 Crossways Blvd Building I			6.25	%			5.38	%		March 2013					8,084				8,225
Linden Business Center			6.01	%			5.58	%		October 2013					7,000				7,080
840 First Street, NE			5.18	%			6.05	%		October 2013					56,242				—
Owings Mills Business Center			5.85	%			5.75	%		March 2014					5,394				5,448
Annapolis Commerce Park East			5.74	%			6.25	%		June 2014					8,426				8,491
Cloverleaf Center			6.75	%			6.75	%		October 2014					17,056				17,204
Plaza 500, Van Buren Business Park, Rumsey Center, Snowden Center, Greenbrier Technology Center II, Norfolk Business Center, Northridge I & II and 15395 John Marshall Highway			5.19	%			5.19	%		August 2015					98,426				99,151
Hanover Business Center:
Building D			8.88	%			6.63	%		August 2015					582				642
Building C			7.88	%			6.63	%		December 2017					982				1,041
Chesterfield Business Center:
Buildings C,D,G and H			8.50	%			6.63	%		August 2015					1,528				1,681
Buildings A,B,E and F			7.45	%			6.63	%		June 2021					2,318				2,398
7458 Candlewood Road — Note 1			4.67	%			6.04	%		January 2016					4,731				4,761
7458 Candlewood Road — Note 2			6.57	%			6.30	%		January 2016					9,835				9,938
Gateway Centre, Building I			7.35	%			5.88	%		November 2016					1,104				1,189
500 First Street, NW			5.72	%			5.79	%		July 2020					38,539				38,793
Battlefield Corporate Center			4.26	%			4.40	%		November 2020					4,219				4,289
Airpark Business Center			7.45	%			6.63	%		June 2021					1,264				1,308
Total Mortgage Debt							5.95	%(5)						$	441,966			$	319,096

On April 8, 2011, the Company acquired One Fair Oaks in Fairfax, Virginia. The acquisition was funded by the assumption of a $52.4 million mortgage loan and available cash. The mortgage loan has a fixed contractual interest rate of 6.31% and matures in June 2012.

(b) Unsecured Term Loan

On July 18, 2011, the Company entered into a three-tranche $175.0 million unsecured term loan. The unsecured term loan’s three tranches have maturity dates staggered in one-year intervals. Tranche A has an outstanding balance of $60.0 million at an interest rate of LIBOR plus 215 basis points and matures on July 18, 2016. Tranche B has an outstanding balance of $60.0 million at an interest rate of LIBOR plus 225 basis points and matures on July 18, 2017. Tranche C has an outstanding balance of $55.0 million at an interest rate of LIBOR plus 230 basis points and matures on July 18, 2018. The term loan agreement contains various restrictive covenants substantially similar to those contained in the Company’s revolving credit facility, including with respect to liens, indebtedness, investments, distributions, mergers and asset sales. In addition, the agreement requires that the Company satisfy certain financial covenants that are also substantially similar to those contained in the Company’s revolving credit facility. The agreement also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the agreement to be immediately due and payable. The Company used the funds to pay down $117.0 million of the outstanding balance on its unsecured revolving credit facility, to repay its $50.0 million senior secured term loan and for other general corporate purposes.

(c) Unsecured Revolving Credit Facility

During the second quarter of 2011, the Company amended and restated its unsecured revolving credit facility. Under the new agreement, the capacity on the Company’s unsecured revolving credit facility was expanded from $225.0 million to $255.0 million and the maturity date was extended to January 2014 with a one-year extension at the Company’s option, which it intends to exercise. The interest rate on the unsecured revolving credit facility decreased from a range of LIBOR plus 275 to 375 basis points to a range of LIBOR plus 200 to 300 basis points, depending on the Company’s overall leverage. At June 30, 2011, LIBOR was 0.19%. The Company’s ability to borrow under the credit facility will be subject to its satisfaction of certain financial covenants and its ongoing compliance with various restrictive covenants similar to those included in the prior credit facility, including with respect to liens, indebtedness, investments, distributions, mergers and asset sales. The credit facility includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the credit facility to be immediately due and payable.

During the second quarter of 2011, the Company borrowed $48.0 million on its unsecured revolving credit facility to provide a subordinated loan to the owners of America’s Square and for general corporate purposes. For the three and six months ended June 30, 2011, the Company’s weighted average borrowings outstanding on its unsecured revolving credit facility was $151.1 million and $132.9 million, respectively, with a weighted average interest rate of 3.1% and 3.2%, respectively, compared with $84.5 million and $117.9 million with a weighted average interest rate of 3.6% and 3.8% for the three and six months ended June 30, 2010, respectively. At June 30, 2011, outstanding borrowings under the unsecured revolving credit facility were $164.0 million. The Company is required to pay an annual commitment fee of 0.25% based on the amount of unused capacity under the unsecured revolving credit facility, which was $91.0 million at June 30, 2011.

(d) Debt Covenants

At June 30, 2011, the Company was in compliance with all of the financial and non-financial covenants associated with its debt instruments with the exception of the mortgage loans explained below.

Certain of the Company’s subsidiaries are borrowers on mortgage loans, the terms of which prohibit certain direct or indirect transfers of ownership interests in the borrower subsidiary (a “Prohibited Transfer”). Under the terms of the mortgage loan documents, a lender could assert that a Prohibited Transfer includes the trading of the Company’s common shares on the NYSE, the issuance of common shares by the Company, or the issuance of units of limited partnership interest in the Operating Partnership. As of June 30, 2011, the Company believes that there were eight mortgage loans with such Prohibited Transfer provisions, representing an aggregate principal amount outstanding of approximately $77 million. Two of these mortgage loans were entered into prior to the Company’s initial public offering (“IPO”) in 2003 and six were assumed subsequent to its IPO. In July 2011, the Company repaid two mortgages totaling $19.7 million with Prohibited Transfer provisions that were both assumed subsequent to its IPO. In each instance, the Company received the consent of the mortgage lender to consummate its IPO (for the two pre-IPO loans) or to acquire the property or the ownership interests of the borrower (for the post-IPO loans), including the assumption by its subsidiary of the mortgage loan. Generally, the underlying mortgage documents, previously applicable to a privately held owner, were not changed at the time of the IPO or the later loan assumptions, although the Company believes that each of the lenders or servicers was aware that the borrower’s ultimate parent was or would become a publicly traded company. Subsequent to the IPO and the assumption of these additional mortgage loans, the Company has issued new common shares and shares of the Company have been transferred on the New York Stock Exchange. Similarly, the Operating Partnership has issued units of limited partnership interest. To date, no lender or servicer has asserted that a Prohibited Transfer has occurred as a result of any such transfer of shares or units of limited partnership interest. If a lender were to be successful in any such action, the Company could be required to immediately repay or refinance the amounts outstanding, or the lender may be able to foreclose on the property securing the loan or take other adverse actions. In addition, in certain cases a Prohibited Transfer could result in the loan becoming fully recourse to the Company or its Operating Partnership. In addition, if a violation of a Prohibited Transfer provision were to occur that would permit the Company’s mortgage lenders to accelerate the indebtedness owed to them, it could result in an event of default under the Company’s Senior Unsecured Series A and Series B Notes, its unsecured revolving credit facility, its senior secured term loan, its two Secured Term Loans and its Exchangeable Senior Notes.

(8) Income Taxes

Beginning in the fourth quarter of 2010, the Company acquired properties located in Washington D.C., which are subject to local franchise taxes. During the three and six months ended June 30, 2011, the Company recognized a benefit for income taxes of $0.1 million and $0.5 million, respectively, related to franchise taxes levied by the city of Washington D.C. at an effective rate of 9.975%. The Company acquired its first property in Washington, D.C. that was subject to franchise tax in the fourth quarter of 2010 and was not subject to any franchise taxes during the three and six months ended June 30, 2010.

The Company recognizes deferred tax assets only to the extent that it is more likely than not that deferred tax assets will be realized based on consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. The Company’s deferred tax assets and liabilities are primarily associated with differences in the GAAP and tax basis of its real estate assets arising from acquisition costs, intangible assets and deferred market rent assets and liabilities that are associated with properties located in Washington D.C. and recorded in its consolidated balance sheets. As of June 30, 2011 and December 31, 2010, the Company recorded its deferred tax assets within “Prepaid expenses and other assets” and recorded its deferred tax liabilities within “Accounts payable and other liabilities” in the Company’s consolidated balance sheets.

The Company has not recorded a valuation allowance against its deferred tax assets as it determined that is more likely than not that future operations will generate sufficient taxable income to realize the deferred tax assets. The Company has not recognized any deferred tax assets or liabilities as a result of uncertain tax positions and has no material net operating loss, capital loss or alternative minimum tax carryovers. There was no (benefit) provision for income taxes associated with the Company’s discontinued operations for any period presented.

As the Company believes it both qualifies as a REIT and will not be subject to federal income tax, a reconciliation between the income tax provision calculated at the statutory federal income tax rate and the actual income tax provision has not been provided.

(9) Derivative Instruments and Comprehensive Income (Loss)

The Company is exposed to certain risks arising from business operations and economic factors. The Company uses derivative financial instruments to manage exposures that arise from business activities in which its future exposure to interest rate fluctuations is unknown. The objective in the use of an interest rate derivative is to add stability to interest expenses and manage exposure to interest rate changes. No hedging activity can completely insulate the Company from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect the Company or adversely affect it because, among other things:

•

available interest rate hedging may not correspond directly with the interest rate risk for which the Company seeks protection;

•

the duration of the hedge may not match the duration of the related liability;

•

the party owing money in the hedging transaction may default on its obligation to pay; and

•

the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs the Company’s ability to sell or assign its side of the hedging transaction.

The Company enters into interest rate swap agreements to hedge its exposure on its variable rate debt against fluctuations in prevailing interest rates. The interest rate swap agreements fix LIBOR to a specified interest rate, however, the swap agreements do not affect the contractual spreads associated with each variable debt instrument’s applicable interest rate. The table below summarizes the Company’s interest rate swap agreements as of June 30, 2011 (dollars in thousands):

Interest Rate

Contractual

Fixed LIBOR

Transaction Date

Maturity Date

Amount

Component

Interest Rate

Consolidated:

July 2010(1)

January 2014

$

50,000

LIBOR

1.474

%

Unconsolidated:

September 2008

September 2011

28,000

(2)

LIBOR

3.47

%

The Company’s interest rate swap agreements are designated as effective cash flow hedges and the Company records any unrealized gains associated with the change in fair value of the swap agreements within equity and “Prepaid expenses and other assets” and any unrealized losses within equity and “Accounts payable and other liabilities.” The Company records its proportionate share of unrealized gains or losses on its cash flow hedges associated with its unconsolidated joint ventures within equity and “Investment in affiliates.”

Total comprehensive income (loss) is summarized as follows (amounts in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Net income (loss)		$	752			$	33			$	(3,141	)		$	(2,174	)
Unrealized (loss) gain on derivative instruments			(540	)			595				(283	)			1,123
Total comprehensive income (loss)			212				628				(3,424	)			(1,051	)
Comprehensive loss (income) attributable to noncontrolling interests			92				(12	)			222				24
Comprehensive income (loss) attributable to First Potomac Realty Trust		$	304			$	616			$	(3,202	)		$	(1,027	)

During July 2011, the Company entered into four interest rate swap agreements that fixed LIBOR on $120 million of its variable rate debt. The table below summarizes the Company’s four new interest rate swap agreements, which were all effective on July 18, 2011 (dollars in thousands):

						Interest Rate		Fixed LIBOR
Maturity Date		Amount				Contractual Component		Interest Rate
July 2016		$	35,000			LIBOR			1.754	%
July 2016			25,000			LIBOR			1.7625	%
July 2017			30,000			LIBOR			2.093	%
July 2017			30,000			LIBOR			2.093	%

(10) Fair Value Measurements

The Company adopted accounting provisions that outline a valuation framework and create a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The new disclosures increase the consistency and comparability of fair value measurements and the related disclosures. Fair value is identified, under the standard, as the price that would be received to sell an asset or paid to transfer a liability between willing third parties at the measurement date (an exit price). In accordance with GAAP, certain assets and liabilities must be measured at fair value, and the Company provides the necessary disclosures that are required for items measured at fair value as outlined in the accounting requirements regarding fair value.

Financial assets and liabilities, as well as those non-financial assets and liabilities requiring fair value measurement, are measured using inputs from three levels of the fair value hierarchy.

The three levels are as follows:

Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).

Level 3 — Unobservable inputs, only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.

In accordance with accounting provisions and the fair value hierarchy described above, the following table shows the fair value of the Company’s consolidated assets and liabilities that are measured on a non-recurring and recurring basis as of June 30, 2011 and December 31, 2010 (amounts in thousands):

		Balance at
		June 30,
		2011				Level 1				Level 2				Level 3
Recurring Measurements:
Derivative instrument-swap agreement		$	788			$	—			$	788			$	—
Contingent consideration related to acquisition of:
Ashburn Center			1,398				—				—				1,398
840 First Street, NE			9,356				—				—				9,356

		Balance at
		December 31,
		2010				Level 1				Level 2				Level 3
Non-recurring Measurement:
Impaired real estate asset		$	10,950			$	—			$	10,950			$	—
Recurring Measurements:
Derivative instrument-swap agreement			396				—				396				—
Contingent consideration related to acquisition of:
Ashburn Center			1,398				—				—				1,398

There were no assets or liabilities measured on a non-recurring basis at June 30, 2011.

Interest Rate Derivatives

On January 18, 2011, the Company fixed LIBOR at 1.474% on $50.0 million of its variable rate debt through an interest rate swap agreement that matures on January 15, 2014. The derivative is fair valued based on prevailing market yield curve on the measurement date. Also, the Company evaluates counter-party risk in calculating the fair value of the interest rate swap derivative instrument. The Company’s interest rate swap derivative is an effective cash flow hedge and any change in fair value is recorded in the Company’s equity section as “Accumulated Other Comprehensive Loss.”

The Company uses a third party to assist with the valuation of its interest rate swap agreements. The third party takes a daily “snapshot” of the market to obtain close of business rates. The snapshot includes over 7,500 rates including LIBOR fixings, Eurodollar futures, swap rates, exchange rates, treasuries, etc. This market data is obtained via direct feeds from Bloomberg and Reuters and from Inter-Dealer Brokers. The selected rates are compared to their historical values. Any rate that has changed by more than normal mean and related standard deviation would be considered an outlier and flagged for further investigation. The rates are than compiled through a valuation process that generates daily valuations, which are used to value the Company’s interest rate swap agreements.

A summary of the Company’s interest rate derivatives liability is as follows (amounts in thousands):

		Six months ended
		June 30,
		2011				2010
Balance at December 31,		$	396			$	1,741
Deconsolidation (1)			—				(396	)
Unrealized loss (gain)			392				(1,089	)
Balance at June 30,		$	788			$	256

The Company recorded an unrealized loss of $0.4 million for the six months ended June 30, 2011 and a unrealized gain of $1.1 million for the six months ended June 30, 2010, related to its derivative liability, which is included in “Accounts payable and other liabilities” in the Company’s consolidated balance sheets.

Contingent Consideration

On March 25, 2011, the Company acquired 840 First Street, NE, in Washington, D.C. for an aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration payable upon the terms of a lease renewal by the building’s sole tenant or the re-tenanting of the property. At acquisition, the Company was in active negotiations with the existing tenant to renew its lease through August 2023. As a result, the Company recorded a contingent consideration obligation of $9.4 million at acquisition. In July 2011, the building’s sole tenant renewed its lease. Based on the probability of renewal and lease terms used in the original estimate of fair value, the value of contingent consideration remained unchanged. The fair value of the contingent consideration obligation was determined based on several probability weighted discounted cash flow scenarios that projected stabilization being achieved at certain timeframes. The fair value was based, in part, on significant inputs, which are not observable in the market, thus representing a Level 3 measurement in accordance with the fair value hierarchy.

The Company has a contingent consideration obligation associated with the 2009 acquisition of Ashburn Center. As part of the acquisition price of Ashburn Center, the Company entered into a fee agreement with the seller under which the Company will be obligated to pay additional consideration upon the property achieving stabilization per specified terms of the agreement. The Company determines the fair value of the obligation through an income approach based on discounted cash flows that project stabilization being achieved within a certain timeframe. The more significant inputs associated with the fair value determination of the contingent consideration include estimates of capitalization rates, discount rates and various assumptions regarding the property’s operating performance and profitability.

The Company did not recognize any gain or loss associated with its contingent consideration for the three and six months ended June 30, 2011. During the first quarter of 2010, the Company fully leased the Ashburn Center, which resulted in an increase in its potential obligation, and recorded a $0.7 million increase in its contingent consideration to reflect the increase in the Company’s potential obligation with a corresponding entry to “Contingent Consideration Related to Acquisition of Property” in its consolidated statements of operations. The Company has classified its contingent consideration liabilities within “Accounts payable and other liabilities” and any changes in its fair value subsequent to their acquisition date valuation are charged to earnings. There was no significant change in the fair value of the contingent consideration during the quarter ended June 30, 2010.

A summary of the Company’s consolidated contingent consideration obligations is as follows (amounts in thousands):

		Six months ended
		June 30,
		2011				2010
Balance at December 31,		$	1,398			$	688
Increase in fair value			—				710
Additions to contingent consideration obligation			9,356				—
Balance at June 30,		$	10,754			$	1,398

Impairment of Real Estate Assets

The Company regularly reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of a property, an impairment analysis is performed.

For the three months ended June 30, 2011 and 2010, the Company did not record any impairment on its real estate assets. During the first quarter of 2011 and 2010, the Company incurred impairment charges of $2.7 million and $0.6 million, respectively, for properties that were disposed of in the three months ended June 30, 2011 and 2010, respectively.

On December 29, 2010, the Company acquired 7458 Candlewood Road, which is located in the Company’s Maryland reporting segment. Due to the bankruptcy of an acquired tenant, the Company realized an impairment charge of $2.4 million to reflect the fair value of the intangible asset associated with the tenant’s lease, which was determined to have no value. The non-recoverable value of the intangible assets was based on, among other items, an analysis of current market rates, the present value of future cash flows that were discounted using capitalization rates, lease renewal probabilities, hypothetical leasing timeframes, historical leasing commissions, expected value of tenant improvements and recently executed leases.

In September 2010, the Company adjusted its anticipated holding period for its Old Courthouse Square property, which is located in the Company’s Maryland reporting segment. The Company entered into a non-binding contract to sell the asset in October 2010. As a result, the Company realized a $3.4 million impairment charge to reduce the property’s carrying value to reflect its fair value, less any potential selling costs. The property was sold on February 18, 2011 for net proceeds of $10.8 million. The Company determined the fair value of the property through an assessment of market data in working with a real estate broker on the transaction and based on the execution of a non-binding letter of intent. The fair value was further validated through an income approach based on discounted cash flows that reflected a reduced holding period.

With the exception of its contingent consideration obligation, the Company did not re-measure or complete any transactions involving non-financial assets or non-financial liabilities that are measured on a recurring basis during the six months ended June 30, 2011. Also, no transfers into and out of fair value measurements levels occurred during the six months ended June 30, 2011 or 2010.

Financial Instruments

The carrying amounts of cash equivalents, accounts and other receivables and accounts payable, with the exception of any items listed above, approximate their fair values due to their short-term maturities. The Company uses third parties with mezzanine lending expertise to value its notes receivable based on comparable deals, market analysis and underlying asset operating results. The Company calculates the fair value of its debt instruments by discounting future contractual principal and interest payments using prevailing market rates for securities with similar terms and characteristics at the balance sheet date. The carrying amount and estimated fair value of the Company’s note receivables and debt instruments at June 30, 2011 and December 31, 2010 are as follows (amounts in thousands):

		June 30, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Financial Assets:
Notes receivable(1)		$	54,627			$	55,000			$	24,750			$	24,750
Financial Liabilities:
Mortgage debt		$	441,966			$	440,519			$	319,096			$	316,169
Exchangeable senior notes(2)			30,216				30,564				29,936				30,412
Series A senior notes			37,500				38,416				37,500				37,850
Series B senior notes			37,500				38,581				37,500				37,251
Secured term loans			100,000				100,031				110,000				109,976
Unsecured revolving credit facility			164,000				166,382				191,000				191,073
Total		$	811,182			$	814,493			$	725,032			$	722,731