Exhibit 99.3

CORPORATE OFFICE PROPERTIES TRUST AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report of Internal Control Over Financial Reporting	F-2
Report of Independent Registered Public Accounting Firm	F-3
Consolidated Balance Sheet as of December 31, 2005 and 2004	F-5
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003	F-6
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003	F-7
Consolidated Statements of Cash Flow for the Years Ended December 31, 2005, 2004 and 2003	F-8
Notes to Consolidated Financial Statements	F-9
FINANCIAL STATEMENT SCHEDULE
Schedule III.—Real Estate and Accumulated Depreciation as of December 31, 2005	F-48

 

F-1

Management’s Report On Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2005. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and trustees; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 based upon criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 2005 based on the criteria in Internal Control-Integrated Framework issued by the COSO.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Dated: March 16, 2006

/s/ Randall M. Griffin		/s/ Roger A. Waesche, Jr.
Randall M. Griffin		Roger A. Waesche Jr.
President and Chief Executive Officer		Executive Vice President and Chief Financial Officer

 

F-2

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Corporate Office Properties Trust:

We have completed integrated audits of Corporate Office Properties Trust’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Corporate Office Properties Trust and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the accompanying “Management’s Report on Internal Control over Financial Reporting,” that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

F-3

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland

March 16, 2006, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects to discontinued operations discussed in Note 18, as to which the date is August 31, 2006.

F-4

Corporate Office Properties Trust and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)

		December 31,
		2005			2004
Assets
Investment in real estate:
Operating properties, net		$	1,631,038		$	1,407,148
Projects under construction or development		255,617			136,152
Total commercial real estate properties, net		1,886,655			1,543,300
Investments in and advances to unconsolidated real estate joint ventures		1,451			1,201
Investment in real estate, net		1,888,106			1,544,501
Cash and cash equivalents		10,784			13,821
Restricted cash		21,476			12,617
Accounts receivable, net		15,606			16,771
Investment in other unconsolidated entity		1,621			1,621
Deferred rent receivable		32,579			26,282
Intangible assets on real estate acquisitions, net		90,984			67,560
Deferred charges, net		35,046			27,642
Prepaid and other assets		29,872			18,646
Furniture, fixtures and equipment, net		4,302			2,565
Total assets		$	2,130,376		$	1,732,026
Liabilities and shareholders’ equity
Liabilities:
Mortgage and other loans payable		$	1,348,351		$	1,022,688
Accounts payable and accrued expenses		41,693			46,307
Rents received in advance and security deposits		14,774			12,781
Dividends and distributions payable		16,703			14,713
Deferred revenue associated with acquired operating leases		12,707			7,247
Distributions in excess of investment in unconsolidated real estate joint venture		3,081			—
Other liabilities		4,727			7,488
Total liabilities		1,442,036			1,111,224
Minority interests:
Common units in the Operating Partnership		95,014			88,355
Preferred units in the Operating Partnership		8,800			8,800
Other consolidated real estate joint ventures		2,013			1,723
Total minority interests		105,827			98,878
Commitments and contingencies (Note 19)
Shareholders’ equity:
Preferred Shares of beneficial interest ($0.01 par value; shares authorized of 15,000,000, issued of 8,569,000 and outstanding of 6,775,000) (Note 11)		67			67
Common Shares of beneficial interest ($0.01 par value; 75,000,000 shares authorized, shares issued and outstanding of 39,927,316 at December 31, 2005 and 36,842,108 at December 31, 2004)		399			368
Additional paid-in capital		657,339			578,228
Cumulative distributions in excess of net income		(67,697		)	(51,358		)
Value of unearned restricted common share grants		(7,113		)	(5,381		)
Accumulated other comprehensive loss		(482		)	—
Total shareholders’ equity		582,513			521,924
Total liabilities and shareholders’ equity		$	2,130,376		$	1,732,026

See accompanying notes to consolidated financial statements.

F-5

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data)

 

		For the Years Ended December 31,
		2005			2004			2003
Revenues
Rental revenue		$	214,275		$	184,857		$	145,496
Tenant recoveries and other real estate operations revenue		30,515			21,515			20,656
Construction contract revenues		74,357			25,018			28,865
Other service operations revenues		4,877			3,885			2,875
Total revenues		324,024			235,275			197,892
Expenses
Property operating expenses		73,213			59,836			48,364
Depreciation and other amortization associated with real estate operations		61,572			49,761			35,068
Construction contract expenses		72,534			23,733			27,483
Other service operations expenses		4,753			3,263			3,450
General and administrative expenses		13,534			10,938			7,893
Total operating expenses		225,606			147,531			122,258
Operating income		98,418			87,744			75,634
Interest expense		(55,297		)	(42,354		)	(39,014		)
Amortization of deferred financing costs		(2,240		)	(2,431		)	(2,767		)
Income from continuing operations before equity in loss of unconsolidated entities, income taxes and minority interests		40,881			42,959			33,853
Equity in loss of unconsolidated entities		(88		)	(88		)	(98		)
Income tax (expense) benefit		(668		)	(795		)	169
Income from continuing operations before minority interests		40,125			42,076			33,924
Minority interests in income from continuing operations
Common units in the Operating Partnership		(4,826		)	(5,497		)	(5,350		)
Preferred units in the Operating Partnership		(660		)	(179		)	(1,049		)
Other consolidated entities		85			12			—
Income from continuing operations		34,724			36,412			27,525
Income from discontinued operations, net of minority interests		4,039			733			3,016
Income before gain (loss) on sales of real estate		38,763			37,145			30,541
Gain (loss) on sales of real estate, net		268			(113		)	336
Net income		39,031			37,032			30,877
Preferred share dividends		(14,615		)	(16,329		)	(12,003		)
Repurchase of preferred units in excess of recorded book value		—			—			(11,224		)
Issuance costs associated with redeemed preferred shares		—			(1,813		)	—
Net income available to common shareholders		$	24,416		$	18,890		$	7,650
Basic earnings per common share
Income from continuing operations		$	0.54		$	0.55		$	0.17
Discontinued operations		0.11			0.02			0.12
Net income		$	0.65		$	0.57		$	0.29
Diluted earnings per common share
Income from continuing operations		$	0.52		$	0.52		$	0.17
Discontinued operations		0.11			0.02			0.10
Net income		$	0.63		$	0.54		$	0.27

 

See accompanying notes to consolidated financial statements.

F-6

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Dollars in thousands)

		Preferred Shares			Common Shares			Additional Paid-in Capital			Cumulative Distributions in Excess of Net Income			Value of Unearned Restricted Common Share Grants			Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2002 (23,606,132 common shares outstanding)		$	43		$	236		$	312,373		$	(21,067	)	$	(2,739	)	$	(349	)	$	288,497
Conversion of common units to common shares (119,533 shares)		—			1			2,065			—			—			—			2,066
Common shares issued to the public (5,290,000 shares)		—			53			79,205			—			—			—			79,258
Series G Cumulative Redeemable Preferred Shares issued to the public (2,200,000 shares)		22			—			53,153			—			—			—			53,175
Series H Cumulative Redeemable Preferred Shares issued to the public (2,000,000 shares)		20			—			48,312			—			—			—			48,332
Series C Preferred Unit redemption		—			—			—			(11,224		)	—			—			(11,224		)
Increase in fair value of derivatives		—			—			—			—			—			55			55
Restricted common share grants issued (119,324 shares)		—			1			1,750			—			(1,751		)	—			—
Value of earned restricted share grants		—			—			185			—			383			—			568
Exercise of share options (262,278 shares)		—			3			2,465			—			—			—			2,468
Expense associated with share options		—			—			75			—			—			—			75
Adjustments to minority interests resulting from changes in ownership of Operating Partnership by COPT		—			—			(6,697		)	—			—			—			(6,697		)
Net income		—			—			—			30,877			—			—			30,877
Dividends		—			—			—			(37,069		)	—			—			(37,069		)
Balance at December 31, 2003 (29,397,267 common shares outstanding)		85			294			492,886			(38,483		)	(4,107		)	(294		)	450,381
Conversion of common units to common shares (326,108 shares)		—			3			8,038			—			—			—			8,041
Common shares issued to the public (5,033,600 shares)		—			50			115,184			—			—			—			115,234
Common shares issued to employees (4,000 shares)		—			—			91			—			—			—			91
Series B preferred share redemption		(13		)	—			(31,238		)	—			—			—			(31,251		)
Series D preferred share conversion		(5		)	12			(7		)	—			—			—			—
Increase in fair value of derivatives		—			—			—			—			—			294			294
Restricted common share grants issued (99,935 shares)		—			1			2,270			—			(2,271		)	—			—
Value of earned restricted share grants		—			—			388			—			997			—			1,385
Exercise of share options (784,398 shares)		—			8			7,502			—			—			—			7,510
Expense associated with share options		—			—			519			—			—			—			519
Adjustments to minority interests resulting from changes in ownership of Operating Partnership by COPT		—			—			(19,360		)	—			—			—			(19,360		)
Increase in tax benefit associated with share-based compensation		—			—			1,955			—			—			—			1,955
Net income		—			—			—			37,032			—			—			37,032
Dividends		—			—			—			(49,907		)	—			—			(49,907		)
Balance at December 31, 2004 (36,842,108 common shares outstanding)		67			368			578,228			(51,358		)	(5,381		)	—			521,924
Conversion of common units to common shares (253,575 shares)		—			3			9,117			—			—			—			9,120
Common shares issued to the public (2,300,000 shares)		—			23			75,118			—			—			—			75,141
Decrease in accumulated other comprehensive loss in connection with derivatives		—			—			—			—			—			(482		)	(482		)
Restricted common share grants issued (130,975 shares)		—			1			3,480			—			(3,481		)	—			—
Restricted common share cancellations (10,422 shares)		—			—			(205		)	—			205			—			—
Value of earned restricted share grants		—			—			536			—			1,544			—			2,080
Exercise of share options (411,080 shares)		—			4			4,394			—			—			—			4,398
Expense associated with share options		—			—			93			—			—			—			93
Adjustments to minority interests resulting from changes in ownership of Operating Partnership by COPT		—			—			(12,888		)	—			—			—			(12,888		)
Decrease in tax benefit associated with share-based compensation		—			—			(534		)	—			—			—			(534		)
Net income		—			—			—			39,031			—			—			39,031
Dividends		—			—			—			(55,370		)	—			—			(55,370		)
Balance at December 31, 2005 (39,927,316 common shares outstanding)		$	67		$	399		$	657,339		$	(67,697	)	$	(7,113	)	$	(482	)	$	582,513

 

F-7

Corporate Office Properties Trust and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)

		For the Years Ended December 31,
		2005			2004			2003
Cash flows from operating activities
Net income		$	39,031		$	37,032		$	30,877
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interests		6,464			5,826			7,761
Depreciation and other amortization		63,555			51,904			37,141
Amortization of deferred financing costs		2,240			2,431			2,799
Amortization of deferred market rental revenue		(426		)	(931		)	(1,817		)
Equity in loss of unconsolidated entities		88			88			98
(Gain) loss on sales of real estate		(4,690		)	150			(3,467		)
Changes in operating assets and liabilities:
Increase in deferred rent receivable		(6,922		)	(8,372		)	(4,670		)
Increase in accounts receivable, restricted cash and prepaid and other assets		(13,095		)	(11,438		)	(11,144		)
Increase in accounts payable, accrued expenses, rents received in advance and security deposits		7,946			5,850			9,278
Other		1,753			1,954			927
Net cash provided by operating activities		95,944			84,494			67,783
Cash flows from investing activities
Purchases of and additions to commercial real estate properties		(499,926		)	(251,982		)	(196,888		)
Proceeds from sales of properties		29,467			—			40,204
Proceeds from contribution of assets to unconsolidated real estate joint venture		68,633			—			—
Investments in and advances to unconsolidated entities		(130		)	(146		)	(7,062		)
Distributions from unconsolidated entities		250			—			—
Leasing costs paid		(9,272		)	(11,024		)	(2,861		)
Advances to certain real estate joint ventures		—			(515		)	(2,520		)
(Increase) decrease in restricted cash associated with investing activities		(5,620		)	1,183			(2,399		)
Other		(2,495		)	(1,308		)	(1,423		)
Net cash used in investing activities		(419,093		)	(263,792		)	(172,949		)
Cash flows from financing activities
Proceeds from mortgage and other loans payable		889,399			573,879			270,956
Repayments of mortgage and other loans payable		(580,642		)	(421,621		)	(271,146		)
Deferred financing costs paid		(4,307		)	(3,436		)	(1,681		)
Increase in other liabilities associated with financing activities		—			4,000			4,000
Acquisition of partner interest in consolidated joint venture		(1,208		)	(4,928		)	—
Net proceeds from issuance of common shares		79,539			122,744			81,726
Net proceeds from issuance of preferred shares		—			—			101,507
Repurchase of preferred units		—			—			(35,591		)
Redemption of preferred shares		—			(31,251		)	—
Dividends paid		(53,587		)	(47,551		)	(34,719		)
Distributions paid		(9,677		)	(8,435		)	(9,210		)
Other		595			237			2,814
Net cash provided by financing activities		320,112			183,638			108,656
Net (decrease) increase in cash and cash equivalents		(3,037		)	4,340			3,490
Cash and cash equivalents
Beginning of period		13,821			9,481			5,991
End of period		$	10,784		$	13,821		$	9,481

See accompanying notes to consolidated financial statements.

F-8

Corporate Office Properties Trust and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)

1.                 Organization

Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”) is a fully-integrated and self-managed real estate investment trust (“REIT”) that focuses on the acquisition, development, ownership, management and leasing of primarily Class A suburban office properties in the Greater Washington, D.C. region and other select submarkets. We have implemented a core customer expansion strategy that is built on meeting, through acquisitions and development, the multi-location requirements of our strategic tenants. As of December 31, 2005, our investments in real estate included the following:

·       165 wholly owned operating properties in our portfolio with an average size of 83,000 square feet per property;

·       14 wholly owned office properties under construction or development that we estimate will total approximately 1.8 million square feet upon completion and one wholly owned office property totaling approximately 52,000 square feet that was under redevelopment;

·       wholly owned land parcels totaling 311 acres that we believe are potentially developable into approximately 4.5 million square feet; and

·       partial ownership interests in a number of other real estate projects in operations or under development or redevelopment.

We conduct almost all of our operations through our operating partnership, Corporate Office Properties, L.P. (the “Operating Partnership”), for which we are the managing general partner. The Operating Partnership owns real estate both directly and through subsidiary partnerships and limited liability companies (“LLCs”). A summary of our Operating Partnership’s forms of ownership and the percentage of those ownership forms owned by COPT as of December 31, 2005 follows:

		December 31,
		2005		2004
Common Units		82	%	80	%
Series E Preferred Units		100	%	100	%
Series F Preferred Units		100	%	100	%
Series G Preferred Units		100	%	100	%
Series H Preferred Units		100	%	100	%
Series I Preferred Units		0	%	0	%

 

Two of our trustees controlled, either directly or through ownership by other entities or family members, an additional 15% of the Operating Partnership’s common units.

F-9

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In addition to owning interests in real estate, the Operating Partnership also owns 100% of Corporate Office Management, Inc. (“COMI”) and owns, either directly or through COMI, 100% of the consolidated subsidiaries that are set forth below (collectively defined as the “Service Companies”):

Entity Name		Type of Service Business
COPT Property Management Services, LLC (“CPM”)(1)		Real Estate Management
COPT Development & Construction Services, LLC (“CDC”)(2)		Construction and Development
Corporate Development Services, LLC (“CDS”)		Construction and Development
Corporate Cooling and Controls, LLC (“CC&C”)		Heating and Air Conditioning

 

(1)             Prior to November 1, 2005, CPM’s name was Corporate Realty Management, LLC.

(2)             CDC was formed on November 1, 2005.

Most of the services that CPM provides are for us. CDC and CC&C provide services to us and to third parties. CDS provided service to us and to third parties until November 1, 2005, after which it provided services only to third parties.

2.                 Basis of Presentation

We use four different accounting methods to report our investments in entities: the consolidation method, the equity method, the cost method and the financing method.

Consolidation Method

We generally use the consolidation method when we own most of the outstanding voting interests in an entity and can control its operations. Under the consolidation method of accounting, the accounts of the entity being consolidated are combined with our accounts. We eliminate balances and transactions between companies when we consolidate these accounts. For all of the periods presented, our Consolidated Financial Statements include the accounts of:

·       COPT;

·       the Operating Partnership and its subsidiary partnerships and LLCs;

·       the Service Companies; and

·       Corporate Office Properties Holdings, Inc. (of which we own 100%).

Our approach to determining when the use of the consolidation method is appropriate changed with our adoption of the Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FIN 46(R)”). FIN 46(R) provides guidance in identifying situations in which an entity is controlled by its owners without such owners owning most of the outstanding voting rights in the entity; it defines the entity in such situations as a variable interest entity (“VIE”). FIN 46(R) then provides guidance in determining when an owner of a VIE should use the consolidation method in accounting for its investment in the VIE. We adopted FIN 46(R) immediately for all VIEs created subsequent to January 31, 2003 and effective March 31, 2004 for VIEs created prior to February 1, 2003. In connection with our adoption of FIN 46(R), we began to use the consolidation method of accounting effective March 31, 2004 for our investments in the following joint ventures: MOR Forbes 2 LLC, Gateway 70 LLC and MOR Montpelier 3 LLC, which were previously accounted for using the equity method of accounting, and NBP 220, LLC, which was previously accounted for using the financing method of accounting (see below for a discussion of the equity and financing methods).

F-10

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Equity Method

We generally use the equity method of accounting when we own an interest in an entity and can exert significant influence over the entity’s operations but cannot control the entity’s operations. Under the equity method, we report:

·       our ownership interest in the entity’s capital as an investment on our Consolidated Balance Sheets; and

·       our percentage share of the earnings or losses from the entity in our Consolidated Statements of Operations.

As discussed above, FIN 46(R) affects our determination of when to use the equity method of accounting.

Cost Method

We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over the entity’s operations. Under the cost method, we report:

·       the cost of our investment in the entity as an investment on our Consolidated Balance Sheets; and

·       distributions to us of the entity’s earnings in our Consolidated Statements of Operations.

Financing Method

We use the financing method of accounting for certain real estate joint ventures. We use this method when we contribute a parcel of land into a real estate joint venture and have an option to acquire our partner’s joint venture interest for a pre-determined purchase price. Details of the financing method of accounting are described below:

·       the costs associated with a land parcel at the time of its contribution into a joint venture are reported as commercial real estate properties on our Consolidated Balance Sheets;

·       the cash received from a joint venture in connection with our land contribution is reported as other liabilities on our Consolidated Balance Sheets. The liability is accreted towards the pre-determined purchase price over the life of our option to acquire our partner’s interest in the joint venture. We also report interest expense in connection with the accretion of the liability;

·       as construction of a building on the land parcel is completed and operations of the building commence, we report 100% of the revenues and expenses associated with the property on our Consolidated Statements of Operations; and

·       construction costs and debt activity for the real estate project relating to periods after the land contribution are not reported by us.

At the time we exercise the option to acquire our partner’s joint venture interest, we begin consolidating the accounts of the entity with our accounts. As discussed above, FIN 46(R) affects our determination of when to use the financing method of accounting.

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3.                 Summary of Significant Accounting Policies

Use of Estimates in the Preparation of Financial Statements

We make estimates and assumptions when preparing financial statements under generally accepted accounting principles (“GAAP”). These estimates and assumptions affect various matters, including:

·       the reported amounts of assets and liabilities in our Consolidated Balance Sheets at the dates of the financial statements;

·       the disclosure of contingent assets and liabilities at the dates of the financial statements; and

·       the reported amounts of revenues and expenses in our Consolidated Statements of Operations during the reporting periods.

These estimates include such items as depreciation, allocation of real estate acquisition costs and allowances for doubtful accounts. Actual results could differ from those estimates. These estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are often beyond management’s control. As a result, actual amounts could differ from these estimates.

Acquisitions of Real Estate

We allocate the costs of real estate acquisitions to assets acquired and liabilities assumed based on the relative fair values at the date of acquisition pursuant to the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations.” In estimating the fair value of the tangible and intangible assets acquired, we consider, among other things, information obtained about each property as a result of our due diligence, leasing activities and knowledge of the markets in which the properties are located. We utilize various valuation methods, such as estimated cash flow projections utilizing discount and capitalization rate assumptions and available market information. We allocate the costs of real estate acquisitions to the following components:

·       Real estate based on a valuation of the acquired property performed with the assumption that the property is vacant upon acquisition (the “as if vacant value”). We then allocate the real estate value derived using this approach between land and building and improvements using our estimates and assumptions.

·       In-place operating leases to the extent that the present value of future rents under the contractual lease terms are above or below the present value of market rents at the time of acquisition (the “lease to market value”). For example, if we acquire a property and the leases in place for that property carry rents below the market rent for such leases at the time of acquisition, we classify the amount equal to the difference between (1) the present value of the future rental revenue under the lease using market rent assumptions and (2) the present value of future rental revenue under the terms of the lease as deferred revenue. Conversely, if the leases in place for that property carry rents above the market rent, we classify the difference as an intangible asset. Deferred revenue or deferred assets recorded in connection with in-place operating leases of acquired properties are amortized into rental revenue over the terms of the leases.

·       Existing tenants in a property (the “lease-up value”). This amount represents the value associated with acquiring a built-in revenue stream on a leased building. It is computed as the difference between the present value of the property’s (1) revenues less operating expenses as if the property was vacant upon acquisition and (2) revenues less operating expenses as if the property was acquired with leases in place at market rents.

·       Deemed cost avoidance of acquiring in-place operating leases (“deemed cost avoidance”). For example, when a new lease is entered into, the lessor typically incurs a number of origination costs

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in connection with the leases; such costs include tenant improvements and leasing costs. When a property is acquired with in-place leases, the origination costs for such leases were already incurred by the prior owner. Therefore, to recognize the value of these costs in recording a property acquisition, we assign value to the tenant improvements and leasing costs associated with the remaining term of in-place operating leases.

·       Tenant relationship value equal to the additional amount that we pay for a property in connection with the presence of a particular tenant in that property (the “tenant relationship value”). Our valuation of this component is affected by, among other things, our tenant lease renewal assumptions and evaluation of existing relationships with tenants.

·       Market concentration premium equal to the additional amount that we pay for a property over the fair value of assets in connection with our strategy of increasing our presence in regional submarkets (the “market concentration premium”).

Commercial Real Estate Properties

We report commercial real estate properties at our depreciated cost. The amounts reported for our commercial real estate properties include our costs of:

·       acquisitions;

·       development and construction;

·       building and land improvements; and

·       tenant improvements paid by us.

We capitalize interest expense, real estate taxes, direct internal labor (including allocable overhead costs) and other costs associated with real estate undergoing construction and development activities to the cost of such activities. We continue to capitalize these costs while construction and development activities are underway until a building becomes “operational,” which is the earlier of when leases commence on space or one year from the cessation of major construction activities. When leases commence on portions of a newly-constructed building’s space in the period prior to one year from the construction completion date, we consider that building to be “partially operational.” When a building is partially operational, we allocate the costs associated with the building between the portion that is operational and the portion under construction. We start depreciating newly-constructed properties when they become operational.

We depreciate our assets evenly over their estimated useful lives as follows:

·  Buildings and building improvements		10-40 years
·  Land improvements		10-20 years
·  Tenant improvements on operating properties		Related lease terms
·  Equipment and personal property		3-10 years

 

When events or circumstances indicate that a property may be impaired, we perform an undiscounted cash flow analysis. We consider an asset to be impaired when its undiscounted expected future cash flows are less than its depreciated cost. When we determine that an asset is impaired, we utilize methods similar to those used by independent appraisers in estimating the fair value of the asset; this process requires us to make certain estimates and assumptions. We then recognize an impairment loss based on the excess of the carrying amount of the asset over its fair value. We have not recognized impairment losses on our real estate assets to date.

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When we determine that a real estate asset will be held for sale, we discontinue the recording of depreciation expense of the asset and estimate the sales price, net of selling costs; if we then determine that the estimated sales price, net of selling costs, is less than the net book value of the asset, we recognize an impairment loss equal to the difference and reduce the carrying amounts of assets.

We expense property maintenance and repair costs when incurred.

Sales of Interests in Real Estate

We recognize gains from sales of interests in real estate using the full accrual method, provided that various criteria relating to the terms of sale and any subsequent involvement by us with the real estate sold are met. We recognize gains relating to transactions that do not meet the requirements of the full accrual method of accounting when the full accrual method of accounting criteria are met.

Cash and Cash Equivalents

Cash and cash equivalents include all cash and liquid investments that mature three months or less from when they are purchased. Cash equivalents are reported at cost, which approximates fair value. We maintain our cash in bank accounts in amounts that may exceed federally insured limits at times. We have not experienced any losses in these accounts in the past and believe we are not exposed to significant credit risk because our accounts are deposited with major financial institutions.

Accounts Receivable

Our accounts receivable are reported net of an allowance for bad debts of $421 at December 31, 2005 and $490 at December 31, 2004.

Prepaid and Other Assets

Prepaid and other assets consisted of the following:

		December 31,
		2005			2004
Construction contract costs incurred in excess of billings		$	15,277		$	7,178
Prepaid expenses		7,007			5,390
Other assets		7,588			6,078
Prepaid and other assets		$	29,872		$	18,646

 

Revenue Recognition

We recognize rental revenue evenly over the terms of tenant leases. When our leases provide for contractual rent increases, which is most often the case, we average the non-cancelable rental revenues over the lease terms to evenly recognize such revenues; we refer to the adjustments resulting from this process as straight-line rental revenue adjustments. We consider rental revenue under a lease to be non-cancelable when a tenant (1) may not terminate its lease obligation early or (2) may terminate its lease obligation early in exchange for a fee or penalty that we consider material enough such that termination would not be probable. We report these straight-line rental revenue adjustments recognized in advance of payments received as deferred rent receivable on our Consolidated Balance Sheets. We report prepaid tenant rents as rents received in advance on our Consolidated Balance Sheets.

When tenants terminate their lease obligations prior to the end of their agreed lease terms, they typically pay fees to cancel these obligations. We recognize such fees as revenue and write off against such revenue any (1) deferred rents receivable and (2) deferred revenue and intangible assets that are amortizable into rental revenue associated with the leases; the resulting net amount is the net revenue

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from the early termination of the leases. When a tenant’s lease in a property is terminated early but the tenant continues to lease space under a new or modified lease in the property, the net revenue from the early termination of the lease is recognized evenly over the remaining life of the new or modified lease in place on that property.

We recognize tenant recovery revenue in the same periods in which we incur the related expenses. Tenant recovery revenue includes payments from tenants as reimbursement for property taxes, insurance and other property operating expenses.

We recognize fees for services provided by us once services are rendered, fees are determinable and collectibility is assured. We generally recognize revenue under construction contracts using the percentage of completion method when the contracts call for services to be provided over a period of time exceeding six months and the revenue and costs for such contracts can be estimated with reasonable accuracy; when these criteria do not apply to a contract, we recognize revenue on that contract once the services under the contract are complete. Under the percentage of completion method, we recognize a percentage of the total estimated revenue on a contract based on the cost of services provided on the contract as of a point in time relative to the total estimated costs on the contract.

Major Tenants

The following table summarizes the respective percentages of our rental revenue earned from our individual tenants that accounted for at least 5% of our rental revenue and our five largest tenants in the aggregate:

		For the Years Ended December 31,
		2005		2004		2003
United States Government		11	%	11	%	10	%
Booz Allen Hamilton, Inc.		6	%	5	%	N/A
Computer Sciences Corporation		5	%	6	%	6	%
AT&T Local Services(1)		N/A		6	%	6	%
Unisys		N/A		N/A		5	%
Five largest tenants		30	%	33	%	31	%

 

(1)             Includes affiliated organizations and agencies.

Geographical Concentration

We derived large concentrations of our total revenue from real estate operations (defined as the sum of rental revenue and tenant recoveries and other real estate operations revenue) from certain geographic regions. The table below sets forth certain of these concentrations:

		Percentage of Total Rental Revenue
		from Real Estate Operations
		for the Years Ended December 31,
		2005		2004		2003
Mid-Atlantic		99	%	100	%	100	%
Greater Washington, D.C.(1)		83	%	79	%	76	%
Baltimore/Washington Corridor		49	%	49	%	55	%

 

(1)             Comprised of our properties in the Baltimore/Washington Corridor (defined as the Maryland counties of Howard and Anne Arundel), Northern Virginia (defined as Fairfax County, Virginia), Suburban Maryland (defined as the Maryland counties of Montgomery, Prince George’s and Frederick) and St. Mary’s and King George Counties (located in Maryland and Virginia, respectively).

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Substantially all of our construction contract and service operations revenues were derived from operations in the Greater/Washington, D.C. region.

Intangible Assets and Deferred Revenue on Real Estate Acquisitions

We capitalize intangible assets and deferred revenue on real estate acquisitions as described in the section above entitled “Acquisitions of Real Estate.” We amortize the intangible assets and deferred revenue as follows:

 

We recognize the amortization of lease to market value assets and deferred revenues as adjustments to rental revenue reported in our Consolidated Statements of Operations; we refer to this amortization as amortization of origination value of leases on acquired properties. We recognize the amortization of other intangible assets on real estate acquisitions as additional depreciation and amortization expense on our Consolidated Statements of Operations.

Deferred Charges

We defer costs that we incur to obtain new tenant leases or extend existing tenant leases. We amortize these costs evenly over the lease terms. When tenant leases are terminated early, we expense any unamortized deferred leasing costs associated with those leases.

We also defer costs for long-term financing arrangements and amortize these costs over the related loan terms on a straight-line basis, which approximates the amortization that would occur under the effective interest method of amortization. We expense any unamortized loan costs when loans are retired early.

When the costs of acquisitions exceed the fair value of tangible and identifiable intangible assets and liabilities, we record goodwill in connection with such acquisitions. We test goodwill annually for impairment and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired. We recognize an impairment loss when the discounted expected future cash flows associated with the related reporting unit are less than its unamortized cost.

Derivatives

We are exposed to the effect of interest rate changes in the normal course of business. We use interest rate swap, interest rate cap and forward starting swap agreements to reduce the impact of such interest rate changes. Interest rate differentials that arise under interest rate swap and interest rate cap contracts are recognized in interest expense over the life of the respective contracts. Interest rate differentials that arise under forward starting swaps are recognized in interest expense over the life of the respective loans for which such swaps are obtained. We do not use such derivatives for trading or speculative purposes. We manage counter-party risk by only entering into contracts with major financial institutions based upon their credit ratings and other risk factors.

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We recognize all derivatives as assets or liabilities in the balance sheet at fair value with the offset to:

·       the accumulated other comprehensive loss component of shareholders’ equity (“AOCL”), net of the share attributable to minority interests, for any derivatives designated as cash flow hedges to the extent such derivatives are deemed effective in hedging risks (risk in the case of our prior existing derivatives being defined as changes in interest rates);

·       interest expense on our Statements of Operations for any derivatives designated as cash flow hedges to the extent such derivatives are deemed ineffective in hedging risks; or

·       other revenue on our Statements of Operations for any derivatives designated as fair value hedges.

We use standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost and termination cost in computing the fair value of derivatives at each balance sheet date.

Minority Interests

As discussed previously, we consolidate the accounts of our Operating Partnership and its subsidiaries into our financial statements. However, we do not own 100% of the Operating Partnership. We also do not own 100% of certain consolidated real estate joint ventures. The amounts reported for minority interests on our Consolidated Balance Sheets represent the portion of these consolidated entities’ equity that we do not own. The amounts reported for minority interests on our Consolidated Statements of Operations represent the portion of these consolidated entities’ net income not allocated to us.

Common units of the Operating Partnership (“common units”) are substantially similar economically to our common shares of beneficial interest (“common shares”). Common units not owned by us are also exchangeable into our common shares, subject to certain conditions. During 2005, we issued 232,652 common units to unrelated third parties in connection with certain property acquisitions.

For a portion of 2003, the Operating Partnership had 1,016,662 Series C Preferred Units outstanding that we did not own. These units were convertible, subject to certain conditions, into common units on the basis of 2.381 common units for each Series C Preferred Unit. These units were repurchased by the Operating Partnership on June 16, 2003 for $36,068 (including $477 for accrued and unpaid distributions), or $14.90 per common share on an as-converted basis. As a result of the repurchase, we recognized an $11,224 reduction to net income available to common shareholders associated with the excess of the repurchase price over the sum of the recorded book value of the units and the accrued and unpaid return to the unitholder.

On September 23, 2004, we issued 352,000 Series I Preferred Units in the Operating Partnership to an unrelated party in connection with our acquisition of two properties in Northern Virginia. These units have a liquidation preference of $25.00 per unit, plus any accrued and unpaid distributions of return thereon (as described below), and may be redeemed for cash by the Operating Partnership at our option any time after September 22, 2019. The owner of these units is entitled to a priority annual cumulative return equal to 7.5% of their liquidation preference through September 22, 2019; the annual cumulative preferred return increases for each subsequent five-year period, subject to certain maximum limits. These units are convertible into common units on the basis of 0.5 common units for each Series I Preferred Unit; the resulting common units would then be exchangeable for common shares in accordance with the terms of the Operating Partnership’s agreement of limited partnership.

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Earnings Per Share (“EPS”)

We present both basic and diluted EPS. We compute basic EPS by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the year. Our computation of diluted EPS is similar except that:

·       the denominator is increased to include the weighted average number of potential additional common shares that would have been outstanding if securities that are convertible into our common shares were converted; and

·       the numerator is adjusted to add back any convertible preferred dividends and any other changes in income or loss that would result from the assumed conversion into common shares.

Our computation of diluted EPS does not assume conversion of securities into our common shares if conversion of those securities would increase our diluted EPS in a given year. A summary of the numerator and denominator for purposes of basic and diluted EPS calculations is set forth below (dollars and shares in thousands, except per share data):

 

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Our diluted EPS computations do not include the effects of the following securities since the conversions of such securities would increase diluted EPS for the respective periods:

		Weighted Average Shares in Denominator For the Years Ended December 31,
		2005		2004		2003
Conversion of weighted average common units		8,702		8,726		8,932
Restricted common shares		206		221		166
Conversion of weighted average convertible preferred units		176		48		1,101
Conversion of weighted average preferred shares		—		—		1,197
Conversion of share options		—		5		47

Stock-Based Compensation

We and the Service Companies recognize expense from share options issued to employees using the intrinsic value method. As a result, we do not record compensation expense for share option grants except when the exercise price of a share option grant is less than the market price of our common shares on the option grant date; when this occurs, we recognize compensation expense equal to the difference between the exercise price and the grant-date market price over the service period to which the options relate.

We grant common shares subject to forfeiture restrictions to certain employees (see Note 11). We recognize compensation expense for such grants over the service periods to which the grants relate. We compute compensation expense for common share grants based on the value of such grants, as determined by the value of our common shares on the applicable measurement date, as defined below:

·       When forfeiture restrictions on grants only require the recipient to remain employed by us over defined periods of time for such restrictions to lapse, the measurement date is the date the shares are granted.

·       When forfeiture restrictions on grants require (1) that the recipient remain employed by us over defined periods of time and (2) that the Company meet certain performance criteria for such restrictions to lapse, the measurement date is the date that the performance criteria are deemed to be met.

Expenses from stock-based compensation are included in our Consolidated Statements of Operations as follows:

		For the Years Ended December 31,
		2005			2004			2003
Increase in general and administrative expenses		$	1,903		$	1,579		$	1,020
Increase in construction contract and other service operations expenses		230			552			374

 

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The following table summarizes our operating results as if we elected to account for our stock-based compensation under the fair value provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”:

		For the Years Ended December 31,
		2005			2004			2003
Net income, as reported		$	39,031		$	37,032		$	30,877
Add: Share-based compensation expense, net of related tax effects and minority interests, included in the determination of net income		1,670			1,824			917
Less: Share-based compensation expense determined under the fair value based method, net of related tax effects and minority interests		(1,671		)	(1,500		)	(835		)
Net income, pro forma		$	39,030		$	37,356		$	30,959
Basic EPS on net income available to common shareholders, as reported		$	0.65		$	0.57		$	0.29
Basic EPS on net income available to common shareholders, pro forma		$	0.65		$	0.58		$	0.29
Diluted EPS on net income available to common shareholders, as reported		$	0.63		$	0.54		$	0.27
Diluted EPS on net income available to common shareholders, pro forma		$	0.63		$	0.55		$	0.28

 

The stock-based compensation expense under the fair value method, as reported in the above table, was computed using the Black-Scholes option-pricing model; the weighted average assumptions we used in that model are set forth below:

 

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). The statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, focusing primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The statement will require us to measure the cost of employee services received in exchange for an award of equity instruments based generally on the fair value of the award on the grant date; such cost will be recognized over the period during which the employee is required to provide service in exchange for the award (generally the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. In 2005, the FASB also issued several FASB Staff Positions that clarify certain aspects of SFAS 123(R). SFAS 123(R) will be effective for us on January 1, 2006 and will apply to all awards granted after January 1, 2006 and to awards modified, repurchased or cancelled after that date. We intend to use the modified prospective application approach to adoption provided for under SFAS 123(R); under this approach, we will recognize compensation cost on or after January 1, 2006 for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the fair value of those awards on the date of grant. After adopting SFAS 123(R), we will generally be recognizing additional expense associated with share options issued to employees relative to what we would recognize under our current method. However, we are still reviewing the

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provisions of SFAS 123(R) and assessing the impact it will have on us for expenses associated with common shares subject to forfeiture restrictions issued to employees.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 expresses the SEC staff’s views regarding the interaction between SFAS 123(R) and certain SEC rules and regulations and provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. In particular, it provides guidance in a number of areas, including share-based payment transactions with nonemployees, valuation methods, the classification of compensation expense, non-GAAP measures, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123(R), the modification of employee share options prior to adoption of SFAS 123(R) and certain disclosure requirements.

Fair Value of Financial Instruments

Our financial instruments include primarily notes receivable, mortgage and other loans payable and interest rate derivatives. The carrying or contract values of notes receivable approximated their fair values at December 31, 2005 and 2004. You should refer to Notes 9 and 10 for fair value of mortgage and other loans payable and derivative information.

Reclassification

We reclassified certain amounts from the prior periods to conform to the current period presentation of our Consolidated Financial Statements. These reclassifications did not affect previously reported consolidated net income or shareholders’ equity.

Recent Accounting Pronouncement

See the section above entitled “Stock-Based Compensation” for disclosure pertaining to SFAS 123(R).

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS 153”). The Accounting Principles Board’s Opinion No. 29, “Accounting for Nonmonetary Transactions” (“APB 29”) is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. However, the guidance in APB 29 included certain exceptions to that principle. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 will be effective for us for nonmonetary asset exchanges occurring after December 31, 2005. We do not expect that the adoption of this standard will have a material effect on our financial position, results of operations or cash flows.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations-an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to an unconditional obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditioned upon future events that may or may not be within the entity’s control. The fair value of liabilities related to such obligations should be recognized when incurred and reasonably estimable. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Statement 143 acknowledges that in some cases, sufficient

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information may not be available to reasonably estimate the fair value of an asset retirement obligation. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We adopted FIN 47 on December 31, 2005. Our financial statements were not significantly impacted by our adoption of FIN 47.

In June 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) regarding EITF 04-05, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” The conclusion provided a framework for addressing the question of when a general partner, as defined in EITF 04-05, should consolidate a limited partnership. Under the consensus, a general partner is presumed to control a limited partnership (or similar entity) and should consolidate that entity unless the limited partners possess kick-out rights or other substantive participating rights as described in EITF 96-16, “Investor’s Accounting for an Investee When the Investor has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights.” This EITF is effective for all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified after June 29, 2005, and, as of January 1, 2006, for existing limited partnership agreements. The EITF did not impact us in 2005. We do not expect that the adoption of this EITF in 2006 for existing limited partnership agreements will have a material effect on our financial position, results of operations or cash flows.

4.                 Commercial Real Estate Properties

Operating properties consisted of the following:

		December 31,
		2005			2004
Land		$	314,719		$	268,327
Buildings and improvements		1,491,254			1,280,537
		1,805,973			1,548,864
Less: accumulated depreciation		(174,935		)	(141,716		)
		$	1,631,038		$	1,407,148

 

Projects we had under construction or development consisted of the following:

		December 31,
		2005			2004
Land		$	117,434		$	74,190
Construction in progress		138,183			61,962
		$	255,617		$	136,152

 

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2005 Acquisitions

We acquired the following office properties in 2005:

 

(1)             Located in the Suburban Maryland region.

(2)             Located in the Baltimore/Washington Corridor region.

(3)             Located in the Suburban Baltimore region.

During 2005, we entered into a joint venture called COPT Opportunity Invest I, LLC in which we have a 92.5% ownership interest. This joint venture identifies and acquires properties to renovate into Class A office space and completes such renovations. We use the consolidation method of accounting to account for our investment in this entity. On December 20, 2005, we acquired the following properties through this joint venture:

·       2900 Towerview Road, located in Herndon, Virginia (which is in the Northern Virginia region), for an initial cost of $12,372. The property includes a 61,000 square foot office building with an attached 79,000 square foot warehouse building that the joint venture plans to convert to office space. The property also includes an additional 4-acre land parcel that can support future development; and

·       7468 Candlewood Road, located in Columbia, Maryland (which is in the Baltimore/Washington Corridor), for an initial cost of $19,222. The property includes a 472,000 square foot warehouse building that the joint venture plans to convert into two office buildings totaling 325,000 square feet.

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