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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended March 31, 2005



| ̈ | Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission file number 000-50727



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ARC CORPORATE REALTY TRUST, INC.

(Exact name of registrant as specified in its charter)



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|                                         |  |                                        
|---------------------------------------- |  | ---------------------------------------
|Maryland                                 |  | 22-3247622                             
|(State of Organization)                  |  | (I.R.S. Employer Identification Number)
|                                         | 
|1401 Broad Street Clifton, New Jersey    |  | 07013                                  
|(Address of principal executive offices) |  | (Zip Code)                             



Registrants
telephone number, including area code: (973) 249-1000



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



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    Yes ̈No  x



As of May 11, 2005, there were 3,181,540 Common Shares of Beneficial Interest
outstanding, par value $0.001 per share.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.



Form
10-Q



Index



|                                                                                                      |  |                                                                                       |  |   
|----------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|Item 1.                                                                                               |  | Financial Statements                                                                  |  | 2 
|                                                                                                      | 
|Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004                    |  | 2                                                                                    
|                                                                                                      | 
|Consolidated Statements of Income for the three months ended March 31, 2005 and 2004 (unaudited)      |  | 3                                                                                    
|                                                                                                      | 
|Consolidated Statements of Shareholders Equity for the three months ended March 31, 2005 (unaudited) |  | 4                                                                                    
|                                                                                                      | 
|Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (unaudited)  |  | 5                                                                                    
|                                                                                                      | 
|Notes to Consolidated Financial Statements                                                            |  | 6                                                                                    
|                                                                                                      |  |                                                                                      
|Item 2.                                                                                               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19
|                                                                                                      |  |                                                                                      
|Item 3.                                                                                               |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 25
|                                                                                                      |  |                                                                                      
|Item 4.                                                                                               |  | Controls and Procedures                                                               |  | 25
|                                                                                                      | 
|PART II: OTHER INFORMATION                                                                            |  |                                                                                      
|                                                                                                      |  |                                                                                      
|Item 1.                                                                                               |  | Legal Proceedings                                                                     |  | 26
|                                                                                                      |  |                                                                                      
|Item 2.                                                                                               |  | Changes in Securities, Use of Proceeds and Issuers Purchases of Equity Securities     |  | 26
|                                                                                                      |  |                                                                                      
|Item 3.                                                                                               |  | Defaults Upon Senior Securities                                                       |  | 26
|                                                                                                      |  |                                                                                      
|Item 4.                                                                                               |  | Submission of Matters to a Vote of Security Holders                                   |  | 26
|                                                                                                      |  |                                                                                      
|Item 5.                                                                                               |  | Other Information                                                                     |  | 26
|                                                                                                      |  |                                                                                      
|Item 6.                                                                                               |  | Exhibits and Reports                                                                  |  | 26
|                                                                                                      | 
|SIGNATURES                                                                                            |  | 27                                                                                   



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##### Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



ARC CORPORATE REALTY TRUST, INC.



Consolidated
Balance Sheets

As of March 31, 2005 (Unaudited) and December 31, 2004



|                                                                                                                            |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                            |  | 2005 |            |   | 2004 |  
|Assets                                                                                                                      |  |      |            |   |      |   |            |  
|                                                                                                                            |  |     
|Property:                                                                                                                   |  |      |            |   |      |   |            |  
|Land                                                                                                                        |  | $    | 12,412,227 |   |      | $ | 14,515,922 |  
|Building and improvements                                                                                                   |  |      | 36,653,540 |   |      |   | 45,068,320 |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|                                                                                                                            |  |      | 49,065,767 |   |      |   | 59,584,242 |  
|Less: accumulated depreciation                                                                                              |  |      | 6,463,278  |   |      |   | 6,401,456  |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|                                                                                                                            |  |      | 42,602,489 |   |      |   | 53,182,786 |  
|                                                                                                                            |  |     
|Investment in unconsolidated subsidiaries and undivided interests                                                           |  |      | 7,812,292  |   |      |   | 7,797,437  |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total property and investments                                                                                              |  |      | 50,414,781 |   |      |   | 60,980,223 |  
|                                                                                                                            |  |     
|Assets held for sale                                                                                                        |  |      | 10,424,338 |   |      |   |           |  
|                                                                                                                            |  |     
|Cash and cash equivalents, including restricted cash of $450,784 and $424,035 for 2005 and 2004, respectively               |  |      | 1,016,841  |   |      |   | 860,299    |  
|                                                                                                                            |  |     
|Deferred rent receivable                                                                                                    |  |      | 1,079,717  |   |      |   | 1,130,154  |  
|                                                                                                                            |  |     
|Rent receivable                                                                                                             |  |      | 321,295    |   |      |   | 236,867    |  
|                                                                                                                            |  |     
|Notes receivable-tenants                                                                                                    |  |      | 358,391    |   |      |   | 369,608    |  
|                                                                                                                            |  |     
|Notes receivable                                                                                                            |  |      |           |   |      |   | 800,000    |  
|                                                                                                                            |  |     
|Prepaid expenses and other assets, net                                                                                      |  |      | 280,575    |   |      |   | 322,159    |  
|                                                                                                                            |  |     
|Deferred financing and other fees, net of accumulated amortization of $642,316 and $624,597 for 2005 and 2004,
respectively |  |      | 359,000    |   |      |   | 522,540    |  
|                                                                                                                            |  |     
|Deferred leasing costs, net of accumulated amortization of $119,894 and $116,353 for 2005 and 2004, respectively            |  |      | 92,573     |   |      |   | 96,114     |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total assets                                                                                                                |  | $    | 64,347,511 |   |      | $ | 65,317,964 |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Liabilities, Minority Interest and Shareholders Equity                                                                     |  |      |            |   |      |   |            |  
|                                                                                                                            |  |     
|Liabilities:                                                                                                                |  |      |            |   |      |   |            |  
|Liabilities related to assets held for sale                                                                                 |  | $    | 8,155,262  |   |      | $ |           |  
|Mortgage notes payable                                                                                                      |  |      | 26,943,170 |   |      |   | 32,377,883 |  
|Lines of credit                                                                                                             |  |      | 1,372,613  |   |      |   | 2,247,613  |  
|Due to related parties                                                                                                      |  |      | 45,061     |   |      |   | 45,061     |  
|Acquired unfavorable leases, net                                                                                            |  |      |           |   |      |   | 2,815,460  |  
|Unearned rental revenue                                                                                                     |  |      | 31,250     |   |      |   | 31,250     |  
|Accounts payable and accrued expenses                                                                                       |  |      | 1,071,292  |   |      |   | 851,859    |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total liabilities                                                                                                           |  |      | 37,618,648 |   |      |   | 38,369,126 |  
|                                                                                                                            |  |     
|Minority interest                                                                                                           |  |      | 30,643     |   |      |   | 30,972     |  
|                                                                                                                            |  |     
|Shareholders Equity:                                                                                                       |  |      |            |   |      |   |            |  
|Common shares: $.001 par value per share; authorized, 40,000,000 shares                                                     |  |      |            |   |      |   |            |  
|Class A shares-5,000,000 authorized; 3,181,540 issued and outstanding                                                       |  |      | 3,182      |   |      |   | 3,182      |  
|Class B shares-5,000,000 authorized; 166,397 issued and outstanding                                                         |  |      | 166        |   |      |   | 166        |  
|Additional paid-in capital                                                                                                  |  |      | 32,106,429 |   |      |   | 32,106,429 |  
|Deferred compensation plans                                                                                                 |  |      | 411,361    |   |      |   | 299,172    |  
|Accumulated distributions in excess of net income                                                                           |  |      | (5,822,918 | ) |      |   | (5,491,083 | )
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total shareholders equity                                                                                                  |  |      | 26,698,220 |   |      |   | 26,917,866 |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total liabilities, minority interest and shareholders equity                                                               |  | $    | 64,347,511 |   |      | $ | 65,317,964 |  
|                                                                                                                            |  |      |            |   |      |   |            |  



The accompanying notes to consolidated
financial statements are an integral part of these statements.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.



Consolidated
Statements of Income

Unaudited



|                                                                        |  |                             |           |   |      |   |          
|----------------------------------------------------------------------- |  | --------------------------- | --------- | - | ---- | - | ---------
|                                                                        |  | Three Months Ended March 31
|                                                                        |  | 2005                        |           |   | 2004
|Revenues:                                                               |  |                             |           |   |      |   |          
|Rental revenues                                                         |  | $                           | 1,390,587 |   |      | $ | 1,296,566
|Real estate tax reimbursements                                          |  |                             | 184,863   |   |      |   | 16,122   
|Interest income                                                         |  |                             | 31,147    |   |      |   | 40,846   
|Equity in income of unconsolidated subsidiaries and undivided interests |  |                             | 304,641   |   |      |   | 198,214  
|Gain on sale of investment in unconsolidated subsidiary                 |  |                             | 400,000   |   |      |   |         
|                                                                        |  |                             |           |   |      |   |          
|Total revenues                                                          |  |                             | 2,311,238 |   |      |   | 1,551,748
|                                                                        |  |                             |           |   |      |   |          
|Expenses:                                                               |  |                             |           |   |      |   |          
|Interest expense                                                        |  |                             | 500,172   |   |      |   | 501,829  
|Depreciation and amortization                                           |  |                             | 268,645   |   |      |   | 262,073  
|Management fees-affiliate                                               |  |                             | 174,619   |   |      |   | 168,368  
|Real estate taxes                                                       |  |                             | 175,916   |   |      |   |         
|Property operating expenses                                             |  |                             | 86,192    |   |      |   | 97,142   
|General and administrative expenses                                     |  |                             | 50,065    |   |      |   | 59,337   
|Stock based compensation                                                |  |                             | 112,189   |   |      |   |         
|Professional expenses                                                   |  |                             | 112,546   |   |      |   | 115,279  
|(Gain) loss on interest rate cap, net                                   |  |                             | (2,622    | ) |      |   | 25,823   
|Other expenses                                                          |  |                             | 10,528    |   |      |   | 5,870    
|State and local taxes                                                   |  |                             | 8,017     |   |      |   | 4,800    
|                                                                        |  |                             |           |   |      |   |          
|Total expenses                                                          |  |                             | 1,496,267 |   |      |   | 1,240,521
|                                                                        |  |                             |           |   |      |   |          
|Income from continuing operations before minority interests             |  |                             | 814,971   |   |      |   | 311,227  
|                                                                        |  |                            
|Minority interests in earnings from subsidiaries                        |  |                             | 51,683    |   |      |   | 55,900   
|                                                                        |  |                             |           |   |      |   |          
|Income from continuing operations                                       |  |                             | 763,288   |   |      |   | 255,327  
|                                                                        |  |                            
|(Loss) income from discontinued operations                              |  |                             | (168,777  | ) |      |   | 46,662   
|                                                                        |  |                             |           |   |      |   |          
|Net income allocable to Class A and Class B common shareholders         |  | $                           | 594,511   |   |      | $ | 301,989  
|                                                                        |  |                             |           |   |      |   |          
|Net income per share from continuing operations - basic                 |  | $                           | 0.23      |   |      | $ | 0.08     
|Net (loss) income per share from discontinued operations - basic        |  |                             | (0.05     | ) |      |   | 0.01     
|                                                                        |  |                             |           |   |      |   |          
|Net income per share - basic                                            |  |                             | 0.18      |   |      |   | 0.09     
|                                                                        |  |                            
|Net income per share from continuing operations - diluted               |  |                             | 0.20      |   |      |   | 0.08     
|Net (loss) income per share from discontinued operations - diluted      |  |                             | (0.05     | ) |      |   | 0.01     
|                                                                        |  |                             |           |   |      |   |          
|Net income per share - diluted                                          |  |                             | 0.15      |   |      |   | 0.09     
|                                                                        |  |                            
|Weighted average shares outstanding-basic                               |  |                             | 3,349,000 |   |      |   | 3,349,000
|Weighted average shares outstanding-diluted                             |  |                             | 3,851,000 |   |      |   | 3,349,000



The accompanying notes to consolidated
financial statements are an integral part of these statements.



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ARC CORPORATE REALTY TRUST, INC.



Consolidated
Statements of Shareholders Equity

For the Three Months Ended March 31, 2005 (unaudited) and the Year Ended December 31, 2004



|                                         |  |                     |       |                     |   |                          |  |                           |            |                                                |   |         |                          |   |            |   |  |   |            |  
|---------------------------------------- |  | ------------------- | ----- | ------------------- | - | ------------------------ |  | ------------------------- | ---------- | ---------------------------------------------- | - | ------- | ------------------------ | - | ---------- | - |  | - | ---------- | -
|                                         |  | Class ACommonShares |       | Class BCommonShares |   | AdditionalPaid-inCapital |  | DeferredCompensationPlans |            | AccumulatedDistributionsin Excess of NetIncome |   |         | TotalShareholdersEquity |  
|Balance, December 31, 2004               |  |                     | 3,182 |                     |   | 166                      |  |                           | 32,106,429 |                                                |   | 299,172 |                          |   | (5,491,083 | ) |  |   | 26,917,866 |  
|Amortization of stock based compensation |  |                     |      |                     |   |                         |  |                           |           |                                                |   | 112,189 |                          |   |           |   |  |   | 112,189    |  
|Net income                               |  |                     |      |                     |   |                         |  |                           |           |                                                |   |        |                          |   | 594,511    |   |  |   | 594,511    |  
|Dividends                                |  |                     |      |                     |   |                         |  |                           |           |                                                |   |        |                          |   | (926,346   | ) |  |   | (926,346   | )
|                                         |  |                     |       |                     |   |                          |  |                           |            |                                                |   |         |                          |   |            |   |  |   |            |  
|Balance, March 31, 2005                  |  | $                   | 3,182 |                     | $ | 166                      |  | $                         | 32,106,429 |                                                | $ | 411,361 |                          | $ | (5,822,918 | ) |  | $ | 26,698,220 |  
|                                         |  |                     |       |                     |   |                          |  |                           |            |                                                |   |         |                          |   |            |   |  |   |            |  



The accompanying notes to consolidated
financial statements are an integral part of these statements.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.



Consolidated
Statements of Cash Flows

For the Three Months Ended March 31, 2005 and 2004

Unaudited



|                                                                                 |  |      |            |   |      |   |            |  
|-------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                 |  | 2005 |            |   | 2004 |  
|Cash Flows from Operating Activities:                                            |  |      |            |   |      |   |            |  
|Net income                                                                       |  | $    | 594,511    |   |      | $ | 301,989    |  
|Adjustments to reconcile net income to net cashprovided by operating activities: |  |      |            |   |      |   |            |  
|Depreciation and amortization                                                    |  |      | 287,391    |   |      |   | 276,773    |  
|Amortization of stock based compensation                                         |  |      | 112,189    |   |      |   |           |  
|Amortization of acquired unfavorable leases                                      |  |      | (57,263    | ) |      |   | (9,543     | )
|Impairment charge                                                                |  |      | 275,000    |   |      |   | 52,521     |  
|Gain on sale of investment in unconsolidated subsidiary                          |  |      | (400,000   | ) |      |   |           |  
|Loss on interest rate cap                                                        |  |      | 8,937      |   |      |   | 5,605      |  
|Write off of TMD minority interest                                               |  |      | 10,528     |   |      |   | 5,870      |  
|Minority interest in earnings of subsidiaries                                    |  |      | 51,683     |   |      |   | 55,900     |  
|Equity in income of unconsolidated subsidiaries and undivided interests          |  |      | (304,641   | ) |      |   | (198,214   | )
|(Increase) decrease in assets:                                                   |  |      |            |   |      |   |            |  
|Rent receivable                                                                  |  |      | (97,044    | ) |      |   | 40,518     |  
|Deferred rent receivable                                                         |  |      | (23,337    | ) |      |   | (12,999    | )
|Prepaid expenses and other assets                                                |  |      | (120,316   | ) |      |   | 23,069     |  
|Increase (decrease) in liabilities:                                              |  |      |            |   |      |   |            |  
|Due to related parties                                                           |  |      |           |   |      |   | 20,130     |  
|Accounts payable and accrued expenses                                            |  |      | 81,166     |   |      |   | (138,947   | )
|Unearned rental revenue                                                          |  |      | 129,493    |   |      |   | 29,500     |  
|                                                                                 |  |      |            |   |      |   |            |  
|Net cash provided by operating activities                                        |  |      | 548,297    |   |      |   | 452,172    |  
|                                                                                 |  |      |            |   |      |   |            |  
|Cash Flows from Investing Activities:                                            |  |      |            |   |      |   |            |  
|Decrease in due to related parties                                               |  |      |           |   |      |   | (147,019   | )
|Acquisition of properties                                                        |  |      |           |   |      |   | (7,527,285 | )
|Proceeds from sale of investment in unconsolidated subsidiary                    |  |      | 400,000    |   |      |   |           |  
|Investment in ARC International                                                  |  |      |           |   |      |   | (753,655   | )
|Payments for tenant improvements                                                 |  |      |           |   |      |   | (146,971   | )
|Distributions from unconsolidated subsidiaries and undivided interests           |  |      | 289,786    |   |      |   | 424,551    |  
|Decrease (increase) in notes receivable                                          |  |      | 800,000    |   |      |   | (50,000    | )
|Decrease in notes receivable-tenants                                             |  |      | 11,217     |   |      |   | 10,105     |  
|                                                                                 |  |      |            |   |      |   |            |  
|Net cash provided by (used in) investing activities                              |  | $    | 1,501,003  |   |      | $ | (8,190,274 | )
|                                                                                 |  |      |            |   |      |   |            |  
|Cash Flows from Financing Activities:                                            |  |      |            |   |      |   |            |  
|Mortgage principal amortization                                                  |  | $    | (191,641   | ) |      | $ | (167,060   | )
|Borrowing under mortgage payable                                                 |  |      |           |   |      |   | 5,300,000  |  
|Net (decrease) increase on lines of credit                                       |  |      | (875,000   | ) |      |   | 3,250,000  |  
|Purchase of interest rate cap                                                    |  |      |           |   |      |   | (56,500    | )
|Deferred financing and other fees                                                |  |      |           |   |      |   | (169,621   | )
|Distributions to minority interest                                               |  |      | (62,540    | ) |      |   | (62,540    | )
|Offering costs paid                                                              |  |      |           |   |      |   | (5,310     | )
|Dividends paid                                                                   |  |      | (763,577   | ) |      |   | (684,755   | )
|                                                                                 |  |      |            |   |      |   |            |  
|Net cash (used in) provided by financing activities                              |  |      | (1,892,758 | ) |      |   | 7,404,214  |  
|                                                                                 |  |      |            |   |      |   |            |  
|Net Increase (Decrease) in Cash and Cash Equivalents                             |  |      | 156,542    |   |      |   | (333,888   | )
|Cash and Cash Equivalents, Beginning of Period                                   |  |      | 860,299    |   |      |   | 1,946,171  |  
|                                                                                 |  |      |            |   |      |   |            |  
|Cash and Cash Equivalents, End of Period                                         |  | $    | 1,016,841  |   |      | $ | 1,612,283  |  
|                                                                                 |  |      |            |   |      |   |            |  
|Supplement Disclosure of Cash Flow Information:                                  |  |      |            |   |      |   |            |  
|Cash payments for interest                                                       |  | $    | 571,352    |   |      | $ | 502,283    |  
|                                                                                 |  |      |            |   |      |   |            |  



The accompanying notes to consolidated
financial statements are an integral part of these statements.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|1. | GENERAL
|-- | -------



ARC Corporate Realty Trust, Inc. and subsidiaries (ACRT) is a corporation which was formed under the laws of the State of Maryland on June 25,
1993. ACRT operates in a manner intended to enable it to qualify as a real estate investment trust (REIT) under Sections 856-860 of the Internal Revenue Code (the Code).ACRT is managed by its advisor, ARC Capital
Advisors L.P. (Advisor), which performs services for ACRT pursuant to the terms of an advisory agreement (the Advisory Agreement) (Note 12). ACRT was formed to purchase geographically diverse credit lease properties which are
general purpose retail, office and industrial properties each 100% leased to one or more creditworthy tenants under a long term lease that generally requires tenants to pay most or all of the operating costs of the property including real estate
taxes and insurance.



Through March 31, 2005, ACRT raised
$33,678,336 of gross proceeds (net of stock retirements) representing 3,181,540 Class A shares from 674 investors which, net of offering costs, has yielded $30,564,590 to ACRT. In addition, ACRT has raised $1,781,735 of gross proceeds representing
166,397 Class B shares from one investor, which net of offering costs, has yielded $1,564,671 to ACRT.



On December 20, 2004, ACRT entered into a Contract of Purchase and Sale (the Agreement), by and among ACRT, certain affiliates of ACRT and
HPI/NL Investors LLC (the Purchaser). The Agreement provides for the sale to the Purchaser of 14 of ACRTs 21 properties and a limited partnership interest in an entity that owns a property. The gross purchase price, including
assumed debt, is approximately $77.8 million, a portion of which will be paid to other parties who are either joint venture partners, minority interest holders or tenants in common of certain of the properties included in the transaction.



On February 2, 2005, ACRT entered into an amendment to the
Agreement. The amendment provides for, among other items, (1) the removal of certain assets from the transaction provided for in the Agreement, (2) a reduction in the purchase price to approximately $65.2 million, subject to further
adjustment, (3) elimination of a potential participation in revenue at one of the properties, and (4) the termination of the purchasers right to terminate the Agreement based upon its due diligence investigation. The properties and
investments included in the amended Agreement are:



|                                     |  |                
|------------------------------------ |  | ---------------
|Montgomeryville, PA                  |  | Marietta, GA   
|Norcross, GA                         |  | Lilburn, GA    
|Overland Park, KS                    |  | San Antonio, TX
|Wichita, KS                          |  | Plymouth, IN   
|Sacramento, CA                       |  | Memphis, TN    
|Levittown, PA (partnership interest) |  |                



ACRT anticipates that
the sale of these properties and investments will close in 2005, subject to shareholder approval. Based on the current sales price in the amended Agreement, ACRT anticipates that all properties and investments will be sold an amount in excess of
their carrying amounts and, therefore, will result in a gain for financial reporting purposes.



In addition to the above, during 2005, ACRT, pursuant to various rights of first refusal and purchase options, entered into various contracts to sell
additional properties and investments not included in the above Agreement, as amended. The purchasers of these properties include joint venture partners, minority interest holders, tenants in common and affiliates of ACRTs advisor. The
properties included in these various contracts are:

|                                           |  |                                                  
|------------------------------------------ |  | -------------------------------------------------
|Fort Washington, PA (partnership interest) |  | Philadelphia, PA (see Note 3)                    
|Paramus, NJ (partnership interest)         |  | New York, NY (partnership interest) (see Note 19)



On January 25, 2005,
the tenant in the Rochelle Park, NJ property, who had filed suit against ACRT, signed a stipulation of settlement agreeing to dismiss the suit against ACRT. As part of the settlement, the tenant entered into a contract to purchase ACRTs 51%
tenant in common interest and the remaining 49% tenant in common interest not owned by ACRT for $19,500,000.This contract was subsequently terminated.



ACRT anticipates that the sale of these properties and investments will close in 2005, subject to shareholder approval. Based on the current sales
prices, ACRT anticipates that all properties and investments, with the exception of the Philadelphia, PA property in which an impairment charge has been recorded (see Note 2f), will be sold for amounts in excess of their carrying amounts and,
therefore, will result in a gain for financial reporting purposes.



6



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



| | a. | Basis of Presentation - The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP) and include the accounts of ACRT, its wholly-owned subsidiaries and those majority-owned subsidiaries in which ACRT can exercise control. Investments in non-controlled entities, which include Triangle Plaza II,
LLC (Note 4), Fort Washington Fitness, L.P. (Note 5), Levittown ARC, LP (Note 6), Willow Grove ACRT, LLC (Note 9) and ARC International Fund II, LP (Note 10) are accounted for under the equity method of accounting. Additionally, ACRTs
undivided interests in the Rochelle Park property (Note 7) and the Paramus property (Note 8) are accounted for under the equity method, as ACRT maintains joint control over the properties. Under the equity method, ACRTs investment increases as
a result of contributions and its allocable share of net income and decreases as a result of distributions and its allocable share of net loss. All significant intercompany balances and transactions have been eliminated in consolidation and in the
use of the equity method of accounting.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Interim Financial Statements (unaudited)  The unaudited financial statements reflect all adjustments, which are, in the opinion of management,
necessary to present fairly the financial condition and results of operations for the interim periods. For a more complete understanding of ACRTs operations and financial position, reference is made to the financial statements (including notes
thereto) previously filed with the Securities and Exchange Commission with ACRTs Form 10-K for the year ended December 31, 2004.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | Use of Estimates - The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Properties - Properties are carried at cost which includes the purchase price, acquisition fees, and any other costs incurred in acquiring the properties. Buildings
are depreciated on a straight-line basis over their estimated useful lives, which are 40 years. Maintenance and repairs are charged to expense as incurred. Replacements and betterments, which significantly extend the useful lives of a property, are
capitalized. In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, ACRT is amortizing certain intangible costs associated with property acquisitions over the lives of the
leases underlying the properties (see Note 2e).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | Purchase Accounting for the Acquisition of Real Estate In accordance with SFAS No. 141, commencing with properties acquired after June 30, 2002, the fair value
of real estate acquired is allocated to the acquired tangible assets, consisting of land and building and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases
and value of tenant relationships, based in each case on their fair values.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The fair value of the tangible assets of an acquired property (which includes land and building) is determined by valuing the property as if it were vacant, and the as-if vacant value is then allocated to
land and building based on managements determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease up periods considering
current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenues during expected lease up periods based
on current market demand. Management also estimates costs to execute similar leases including leasing commissions.



In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease
values are recorded based on the difference between the current in-place lease rent and managements estimate of current market rent.



The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the
purchase price paid for a property over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships based on managements
evaluation of the specific characteristics of each tenants lease. The value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the respective leases.



| | f. | Impairment- ACRT continually assesses the recoverability of its properties by determining whether the costs can be recovered through projected undiscounted
cash flows. The amount of impairment, if any, is measured by comparing the carrying amounts to the fair values of such properties. The evaluation includes reviewing anticipated cash flows of the properties, based on current leases in place, coupled
with an estimate of proceeds to be realized upon sale. However, estimating future sales proceeds is highly subjective and such estimates could differ materially from actual results.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



SFAS No. 144 Accounting for the Impairment or Disposal of Long Lived
Assets updates and clarifies the accounting and reporting for the impairment of assets held in use and to be disposed of. The Statement, among other things, requires ACRT to classify the operations of properties to be disposed of as
discontinued operations.



In 2004, the property located in
Memphis, Tennessee, leased to Federal Express Corp. was designated as to be disposed and an impairment charge of $52,521 was recorded. This property was subsequently sold in 2004 for aggregate net proceeds of $2,310,027 which resulted in no gain or
loss on the sale for financial reporting purposes.



As of
March 31, 2005, ACRT has one property in Philadelphia, PA designated to be disposed of (Note 3). Based on the proposed sales price of the Philadelphia, PA property, ACRT has recorded an impairment charge of $275,000, which includes an estimated
disposition fee of $230,000 payable to the Advisor per the Advisory Agreement. This amount is included in income from discontinued operations on the consolidated statements of income in 2005.



The following presents the operating results for the property to be disposed
of for the applicable periods:



|                  |  |                               |          |   |      |   |        
|----------------- |  | ----------------------------- | -------- | - | ---- | - | -------
|                  |  | Three Months Ended March. 31,
|                  |  | 2005                          |          |   | 2004
|Revenues          |  | $                             | 275,668  |   |      | $ | 188,870
|Net (Loss) Income |  |                               | (168,777 | ) |      |   | 46,662 



| | g. | Cash and Cash Equivalents - Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less. Restricted cash
represents cash maintained for real estate taxes, insurance and capital expenditures.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cash and cash equivalent balances may exceed insurable limits. ACRT believes it mitigates risk by investing in or through major financial institutions.



| | h. | Rent Receivable  ACRT continuously monitors collections from its tenants and makes a provision for estimated losses based upon historical experience and any
specific tenant collection issues that ACRT has identified.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i. | Amortization- Deferred financing costs are amortized using the straight-line method over the life of the related mortgage or line of credit. Deferred leasing costs are
amortized using the straight-line method over the life of the related lease. Capitalized costs related to ACRTs equity investments are amortized over the estimated useful life of the underlying real estate assets.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | j. | Income Taxes - ACRT operates in a manner intended to enable it to qualify as a REIT under Sections 856-860 of the Code. Under these sections, a real estate investment
trust which distributes at least 90% of its real estate investment trust taxable income to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its
shareholders. ACRT pays state taxes, which are not significant, as applicable.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | k. | Revenue Recognition - Rental revenue from tenant operating leases which provide for scheduled rental increases are recognized on a straight-line basis over the term of
the respective leases.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Gains on sales of real
estate are recognized pursuant to the provisions of SFAS No. 66, Accounting for Sales of Real Estate. The specific timing of the sale is measured against various criteria in SFAS No. 66 related to the terms of the transactions and
any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied
until the sales criteria are met.



| | l. | Derivative Instruments and Hedging Activities - ACRT follows the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. The Statement generally requires that all derivative instruments be reflected in the consolidated financial statements at their estimated fair value. Changes in the fair value of non-hedging instruments are reported
in current period earnings.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



8



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



| | m. | Earnings Per Share Basic net income per share is computed by dividing net income allocable to Class A and B common shareholders by the weighted
average number of shares outstanding during the period. Diluted net income per share amounts are similarly computed but include the effect, when dilutive, of in the money common share options.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following is a reconciliation of the denominator of the basic and
diluted weighted average number of common shares outstanding.



|                                                                                           |  |                                            |  |      
|------------------------------------------------------------------------------------------ |  | ------------------------------------------ |  | -----
|                                                                                           |  | Three Months ended March 31,(In thousands)
|                                                                                           |  | 2005                                       |  | 2004 
|Total weighted average Class A common shares                                               |  | 3,183                                      |  | 3,183
|Total weighted average Class B common shares                                               |  | 166                                        |  | 166  
|                                                                                           |  |                                            |  |      
|Weighted average number of common shares used in                                           |  |                                            |  |      
|calculation of basic earnings per share                                                    |  | 3,349                                      |  | 3,349
|                                                                                           |  |                                           
|Shares issuable upon exercise of stock options (15% of outstanding common shares)          |  | 502                                        |  |     
|                                                                                           |  |                                            |  |      
|Weighted average number of common shares used in calculation of diluted earnings per share |  | 3,851                                      |  | 3,349



| | n. | Recent Accounting Pronouncements  In December 2002, FASB Statement No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, an
amendment of FASB Statement No. 123 (SFAS 148), was issued. SFAS 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method
of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o. | Stock-based CompensationOn May 21, 2004, ACRT shareholders approved revisions to ACRTs 1997 Stock Option Plan which extended the
life of ACRTs stock options from ten to fifteen years and removed all restrictions on their exercise on April 1, 2008 or upon the occurrence of certain earlier events. However, the total number of options exercised cannot exceed fifteen
percent of the outstanding shares at the exercise date.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Accordingly, ACRT will recognize compensation expense ratably over the vesting period for variable stock awards previously granted under the plan. For the three months ended March 31, 2005 and 2004, ACRT recognized
stock based compensation expense totaling $112,189 and $0, respectively.



Compensation expense was calculated using a market price of $12.00 based on ACRTs last stock offering which expired on December 31, 2003, and the option price of $8.50 per option.



| | p. | Fair Value of Financial Instruments
| | -- | -----------------------------------



Cash Equivalents, Notes Receivable, Rent Receivable and Accounts Payable and Accrued Expenses



ACRT estimates that the fair value approximates carrying
value due to the relatively short maturities of the instruments.



9



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Mortgage Notes Payable and Lines of Credit



ACRT determines the fair value of these instruments based on a discounted
cash flow analysis using a discount rate that approximates the current borrowing rates for instruments of similar maturities. Based on this analysis, ACRT has determined that the fair value of these instruments approximates their carrying values.



| | q. | Industry Segments ACRT operates in one industry segment, investments in credit lease properties.
| | -- | -------------------------------------------------------------------------------------------------



| | r. | Environmental Matters - Based upon managements ongoing review of its properties, management is not aware of any environmental conditions with
respect to any of ACRTs properties, which would be reasonably likely to have a material adverse effect on ACRT. There can be no assurance, however, that the discovery of environmental conditions which were previously unknown, changes in law,
the conduct of tenants or activities relating to properties in the vicinity of ACRTs properties, will not expose ACRT to material liability in the future. Changes in law increasing the potential liability for environmental conditions existing
on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of ACRTs tenants, which would adversely affect ACRTs
consolidated financial condition and results of operations.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | s. | Reclassifications - Certain reclassifications were made to prior period amounts to conform with the current period presentation.
| | -- | --------------------------------------------------------------------------------------------------------------------------------



|3. | PROPERTIES AND PROPERTY INVESTMENTS
|-- | -----------------------------------



The following acquisitions, investments and disposals were consummated during 2005 and 2004:



On March 4, 2004, ACRT paid $7,067,000 plus acquisition fees and other
expenses to purchase a 22,743 square foot retail condominium in a building located on Rittenhouse Square between 18thand 17thStreet in Philadelphia, Pennsylvania leased to Barnes & Noble, Inc. An option to
purchase the property from the third party owner was originally held by an affiliate of the Chairman and President of ACRT. The purchase price included $1,000,000, which was paid to that affiliate by ACRT in connection with the assignment of the
option to ACRT. ACRT recorded an initial $2,996,994 acquired unfavorable lease liability on this property in connection with the acquisition.



On March 31, 2004, ACRT acquired an 11.2% limited partnership interest in ARC International Fund II, LP. An affiliate of the Chairman and President of
ACRT is the general partner of ARC International (Note 10).



On April 30, 2004, ACRT sold the Memphis, Tennessee property leased to Federal Express Corp. for $2,325,000 resulting in net proceeds to ACRT of approximately $2,310,000 after costs and expenses, which resulted in no gain or loss for
financial reporting purposes.



On January 3,
2005, an affiliate of the Advisor exercised its right to purchase ACRTs property located in Philadelphia, PA for approximately $7.7 million. ACRT has recorded an impairment charge of $275,000 in connection with the proposed transaction. The
transaction is expected to close in 2005.



On February
15, 2005, the Willow Grove outstanding loan balance of $800,000 was repaid plus all outstanding and accrued interest, and as a result, ACRTs investment in Willow Grove was zero. Additionally, ACRT sold its member interest in Willow Grove to
the other Willow Grove member and an affiliate of the Advisor for net proceeds and a gain of $400,000.



The following proforma operating information for the three months ended March 31, 2005 and 2004 has been prepared as if all ACRT acquisitions and
dispositions in 2005 and 2004 had been consummated as of January 1, 2004. The information does not purport to be indicative of what the operating results of ACRT would have been had the acquisitions and dispositions been consummated on January 1,
2004. Proforma results are as follows:



|                             |  |                                                              |       |      |   |      
|---------------------------- |  | ------------------------------------------------------------ | ----- | ---- | - | -----
|                             |  | Three Months Ended March 31,(000s except per share amounts)
|                             |  | 2005                                                         |       | 2004
|Revenues                     |  | $                                                            | 1,891 |      | $ | 1,620
|Net Income                   |  |                                                              | 343   |      |   | 341  
|Net Income per share  basic |  |                                                              | .18   |      |   | .10  
| diluted                    |  |                                                              | .15   |      |   | .10  



10



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ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|4. | INVESTMENT IN TRIANGLE PLAZA II
|-- | -------------------------------



On June 9, 1998, ACRT, through a wholly owned subsidiary, acquired a 40% interest in Triangle Plaza II, LLC (Triangle), for an initial equity
investment of $4,473,900 at completion. Triangle owns a 139,294-square-foot retail complex in College Point (Queens), New York City which was completed in July 1999. The complex is leased to Toys R UsDelaware Inc. (for use as a Toys R Us and
Kids R Us facility) and National Amusements, Inc. In March of 2000, Triangle purchased the land under the property for approximately $10,200,000. The land was previously subject to a ground lease.



ACRTs investment in Triangle includes costs capitalized by ACRT in the
amount of $901,829. This amount, which includes the acquisition fee of $572,520, which was paid to the Advisor per the Advisory Agreement, and capitalized interest totaling $308,830, is not reflected in the underlying equity of Triangle and is being
amortized over the estimated useful life of the underlying asset, which is 39 years. Amortization expense in the amount of $5,781 has been recorded in each of 2005 and 2004 and charged against ACRTs equity in income of unconsolidated
subsidiaries and undivided interests, which appears on the accompanying consolidated statements of income. ACRT earns a 12% preferred return on its investment in Triangle in the form of distributions and, after a similar preferred return to the
other member, receives 40% of distributable cash flow attributable to base rent and recoveries and 20% of all percentage rents. ACRT received distributions of $146,986 and $121,551 from cash flows attributable to base rent and recoveries for the
three months ended March 31, 2005 and 2004, respectively.



In
September 2000, Triangle refinanced the property. The refinancing produced excess distributable capital proceeds of $1,433,409, of which $1,427,156 was distributed to ACRT in 2000, thereby reducing ACRTs contributed capital to $3,046,744.



In March 2005, ACRT brought suit against its joint venture
partner regarding the exercise of a right of first refusal on the purchase of ACRTs interest in the property (see Note 19).



The following is the summary balance sheet information of Triangle as of March 31, 2005 and December 31, 2004:



|                  |  |               |            |                  |   |           
|----------------- |  | ------------- | ---------- | ---------------- | - | ----------
|                  |  | March 31,2005 |            | December 31,2004
|Total Assets      |  | $             | 29,904,423 |                  | $ | 29,945,219
|Total Liabilities |  |               | 26,036,961 |                  |   | 26,021,652



The following is the
summary income statement information of Triangle for the three months ended March 31, 2005 and 2004:



|                              |  |                             |           |      |          
|----------------------------- |  | --------------------------- | --------- | ---- | ---------
|                              |  | Three Months Ended March 31
|                              |  | 2005                        |           | 2004
|Rental Revenue                |  | $                           | 1,226,419 |      | 1,234,506
|Interest and Other income     |  |                             | 1,567     |      | 370      
|Operating Expenses            |  |                             | 390,793   |      | 415,402  
|Interest Expense              |  |                             | 468,811   |      | 479,474  
|Depreciation and Amortization |  |                             | 177,723   |      | 177,723  
|Net Income                    |  |                             | 190,659   |      | 162,277  



|5. | INVESTMENT IN FORT WASHINGTON
|-- | -----------------------------



On December 24, 2002, ACRT through a wholly owned subsidiary, acquired a 50% limited partnership interest in Fort Washington Fitness, LP (Fort
Washington) for $1,000,000 cash plus the assumption of its pro rata share of the debt and acquisition fees. ACRT does not have any additional funding obligations to Fort Washington. Fort Washington owns a property located in Fort Washington,
Pennsylvania, which consists of a 41,000-square-foot LA Fitness Center (built by LA Fitness, the tenant). The property was completed in November 2003 and the LA Fitness lease has a rent commencement date of January 2, 2004. Due to the rent
commencement date, no income was recorded in 2003.



11



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



ACRTs investment in Fort Washington includes the acquisition fee of
$105,000 paid to the Advisor per the Advisory Agreement, which is not reflected in the underlying equity of Fort Washington. This amount is being amortized over the estimated useful life of the underlying asset.



ACRT will earn a 12% preferred return on its investment in Fort Washington
from the date of investment in the form of distributions and, after a similar preferred return to the other partners, will receive 50% of the remaining distributable cash flow. ACRT received distributions of $30,000 and $150,000 for the three months
ended March 31, 2005 and 2004, respectively. The distributions received in 2004 included $120,000 in preferred return for the period January 1, 2003 through December 31, 2003.



The following is the summary balance sheet information of Fort Washington as of March 31, 2005 and December 31, 2004:



|                  |  |               |           |                  |   |          
|----------------- |  | ------------- | --------- | ---------------- | - | ---------
|                  |  | March 31,2005 |           | December 31,2004
|Total Assets      |  | $             | 6,322,304 |                  | $ | 6,359,841
|Total Liabilities |  |               | 4,964,515 |                  |   | 5,041,678



The following is the
summary income statement information of Fort Washington for the three months ended March 31, 2005 and 2004:



|                              |  |                             |  |        
|----------------------------- |  | --------------------------- |  | -------
|                              |  | Three Months Ended March 31
|                              |  | 2005                        |  | 2004   
|Rental Revenue $              |  | 185,400                     |  | 183,406
|Interest Income               |  |                            |  | 39     
|Operating Expenses            |  | 3,708                       |  | 9,786  
|Interest Expense              |  | 79,763                      |  | 70,019 
|Depreciation and Amortization |  | 32,303                      |  | 24,826 
|Net Income                    |  | 69,626                      |  | 78,814 



ACRT expects to sell
its investment in this property in 2005.



|6. | INVESTMENT IN LEVITTOWN
|-- | -----------------------



On March 7, 2003, ACRT acquired a 20% limited partnership interest in Levittown ARC, LP (Levittown) for $200,000 plus the assumption of its
pro rata share of the debt and acquisition fees. ACRT does not have any additional funding obligations to Levittown. Levittown owns a property located in Levittown, Pennsylvania which is currently leased to Giant Food, Inc.



ACRTs investment in Levittown includes the acquisition fee of $17,408
paid to the Advisor per the Advisory Agreement, which is not reflected in the underlying equity of Levittown. This amount is being amortized over the estimated useful life of the underlying asset, which is 39 years.



ACRT will earn a 9% preferred return on its investment in Levittown in the
form of distributions and, after a similar preferred return to the other limited partners, all distributions in excess of 9% are allocated 50% to the limited partners and 50% to Levittown ARC Residual Partners, of which ACRT owns 63%. ACRT has
received $4,500 in distributions for the three months ended March 31, 2005 and 2004, respectively.



The following is the summary balance sheet information of Levittown as of March 31, 2005 and December 31, 2004:



|                  |  |               |           |                  |   |          
|----------------- |  | ------------- | --------- | ---------------- | - | ---------
|                  |  | March 31,2005 |           | December 31,2004
|Total Assets      |  | $             | 3,328,479 |                  | $ | 3,359,619
|Total Liabilities |  |               | 2,554,393 |                  |   | 2,561,051





12



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The following is the summary income statement information of Levittown for
the three months ended March 31, 2005 and 2004:



|                              |  |                              |        |   |      |   |         |  
|----------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------- | -
|                              |  | Three Months Ended March 31, |       
|                              |  | 2005                         |        |   | 2004 |  
|Rental Revenue                |  | $                            | 83,007 |   |      | $ | 83,007  |  
|Operating Expenses            |  |                              | 6,171  |   |      |   | 6,235   |  
|Interest Expense              |  |                              | 45,224 |   |      |   | 62,186  |  
|Depreciation and Amortization |  |                              | 34,155 |   |      |   | 34,155  |  
|Net Loss                      |  |                              | (3,022 | ) |      |   | (19,569 | )



ACRT expects to sell
its investment in this property in 2005.



|7. | INVESTMENT IN ROCHELLE PARK PROPERTY
|-- | ------------------------------------



On April 1, 2003, ACRT converted its 51% limited partnership interest in Rochelle Park Investors, LP into a 51% undivided interest in the property held by
Rochelle ACRT 1, LLC and Rochelle ACRT 2, LLC, both wholly owned subsidiaries of ACRT. This conversion resulted in the deconsolidation of Rochelle Park Investors LP in the consolidated financial statements of ACRT. This transaction represents a
non-cash transaction for the purposes of the consolidated statements of cash flows. ACRTs undivided interest is reflected on the consolidated financial statements under the equity method of accounting.



On April 1, 2003, the property was refinanced. The refinancing produced
excess distributable capital proceeds of approximately $2,200,000, which were distributed to ACRT. ACRT has received $46,000 and $97,500 for the three months ended March 31, 2005 and 2004, respectively.



The following is the combined summary balance sheet information of Rochelle
ACRT 1 and 2s 51% undivided interests as of March 31, 2005 and December 31, 2004:



|                  |  |               |           |                  |   |          
|----------------- |  | ------------- | --------- | ---------------- | - | ---------
|                  |  | March 31,2005 |           | December 31,2004
|Total Assets      |  | $             | 5,567,141 |                  | $ | 5,505,782
|Total Liabilities |  |               | 5,678,254 |                  |   | 5,701,177



The following is the
combined summary income statement information of Rochelle ACRT 1 and 2s 51% undivided interests for the three months ended March 31, 2005 and 2004:



|                                 |  |                              |         |   |      |   |        
|-------------------------------- |  | ---------------------------- | ------- | - | ---- | - | -------
|                                 |  | Three Months Ended March 31,
|                                 |  | 2005                         |         |   | 2004
|Rental Revenue                   |  | $                            | 271,213 |   |      | $ | 284,091
|Operating Expenses               |  |                              | 125,869 |   |      |   | 97,640 
|(Gain) Loss on Interest Rate Cap |  |                              | (51,676 | ) |      |   | 85,831 
|Interest Expense                 |  |                              | 72,655  |   |      |   | 56,494 
|Depreciation and Amortization    |  |                              | 40,081  |   |      |   | 40,081 
|Net Income                       |  |                              | 84,284  |   |      |   | 4,045  

|
|



ACRT expects
to sell its investment in this property in 2005.



|8. | INVESTMENT IN PARAMUS PROPERTY
|-- | ------------------------------



On May 21, 2003, ACRT acquired, through Paramus ACRT, LLC (a wholly owned subsidiary), a 40% undivided interest in a 154,768 square foot retail and
warehouse property located in Paramus, New Jersey for $2,400,000 cash plus the assumption of its pro rata share of the debt and acquisition fees. The property is leased to Babys R Us, Levitz Furniture and Wade Odell Wade Padded Van Services.
ACRT has received $62,300 and $51,000 in distributions for the three months ended March 31, 2005 and 2004, respectively.



13



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The following is the summary balance sheet information of the Paramus
ACRTs 40% undivided interest as of March 31, 2005 and December 31, 2004:



|                  |  |               |           |                  |   |          
|----------------- |  | ------------- | --------- | ---------------- | - | ---------
|                  |  | March 31,2004 |           | December 31,2004
|Total Assets      |  | $             | 8,213,696 |                  | $ | 8,231,980
|Total Liabilities |  |               | 5,811,737 |                  |   | 5,828,279



The following is the
summary income statement information of the Paramus ACRTs 40% undivided interest for the three months ended March 31, 2005 and 2004:



|                              |  |                               |         |      |   |         |  | 
|----------------------------- |  | ----------------------------- | ------- | ---- | - | ------- |  | 
|                              |  | Three Months Ended March. 31,
|                              |  | 2005                          |         | 2004
|Rental Revenue                |  | $                             | 244,034 |      | $ | 234,732
|Operating Expenses            |  |                               | 35,234  |      |   | 27,414 
|Interest Expense              |  |                               | 108,574 |      |   | 110,873
|Depreciation and Amortization |  |                               | 45,102  |      |   | 45,102 
|Net Income                    |  |                               | 55,124  |      |   | 51,343 



ACRT expects to sell
its investment in this property in 2005.



|9. | INVESTMENT IN WILLOW GROVE
|-- | --------------------------



On October 3, 2003, ACRT, through Willow Grove ACRT, LLC (Willow Grove ACRT), a wholly owned subsidiary of ACRT, entered into an operating
agreement with Willow Grove, LLC. Willow Grove ACRT has a 25% member interest in Willow Grove, LLC. Additionally, Willow Grove ACRT will fund up to a maximum of $550,000 in the form of a loan (the Willow Grove Loan), to Willow Grove, LLC
at an interest rate of 12% per annum payable monthly. The Willow Grove Loan was to mature on April 1, 2006. The purpose of the Willow Grove Loan was to fund pre-construction costs in connection with the development of 12 acres of land located in
Willow Grove, Pennsylvania. The Willow Grove Loan was secured by a second mortgage on 42 acres of land held by an affiliate of the managing member of Willow Grove, LLC. Willow Grove ACRT was not required to make any capital contributions beyond the
maximum amount of the Willow Grove Loan.



At any time prior to
the commencement of construction but in no event later than 30 months from the date of execution of the operating agreement, the managing member had the option to purchase Willow Grove ACRTs ownership interest for an amount equal to (a) the
greater of $250,000 or the highest outstanding loan balance not to exceed $550,000 plus (b) payment of any outstanding loans, plus accrued interest, made by Willow Grove ACRT. Additionally, Willow Grove ACRT had the option to sell its 25% ownership
interest to the managing member at the earlier of 30 months from the date of the execution of the operating agreement or the completion of the project and receipt of a certificate of occupancy for an amount equal to (a) the greater of $250,000 or
the highest outstanding loan balance not to exceed $550,000 and (b) repayment of any loan, plus accrued interest, made by Willow Grove ACRT.



On October 5, 2004, the operating agreement with Willow Grove, LLC was amended to increase the maximum loan amount to $650,000. On October 21, 2004, the
operating agreement with Willow Grove, LLC was further amended to increase the maximum loan amount to $800,000. All other terms and conditions set forth in the original agreement remain unchanged.



On January 20, 2005, the board of directors agreed to amend the Willow Grove
agreement to accept repayment of the outstanding loan balance of $800,000 plus all outstanding and accrued interest within ninety days in lieu of waiting the remaining fifteen months outstanding, as stated in the original agreement. After the
repayment, ACRTs investment in Willow Grove was zero. Additionally, ACRT agreed to sell its member interest in Willow Grove to the other Willow Grove member and an affiliate of the Advisor for net proceeds and a gain of $400,000. This
transaction was completed on February 15, 2005.



|10. | INVESTMENT IN ARC INTERNATIONAL FUND II, LP
|--- | -------------------------------------------



On March 31, 2004, ACRT acquired an 11.2% limited partnership interest in ARC International Fund II, LP (ARC International) for $691,000 plus
the assumption of its prorata share of the debt and acquisition fees. ACRT does not have any additional funding obligations to ARC International. ARC International owns a property located in Woodcliff Lake, New Jersey which is leased to Great
Atlantic and Pacific Tea Co.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



ACRTs investment in ARC International includes the acquisition fee of
$62,655, paid to the Advisor per the Advisory Agreement,which is not reflected in the underlying equity of ARC International. This amount is being amortized over the estimated useful life of the underlying asset, which is 39 years.



ACRT will earn a 9.0% return on its investment in ARC
International in the form of distributions.



The following is
the summary balance sheet information of ARC International as of March 31, 2005 and December 31, 2004:



|                  |  |               |            |                  |           
|----------------- |  | ------------- | ---------- | ---------------- | ----------
|                  |  | March 31,2005 |            | December 31,2004
|Total Assets      |  | $             | 20,137,210 |                  | 20,129,842
|Total Liabilities |  |               | 12,312,768 |                  | 12,368,644



The following is the
summary income statement information of ARC International for the three months ended March 31, 2005:



|                              |  |                                   |        
|----------------------------- |  | --------------------------------- | -------
|                              |  | Three Months Ended March, 31 2005
|Rental Revenue                |  | $                                 | 448,929
|Operating Expenses            |  |                                   | 23,433 
|Interest Expense              |  |                                   | 213,298
|Depreciation and Amortization |  |                                   | 78,688 
|Net Income                    |  |                                   | 133,510



|11. | INTEGRAL NOTE RECEIVABLE
|--- | ------------------------



On December 31, 2003, Montgomeryville 309 Associates, LP (Montgomeryville 309), a wholly owned subsidiary of ACRT, in connection with its
purchase of the property located in Montgomeryville, Pennsylvania entered into a note agreement with Integral Development Associates (Integral), the seller of the property. Under the terms of the note agreement, Montgomeryville 309
loaned Integral $645,000 at an interest rate of 12% per annum, which is secured by certain other property owned by Integral. The loan was to mature on January 1, 2006 and interest was payable monthly starting July 1, 2004 (which shall include all
accrued but unpaid interest through June 30, 2004). For the three months ended March 31, 2004, $19,350 in interest has been paid under this note. On September 24, 2004, the principal on the note of $645,000, together with all outstanding interest,
was repaid by Integral.



|12. | RELATED PARTY TRANSACTIONS
|--- | --------------------------



The Advisor performs services for ACRT pursuant to the terms of the Advisory Agreement. Such services include serving as ACRTs investment and
financial advisor and providing consultation, analysis and supervision of ACRTs activities in acquiring, financing, managing and disposing of properties. The Advisor also performs and supervises the various administrative duties of ACRT such
as maintaining the books and records. The Chairman and President of ACRT is an affiliate of the Advisor.



For the three months ended March 31, 2005 and 2004, ACRT incurred the following fees and reimbursements payable to the Advisor:



Acquisition Fee - On March 4 and March 31, 2004, ACRT incurred
acquisition fees in the amounts of $212,000 and $62,655 in connection with the purchase of the Philadelphia, Pennsylvania property and the investment in ARC International, respectively.



No acquisition fees were incurred in 2005.



Financing Fee On March 4, and June 18, 2004, ACRT incurred financing fees of $26,500 and $27,500
in connection with the purchase of the Philadelphia, Pennsylvania property and the placement of a line of credit on the Montgomeryville property, respectively. No financing fees were incurred in 2005. The financing fee is generally equal to .5% of
the principal amount financed.



Asset Management Fees- Asset management fees of $174,619 and $168,368 for the three months ended March 31, 2005 and 2004, respectively, were incurred and are payable to the advisor of ACRT. The annual asset management fee is equal to 1% of the first $36,049,000
of ACRTs average invested assets (the base amount, as defined in the Advisory Agreement). One half of this fee, the subordinated asset management fee, is withheld by ACRT until the shareholders have been paid the Preferred Return



15



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



(as defined in the Advisory Agreement). For assets in excess of the first $36,049,000, the asset management fee is equal to
0.5% of the ACRTs average invested assets. Pursuant to the Advisory Agreement, beginning in 1999, average invested assets were subject to periodic valuation performed by a third party (as defined in the Advisory Agreement). It was agreed by
the Advisor, that the 2004 valuation, which would have resulted in an increase in asset management fees, would not be used to calculate the asset management fees. Accordingly, asset management fees were calculated using the 2003 valuation



Unpaid asset management fees included in due to related
parties on the consolidated balance sheets were $45,061 at March 31, 2005 and 2004.



Disposition Fee- There were no disposition fees incurred for the three months ended March 31, 2005 and 2004. The disposition fee is generally equal to 3% of the contract sales price.



Stock Ownership- As of March 31, 2005, principals of the
Advisor owned 44,760 shares of Class A Common Stock, which represents approximately 1.4% of the outstanding shares of Class A Common Stock of ACRT. The total amounts purchased, net of commissions, were $414,030.



Miscellaneous- ACRT agreed to reimburse the Advisor $1,250
per month for various legal functions connected with stock transfers and filings of ACRT. These reimbursements totaled $3,750 for the three months ended March 31, 2005 and 2004, and are included in professional expenses on the accompanying
consolidated statements of income.



|13. | LEASES
|--- | ------



ACRT is entitled to certain rentals relating to the properties it owns. In addition to the base rent, the tenants are generally required to pay all
operating costs related to the properties. Future minimum annual base rentals due under the non-cancelable operating leases in effect as of March 31, 2005 are as follows:



|           |  |   |           
|---------- |  | - | ----------
|2005       |  | $ | 4,499,531 
|2006       |  |   | 5,923,339 
|2007       |  |   | 6,140,974 
|2008       |  |   | 6,023,122 
|2009       |  |   | 5,939,597 
|Thereafter |  |   | 28,254,445
|           |  |   |           
|           |  | $ | 56,781,008
|           |  |   |           



ACRT seeks to reduce
its operating and leasing risks through diversification achieved by geographic distribution of its properties, tenant industry diversification, avoiding dependency on a single property and the creditworthiness of its tenants. For the three months
ended March 31, 2005 and 2004, the following tenants accounted for greater than 10% of rental revenues:



|                     |  |      |   |  |      |  
|-------------------- |  | ---- | - |  | ---- | -
|                     |  | 2005 |   |  | 2004 |  
|Sports Authority     |  | 13.7 | % |  | 14.6 | %
|Bed, Bath and Beyond |  | 11.2 |   |  | 12.4 |  
|Barnes and Noble     |  | 11.2 |   |  |     |  
|CaroMont Medical     |  | 10.0 |   |  | 11.1 |  



|14. | MORTGAGES PAYABLE
|--- | -----------------



ACRT had fixed rate mortgages totaling $18,601,570 and $18,717,178 at March 31, 2005 and at December 31, 2004, respectively. These mortgages are secured
by the respective properties with a total net book value of $21,708,109 and $21,824,655 at March 31, 2005 and at December 31, 2004, respectively.



The fixed rate mortgages have interest rates ranging from 6.86% to 8.65% and have maturities at various dates through July 1, 2017.



ACRT had variable rate mortgages totaling $13,584,672 and $13,660,705 at
March 31, 2005 and December 31, 2004, respectively. The mortgages carry variable interest rates of 206, 220 and 225 basis points over LIBOR (2.62 % at March 31, 2005). The variable rate mortgages are secured by three properties with a combined net
book value of $19,423,006 and $19,527,811 at March 31, 2005 and December 31, 2004, respectively.



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



At March 31, 2005, the payment of principal under the fixed and variable rate
mortgages for the next five years and thereafter is as follows:



|           |  |                        |           |                  |   |            |  |   |           
|---------- |  | ---------------------- | --------- | ---------------- | - | ---------- |  | - | ----------
|           |  | Scheduled Amortization |           | Balloon Payments |   | Total     
|2005       |  | $                      | 626,047   |                  |   |           |  | $ | 626,047   
|2006       |  |                        | 709,284   |                  | $ | 8,227,954  |  |   | 8,937,238 
|2007       |  |                        | 738,533   |                  |   | 3,820,638  |  |   | 4,559,171 
|2008       |  |                        | 649,639   |                  |   |           |  |   | 649,639   
|2009       |  |                        | 544,358   |                  |   |           |  |   | 544,358   
|Thereafter |  |                        | 1,965,092 |                  |   | 14,904,697 |  |   | 16,869,789
|           |  |                        |           |                  |   |            |  |   |           
|           |  | $                      | 5,232,953 |                  | $ | 26,953,289 |  | $ | 32,186,242
|           |  |                        |           |                  |   |            |  |   |           

|15. | DERIVATIVE INSTRUMENTS
|--- | ----------------------



On January 15, 2003, in connection with ACRTs variable rate mortgage totaling $4,414,500 (Note 14), ACRT entered into an interest rate cap agreement
with a third party. The cap is coterminous with the mortgage loan and its notional amount equals the outstanding principal balance on the mortgage loan. The cap agreement was entered into as part of ACRTs management of interest rate exposure
and effectively limits the amount of interest rate risk that may be taken on its variable rate mortgage. In accordance with SFAS No. 133, the interest rate cap is reflected at its fair value. The carrying amount of the interest rate cap, included in
prepaid expenses and other assets, net was reported as an asset of $13,511 and $10,889, as of March 31, 2005 and December 31, 2004, respectively, based on information supplied by the counter party to the cap contract, and the change in the fair
value of the interest rate cap of ($2,622) and $25,823 has been recorded as a (gain) loss on interest rate cap, net on the accompanying consolidated statements of income for the three months ended March 31, 2005 and 2004, respectively.



On March 4, 2004, in connection with ACRTs variable rate mortgage
totaling $5,300,000 (Note 14), ACRT entered into an interest rate cap agreement and an interest rate swap agreement with a third party. The cap is coterminous with the mortgage loan. The cap, which terminates on March 1, 2007, is for the notional
amount of $2,650,000. In accordance with SFAS No. 133, the interest rate cap is reflected at its fair value. The carrying amount of the interest rate cap is $16,699 at March 31, 2005 and is included in assets held for sale. The carrying amount of
the interest rate cap at December 31, 2004 was $28,258 and is included in prepaid expenses and other assets, net. These amounts are based on information supplied by the counter party to the cap contract and the change in the fair value of the
interest rate cap of $11,559 and $20,218 has been recorded as a loss on interest rate cap, net, and as a component of income from discontinued operations in the accompanying consolidated statements of income for the three months ended March 31, 2005
and 2004, respectively. The impact of the interest rate swap was not material to the consolidated financial statements.



|16. | LINES OF CREDIT
|--- | ---------------



On April 1, 2003, ACRT renewed and converted its two credit facility agreements into a single credit facility. The new credit facility agreement totals
$5,500,000 and replaces the previous credit facility agreements, which had total amounts available of $6,500,000. Interest is payable at LIBOR plus 2% on the new credit facility and ACRT is also required to pay a commitment fee equal to 0.5% per
annum on the unused portion of the commitment. The new facility is for a period of three years and amounts available are reduced by $125,000 per quarter from its inception.



On April 30, 2004, with the sale of the Memphis, Tennessee property leased to Federal Express Corp., the credit facility was
reduced by $1,652,387 which represented the collateral value of this property in the loan agreement. In addition, the quarterly reduction in the amount available under the loan was reduced from $125,000 to $84,150.



The total amount available under this facility at March 31, 2005, after
quarterly amortization and the sale of the Memphis property, is $3,011,015 and $1,372,613 has been drawn leaving a balance available for use of $1,638,402 at March 31, 2005.



On June 17, 2004, ACRT established an additional secured credit facility, which provides for additional borrowing of up to
$5,500,000 and decreases by $100,000 per annum. This credit facility bears interest at LIBOR plus 225 basis points and matures in five years. ACRT is required to pay an annual commitment fee equal to 0.5% on the unused portion of the facility. The
total amount available under this facility at March 31, 2005 was the full $5,500,000.



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ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|17. | CREDIT EVENTS
|--- | -------------



In 2003, Kids R Us announced it would cease operations. ACRT, through a lease with Toys R Us, leases 18,961 square feet to Kids R Us at its New York City
property. Kids R Us closed this Kids R Us location on May 1, 2004 and subsequently subleased this property to Office Depot. As of March 31, 2005, all rents and reimbursements due were paid.



|18. | CLASS B COMMON STOCK
|--- | --------------------



In 2004, ACRT approved dividends to the holders of Class B common stock for the year ending 2003. The dividends, totaling $118,077, were accrued but not
paid as of March 31, 2005. In 2005, ACRT approved dividends to the holders of Class B common stock for the year ending 2004. These dividends, totaling $162,769, were accrued but not paid as of March 31, 2005.



|19. | LEGAL MATTER
|--- | ------------



On March 25, 2005, Whitestone Triangle LP (Whitestone) a wholly owned subsidiary of ACRT brought suit against its joint venture partner in the
New York, NY property (Note 4) regarding the exercise of a right of first refusal to purchase ACRTs interest in the property. On January 5, 2005, Whitestone sent to the joint venture partner a notice of right of first refusal to purchase
Whitestones interest in the property at a price and other terms as set forth in the notice, subject to an attached form of contract that required both shareholder and board of director approval. Subsequently, ACRT discovered that the
calculation used to allocate capital proceeds in the contemplated sale, prepared by a third party firm, was incorrectly allocated and as a result management and the board of directors of ACRT did not approve the terms of the sale. In addition, ACRT
believes the joint venture partner, due to their unique insight into the value of the interest as the manager of the property, was aware that the capital proceeds were incorrectly allocated. The joint venture partner has refused to accept a revised
purchase price calculation, which necessitated ACRT bringing suit to halt the sale.



On April 1, 2005 its joint venture partner filed a separate lawsuit against Whitestone compelling a sale of ACRTs interest under the terms of the original right of first refusal. Management and ACRTs legal
counsel believes it is too early to determine the outcome of this lawsuit.



|20. | SUBSEQUENT EVENTS
|--- | -----------------



On April 27, 2005, ACRT paid the 2003 and 2004 annual cash dividends of $118,077 and $162,769, respectively, to its Class B shareholder of record as of
December 31, 2003 and 2004, respectively.



On April 30, 2005,
ACRT paid a quarterly cash dividend of $763,577 to Class A shareholders of record as of September 30, 2004.





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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITIONS AND RESULTS OF OPERATIONS



Forward Looking Statements



Certain information included or incorporated by reference in this Form 10-Q may contain
forward-looking statements within the meaning of Section 27A of the Securities Act, and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially
different from future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words may, will, should, expect, anticipate, estimate, believe, intend, project, or the negative of
these words or other similar words or terms. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in economic conditions generally and the real estate market specifically,
adverse developments with respect to our tenants, legislative/regulatory changes including changes to laws governing the taxation of REITs, availability of debt and equity capital, interest rates, competition, supply and demand for properties in our
current and proposed market areas and policies and guidelines applicable to REITs. These risks and uncertainties should be considered in evaluating any forward-looking statements contained in this Form 10-Q.



The following should be read in conjunction with the unaudited consolidated financial
statements of ACRT including the respective notes thereto, all of which are included in this Form 10-Q.



General



ACRT was formed as a
Maryland corporation in June 1993 and is an externally advised real estate investment trust (REIT) under the Internal Revenue Code of 1986. It has operated as a REIT since its inception. ACRT is managed by its advisor, ARC Capital
Advisors, L.P., an affiliate of Robert Ambrosi, ACRTs Chairman, President and a director. The advisor performs services for ACRT pursuant to the terms of an advisory agreement. Such services include serving as ACRTs investment and
financial advisor and providing consultation, analysis and supervision of ACRTs activities in acquiring, financing, managing and disposing of properties. The advisor also performs and supervises the various administrative duties of ACRT, such
as maintaining its books and records.



ACRT was formed to purchase
geographically diverse credit lease properties, which are general purpose retail, office and industrial properties. Each property is 100% leased to one or more creditworthy tenants under a long-term lease that generally requires tenants to pay most
or all of the operating costs of the property, including real estate taxes and insurance.



On December 20, 2004, ACRT entered into a Contract of Purchase and Sale (the Agreement), by and among ACRT, certain affiliates of ACRT and HPI/NL Investors LLC (the Purchaser). The Agreement
provides for the sale to the Purchaser of 14 of ACRTs 22 properties and a limited partnership interest in an entity that owns a property. The gross purchase price, including assumed debt, is approximately $77.8 million, a portion of which will
be paid to other parties who are either joint venture partners, minority interest holders or tenants in common of certain of the properties included in the transaction.



On February 2, 2005, ACRT entered into an amendment to the Agreement. The amendment provides for, among other items, (1) the removal of
certain assets from the transaction provided for in the Agreement, (2) a reduction in the purchase price to approximately $65.2 million, subject to further adjustment, (3) elimination of a potential participation in revenue at one of the properties,
and (4) the termination of the purchasers right to terminate the Agreement based upon its due diligence investigation. The properties and investments included in the amended Agreement are:



|                                     |  |                
|------------------------------------ |  | ---------------
|Montgomeryville, PA                  |  | Marietta, GA   
|Norcross, GA                         |  | Lilburn, GA    
|Overland Park, KS                    |  | San Antonio, TX
|Wichita, KS                          |  | Plymouth, IN   
|Sacramento, CA                       |  | Memphis, TN    
|Levittown, PA (partnership interest) |  |                



ACRT anticipates that the sale of
these properties and investments will close in 2005, subject to shareholder approval. Based on the current sales price in the amended Agreement, ACRT anticipates that all properties and investments will be sold an amount in excess of their carrying
amounts and, therefore, will result in a gain for financial reporting purposes.



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##### Table of Contents

In addition to the above, during 2005, ACRT, pursuant to various rights of first refusal and purchase agreements, entered
into various contracts to sell additional properties and investments not included in the above Agreement as amended. The purchasers of these properties include joint venture partners, minority interest holders, tenants in common and affiliates of
the Advisor. The properties included in these various contracts are:



|                                           |  |                                    
|------------------------------------------ |  | -----------------------------------
|Fort Washington, PA (partnership interest) |  | Philadelphia, PA                   
|Paramus, NJ (partnership interest)         |  | New York, NY (partnership interest)



On January 25, 2005, the tenant in the
Rochelle Park, NJ property, who had filed suit against ACRT, signed a stipulation of settlement agreeing to dismiss the suit against ACRT. As part of the settlement, the tenant entered into a contract to purchase ACRTs 51% tenant in common
interest and the remaining 49% tenant in common interest not owned by ACRT for $19,500,000. This contract was subsequently terminated.



ACRT anticipates that the sale of these properties and investments will close in 2005, subject to shareholder approval. Based on the current sales prices, ACRT
anticipates that all properties and investments, with the exception of the Philadelphia, PA property in which an impairment charge has been recorded, will be sold for amounts in excess of their carrying amounts and, therefore will result in a gain
for financial reporting purposes.



As of March 31, 2005, ACRT owned or had
interests in 21 real estate properties encompassing 1,071,266 rentable square feet.



Critical Accounting Issues



ACRTs accompanying
consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that effect the amounts of revenues, expenses, assets and
liabilities reported. The following are critical accounting policies which are important to the understanding of ACRTs financial condition and results of operations and which require some of managements most difficult, subjective and
complex judgments. The accounting for these matters involves the making of estimates based on current facts, circumstances and assumptions which could change in a manner that would materially affect managements future estimates with respect to
such matters. Accordingly, future reported financial conditions and results could differ materially from the current financial condition and results of operations reported based on managements current estimates.



Revenue Recognition.Rental revenue from tenant operating leases which provide for
scheduled rental increases are recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 13, on a straight-line basis over the term of the respective leases.



Gains on sales of real estate are recognized pursuant to the provisions of SFAS No. 66,
Accounting for Sales of Real Estate. The specific timing of the sale is measured against various criteria in SFAS No. 66 related to the terms of the transactions and any continuing involvement in the form of management or financial
assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met.



Rent Receivable.ACRT continuously monitors collections from its tenants and makes a
provision for estimated losses based upon historical experience and any specific tenant collection issues that ACRT has identified.



Purchase Accounting for the Acquisition of Real Estate.In accordance with SFAS No. 141, commencing with properties acquired after June 30, 2002, the fair value of
real estate acquired is allocated to the acquired tangible assets, consisting of land and building, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and
value of tenant relationships, based in each case on their fair values.



The
fair value of the tangible assets of an acquired property (which includes land and building) is determined by valuing the property as if it were vacant, and the as-if vacant value is then allocated to land and building based on
managements determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease up periods, considering current market conditions
and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenues during expected lease up periods based on current market demand.
Management also estimates costs to execute similar leases including leasing commissions.



In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the difference between the current
in-place lease rent and managements estimate of current market rent.



20



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##### Table of Contents

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is
measured by the excess of (1) the purchase price paid for a property over (2) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant
relationships based on managements evaluation of the specific characteristics of each tenants lease. The value of in-place leases and customer relationships are amortized to expense over the remaining non-cancelable periods of the
respective leases.



Industry Segments. ACRT currently operates in one
industry segmentinvestments in credit lease properties.



Impairment.ACRT continually assesses the recoverability of its properties by determining whether the costs can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is measured by comparing the carrying amounts to the
fair values of such properties. Based on ACRTs analysis, management does not believe that any of its properties are impaired. SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, updates and
clarifies the accounting and reporting for the impairment of assets held in use and to be disposed of. The Statement, among other things, requires ACRT to classify the operations and cash flow of properties to be disposed of as discontinued
operations.



For the three months ended March 31, 2005 and 2004 , ACRT incurred
an impairment charge of $275,000 and $52,521, respectively. The impairment charge in 2005 was on the Philadelphia, Pennsylvania property leased to Barnes and Noble. The impairment charge in 2004 was on the Memphis, Tennessee property leased to
Federal Express Corp.



Liquidity and Capital Resources



ACRTs main source of capital for growth has been the
private placement equity market, selective secured indebtedness, its secured credit facility and undistributed funds from operations. ACRT expects to continue to have access to and use these sources in the future; however, there are factors that may
have a material adverse effect on ACRTs access to capital sources. ACRTs ability to incur additional debt to fund acquisitions is dependent upon its existing leverage, the value of the assets ACRT is attempting to leverage and general
economic conditions, which may be outside managements control.



During
the three months ended March 31, 2004, ACRT purchased two retail properties, including an equity method investment in one property, totaling 92,743 rentable square feet for $7,758,000.



ACRTs $5.5 million variable rate secured line-of-credit facility, which is scheduled to expire in April 2006, is available to finance
acquisitions on a temporary basis until selective secured indebtedness can be obtained and to meet any short-term capital requirements. Interest is payable at the London Interbank Offered Rate (LIBOR) plus 2% on the facility and ACRT is
also required to pay a commitment fee equal to 0.5% per year on the unused portion of the commitment. On April 30, 2004, with the sale of the Memphis, Tennesse property leased to Federal Express Corp., the credit facility was reduced by $1,652,387
which represented the collateral value of the Memphis property in the loan agreement. In addition, the quarterly reduction in the amount available under the loan was reduced from $125,000 to $84,150. The total amount available under this facility at
March 31, 2005, after quarterly amortization and the sale of the Memphis property, is $3,011,015 and $1,372,613 has been drawn leaving a balance available for use of $1,638,402 at March 31, 2005.



On June 17, 2004, ACRT established an additional secured credit facility, which provides for
additional borrowing of up to $5,500,000 and decreases by $100,000 per annum. This credit facility bears interest at LIBOR plus 2.25% and matures in five years. ACRT is required to pay an annual commitment fee equal to 0.5% on the unused portion of
the facility. The total amount available under this facility at March 31, 2005 was the full $5,500,000.



Since 1993, ACRT has raised, through the issuance of shares of Class A common stock, aggregate capital of approximately $30.6 million, and through the issuance of shares of Class B common stock, aggregate capital of
approximately $1.56 million. The capital raised was used primarily to acquire properties and to retire indebtedness.



During 2005, ACRT has not sold any additional Class A or Class B common shares.



See the comments under the General section regarding the sale of certain assets.



Dividends. In connection with its intention to continue to qualify as a REIT for federal income tax purposes, ACRT expects to
continue paying regular dividends to its shareholders. These dividends are expected to be paid from operating cash flows and/or from other sources.



Dividends paid to common shareholders for the three months ended March 31, 2005 and 2004 were $763,577 and $684,755 respectively. The increase is due to an increase in
the outstanding shares from sales of Class A shares in the fourth quarter of 2003 which were prorated in calculating the first quarter 2004 dividend payment. In 2004, ACRT approved dividends to the Class B shareholders for the year ending 2003
totaling $118,077. In 2005, ACRT approved dividends to the Class B shareholders for the year ending 2004 totaling $162,769. The dividends were accrued but not paid as of March 31, 2005.



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ACRT believes that cash flows from operations will continue to provide adequate capital to fund its operating and
administrative expenses, regular debt service obligations and all dividend payments in compliance with REIT requirements in both the short and long-term. In addition, ACRT anticipates that cash on hand and borrowings under its secured credit
facilities will provide the necessary capital for its operations. Cash flows from operations as reported in the consolidated statements of cash flows were $548 thousand and $452 thousand for 2005 and 2004, respectively. The increase in cash flows
from operations is primarily due a full quarter of activity in 2005 for properties and investments purchased in the first quarter of 2004.



Net cash provided by investing activities was $1.501 million in 2005 and net cash used in investing activities was $8.190 million in 2004. Net cash provided by investing
activities is related primarily to sale of properties or investments and repayments of notes receivable while net cash used in investing activities is primarily related to purchase of investments in real estate properties and investments in joint
ventures. Therefore, the fluctuation in investing activities relates primarily to the timing of investments and dispositions.



Net cash used in financing activities was $1.893 million in 2005 and net cash provided by financing activities was $7.404 million in 2004. Net cash used in 2005 was for
repayments under the secured credit facility, dividends paid and debt service payments. Net cash provided by financing activities in 2004 was primarily attributable to proceeds from mortgage financings, and advances under the secured credit
facility.



Debt Service Requirements



ACRTs principal liquidity needs are payments of interest and principal on outstanding
indebtedness. As of March 31, 2005, a total of eight of ACRTs thirteen consolidated properties were subject to outstanding mortgages which had an aggregate principal amount outstanding of $32.186 million ($5.243 million is attributable to the
Philadelphia, PA property which is included in liabilities related to assets held for sale on the Consolidated Balance Sheets as of March 31, 2005), including $13.6 million in variable interest rate mortgages. As of March 31, 2005, the weighted
averaged interest rate on ACRTs outstanding mortgages was 6.69 %. The scheduled principal payments for the next five years are as follows:



|     |  |   |        
|---- |  | - | -------
|2005 |  | $ | 626,047
|2006 |  |   | 709,284
|2007 |  |   | 738,533
|2008 |  |   | 649,639
|2009 |  |   | 544,358



Balloon payment
amounts, due in the next five years, excluding the secured credit facility, are as follows:



|     |  |   |          
|---- |  | - | ---------
|2005 |  | $ |         
|2006 |  |   | 8,227,954
|2007 |  |   | 3,820,638
|2008 |  |   |         
|2009 |  |   |         



The interest rates on ACRTs
outstanding indebtedness range from 4.67% (variable rate at March 31, 2005) to 8.65%. The ability of ACRT to make its balloon payments will depend upon its ability to refinance the mortgages related thereto, sell the related property, have amounts
available under its secured credit facility or obtain access to other capital. The ability of ACRT to accomplish this will be affected by the availability and cost of mortgage debt at that time, ACRTs equity in the mortgaged properties, the
financial condition of ACRT, the operating history of the mortgaged properties, the then current tax laws and general national, regional and local economic conditions.



ACRT expects to continue to use property specific, non-recourse mortgages as it believes that by properly matching a debt obligation,
including the balloon maturity risk, with a lease expiration, ACRTs cash-on-cash returns increase and the exposure to residual valuation risk is reduced.



ACRT has also purchased interest rate caps in connection with its variable rate mortgage on the Sacramento, California property and the Philadelphia, Pennsylvania
property. The Sacramento interest rate cap is coterminous with the mortgage and its notional amount equals the outstanding balance on the mortgage. The Philadelphia interest rate cap is coterminous with the mortgage and its notional amount equals
50% of the outstanding principal balance on the mortgage. In addition, ACRT has an interest swap which is coterminous with the mortgage on the Philadelphia property and its notional amount equals 50% of the outstanding principal balance on the
mortgage.



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Lease Obligations



Since ACRTs tenants bear all or substantially all of the cost of property operations and maintenance and repairs, ACRT does not
anticipate significant need for cash for these costs. For two of the thirteen consolidated properties, ACRT has a certain level of property operating expense responsibility. To the extent there is a vacancy in a property, ACRT would be obligated to
pay for all operating expenses, including real estate taxes and insurance.



Results of Operations for the Three Months March 31, 2005 and 2004



|                                                                       |  |                        |       |   |      |   |                                 |  |   |      |  
|---------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ------------------------------- |  | - | ---- | -
|Selected Income Statement Data                                         |  | 2005                   |       |   | 2004 |   | Favorable(Unfavorable)2005-2004 | 
|                                                                       |  | (Dollars in thousands) |      
|Rental revenues                                                        |  | $                      | 1,576 |   |      | $ | 1,313                           |  | $ | 263  |  
|Interest income                                                        |  |                        | 31    |   |      |   | 41                              |  |   | (10  | )
|Equity in income of unconsolidated subsidiaries and undivided interest |  |                        | 305   |   |      |   | 198                             |  |   | 107  |  
|Gain on sale of investment in unconsolidated subsidiaries              |  |                        | 400   |   |      |   |                                |  |   | 400  |  
|Interest expense                                                       |  |                        | 500   |   |      |   | 502                             |  |   | 2    |  
|Depreciation and amortization expense                                  |  |                        | 269   |   |      |   | 262                             |  |   | (7   | )
|Management fees-affiliate                                              |  |                        | 175   |   |      |   | 169                             |  |   | (6   | )
|Real estate taxes                                                      |  |                        | 176   |   |      |   |                                |  |   | (176 | )
|Property operating expenses                                            |  |                        | 86    |   |      |   | 97                              |  |   | 11   |  
|General and administrative taxes                                       |  |                        | 50    |   |      |   | 59                              |  |   | 9    |  
|Stock based compensation                                               |  |                        | 112   |   |      |   |                                |  |   | (112 | )
|Professional expenses                                                  |  |                        | 112   |   |      |   | 115                             |  |   | 3    |  
|Other expenses                                                         |  |                        | 16    |   |      |   | 36                              |  |   | 20   |  
|Minority interest in earnings of subsidiaries                          |  |                        | 52    |   |      |   | 56                              |  |   | 4    |  
|(Loss) income from discontinued operations                             |  |                        | (169  | ) |      |   | 46                              |  |   | (215 | )
|Net income                                                             |  |                        | 595   |   |      |   | 302                             |  |   | 293  |  



Rental revenues increased by $263,000
which is primarily attributable to $168,000 higher real estate tax reimbursements due to the timing and recording of revenues. The increase in revenues is offset by a similar increase in real estate tax expense, $81,000 in higher rents from the
Montgomeryville property due to timing of rent commencements in 2004 and $10,000 higher rents on the Sacramento, CA property due to a CPI rent increase.



Interest income decreased by $10,000, due mainly to lower interest income from the Integral loan, which was repaid in September 2004.



Equity in income of unconsolidated subsidiaries and undivided interests increased by $107,000
of which $80,000 is attributable to higher income from the Rochelle Park property due primarily to gains on the value of the interest rate cap and swap, $14,000 from the investment in the Woodcliffe Lake, NJ property purchased on March 31, 2004 and
slightly higher income from the New York, NY property due to lower interest expense due to mortgage amortization and higher interest income.



Gain on sale of investment in unconsolidated subsidiaries is attributable to the sale of the Willow Grove member interest.



Deprecation and amortization expense increased by $7,000 due to the amortization of the
finance fees associated with the Montgomeryville line of credit, which was established in June 2004.



Asset management fees increased by $6,000 due to the acquisition of the Philadelphia, PA property and the investment in the Woodcliffe Lake property which occurred in March 2004.



Real estate taxes increased by $176,000 due to the timing and recording of expenses (see
rental revenues).



Property operating expenses decreased by $11,000 primarily
due to higher electricity reimbursements from the tenant in the Philadelphia, PA property due to timing. General expense decreased by $9,000 due mainly to lower travel expense.



Stock based compensation increased $112,000 due to modifications made in May 2004 to the 1997 Stock Option Plan.





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##### Table of Contents

Other expenses decreased by $20,000 due primarily to a gain on an interest rate cap of $3,000 in 2005 versus a loss of
$26,000 in 2004, offset by $5,000 higher loss on minority interest receivable write-offs and $3,000 higher state tax expense.



Minority interest in earnings of subsidiaries decreased by $4,000 due to slightly lower income from the joint venture properties.



Income from discontinued operations decreased by $215,000 due primarily to the Philadelphia,
PA property which was in operation for the full three-month period in 2005 versus less than one month in 2004 offset by a $275,000 impairment charge on this property.



Environmental Matters



Based upon managements ongoing review of its properties, management is not aware of any environmental conditions with respect to any of ACRTs properties,
which would be reasonably likely to have a material adverse effect on ACRT. There can be no assurance, however, that the discovery of environmental conditions which were previously unknown, changes in law, the conduct of tenants or activities
relating to properties in the vicinity of ACRTs properties, will not expose ACRT to material liability in the future. Changes in law increasing the potential liability for environmental conditions existing on properties or increasing the
restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of ACRTs tenants, which would adversely affect ACRTs consolidated financial condition
and results of operations.



Funds from Operations



ACRT believes that Funds from Operations (FFO) enhances an investors
understanding of ACRTs financial condition, results of operations and cash flows. ACRT believes that FFO is an appropriate but limited measure of the performance of an equity REIT. FFO is defined in the April 2002 White Paper
issued by the National Association of Real Estate Investments Trusts, Inc. (NAREIT) as net income (or loss) computed in accordance with generally accepted accounting principles (GAAP), excluding gains (or losses) from
the sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. FFO should not be considered an alternative to net income as an indicator of operating performance or to cash
flows from operating activities as determined in accordance with GAAP, or as a measure of liquidity to other consolidated income or cash flow statement data as determined in accordance with GAAP.



The following table reflects the calculation of ACRTs FFO and cash flow activities for
the three months ended March 31, 2005 and 2004.



|                                                                                            |  |                |        |   |      |   |        |  
|------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                                                            |  | 2005           |        |   | 2004 |  
|                                                                                            |  | (In thousands) |       
|Income from continuing operations before gains on sale of investments and minority interest |  | $              | 415    |   |      | $ | 311    |  
|Depreciation and amortization of real estate                                                |  |                | 235    |   |      |   | 234    |  
|Amortization of leasing commissions                                                         |  |                | 4      |   |      |   | 4      |  
|Joint venture adjustment-depreciation and amortization of real estate                       |  |                | 145    |   |      |   | 145    |  
|Joint venture adjustment-amortization of leasing commissions                                |  |                | 6      |   |      |   | 6      |  
|                                                                                            |  |                |        |   |      |   |        |  
|Funds from Operations                                                                       |  |                | 805    |   |      |   | 700    |  
|Cash flow from operating activities                                                         |  |                | 548    |   |      |   | 452    |  
|Cash flow used in investing activities                                                      |  |                | 1,501  |   |      |   | (8,190 | )
|Cash flow provided by financing activities                                                  |  |                | (1,893 | ) |      |   | 7,404  |  



Off-Balance Sheet Arrangements



Unconsolidated Real Estate Joint Ventures and Undivided Interests



ACRT has investments in various real estate joint ventures with varying
structures. These investments include ACRTs non-controlling interests in Triangle Plaza II, LLC, Fort Washington Fitness, L.P., Levittown ARC, LP, Willow Grove ACRT, LLC and ARC International Fund II, LP and its undivided interests in the
Rochelle Park property and the Paramus property. See Item 1 notes 4 to 10 of Notes to Consolidated Financial Statements for information on these investments.



The properties owned by the joint ventures and the undivided interests are financed with individual non-recourse mortgage loans. Non-recourse mortgage debt is generally
defined as debt whereby the lenders sole recourse with respect to borrower defaults is limited to the value of the property collateralized by the mortgage. The lender generally does not have recourse against any other assets owned by the
borrower or any of the members of the borrower, except for certain specified expectations listed in the particular loan documents. These exceptions generally relate to limited circumstances including breaches of material representations. ACRT
invests in joint ventures with third parties to increase portfolio diversification, reduce the amount of equity invested in any one property and to increase returns on equity due to the realization of advisory fees. See the footnotes to the
consolidated financial statements referenced above for summary balance sheet and income statement data.



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ITEM 3. QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK



Quantitative and Qualitative Disclosures about Market Risk



ACRTs exposure to market risk relates to its variable rate debt. At March 31, 2005
ACRT had three variable rate mortgages outstanding totaling $13.6 million. These mortgages bear interest at LIBOR plus 206 basis points (4.67 % per year on $4.158 million), LIBOR plus 225 basis points (4.92 % per year on $4.183 million) and LIBOR
plus 220 basis points (4.82 % per year on $5.243 million). Had the LIBOR rate been 100 basis points higher during the three months ended March 31, 2005, ACRTs net income would have been reduced by approximately $34,000. ACRT also entered into
an interest rate cap agreement on a notional amount equal to the $4.158 million mortgage balance at March 31, 2005, which effectively caps the LIBOR rate at 7.45% per year and 50% of the notional amount of the $5.243 million mortgage balance at
March 31, 2005, which effectively caps the LIBOR rate of 9.2% per year.



ITEM 4. CONTROLS AND PROCEDURES



Evaluation
of Disclosure Controls and Procedures



| | (a) | Disclosure Controls and Procedures. ACRTs management, with the participation of ACRTs Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness
of ACRTs disclosure controls and procedures (as such term is defined in Rules 13a-15 (e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation,
ACRTs Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, ACRTs disclosure controls and procedures are effective.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Internal Control Over Financial Reporting



| | (b) | Internal Control Over Reporting. There have not been any changes in ACRTs internal control over financial reporting during the first quarter to which this report relates that
have materially affected, or are reasonably likely to materially affect, ACRTs internal control over reporting.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

PART II - OTHER INFORMATION



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 1. |  | On March 25, 2005, Whitestone Triangle LP (Whitestone) a wholly owned subsidiary of ACRT brought suit against the joint venture partner in the New York, NY property (see Note 4 of
Notes to Consolidated Financial Statements) regarding the exercise of a right of first refusal to purchase ACRTs interest in the property. On January 5, 2005, Whitestone sent to the joint venture partner a notice of right of first refusal to
purchase Whitestoness interest in the property at a price and other terms as set forth in the notice, subject to an attached form of contract that required both shareholder and board of director approval. Subsequently, ACRT discovered that the
calculation used to allocate capital proceeds in the contemplated sale, prepared by a third party firm, was incorrectly allocated and as a result management and the board of directors of ACRT did not approve the terms of the sale. In addition, ACRT
believes the joint venture partner, due to their unique insight into the value of the interest as the manager of the property, was aware that the capital proceeds were incorrectly allocated. The joint venture partner has refused to accept a revised
purchase price calculation, which necessitated ACRT bringing suit to halt the sale.
|        | 
|        |  | On April 1, 2005 the joint venture partner filed a separate lawsuit against Whitestone compelling a sale of ACRTs interest under the terms of the original right of first refusal.
Management and ACRTs legal counsel believes it is too early to determine the outcome of this lawsuit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 
|ITEM 2. |  | Changes in Securities and Use of Proceeds- not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 
|ITEM 3. |  | Defaults Upon Senior Securities-not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 
|ITEM 4. |  | Submission of Matters to a Vote of Security Holders- not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 
|ITEM 5. |  | Other information- not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|ITEM 6. |  | Exhibits and Reports                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 
|        |  | 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|        |  | 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|        |  | 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 
|        |  | 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 11th day of May 2005.



ARC CORPORATE REALTY TRUST, INC.By:

/s/ Robert J. AmbrosiName:

Robert J. AmbrosiTitle:

Chairman and PresidentBy:

/s/ Bruce NelsonName:

Bruce NelsonTitle:

Chief Financial Officer






27