##### Table of Contents

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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 September 30, 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



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



As of November 10, 2005, there were
3,181,540 Class A 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                                                                                                 |  |   
|           |  |                                                                                                                     
|           |  | Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004                               |  | 2 
|           |  |                                                                                                                     
|           |  | Consolidated Statements of Income for the three months and nine months ended September 30, 2005 and 2004 (unaudited) |  | 3 
|           |  |                                                                                                                     
|           |  | Consolidated Statements of Shareholders Equity for the nine months ended September 30, 2005 (unaudited)             |  | 4 
|           |  |                                                                                                                     
|           |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (unaudited)              |  | 5 
|           |  |                                                                                                                     
|           |  | Notes to Consolidated Financial Statements (unaudited)                                                               |  | 6 
|           |  |                                                                                                                     
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                |  | 20
|           |  |                                                                                                                     
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                           |  | 28
|           |  |                                                                                                                     
|Item 4.    |  | Controls and Procedures                                                                                              |  | 28
|           |  |                                                                                                                     
|PART II:   |  | OTHER INFORMATION                                                                                                    |  |   
|           |  |                                                                                                                     
|Item 1.    |  | Legal Proceedings                                                                                                    |  | 29
|           |  |                                                                                                                     
|Item 2.    |  | Changes in Securities, Use of Proceeds and Issuers Purchases of Equity Securities                                    |  | 29
|           |  |                                                                                                                     
|Item 3.    |  | Defaults Upon Senior Securities                                                                                      |  | 29
|           |  |                                                                                                                     
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                  |  | 29
|           |  |                                                                                                                     
|Item 5.    |  | Other Information                                                                                                    |  | 29
|           |  |                                                                                                                     
|Item 6.    |  | Exhibits and Reports                                                                                                 |  | 29
|           | 
|SIGNATURES |  | 30                                                                                                                  



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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 September 30, 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                                                                                              |  |      | 6,922,129  |   |      |   | 6,401,456  |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|                                                                                                                            |  |      | 42,143,638 |   |      |   | 53,182,786 |  
|                                                                                                                            |  |     
|Investment in unconsolidated subsidiaries and undivided interests                                                           |  |      | 7,575,970  |   |      |   | 7,797,437  |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total property and investments                                                                                              |  |      | 49,719,608 |   |      |   | 60,980,223 |  
|                                                                                                                            |  |     
|Cash and cash equivalents, including restricted cash of $507,673 and $424,035 for 2005 and 2004, respectively               |  |      | 1,341,859  |   |      |   | 860,299    |  
|                                                                                                                            |  |     
|Deferred rent receivable                                                                                                    |  |      | 1,227,254  |   |      |   | 1,130,154  |  
|                                                                                                                            |  |     
|Rent receivable                                                                                                             |  |      | 314,055    |   |      |   | 236,867    |  
|                                                                                                                            |  |     
|Notes receivable-tenants                                                                                                    |  |      | 335,055    |   |      |   | 369,608    |  
|                                                                                                                            |  |     
|Notes receivable                                                                                                            |  |      |           |   |      |   | 800,000    |  
|                                                                                                                            |  |     
|Prepaid expenses and other assets, net                                                                                      |  |      | 293,206    |   |      |   | 322,159    |  
|                                                                                                                            |  |     
|Deferred financing and other fees, net of accumulated amortization of $700,839 and $624,597 for 2005 and 2004,
respectively |  |      | 300,478    |   |      |   | 522,540    |  
|                                                                                                                            |  |     
|Deferred leasing costs, net of accumulated amortization of $126,977 and $116,353 for 2005 and 2004, respectively            |  |      | 85,490     |   |      |   | 96,114     |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total assets                                                                                                                |  | $    | 53,617,005 |   |      | $ | 65,317,964 |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Liabilities and Shareholders Equity                                                                                        |  |      |            |   |      |   |            |  
|                                                                                                                            |  |     
|Liabilities:                                                                                                                |  |      |            |   |      |   |            |  
|Mortgage notes payable                                                                                                      |  | $    | 26,579,189 |   |      | $ | 32,377,883 |  
|Lines of credit                                                                                                             |  |      |           |   |      |   | 2,247,613  |  
|Due to related parties                                                                                                      |  |      | 45,061     |   |      |   | 45,061     |  
|Acquired unfavorable leases, net                                                                                            |  |      |           |   |      |   | 2,815,460  |  
|Unearned rental revenue                                                                                                     |  |      | 77,392     |   |      |   | 31,250     |  
|Accounts payable and accrued expenses                                                                                       |  |      | 721,256    |   |      |   | 851,859    |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total liabilities                                                                                                           |  |      | 27,422,898 |   |      |   | 38,369,126 |  
|                                                                                                                            |  |     
|Minority interest                                                                                                           |  |      | 33,654     |   |      |   | 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                                                                                                 |  |      | 635,740    |   |      |   | 299,172    |  
|Accumulated distributions in excess of net income                                                                           |  |      | (6,585,064 | ) |      |   | (5,491,083 | )
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total shareholders equity                                                                                                  |  |      | 26,160,453 |   |      |   | 26,917,866 |  
|                                                                                                                            |  |      |            |   |      |   |            |  
|Total liabilities and shareholders equity                                                                                  |  | $    | 53,617,005 |   |      | $ | 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 September 30 |           | Nine Months Ended September 30
|                                                                        |  | 2005                            |           |                                | 2004 |   | 2005      |  |   | 2004     
|Revenues:                                                               |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Rental revenues                                                         |  | $                               | 1,392,578 |                                |      | $ | 1,339,049 |  | $ | 4,343,515 |   |  | $ | 3,980,048
|Real estate tax reimbursements                                          |  |                                 | 173,889   |                                |      |   | 414,124   |  |   | 527,377   |   |  |   | 498,362  
|Interest income                                                         |  |                                 | 11,040    |                                |      |   | 39,520    |  |   | 53,278    |   |  |   | 116,423  
|Gain on sale of investment in unconsolidated subsidiary                 |  |                                 |          |                                |      |   |          |  |   | 400,000   |   |  |   |         
|Equity in income of unconsolidated subsidiaries and undivided interests |  |                                 | 305,876   |                                |      |   | 228,635   |  |   | 854,383   |   |  |   | 875,863  
|                                                                        |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Total revenues                                                          |  |                                 | 1,883,383 |                                |      |   | 2,021,328 |  |   | 6,178,553 |   |  |   | 5,470,696
|                                                                        |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Expenses:                                                               |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Interest expense                                                        |  |                                 | 505,957   |                                |      |   | 488,793   |  |   | 1,513,238 |   |  |   | 1,458,735
|Depreciation and amortization                                           |  |                                 | 268,937   |                                |      |   | 268,873   |  |   | 806,228   |   |  |   | 793,634  
|Management fees-affiliate                                               |  |                                 | 169,679   |                                |      |   | 174,619   |  |   | 518,917   |   |  |   | 518,513  
|Real estate taxes                                                       |  |                                 | 173,278   |                                |      |   | 436,703   |  |   | 527,377   |   |  |   | 492,940  
|Property operating expenses                                             |  |                                 | 82,648    |                                |      |   | 100,908   |  |   | 228,466   |   |  |   | 288,519  
|General and administrative expenses                                     |  |                                 | 20,162    |                                |      |   | 35,089    |  |   | 89,378    |   |  |   | 149,741  
|Stock based compensation                                                |  |                                 | 112,189   |                                |      |   | 112,167   |  |   | 336,568   |   |  |   | 186,983  
|Professional expenses                                                   |  |                                 | 173,678   |                                |      |   | 151,486   |  |   | 442,960   |   |  |   | 300,990  
|(Gain) loss on interest rate cap, net                                   |  |                                 | (3,016    | )                              |      |   | 17,777    |  |   | 3,135     |   |  |   | 36,097   
|Other expenses                                                          |  |                                 | 11,647    |                                |      |   | 32,772    |  |   | 22,134    |   |  |   | 49,942   
|State and local taxes                                                   |  |                                 | 6,573     |                                |      |   | 5,878     |  |   | 17,096    |   |  |   | 16,807   
|                                                                        |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Total expenses                                                          |  |                                 | 1,521,732 |                                |      |   | 1,825,065 |  |   | 4,505,497 |   |  |   | 4,292,901
|                                                                        |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Income from continuing operations before minority interests             |  |                                 | 361,651   |                                |      |   | 196,263   |  |   | 1,673,056 |   |  |   | 1,177,795
|                                                                        |  |                                 |           |                               
|Minority interests in earnings from subsidiaries                        |  |                                 | 52,901    |                                |      |   | 29,792    |  |   | 168,167   |   |  |   | 137,380  
|                                                                        |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Income from continuing operations                                       |  |                                 | 308,750   |                                |      |   | 166,471   |  |   | 1,504,889 |   |  |   | 1,040,415
|                                                                        |  |                                 |           |                               
|(Loss) income from discontinued operations                              |  |                                 | (59,959   | )                              |      |   | 59,621    |  |   | (145,370  | ) |  |   | 207,832  
|                                                                        |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Net income allocable to Class A and Class B common shareholders         |  | $                               | 248,791   |                                |      | $ | 226,092   |  | $ | 1,359,519 |   |  | $ | 1,248,247
|                                                                        |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Net income per share from continuing operations - basic                 |  | $                               | 0.09      |                                |      | $ | 0.05      |  | $ | 0.45      |   |  | $ | 0.31     
|Net (loss) income per share from discontinued operations - basic        |  |                                 | (0.02     | )                              |      |   | 0.02      |  |   | (0.04     | ) |  |   | 0.06     
|                                                                        |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Net income per share - basic                                            |  |                                 | 0.07      |                                |      |   | 0.07      |  |   | 0.41      |   |  |   | 0.37     
|                                                                        |  |                                 |           |                               
|Net income per share from continuing operations - diluted               |  |                                 | 0.08      |                                |      |   | 0.04      |  |   | 0.39      |   |  |   | 0.27     
|Net (loss) income per share from discontinued operations - diluted      |  |                                 | (0.02     | )                              |      |   | 0.02      |  |   | (0.04     | ) |  |   | 0.05     
|                                                                        |  |                                 |           |                                |      |   |           |  |   |           |   |  |   |          
|Net income per share - diluted                                          |  |                                 | 0.06      |                                |      |   | 0.06      |  |   | 0.35      |   |  |   | 0.32     
|                                                                        |  |                                 |           |                               
|Weighted average shares outstanding-basic                               |  |                                 | 3,349,000 |                                |      |   | 3,349,000 |  |   | 3,349,000 |   |  |   | 3,349,000
|Weighted average shares outstanding-diluted                             |  |                                 | 3,851,000 |                                |      |   | 3,851,000 |  |   | 3,851,000 |   |  |   | 3,851,000



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 Shareholders Equity

For the Nine Months Ended September 30, 2005 (unaudited)



|                                         |  |                       |       |                       |   |                            |  |                             |            |                                                   |   |         |                            |   |            |   |  |   |            |  
|---------------------------------------- |  | --------------------- | ----- | --------------------- | - | -------------------------- |  | --------------------------- | ---------- | ------------------------------------------------- | - | ------- | -------------------------- | - | ---------- | - |  | - | ---------- | -
|                                         |  | Class A Common Shares |       | Class B Common Shares |   | Additional Paid-in Capital |  | Deferred Compensation Plans |            | Accumulated Distributions in Excess of Net Income |   |         | Total Shareholders Equity |  
|Balance, December 31, 2004               |  | $                     | 3,182 |                       | $ | 166                        |  | $                           | 32,106,429 |                                                   | $ | 299,172 |                            | $ | (5,491,083 | ) |  | $ | 26,917,866 |  
|                                         |  |                       |       |                       |   |                           
|Amortization of stock based compensation |  |                       |      |                       |   |                           |  |                             |           |                                                   |   | 336,568 |                            |   |           |   |  |   | 336,568    |  
|                                         |  |                       |       |                       |   |                           
|Net income                               |  |                       |      |                       |   |                           |  |                             |           |                                                   |   |        |                            |   | 1,359,519  |   |  |   | 1,359,519  |  
|                                         |  |                       |       |                       |   |                           
|Dividends                                |  |                       |      |                       |   |                           |  |                             |           |                                                   |   |        |                            |   | (2,453,500 | ) |  |   | (2,453,500 | )
|                                         |  |                       |       |                       |   |                            |  |                             |            |                                                   |   |         |                            |   |            |   |  |   |            |  
|Balance, September 30, 2005              |  | $                     | 3,182 |                       | $ | 166                        |  | $                           | 32,106,429 |                                                   | $ | 635,740 |                            | $ | (6,585,064 | ) |  | $ | 26,160,453 |  
|                                         |  |                       |       |                       |   |                            |  |                             |            |                                                   |   |         |                            |   |            |   |  |   |            |  



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 Nine Months Ended September 30, 2005 and 2004

Unaudited



|                                                                                  |  |      |             |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ---------- | -
|                                                                                  |  | 2005 |             |   | 2004 |  
|Cash Flows from Operating Activities:                                             |  |      |             |   |      |   |            |  
|Net income                                                                        |  |      | 1,359,519   |   |      |   | 1,248,247  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |             |   |      |   |            |  
|Depreciation and amortization                                                     |  |      | 832,365     |   |      |   | 921,471    |  
|Write off of financing costs                                                      |  |      | 141,376     |   |      |   |           |  
|Amortization of stock based compensation                                          |  |      | 336,568     |   |      |   | 186,983    |  
|Amortization of acquired unfavorable lease                                        |  |      | (139,772    | ) |      |   | (124,071   | )
|Minority interest in earnings of subsidiaries                                     |  |      | 168,167     |   |      |   | 137,380    |  
|Impairment charge on disposed property                                            |  |      | 287,259     |   |      |   | 52,521     |  
|Gain on sale of investment in unconsolidated subsidiary                           |  |      | (400,000    | ) |      |   |           |  
|Write off of TMD minority interest                                                |  |      | 22,134      |   |      |   | 49,942     |  
|Loss on interest rate cap, net                                                    |  |      | 15,396      |   |      |   | 52,771     |  
|Equity in income of unconsolidated subsidiaries and undivided interests           |  |      | (854,383    | ) |      |   | (875,863   | )
|(Increase) decrease in assets:                                                    |  |      |             |   |      |   |            |  
|Rent receivable                                                                   |  |      | (77,188     | ) |      |   | (47,629    | )
|Deferred rent receivable                                                          |  |      | (97,100     | ) |      |   | (72,584    | )
|Prepaid and other assets, net                                                     |  |      | (14,017     | ) |      |   | (39,407    | )
|Increase (decrease) in liabilities:                                               |  |      |             |   |      |   |            |  
|Due to related parties, net                                                       |  |      |            |   |      |   | 86,088     |  
|Accounts payable and accrued expenses                                             |  |      | (130,603    | ) |      |   | (61,846    | )
|Unearned rent                                                                     |  |      | 46,142      |   |      |   | 86,652     |  
|                                                                                  |  |      |             |   |      |   |            |  
|Net cash provided by operating activities                                         |  |      | 1,495,863   |   |      |   | 1,600,655  |  
|                                                                                  |  |      |             |   |      |   |            |  
|Cash Flows from Investing Activities:                                             |  |      |             |   |      |   |            |  
|Payment for tenant improvements                                                   |  |      |            |   |      |   | (146,971   | )
|Due to related parties, net                                                       |  |      |            |   |      |   | (209,674   | )
|Proceeds from sale of investment in unconsolidated subsidiary                     |  |      | 400,000     |   |      |   |           |  
|Proceeds from sale of property                                                    |  |      | 7,362,720   |   |      |   | 2,310,027  |  
|Acquisition of properties                                                         |  |      |            |   |      |   | (7,527,285 | )
|Investment in unconsolidated subsidiaries and undivided interests                 |  |      |            |   |      |   | (753,655   | )
|Distributions from unconsolidated subsidiaries and undivided interests            |  |      | 1,075,850   |   |      |   | 1,210,032  |  
|Increase in notes receivable                                                      |  |      |            |   |      |   | (400,000   | )
|Payoff of note receivable                                                         |  |      | 800,000     |   |      |   | 645,000    |  
|Principal payments on notes receivable-tenants                                    |  |      | 34,553      |   |      |   | 31,123     |  
|                                                                                  |  |      |             |   |      |   |            |  
|Net cash provided by (used in) investing activities                               |  |      | 9,673,123   |   |      |   | (4,841,403 | )
|                                                                                  |  |      |             |   |      |   |            |  
|Cash Flows from Financing Activities:                                             |  |      |             |   |      |   |            |  
|Mortgage note principal amortization                                              |  |      | (580,982    | ) |      |   | (524,155   | )
|Paydown of principal on mortgage note                                             |  |      | (5,217,712  | ) |      |   |           |  
|Borrowings under mortgage note payable                                            |  |      |            |   |      |   | 5,300,000  |  
|Lines of credit, net                                                              |  |      | (2,247,613  | ) |      |   | 97,613     |  
|Deferred financing and other costs                                                |  |      |            |   |      |   | (264,223   | )
|Purchase of interest rate cap                                                     |  |      |            |   |      |   | (56,500    | )
|Distributions to minority interest owners                                         |  |      | (187,619    | ) |      |   | (187,619   | )
|Offering costs paid                                                               |  |      |            |   |      |   | (5,310     | )
|Dividends paid                                                                    |  |      | (2,453,500  | ) |      |   | (2,211,911 | )
|                                                                                  |  |      |             |   |      |   |            |  
|Net cash (used in) provided by financing activities                               |  |      | (10,687,426 | ) |      |   | 2,147,895  |  
|                                                                                  |  |      |             |   |      |   |            |  
|Net Increase (Decrease) in Cash and Cash Equivalents                              |  |      | 481,560     |   |      |   | (1,092,853 | )
|Cash and Cash Equivalents, Beginning of Period                                    |  |      | 860,299     |   |      |   | 1,946,171  |  
|                                                                                  |  |      |             |   |      |   |            |  
|Cash and Cash Equivalents, End of Period                                          |  | $    | 1,341,859   |   |      | $ | 853,318    |  
|                                                                                  |  |      |             |   |      |   |            |  
|Supplement Disclosure of Cash Flow Information:                                   |  |      |             |   |      |   |            |  
|Cash payments for interest                                                        |  | $    | 1,712,603   |   |      | $ | 1,602,862  |  
|                                                                                  |  |      |             |   |      |   |            |  



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



5



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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
September 30, 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 $30,545,106 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, (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) |  |                 |  | 



On June 30, 2005
the Agreement became subject to termination. While there is still a chance that the Agreement could be reinstated, management of ACRT does not have confidence that the transaction will be completed.



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



Fort Washington, PA (partnership interest) New York, NY (partnership interest) (see Note 19)

Paramus, NJ
(partnership interest)



ACRT anticipates that the sale of
these investments will close in 2005. Based on the current sales prices, ACRT anticipates that all investments will be sold for amounts in excess of their carrying amounts and, therefore, will result in a gain for financial reporting purposes.



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.



6



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



On August 10, 2005, ACRT sold the Philadelphia, Pennsylvania property
leased to Barnes and Noble (see Note 3).



|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.



7



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



| | 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



In 2005,
the property located in Philadelphia, Pennsylvania, leased to Barnes and Noble, was designated as to be disposed and an impairment charge of $287,259 was recorded, which included a disposition fee of $116,016. This property was sold on
August 10, 2005 for aggregate net proceeds of $7,362,720 which resulted in no gain or loss for financial reporting purposes.



The following presents the operating results for the property to be disposed of and the property sold in 2004 for the applicable periods:



|                  |  |                              |         |                             |      |   |         |  |   |          |   |  |   |        
|----------------- |  | ---------------------------- | ------- | --------------------------- | ---- | - | ------- |  | - | -------- | - |  | - | -------
|                  |  | Three Months Ended Sept. 30, |         | Nine Months Ended Sept. 30,
|                  |  | 2005                         |         |                             | 2004 |   | 2005    |  |   | 2004    
|Revenues          |  | $                            | 182,444 |                             |      | $ | 297,491 |  | $ | 745,587  |   |  | $ | 737,966
|Net (Loss) Income |  |                              | (59,959 | )                           |      |   | 59,621  |  |   | (145,370 | ) |  |   | 207,832



| | 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.



8



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



| | 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 Sept. 30, |  | Nine Months Ended Sept. 30,
|                                                                                           |  | (In thousands)               |  | (In thousands)             
|                                                                                           |  | 2005                         |  | 2004                        |  | 2005  |  | 2004 
|Total weighted average Class A common shares                                               |  | 3,183                        |  | 3,183                       |  | 3,183 |  | 3,183
|                                                                                           |  |                              |  |                            
|Total weighted average Class B common shares                                               |  | 166                          |  | 166                         |  | 166   |  | 166  
|                                                                                           |  |                              |  |                             |  |       |  |      
|Weighted average number of common shares used in calculation of basic earnings per share   |  | 3,349                        |  | 3,349                       |  | 3,349 |  | 3,349
|                                                                                           |  |                              |  |                            
|Shares issuable upon exercise of stock options (15% of outstanding common shares)          |  | 502                          |  | 502                         |  | 502   |  | 502  
|                                                                                           |  |                              |  |                             |  |       |  |      
|Weighted average number of common shares used in calculation of diluted earnings per share |  | 3,851                        |  | 3,851                       |  | 3,851 |  | 3,851



| | 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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections which replaces Accounting Principles Board Opinions No. 20 Accounting Changes and SFAS No. 3 Reporting Accounting Changes in Interim Financial Statements An
Amendment of APB Opinion No. 28. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change
in accounting principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of adopting this statement
is not expected to have a material adverse impact on ACRTs consolidated financial position or results of operations.



| | 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 nine months ended September 30, 2005 and 2004, ACRT recognized stock based
compensation expense totaling $336,568 and $186,983, 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.



9



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



| | 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.



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 $287,259 in connection with the transaction in 2005. On
August 10, 2005, ACRT sold the Philadelphia, Pennsylvania property leased to Barnes and Noble for $7,734,375 resulting in net proceeds to ACRT of $7,362,720 after costs and expenses, which resulted in no gain or loss for financial reporting
purposes



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 nine months ended September 30, 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:



10



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                             |  |                                                              |       |      |   |      
|---------------------------- |  | ------------------------------------------------------------ | ----- | ---- | - | -----
|                             |  | Nine Months Ended Sept. 30, (000s except per share amounts)
|                             |  | 2005                                                         |       | 2004
|Revenues                     |  | $                                                            | 5,758 |      | $ | 5,520
|Net Income                   |  |                                                              | 1,088 |      |   | 1,033
|                             |  |                                                             
|Net Income per share  basic |  |                                                              | .32   |      |   | .31  
|- diluted                    |  |                                                              | .28   |      |   | .27  



|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 $17,343 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 $421,512 and $378,571 from cash flows attributable to base rent and recoveries for the
nine months ended September 30, 2005 and 2004, respectively. ACRT also received $57,823 and $83,647 in percentage rent distributions for the nine months ended September 30, 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 September 30, 2005 and December 31, 2004:



|                  |  |                |            |                  |   |           
|----------------- |  | -------------- | ---------- | ---------------- | - | ----------
|                  |  | Sept. 30, 2005 |            | December 31,2004
|Total Assets      |  | $              | 29,308,041 |                  | $ | 29,945,219
|Total Liabilities |  |                | 25,811,210 |                  |   | 26,021,652



The following is the
summary income statement information of Triangle for the three and nine months ended September 30, 2005 and 2004:



|                              |  |                              |           |                             |           |      |   |           |  |          
|----------------------------- |  | ---------------------------- | --------- | --------------------------- | --------- | ---- | - | --------- |  | ---------
|                              |  | Three Months Ended Sept. 30, |           | Nine Months Ended Sept. 30,
|                              |  | 2005                         |           | 2004                        |           | 2005 |   | 2004     
|Rental Revenue                |  | $                            | 1,046,987 |                             | 1,098,044 |      | $ | 3,209,481 |  | 3,442,271
|Interest and Other Income     |  |                              | 2,239     |                             | 267       |      |   | 5,594     |  | 862      
|Operating Expenses            |  |                              | 228,160   |                             | 212,275   |      |   | 781,780   |  | 788,797  
|Interest Expense              |  |                              | 476,121   |                             | 481,520   |      |   | 1,420,900 |  | 1,438,155
|Depreciation and Amortization |  |                              | 177,720   |                             | 177,723   |      |   | 533,163   |  | 533,169  
|Net Income                    |  |                              | 167,225   |                             | 226,793   |      |   | 479,232   |  | 683,012  



11



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##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|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 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.



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 $90,000 and $247,053 for the nine months
ended September 30, 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 September 30, 2005 and December 31, 2004:



|                  |  |                |           |                   |   |          
|----------------- |  | -------------- | --------- | ----------------- | - | ---------
|                  |  | Sept. 30, 2005 |           | December 31, 2004
|Total Assets      |  | $              | 6,372,295 |                   | $ | 6,359,841
|Total Liabilities |  |                | 4,942,378 |                   |   | 5,041,678



The following is the
summary income statement information of Fort Washington for the three and nine months ended September 30, 2005 and 2004:



|                              |  |                              |         |                             |         |      |   |         |  |        
|----------------------------- |  | ---------------------------- | ------- | --------------------------- | ------- | ---- | - | ------- |  | -------
|                              |  | Three Months Ended Sept. 30, |         | Nine Months Ended Sept. 30,
|                              |  | 2005                         |         | 2004                        |         | 2005 |   | 2004   
|Rental Revenue                |  | $                            | 185,400 |                             | 185,842 |      | $ | 556,200 |  | 557,813
|Interest and Other Income     |  |                              |        |                             | 2       |      |   |        |  | 47     
|Operating Expenses            |  |                              | 6,460   |                             | 6,305   |      |   | 16,950  |  | 22,862 
|Interest Expense              |  |                              | 78,787  |                             | 73,254  |      |   | 247,878 |  | 215,947
|Depreciation and Amortization |  |                              | 28,658  |                             | 27,746  |      |   | 89,619  |  | 81,776 
|Net Income                    |  |                              | 71,495  |                             | 78,539  |      |   | 201,753 |  | 237,275



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 $13,500 in distributions for the nine months ended September 30, 2005 and 2004, respectively.



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ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



The following is the summary balance sheet information of Levittown as of
September 30, 2005 and December 31, 2004:



|                  |  |                |           |                  |   |          
|----------------- |  | -------------- | --------- | ---------------- | - | ---------
|                  |  | Sept. 30, 2005 |           | December 31,2004
|Total Assets      |  | $              | 3,261,464 |                  | $ | 3,359,619
|Total Liabilities |  |                | 2,537,684 |                  |   | 2,561,051



The following is the
summary income statement information of Levittown for the three and nine months ended September 30, 2005 and 2004:



|                              |  |                              |        |   |                             |   |        |      |  |   |         |   |  |   |         |  
|----------------------------- |  | ---------------------------- | ------ | - | --------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                              |  | Three Months Ended Sept. 30, |        |   | Nine Months Ended Sept. 30, |  
|                              |  | 2005                         |        |   | 2004                        |   |        | 2005 |  |   | 2004    |  
|Rental Revenue                |  | $                            | 83,007 |   |                             | $ | 83,007 |      |  | $ | 249,021 |   |  | $ | 249,021 |  
|Operating Expenses            |  |                              | 4,844  |   |                             |   | 5,793  |      |  |   | 18,873  |   |  |   | 16,854  |  
|Interest Expense              |  |                              | 45,883 |   |                             |   | 46,081 |      |  |   | 136,658 |   |  |   | 154,469 |  
|Depreciation and Amortization |  |                              | 34,155 |   |                             |   | 34,155 |      |  |   | 102,465 |   |  |   | 102,465 |  
|Net Loss                      |  |                              | (1,875 | ) |                             |   | (3,022 | )    |  |   | (8,975  | ) |  |   | (24,767 | )



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. 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 distributions of $243,000 and $291,500 for the nine months ended September 30, 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 September 30, 2005 and
December 31, 2004:



|                  |  |                |           |                   |   |          
|----------------- |  | -------------- | --------- | ----------------- | - | ---------
|                  |  | Sept. 30, 2005 |           | December 31, 2004
|Total Assets      |  | $              | 5,650,056 |                   | $ | 5,505,782
|Total Liabilities |  |                | 5,618,660 |                   |   | 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 and nine months ended September 30, 2005 and 2004:



|                                 |  |                             |         |   |                            |         |   |      |   |         |      |  |   |        
|-------------------------------- |  | --------------------------- | ------- | - | -------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------
|                                 |  | Three Months EndedSept. 30, |         |   | Nine Months EndedSept. 30,
|                                 |  | 2005                        |         |   | 2004                       |         |   | 2005 |   |         | 2004
|Rental Revenue                   |  | $                           | 296,109 |   |                            | 290,398 |   |      | $ | 873,049 |      |  | $ | 854,623
|(Gain) loss on Interest Rate Cap |  |                             | (34,917 | ) |                            | 62,032  |   |      |   | (46,023 | )    |  |   | 31,103 
|Operating Expenses               |  |                             | 111,093 |   |                            | 110,926 |   |      |   | 343,694 |      |  |   | 306,810
|Interest Expense                 |  |                             | 80,735  |   |                            | 84,729  |   |      |   | 228,345 |      |  |   | 189,034
|Depreciation and Amortization    |  |                             | 40,081  |   |                            | 40,081  |   |      |   | 120,242 |      |  |   | 120,242
|Net Income (Loss)                |  |                             | 99,117  |   |                            | (7,370  | ) |      |   | 226,791 |      |  |   | 207,434



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



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ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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 $187,915 and $164,786 in distributions for the nine months ended September 30, 2005 and 2004, respectively.



The following is the summary balance sheet information of the Paramus
ACRTs 40% undivided interest as of September 30, 2005 and December 31, 2004:



|                  |  |                |           |                   |   |          
|----------------- |  | -------------- | --------- | ----------------- | - | ---------
|                  |  | Sept. 30, 2005 |           | December 31, 2004
|Total Assets      |  | $              | 8,153,496 |                   | $ | 8,231,980
|Total Liabilities |  |                | 5,780,609 |                   |   | 5,828,279



The following is the
summary income statement information of the Paramus ACRTs 40% undivided interest for the three and nine months ended September 30, 2005 and 2004:



|                              |  |                             |         |                            |         |      |   |         |  |   |        
|----------------------------- |  | --------------------------- | ------- | -------------------------- | ------- | ---- | - | ------- |  | - | -------
|                              |  | Three Months EndedSept. 30, |         | Nine Months EndedSept. 30,
|                              |  | 2005                        |         | 2004                       |         | 2005 |   | 2004   
|Rental Revenue                |  | $                           | 241,729 |                            | 248,794 |      | $ | 729,798 |  | $ | 714,503
|Operating Expenses            |  |                             | 37,319  |                            | 40,841  |      |   | 109,397 |  |   | 98,636 
|Interest Expense              |  |                             | 110,384 |                            | 111,547 |      |   | 328,428 |  |   | 333,019
|Depreciation and Amortization |  |                             | 45,102  |                            | 45,102  |      |   | 135,306 |  |   | 135,306
|Net Income                    |  |                             | 48,924  |                            | 51,304  |      |   | 156,667 |  |   | 147,542



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.



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ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|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.



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. ACRT has received $62,100 and $30,975 in distributions for the nine months ended September 30, 2005 and 2004, respectively.



The following is the summary balance sheet information of ARC International
as of September 30, 2005 and December 31, 2004:



|                  |  |                |            |                   |           
|----------------- |  | -------------- | ---------- | ----------------- | ----------
|                  |  | Sept. 30, 2005 |            | December 31, 2004
|Total Assets      |  | $              | 19,919,249 |                   | 20,129,842
|Total Liabilities |  |                | 12,203,345 |                   | 12,368,644



The following is the
summary income statement information of ARC International for the three and nine months ended September 30, 2005 and 2004:



|                              |  |                              |         |                             |         |      |   |           |  |        
|----------------------------- |  | ---------------------------- | ------- | --------------------------- | ------- | ---- | - | --------- |  | -------
|                              |  | Three Months Ended Sept. 30, |         | Nine Months Ended Sept. 30,
|                              |  | 2005                         |         | 2004                        |         | 2005 |   | 2004     
|Rental Revenue                |  | $                            | 449,460 |                             | 448,000 |      | $ | 1,347,692 |  | 896,534
|Operating Expenses            |  |                              | 23,455  |                             | 24,184  |      |   | 70,300    |  | 47,890 
|Interest Expense              |  |                              | 215,207 |                             | 215,377 |      |   | 642,227   |  | 433,999
|Depreciation and Amortization |  |                              | 78,687  |                             | 78,688  |      |   | 236,060   |  | 157,374
|Net Income                    |  |                              | 132,111 |                             | 129,751 |      |   | 399,105   |  | 257,271



|11. | 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). 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 nine months ended September 30, 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.



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ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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 $518,917 and $518,513 for the nine months ended September 30, 2005 and 2004, respectively, were incurred and are payable to the Advisor. 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 (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 September 30, 2005 and 2004.



Disposition Fee On August 10, 2005,
ACRT incurred a disposition fee in the amount of $116,015 on the sale of the Philadelphia, Pennsylvania property leased to Barnes and Noble. The disposition fee on this sale was equal to 1.5% of the contract sales price. The disposition fee is
generally equal to 3% of the contract sales price pursuant to the Advisory Agreement.



Stock Ownership - As of September 30, 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. The reimbursements were discontinued in May 2005.
These reimbursements totaled $6,250 and $11,250 for the nine months ended September 30, 2005 and 2004, respectively, 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 September 30, 2005 are as follows:



|           |  |   |           
|---------- |  | - | ----------
|2005       |  | $ | 1,353,753 
|2006       |  |   | 5,456,457 
|2007       |  |   | 5,475,818 
|2008       |  |   | 5,342,497 
|2009       |  |   | 5,258,972 
|Thereafter |  |   | 22,979,602
|           |  |   |           
|           |  | $ | 45,867,099
|           |  |   |           



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 nine months
ended September 30, 2005 and 2004, the following tenants accounted for greater than 10% of rental revenues:



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ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|                     |  |      |   |  |      |  
|-------------------- |  | ---- | - |  | ---- | -
|                     |  | 2005 |   |  | 2004 |  
|Sports Authority     |  | 13.7 | % |  | 13.6 | %
|Bed, Bath and Beyond |  | 11.0 |   |  | 11.7 |  
|Barnes and Noble     |  | 9.1  |   |  | 10.0 |  
|CaroMont Medical     |  | 9.9  |   |  | 10.4 |  



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



ACRT had fixed rate mortgages totaling $18,325,652 and $18,717,178 at September 30, 2005 and at December 31, 2004, respectively. These mortgages
are secured by the respective properties with a total net book value of $21,475,015 and $21,824,655 at September 30, 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
$8,253,537 and $13,660,705 at September 30, 2005 and December 31, 2004, respectively. The mortgages carry variable interest rates of 206 and 225 basis points over LIBOR (3.69 % at September 30, 2005). The variable rate mortgages are
secured by two properties with a combined net book value of $9,224,702 and $19,527,811 at September 30, 2005 and December 31, 2004, respectively. On August 10, 2005, in connection with the sale of the Philadelphia, Pennsylvania
property leased to Barnes and Noble, ACRT repaid the related mortgage totaling $5,217,712.



At September 30, 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       |  | $                      | 186,764   |                  |   |           |  | $ | 186,764   
|2006       |  |                        | 674,924   |                  | $ | 8,227,954  |  |   | 8,902,878 
|2007       |  |                        | 670,787   |                  |   | 3,820,638  |  |   | 4,491,425 
|2008       |  |                        | 576,742   |                  |   |           |  |   | 576,742   
|2009       |  |                        | 466,190   |                  |   |           |  |   | 466,190   
|Thereafter |  |                        | 1,578,249 |                  |   | 10,376,941 |  |   | 11,955,190
|           |  |                        |           |                  |   |            |  |   |           
|           |  | $                      | 4,153,656 |                  | $ | 22,425,533 |  | $ | 26,579,189
|           |  |                        |           |                  |   |            |  |   |           



|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 $7,754 and $10,889, as of September 30, 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 ($3,135) and ($36,097) has been recorded as a loss on interest rate cap, net on the accompanying consolidated statements of income for the nine months ended September 30, 2005 and
2004, respectively.



On March 4, 2004, in connection with
ACRTs variable rate mortgage totaling $5,300,000 (Note 14) on the Philadelphia, Pennsylvania property leased to Barnes and Noble, ACRT entered into an interest rate cap agreement and an interest rate swap agreement with a third party. The cap
was coterminous with the mortgage loan. The cap, which was to terminate on March 1, 2007, was for the notional amount of $2,650,000. In accordance with SFAS No. 133, the interest rate cap was reflected at its fair value. 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. In connection with the sale of the Philadelphia, Pennsylvania property on August 10, 2005 (Note 3) the interest
rate cap was written off.



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ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|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 September 30, 2005,
after quarterly amortization and the sale of the Memphis property, is $2,842,715 and $0 has been drawn.



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 September 30, 2005 was $5,400,000.



|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 September 30, 2005, all rents and reimbursments 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 paid on
April 25, 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 paid on April 25, 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, 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, ACRTs 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.



On October 31, 2005, ACRTs request for summary judgment against
its joint venture partner regarding the joint venture partners exercise of a right of first refusal to purchase ACRTs interest in the New York, NY property was denied. Summary judgment was found in favor of its joint venture partner in
enforcement of the right of first refusal to purchase ACRTs interest as now written. ACRT plans to appeal this ruling. ACRTs management does not believe that the ruling will have a material adverse impact on ACRTs consolidated
financial position or results of operations.



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ARC CORPORATE REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



On October 11, 2005, Levitz Furniture one of the tenants in the Paramus, New Jersey property which is included in investments in unconsolidated
subsidiaries and undivided interests on ACRTs balance sheet, declared bankruptcy under Chapter 11 of the U.S. Bankruptcy code. At the time of the declaration, rent totaling $99,572 related to October was unpaid.



On October 31, 2005, ACRT paid a quarterly cash dividend of $763,577 to
Class A shareholders of record as of September 30, 2005.



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL



CONDITION 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 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 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) |  |                 |  | 



On June 30, 2005 the Agreement
became subject to termination. While there is still a chance that the Agreement could be reinstated, management does not have confidence that the transaction will be completed.



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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 investments included in these various contracts are:



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



ACRT anticipates that the sale of the
remaining properties and investments will close in 2005. Based on the current sales prices, ACRT anticipates that all properties and investments, with the exception of the Philadelphia, PA property, which was sold on August 10, 2005, 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.



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.



On August 10, 2005, ACRT sold the Philadelphia, Pennsylvania property leased to Barnes and Noble.



As of September 30, 2005, ACRT owned or had interests in 20 real estate properties encompassing 1,048,523 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.



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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 (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 nine months ended
September 30, 2005 and 2004, ACRT incurred an impairment charge of $287,259 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 nine months ended September 30, 2004, ACRT purchased two retail properties, including an equity method investment in one property, totaling 92,743
rentable square feet for $7,758,000 and sold one property for net cash proceeds of $2.3 million. During the nine months ended September 30, 2005 ACRT has not purchased any properties but has sold one property for net cash proceeds of $7.5
million.



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 September 30, 2005, after quarterly amortization and the sale of the Memphis property, is $2,842,715 and $0 has been drawn.



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 September 30, 2005 was $5,400,000 .



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.



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Dividends paid to common shareholders for the nine months ended September 30, 2005 and 2004 were $2.454 million and
$2.212 million 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 and to the payment
of the Class B dividends for 2003 and 2004 on April 25, 2005.



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 $1.496 million and $1.601 million for 2005 and 2004, respectively. The decrease in cash flows from operations is primarily due to lower net income after removing the impact from the gain on sale of investment in unconsolidated subsidiary
..



Net cash provided by investing activities was $9.673 million in 2005 and net
cash used in investing activities was $4.841 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 $10.687 million in 2005 and net cash provided by
financing activities was $2.148 million in 2004. Net cash used in 2005 was for repayments under the secured credit facility, dividends paid and debt service payments including paydown of one mortgage loan. 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 September 30, 2005, a total of eight of
ACRTs eleven consolidated properties were subject to outstanding mortgages which had an aggregate principal amount outstanding of $26.579 million including $8.254 million in variable interest rate mortgages. As of September 30, 2005, the
weighted averaged interest rate on ACRTs outstanding mortgages was 7.28 %. The scheduled principal payments as of September 30, 2005 for the next five years are as follows:



|     |  |   |        
|---- |  | - | -------
|2005 |  | $ | 186,764
|2006 |  |   | 674,924
|2007 |  |   | 670,787
|2008 |  |   | 576,742
|2009 |  |   | 466,190



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



|     |  |   |          
|---- |  | - | ---------
|2006 |  | $ | 8,227,954
|2007 |  |   | 3,820,638



The interest rates on ACRTs
outstanding indebtedness range from 5.41% (variable rate at September 30, 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 sources of 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 an interest rate cap in connection with its variable rate mortgage on the Sacramento, California property. The Sacramento interest rate cap is
coterminous with the mortgage and its notional amount equals the outstanding 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 Ended September 30, 2005 and 2004



|                                                                       |  |                        |       |   |      |   |                                   |  |   |      |  
|---------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | --------------------------------- |  | - | ---- | -
|Selected Income Statement Data                                         |  | 2005                   |       |   | 2004 |   | Favorable (Unfavorable) 2005-2004 | 
|                                                                       |  | (Dollars in thousands) |      
|Rental revenues                                                        |  | $                      | 1,566 |   |      | $ | 1,753                             |  | $ | (187 | )
|Interest income                                                        |  |                        | 11    |   |      |   | 39                                |  |   | (28  | )
|Equity in income of unconsolidated subsidiaries and undivided interest |  |                        | 306   |   |      |   | 229                               |  |   | 77   |  
|Interest expense                                                       |  |                        | 506   |   |      |   | 489                               |  |   | (17  | )
|Depreciation and amortization expense                                  |  |                        | 269   |   |      |   | 269                               |  |   |     |  
|Management fees-affiliate                                              |  |                        | 170   |   |      |   | 175                               |  |   | 5    |  
|Real estate taxes                                                      |  |                        | 173   |   |      |   | 437                               |  |   | 264  |  
|Property operating expenses                                            |  |                        | 83    |   |      |   | 101                               |  |   | 18   |  
|General and administrative expenses                                    |  |                        | 20    |   |      |   | 35                                |  |   | 15   |  
|Stock based compensation                                               |  |                        | 112   |   |      |   | 112                               |  |   |     |  
|Professional expenses                                                  |  |                        | 174   |   |      |   | 151                               |  |   | (23  | )
|Other expenses                                                         |  |                        | 15    |   |      |   | 56                                |  |   | 41   |  
|Minority interest in earnings of subsidiaries                          |  |                        | 52    |   |      |   | 30                                |  |   | (22  | )
|(Loss) income from discontinued operations                             |  |                        | (60   | ) |      |   | 60                                |  |   | (120 | )
|Net income                                                             |  |                        | 249   |   |      |   | 226                               |  |   | 23   |  



Rental revenues decreased by $187,000,
of which $240,000 is due to lower real estate tax reimbursements due to the timing and recording of revenues in 2004, offset by $37,000 in rent on the Montgomeryville property and $14,000 higher rents on the Sacramento, CA property due to a CPI rent
increase. The decrease in real estate tax reimbursements is offset by a similar decrease in real estate tax expense.



Interest income decreased by $28,000 due mainly to lower interest income from the Integral loan, which was repaid in September 2004 and the Willow Grove loan, which was
repaid in February 2005.



Equity in income of unconsolidated subsidiaries and
undivided interests increased by $77,000 of which $106,000 is attributable to income from the Rochelle Park property due primarily to an increase in the fair value of the interest rate cap and swap in 2005, offset by higher interest expense in 2005
due to higher interest rates, offset by $24,000 lower income on the Triangle property due mainly to an adjustment for uncollectible percentage rents.



Interest expense increased by $17,000 primarily due to higher interest rates in 2005 partially offset by lower outstanding loan balances on the line of credit.



Real estate taxes decreased by $264,000 due
to the timing and recording of expenses in 2004 (see rental revenues).



Property operating expenses decreased by $18,000 primarily due to higher parking lot and electrical repairs at the Overland Park, KS property in 2004 which were non-recurring.



General and administrative expenses decreased by $15,000 due to $4,000 in non -recurring aerial photography costs related to the proposed
asset sale in 2004, $5,000 lower travel expense, and $4,700 lower seminars expense.



Professional expenses increased by $23,000 due to increased legal and accounting fees associated with the sale of various assets and increased legal fees associated with proxy preparation and lawsuits.



Minority interest in earnings of subsidiaries increased by $22,000 due to higher income from
joint venture properties consolidated by ACRT.



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Income from discontinued operations decreased by $120,000 due primarily the sale of the Philadelphia, Pennsylvania
property in August 2005 and to costs associated with the sale.



Results
of Operations for the Nine Months Ended September 30, 2005 and 2004



|                                                                       |  |                        |       |   |      |   |                                   |  |   |      |  
|---------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | --------------------------------- |  | - | ---- | -
|Selected Income Statement Data                                         |  | 2005                   |       |   | 2004 |   | Favorable (Unfavorable) 2005-2004 | 
|                                                                       |  | (Dollars in thousands) |      
|Rental revenues                                                        |  | $                      | 4,871 |   |      | $ | 4,478                             |  | $ | 393  |  
|Interest income                                                        |  |                        | 53    |   |      |   | 116                               |  |   | (63  | )
|Equity in income of unconsolidated subsidiaries and undivided interest |  |                        | 854   |   |      |   | 876                               |  |   | (22  | )
|Gain on sale of investment in unconsolidated subsidiary                |  |                        | 400   |   |      |   |                                  |  |   | 400  |  
|Interest expense                                                       |  |                        | 1,513 |   |      |   | 1,459                             |  |   | (54  | )
|Depreciation and amortization expense                                  |  |                        | 806   |   |      |   | 794                               |  |   | (12  | )
|Management fees-affiliate                                              |  |                        | 519   |   |      |   | 519                               |  |   |     |  
|Real estate taxes                                                      |  |                        | 528   |   |      |   | 493                               |  |   | (35  | )
|Property operating expenses                                            |  |                        | 229   |   |      |   | 288                               |  |   | 59   |  
|General and administrative expenses                                    |  |                        | 89    |   |      |   | 150                               |  |   | 61   |  
|Stock based compensation                                               |  |                        | 337   |   |      |   | 186                               |  |   | (151 | )
|Professional expenses                                                  |  |                        | 443   |   |      |   | 301                               |  |   | (142 | )
|Other expenses                                                         |  |                        | 42    |   |      |   | 103                               |  |   | 61   |  
|Minority interest in earnings of subsidiaries                          |  |                        | 168   |   |      |   | 137                               |  |   | (31  | )
|(Loss) income from discontinued operations                             |  |                        | (145  | ) |      |   | 208                               |  |   | (353 | )
|Net income                                                             |  |                        | 1,359 |   |      |   | 1,248                             |  |   | 111  |  



Rental revenues increased by $393,000
of which $318,000 is attributable to rent on the Montgomeryville property, $29,000 higher real estate tax reimbursements due to the timing and recording of revenues, and $39,000 higher rents on the Sacramento, CA property due to a CPI rent increase.
The increase in real estate tax reimbursements is offset by a similar increase in real estate tax expense.



Interest income decreased by $63,000, due mainly to lower interest income from the Integral loan, which was repaid in September 2004 and the Willow Grove loan, which was repaid in February 2005.



Equity in income of unconsolidated subsidiaries and undivided interests decreased by $22,000
mainly due to $51,000 in lower income from the Triangle property due to uncollectible percentage rents offset by $19,000 attributable to higher income from the Rochelle Park property due primarily to an increase in the fair value of the interest
rate cap and swap in 2005 and offset by higher interest expense in 2005 due to higher rates and $14,000 from the investment income in the Woodcliff Lake, NJ property purchased on March 31, 2004.



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



Interest expense increased $54,000 due mainly to
higher interest rates on the variable rate mortgages partially offset by normal shifting of mortgage amortization from interest to principal on the fixed rate debt and lower balances outstanding on the line of credit.



Depreciation and amortization expense increased by $12,000 due to the amortization of the
financing fees associated with the Montgomeryville line of credit, which was established in June 2004.



Real estate taxes increased by $35,000 due to the timing and recording of expenses in 2004 (see rental revenues).



Property operating expenses decreased by $59,000 primarily to higher parking lot and road
repairs at the Overland Park, KS property in 2004.



General and administrative
expenses decreased by $61,000 due mainly to $20,000 lower printing expense due to changes in the printing of the annual report, $8,000 lower aerial photography expense associated with the asset sale and $22,000 lower travel expense and board fees
due to one less board meeting in 2005.



Stock
based compensation increased $151,000 due to modifications made in May 2004 to the 1997 Stock Option Plan.



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Professional expenses increased by $142,000 due to increased legal and accounting fees associated with the sale of
various assets and increased legal fees associated with proxy preparation and lawsuits.



Other expenses decreased by $61,000 due to a lower loss on the interest rate cap of $37,000 and $22,000 lower loss on minority interest receivable write-offs.



Minority interest in earnings of subsidiaries increased by $31,000 due to higher income from the joint venture properties consolidated by
ACRT.



Income from discontinued operations decreased by $353,000 due primarily
to an impairment charge on the Philadelphia, PA property of and expenses connected with the sale, offset by income from this property which was in operation for the full six month period in 2005 versus less than four months in 2004.



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 nine months ended September 30, 2005 and 2004.



|                                                                                            |  |                |         |   |      |   |        |  
|------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------ | -
|                                                                                            |  | 2005           |         |   | 2004 |  
|                                                                                            |  | (In thousands) |        
|Income from continuing operations before gains on sale of investments and minority interest |  | $              | 1,273   |   |      | $ | 1,178  |  
|Depreciation and amortization of real estate                                                |  |                | 708     |   |      |   | 709    |  
|Amortization of leasing commissions                                                         |  |                | 11      |   |      |   | 11     |  
|Joint venture adjustment-depreciation and amortization of real estate                       |  |                | 459     |   |      |   | 453    |  
|Joint venture adjustment-amortization of leasing commissions                                |  |                | 17      |   |      |   | 17     |  
|                                                                                            |  |                |         |   |      |   |        |  
|Funds from Operations                                                                       |  |                | 2,468   |   |      |   | 2,368  |  
|Cash flow provided by operating activities                                                  |  |                | 1,496   |   |      |   | 1,601  |  
|Cash flow provided by (used in) investing activities                                        |  |                | 9,673   |   |      |   | (4,841 | )
|Cash flow (used in) provided by financing activities                                        |  |                | (10,687 | ) |      |   | 2,148  |  



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 (unaudited) for
information on these investments.



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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 September 30, 2005, ACRT had two variable rate mortgages outstanding totaling $8.254 million. These mortgages bear interest at LIBOR plus 206 basis points (5.75% on $4.133 million) and LIBOR plus 225 basis points (5.94 % on $4.120
million). Had the LIBOR rate been 100 basis points higher during the nine months ended September 30, 2005, ACRTs net income would have been reduced by approximately $62,000. ACRT also entered into an interest rate cap agreement on a
notional amount equal to the $4.133 million mortgage balance at September 30, 2005, which effectively caps the LIBOR rate at 7.45% 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 Financial Reporting. There have not been any changes in ACRTs internal control over financial reporting during the third quarter to which this report
relates that have materially affected, or are reasonably likely to materially affect, ACRTs internal control over financial 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.



On October 31, 2005, ACRTs request for summary judgment against its joint venture partner regarding the joint venture partners exercise
of a right of first refusal to purchase ACRTs interest in the New York, NY property was denied. Summary judgment was found in favor of its joint venture partner in enforcement of the right of first refusal to purchase ACRTs interest as
now written. ACRT plans to appeal this ruling. ACRTs management does not believe that the ruling will have a material adverse impact on ACRTs consolidated financial position or results of operations.



|ITEM 2. | Changes in Securities, Use of Proceeds and Issuers Purchase of Equity Securities- 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 10th day of November 2005.



ARC CORPORATE REALTY TRUST, INC.By:

/s/ Robert J. AmbrosiName:

Robert J. AmbrosiTitle:

Chairman and President




By:

/s/ Bruce NelsonName:

Bruce NelsonTitle:

Chief Financial Officer




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