UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-K





[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
Fiscal Year Ended December 31, 2007


OR


[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934


For the
transition period from ______ to ______.





Commission
file number 001-33262





MERUELO MADDUX PROPERTIES,
INC.


(Exact
name of registrant as specified in its charter)





Delaware
            20-5398955(State
      or other jurisdiction
              of
      incorporation or organization)
            (IRS
      Employer
              Identification
      No.)761
      Terminal Street, Building 1, Second Floor,
              Los
      Angeles, California
            90021(Address
      of principal executive offices)
            (Zip
      Code)





(213)
291-2800


(Registrant’s
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act:


Title
      of each class
            
            Name
      of each exchange on
              which
      registeredCommon
      stock, $0.01 par value
            
            The
      Nasdaq Global Market





Securities
registered pursuant to Section 12(g) of the Act:  None





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.  Yes [   ]  No [ X
]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.  Yes
[   ]  No [ X ]





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 if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form
10-K.  [  ]





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





Large accelerated filer
[  ]                                                      Accelerated
filer  [  ]





Non-accelerated filer
[X]                                           Smaller
reporting company  [  ]


(Do not check if a smaller reporting
company)





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





The aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant was
approximately $347,208,000 based on the closing price on the NASDAQ Global
Market as of June 30, 2007.





Number of the registrant’s common stock
outstanding as of March 28, 2008: 86,678,100





DOCUMENTS
INCORPORATED BY REFERENCE





Portions of the registrant’s
definitive Proxy Statement with respect to its 2008 Annual Meeting of
Stockholders to be filed not later than 120 days after the end of the
registrant’s fiscal year are incorporated by reference into Part III hereof as
noted therein.







MERUELO
MADDUX PROPERTIES, INC.





INDEX


Item
              No.
            
            
            
            Form
      10-K
              Report
              PagePART
      I1.
            
            Business
            
            
            31A.
            
            Risk Factors
            
            
            81B.
            
            Unresolved Staff Comments
            
            
            212.
            
            Properties
            
            
            223.
            
            Legal Proceedings
            
            
            264.
            
            Submission of Matters to a Vote of Security Holders
            
            
            27PART
      II5.
            
            Market for Registrant’s Common Equity, Related Stockholder
      Matters, and Issuer Purchases of Equity Securities
            
            
            276.
            
            Selected Financial Data
            
            
            307.
            
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            
            337A.
            
            Quantitative and Qualitative Disclosures About Market Risk
            
            
            548.
            
            Financial Statements and Supplementary Data
            
            
            549.
            
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            
            
            549A
            (T).
            Controls and Procedures
            
            
            549B.
            
            Other Information
            
            
            55PART
      III10.
            
            Directors, Executive Officers and Corporate Governance
            
            
            5611.
            
            Executive Compensation
            
            
            5612.
            
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            
            
            5613.
            
            Certain Relationships and Related Transactions, and
      Director Independence
            
            
            5614.
            
            Principal Accountant Fees and Services
            
            
            56PART
      IV15.
            
            Exhibits and Financial Statement Schedules
            
            
            57








Forward-Looking
Statements





This
report contains various “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.  We intend for such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and we include this statement for purposes of complying with these
safe harbor provisions.





Forward-looking
statements relate to expectations, beliefs, projections, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. In some cases, you can identify
forward-looking statements by the use of forward-looking terminology such as
“believes,” “expects,” “may,” “will,” “would,” “could,” “should,” “seeks,”
“approximately,” “intends,” “plans,” “projects,” “estimates” or “anticipates” or
the negative of these words and phrases or similar words or phrases. Statements
regarding the following subjects may be impacted by a number of risks and
uncertainties:




•
            our
      business and investment strategy;




•
            our
      projected results of operations;




•
            completion
      of any pending acquisitions, including our successful acquisition of
      properties subject to build-to-suit contracts, executory purchase
      contracts in litigation or purchase
options;




•
            our
      proposed development and redevelopment of our projects and our uses of
      projects after such development or
  redevelopment;




•
            our
      ability to obtain land use
entitlements;




•
            our
      ability to obtain future financing
arrangements;




•
            our
      statements relating to future
dividends;




•
            our
      understanding of our competition and our ability to compete
      effectively;




•
            market
      and industry trends in the United
States;




•
            projected
      capital and operating expenditures (including projected redevelopment
      costs);




•
            state
      of the real estate industry, particularly with respect to commercial,
      residential and mixed-use projects;




•
            availability
      and creditworthiness of current and prospective
  tenants;




•
            interest
      rates; and




•
            lease
      rates and terms.




The
forward-looking statements are based on our beliefs, assumptions and
expectations of our future performance, taking into account all information
currently available to us. These beliefs, assumptions and expectations are
subject to risks and uncertainties and can change as a result of many possible
events or factors, not all of which are known to us. If a change occurs, our
business, financial condition, liquidity and results of operations may vary
materially from those expressed in our forward-looking statements. You should
carefully consider these risks before you make an investment decision with
respect to our common stock, along with the following factors that could cause
actual results to vary from our forward-looking statements:




•
            the
      factors referenced in this report, including those set forth under the
      sections captioned “Risk Factors” and “Management’s Discussion and
      Analysis of Financial Condition and Results of
  Operations”;





•
            availability,
      terms and deployment of capital;





•
            general
      volatility of the capital markets;




•
            changes
      in our business and investment
strategy;




•
            availability
      of qualified personnel;




•
            perception
      of the commercial and residential subsegments of the real estate
      industry;




2
 Table of Contents


•
            changes
      in supply and demand dynamics within the commercial and residential
      subsegments of the real estate
industry;




•
            availability
      of purchasers of our projects;




•
            change
      in costs associated with development or redevelopment and repositioning of
      projects;




•
            changes
      in interest rates;




•
            changes
      in applicable laws and regulations (including land use entitlement
      processes);




•
            changes
      in political climates that may affect our proposed development and
      redevelopment projects;




•
            state
      of the general economy and the greater Los Angeles economy in which
      our projects are located;





•
            a
      taking of any of our rental properties or development projects by eminent
      domain; and





•
            the
      degree and nature of our
competition.




We cannot
guarantee future results, levels of activity, performance or achievements. You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this report. We do not intend and disclaim any duty or
obligation to update or revise any industry information or forward-looking
statements set forth in this report to reflect new information, future events or
otherwise.




Market
Data




Market
and industry data and forecasts used in this report have been obtained from
independent industry sources and from research reports prepared for other
purposes. Forecasts and other forward-looking information obtained from these
sources are subject to the same qualifications and uncertainties as other
forward-looking statements in this report.







PART
I





Item
1.                              Business





In
this report, unless the context suggests otherwise, references to “our company,”
“we,” “us” and “our” mean Meruelo Maddux Properties, Inc. and its
subsidiaries.





When
we refer to “urban infill,” we mean development of vacant land or redevelopment
of underused structures in built-up areas that have infrastructure and other
public services in place. When we refer to “stabilized properties,” we mean
completed development or redevelopment projects that have consistently commanded
market-rate rents and occupancies.




The
historical operations described in this report refer to the historical
operations of Meruelo Maddux Properties, Inc., entities contributed to Meruelo
Maddux Properties, Inc. and certain of their affiliates and predecessor
entities, which we refer to collectively as our predecessor business throughout
this report. We have generally described our operations in this report as if the
historical operations of our predecessor business were conducted by
us.





Overview




We are a
self-managed, full-service real estate company that develops, redevelops and
owns commercial and residential properties located in downtown Los Angeles
and other densely populated urban areas in California.We focus on
properties that we believe have alternate, more profitable uses achievable
through major renovation, redevelopment or development. Our projects are
predominantly located in a densely urban, multi-ethnic environment and involve
numerous local entitlement, property assemblage and physical
challenges.




We are
committed to responsible property investing that has economic, environmental and
social benefits. Our development activities include urban infill projects that
are expected to meet the demands of urban communities and that utilize or
upgrade existing infrastructure instead of creating new infrastructure. Many of
our projects will locate businesses, customers and employees close to each other
and close to existing public transit systems.




We were
formed to succeed certain operations of the our predecessor, which was not a
legal entity but rather a combination of entities and operations whose owners
were Richard Meruelo, Maria Meruelo and John Charles Maddux and were
collectively doing business as Meruelo Maddux, an owner, developer and acquirer
of industrial, commercial and residential
properties.  We were incorporated, and the operating partnership was
formed, in Delaware on July 5, 2006 in anticipation of our initial public
offering of common stock (our “IPO”), which was consummated on January 30, 2007
concurrently with the consummation of various formation
transactions.   The formation transactions and IPO were designed
to (i) allow us to acquire and continue the operations of our predecessor
business, (ii) pay down existing mortgage debt, (iii) payoff a
mezzanine loan facility from the State of California Public Employees’
Retirement System, or CalPERS, (iv) provide capital for future
acquisitions, (v) fund future development costs, and (vi) establish a
capital reserve for general corporate purposes.




3
 Table of Contents


On
January 30, 2007, we consummated our IPO and sold to the public 40,000,000
shares of our common stock at $10.00 per share. On February 14, 2007, the
underwriters of our IPO exercised their option to purchase an additional
5,550,000 shares of our common stock at $10.00 per share. Including the shares
issued in the over-allotment option, we raised approximately $425.7 million in
proceeds in our IPO, after underwriting discounts but before expenses related to
the IPO. Our company’s operations are predominantly carried out, and its assets
are owned through, Meruelo Maddux Properties, L.P., which we refer to as our
operating partnership. As of December 31, 2007, we held a 99.6% interest in our
operating partnership. We are structured as a taxable corporation under
Subchapter C of the Internal Revenue Code of 1986, as amended (the “Code”). As
of December 31, 2007, the total number of shares of our common stock outstanding
was 85,837,900.




As of
December 31, 2007, we own, lease with rights to purchase and have rights to
acquire interests in 27 rental projects and 28 projects held for real estate
development. Most of our projects are located in or around the downtown area of
Los Angeles, and all of our projects are in Southern
California.  Downtown Los Angeles is commonly defined as an area
of approximately 350 city blocks, or approximately 2,500 acres, ringed by the
U.S. Highway 101/Santa Ana Freeway on the north, the Los Angeles River on
the east, U.S. Interstate 10/Santa Monica Freeway to the south and the State
Highway 110/Pasadena Freeway to the west. Downtown Los Angeles has
attracted more than $17.7 billion in new construction investment from 1999
through the third quarter of 2007, according to the Los Angeles Downtown
Center Business Improvement District. With approximately 80 acres of land in
downtown Los Angeles owned or controlled through executory purchase and
sale agreements or options to purchase, we believe we are the largest
non-government landowner in downtown Los Angeles. By comparison, a 27-block
area in the financial district of downtown Los Angeles, often referred to as
Bunker Hill, which contains the bulk of downtown’s class A high-rise office
buildings, major hotels and retail properties, is situated on approximately 143
acres.




Incidental
to our ownership of one of our projects, we own and operate a cold storage
business in an approximately 85,800 square foot facility.




Current
Year Highlights





Since becoming a public company on
January 30, 2007, we have completed the following activities:





Financing
Transactions





·
            We
      repaid all principal and interest outstanding under the revolving credit
      facility that was provided to our predecessor by
  CALPERS.





·
            We
      retired mortgage debt instruments secured by certain of the projects we
      acquired in our formation
transactions.





Leasing
Transactions





·
            We
      signed a lease amendment with one of our largest tenants to extend its
      lease for seven years at a rental rate of $2.865 million per year (plus
      3.0% annual base rent increases), which is an increase of over $1.5
      million per year above the rental rate of their previous
      lease.  The lease amendment became effective as of November 1,
      2007.  The tenant has an option to extend the term of the lease
      for an additional five years.





Acquisition
and Development Activities





·
            We
      substantially completed construction on the residential portion of the
      Union Lofts project and began leasing the property in March
      2008.





·
            We
      continued to make progress on the development of the 717 W 9th
      Street project.  The structural tower has been constructed up to
      the 16th
      level of the thirty-four floor
structure.




4
 Table of Contents


·
            We
      successfully completed the following acquisitions or conversions of
      development projects to rental
projects:




Projects
            Acquisition
      or
                Conversion
      Date
            
            Square
                FootageWashington
      Produce Market (2640 Washington Blvd)
            3/7/2007
            
            
            31,876230
      W. Avenue 26th
            4/1/2007
            
            
            67,9712000
      San Fernando Road
            4/2/2007
            
            
            119,381420
      Boyd Street
            6/27/2007
            
            
            47,8064th
      Street Center
            9/30/2007
            
            
            14,472Total
            
            
            
            281,506





·
            We
      successfully completed, acquired or placed in service the following
      parcels attached to current rental
projects:




Projects
            Date
      of Addition
            
            Square
              FootageCrown
      Commerce Center
            1/26/2007
            
            
            18,500905
      E 8th
      Street
            3/23/2007
            
            
            3,597Center
      Village
            3/27/2007
            
            
            66,135620
      Gladys Avenue
            4/13/2007
            
            
            49,959Total
            
            
            
            138,191







Effect
of Credit Market Disruption




Our
primary objective is to maximize return on investment through development and
redevelopment activities, and these activities require significant amounts of
capital.  The current disruption in the credit markets has made it
more difficult for us to obtain debt financing.  It has also caused us
to evaluate additional sources of capital and cash flow. This disruption has or
may affect us in a number of ways, including by:




•
            making
      it more difficult for us to obtain financing on attractive terms,
      resulting in lower loan-to-value ratios and loan-to-cost ratios, higher
      interest rates and generally less available debt
  capital;




•
            creating
      the need to evaluate and adjust as appropriate our previously disclosed
      development and redevelopment plans and timelines (both commencement and
      completion dates) to correlate with adjustments in the availability of
      capital and other current and changing market
  conditions;




•
            increasing
      our projected development costs and  therefore amount of equity we
      are required to contribute to our
projects;




•
            moving
      sales and leasing revenue from our properties from earlier periods to
      subsequent periods, thereby not eliminating our negative cash flow as
      quickly as we anticipate and as a result reducing our liquidity more than
      anticipated;




•
            leading
      us to decide to sell certain assets that we believe have reached near-term
      maximum value or which are not central to our development or redevelopment
      plans, or which are otherwise in the best interests of the company to
      sell;




•
            leading
      us to enter into joint venture agreements with respect to certain of our
      more capital intensive projects;




•
            leading
      us to seek debt or equity-linked capital available to public companies
      and




•
            leading
      us to refocus certain previously anticipated longer-term development
      projects to produce more near-term income through leasing the project and
      thereby reducing capital outflows through the redevelopment process and
      increasing near-term cash flow.




Please refer to “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” Part
II, Item 5 of this report below.





5
 Table of Contents


History
of our Company and our Management Team




Through
our predecessor business, we have been investing in urban real estate since
1972, when Cuban immigrants Homero and Belinda Meruelo purchased their first
commercial building in downtown Los Angeles. Our current management team is
led by our co-founders Richard Meruelo, who serves as our Chief Executive
Officer and Chairman of our Board of Directors and who is the son of Homero and
Belinda Meruelo, and John Charles Maddux, who serves as our President and Chief
Operating Officer and a member of our Board of Directors. Each has more than 20
years of experience in identifying, acquiring, entitling, financing, developing
and redeveloping urban real estate. They have worked together since
1987.




Our
Strategies




Our
business is focused on real estate development and redevelopment. The
substantial majority of our properties are not stabilized. Our strategy has
three primary components: investment, value creation and
operations.





Our
Investment Strategy




We invest
in sub-markets that are undergoing demographic, structural or economic changes,
where a significant portion of the properties and participants are historically
of a non-institutional nature, where the buildings are predominantly obsolete or
no longer relevant to the submarket’s changing profile, where we have
established strong working relationships with the city planners, community
redevelopment agencies and local political organizations and where the existing
transportation networks, particularly public transportation systems, are
nearby.




Our
Value Creation Strategies




Focus on the
Property Needs of Specific Industries and Premium Space Users.We seek to achieve rent
premiums by meeting the property needs of “premium space users” such as cold
storage, food processing and food distribution companies, whose critical
business functions depend on the location, zoning, tenant improvements or
utilities of the leased space and whose needs frequently coincide with urban
environments. The ability to provide premium space users with facilities and
services that maximize their operating profits may allow a landlord to minimize
leasing risk and charge rents that, net of costs incurred to provide such
facilities and services, exceed rents that could be obtained from tenants that
are relatively indifferent to location or amenities. We will continue to
identify premium space users in our markets and work to understand and fulfill
their evolving requirements.




Focus on
Sub-Markets that are Transitioning from Large to Small Tenants. We
acquire, modernize and subdivide large, older single-tenant industrial and
mixed-use buildings. In many urban markets, large manufacturers and distributors
have relocated their businesses, often vacating such buildings for overseas or
suburban locations. Taking their place are small emerging businesses and
established companies that are de-centralizing their operations. We seek to
transform large, single-tenant buildings into workplaces for many small tenants
by re-using a large portion of the existing facility and creatively subdividing
the space at a relatively low cost. This approach should allow us to offer
competitively-priced space (as compared to rental rates for new buildings) in
convenient urban locations.




Aggregate Small,
Synergistic Tenants. In urban areas, the non-office tenant base includes
many small businesses. Grouping similar businesses together creates a
marketplace that offers convenience to product buyers and a steadier stream of
prospective customers to the businesses. These advantages may increase tenants’
business profits and stability and may justify a rental premium compared to
stand-alone locations. We seek sub-markets where there is an active, but
unorganized, critical mass of similar businesses that could benefit from
aggregation. We believe this strategy should allow us to generate higher rental
income from our small tenants.




Focus on Residential Development in
Appropriate Locations. We intend to develop downtown residential projects
on sites we own near transportation infrastructure and demand generators such as
office buildings, retail stores, restaurants, and cultural and sports
venues.In the last
seven years, housing unit demand has outpaced supply in the Los Angeles
area.  From 2000 to the beginning of 2007, the population has increased by
approximately 813,000 people in Los Angeles County.  This implies
historical demand for approximately 267,000 additional housing units (based on
3.04 persons per housing unit, derived from housing and population statistics)
while only approximately 142,000 new housing units were permitted.


We
believe demand for residential units in downtown Los Angeles will also
grow. We believe that our residential projects will offer desirable housing and
provide us with attractive returns on invested capital.




Coordinate
Residential and Industrial Development in Shifting Urban Markets. We
believe that much of the downtown Los Angeles industrial space is aging or
obsolete and not properly serving its industrial users. We seek properties
within historically industrial districts that are located in emerging housing
sub-markets. As active developers and operators of industrial/distribution
space, we believe we have greater ability to acquire such opportunities quickly
and at lower industrial/distribution pricing than residential-only developers.
We also seek the purchase of industrial/distribution properties in areas near
downtown but not in emerging residential markets. We see opportunities to better
serve industrial users we displace through residential redevelopment by
providing them with more suitable space in commercial projects of ours in such
near downtown areas. We believe coordinating residential and industrial
development in this manner facilitates our land assemblage.




6
 Table of Contents


Pursue
Opportunities Offered by Governmental Organizations. In the State of
California, the state government, regional agencies and local community
redevelopment agencies created under the California Community Redevelopment Law
control a large amount of surplus property in urban areas and have substantial
land use discretion. These organizations often must dispose of their surplus
property in a manner that encourages socially responsible development. We
believe that such organizations present some of the more compelling
opportunities in California urban areas because of the size or location of the
parcels they control or because the acquisition terms for such parcels may be
more favorable than typical private seller terms. We believe our management’s
advocacy of socially-minded solutions for urban real estate problems gives us a
competitive advantage to be selected by these government organizations, thereby
creating opportunities to acquire properties at attractive values.





Aggregate
Separate Parcels and Acquire Controlling Locations in Developing
Neighborhoods.In our markets, large,
contiguous development properties are infrequently for sale and, when available,
sell for prices that often reflect their potential value. We seek to acquire
smaller, separate real estate parcels over time with a view toward aggregating
those smaller parcels into one property that can accommodate a larger-scale
development project. To acquire the individual parcels and reduce our holding
costs, we sometimes purchase an option contract or sign a long-term purchase
agreement that gives us the right to acquire the land at a specific price on or
before a specified future date. We may also acquire a strategically sized or
configured parcel in a city block that would be instrumental in any material
redevelopment of the block, thereby deterring any substantial competing
development and creating an incentive for owners of adjacent parcels to
sell.





Our
Operating Strategies




Efficiently
Manage the Development and Operation of Our Projects. We employ a mixture
of project development management and asset management strategies. First, we
keep direct control over critical development functions in which we believe we
have valuable expertise and that require significant local knowledge, such as
identification and acquisition of projects and land use entitlement. Second,
because of the widely varying nature of our projects, we generally retain expert
third-party general contractors to manage the construction of our projects, and
we employ in-house project managers to supervise the construction management
process closely. Third, once a project is complete, we directly manage its
operation and leasing activities, or we retain third-party sales companies in
the case of for-sale projects. We will occasionally engage third-party leasing
agents when they have superior tenant relationships or knowledge of the
sub-markets in which our projects are located.




Seek Interim
Revenues from Properties. The public approval process for certain
projects may last two years or longer. During the assemblage or approval
process, we take steps to permit us to generate interim revenues and allow us to
terminate leases promptly or relocate tenants when we obtain the final
assemblage piece or approvals. We accomplish this by converting long-term leases
to month-to-month leases and seeking additional interim income from additional
sources, such as surface parking or by temporarily licensing space to
entertainment companies for on-location filming. In addition, because we have a
roster of month-to-month tenants who have shown a willingness to relocate at our
discretion, we have the flexibility to generate interim revenues by relocating
tenants from a property commencing redevelopment construction to another
property that is not currently being redeveloped.




Sell or
Recapitalize our Projects to Realize Value. We expect to dispose of or
recapitalize many of our projects from time to time once they reach what we
believe to be their maximum near-term value and redeploy some or all of our
equity and profits into other real estate investments that we believe have a
greater long-term potential for economic appreciation. We believe that we will
maximize our risk-adjusted returns with a policy of selling some of our
completed projects to realize capital appreciation and reinvesting the net
proceeds in new redevelopment projects, rather than redeveloping and retaining
these projects to realize increased rents over a long period.




Our
Underwriting Process




In
considering whether to acquire an available property, we first examine the
property’s current use and market value based on historical income from
operations, revenue and expense trends and likely future profitability based on
its current use. We then undertake an extensive due diligence review and analyze
current demand generators and the property’s competitive position. As
applicable, we review the property’s current tenants and leases.




7
 Table of Contents


Because
we are foremost a redeveloper and focus on creating value through converting
real estate to different uses, we critically examine possible uses of each
potential property. In addition to the net financial value of a new property
use, our financial models of these potential properties consider projected
returns to stockholders that reflect risk discounts and timelines that take into
account the factors described below. Key factors in our investment decision
include compatibility of the property’s future use with the general plan, zoning
and planning laws, regulations and policies of the municipality, including
current zoning; an estimate of our ability and the time needed to obtain
necessary entitlement; local political support or opposition to the proposed
use; whether we own or control adjacent parcels; whether we have the ability to
relocate current tenants to other projects in our portfolio; the profile and
availability of anticipated future tenants or purchasers; trends in the
property’s neighborhood, including ongoing or proposed redevelopment projects
and expected shifts in demographics and demand generators; and the availability
of debt financing for the project upon acceptable terms.




As we
evaluate potential residential developments, we underwrite such property on a
for-rent and on a for-sale basis. We decide to sell or rent the units in a
residential development based on market factors at the time and based on which
strategy will maximize the return to the company.





Competition




We
compete with other public and private real estate companies (including real
estate investment trusts, or REITs), public and private investment firms,
private real estate investors and lenders in acquiring and developing
properties. Many of these entities have greater resources than us or other
competitive advantages. We also face significant competition in leasing or
subleasing available properties to prospective tenants and in re-leasing space
to existing tenants.




Principal
factors of competition in our primary business of owning, acquiring, developing,
redeveloping and leasing properties are the quality and nature of properties,
leasing terms (including rent and other charges and allowances for tenant
improvements), attractiveness and convenience of location, the quality and
breadth of tenant services provided, and reputation of an owner and operator of
quality properties in the relevant market. Each of our projects is subject to
significant competition from other properties in the same general area.
Additionally, our ability to compete depends upon, among other factors,
availability and cost of capital, trends of the national and local economies,
investment alternatives, the financial condition and operating results of
current and prospective tenants, construction and renovation costs, taxes,
governmental regulations, legislation and population trends.




Insurance




Our
projects are covered by comprehensive liability, casualty and rental loss
insurance. We believe that the policy specifications and insured limits are
appropriate given the relative risk of loss, the cost of the coverage and
industry practice, and that our projects will be covered adequately by
insurance. Because it is expensive and not customary in the market, we do not
have earthquake or terrorism coverage for our projects. However, future lenders
may require that we obtain insurance to cover losses caused by terrorism and
earthquakes.




Employees




We
employed 95 full-time employees as of March 28, 2008. We believe that our
relations with our employees are good.





Additional
Information





We have made available copies of the
charters of the committees of our Board of Directors, our code of ethics and
conduct, our corporate governance guidelines, our whistleblower policy and any
materials we file with the SEC on our website at www.meruelomaddux.com.  Copies
of these documents are available in print to any stockholder who requests
them.  Requests should be sent to Meruelo Maddux Properties, Inc., 761
Terminal Street, Building 1, Second Floor, Los Angeles, California,
Attention:  Corporate Secretary.  All filings we make with
the SEC are also available on our website.





All reports filed with the Securities
and Exchange Commission may also be read and copied at the SEC’s public
reference room at 100 F Street, N.E., Washington, D.C. 20549.  Further
information regarding the operation of the public reference room may be obtained
by calling 1-800-SEC-0330.  In addition, all of our filed reports can
be obtained at the SEC’s website at www.sec.gov.





Item
1A.                    Risk
Factors


Investment
in our common stock involves significant risks. If any of the risks discussed in
this report occur, our business, financial condition, liquidity and results of
operations could be materially and adversely affected. The risk factors set
forth below are not the only risks that may affect us. Additional risks and
uncertainties not presently known to us, or not identified below, may also
materially affect our business, financial condition, liquidity and results of
operations. Some statements in this report, including statements in the
following risk factors, constitute forward-looking statements. Please refer to
the section entitled “Forward-Looking Statements.”




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Risks
Related to Our Business and Our Projects




Our Markets
and Future Development Plans




We
currently generate insufficient revenue from operations to pay our contractual
obligations, and we will require significant amounts of cash to stabilize our
portfolio, build out our development projects and satisfy our contractual
obligations.


We
currently incur a negative after-tax cash flow of approximately $0.5 million per
month.  In addition to this monthly loss, we incur an additional
approximately $2.0 million per month in costs associated with carrying our
development properties, before any on-site development of those
properties.


Assuming
no development of any of our projects other than the project identified below,
our cash requirements for 2008 include but are not limited to: approximately
$78.0 million to fund binding development commitments relating to our 717 W. 9th
Street project, approximately $172.3 million to satisfy borrowings maturing in
2008, approximately $104.8 million to acquire projects (including projects that
we intend to sell concurrently with their acquisition by us) that are currently
subject to purchase rights (which we could not be legally compelled to purchase,
but in the event we did not complete such purchases, we would forfeit deposits
and other costs aggregating $15.0 million), approximately $11.0 million of
planned but uncommitted capital improvements to our operating properties,
and approximately $24.0 million in interest, real property tax and other costs
to carry our development projects, before any on-site development at the
projects.
  In
addition, certain of our lenders may have the ability to accelerate indebtedness
of ours totaling $61.9 million, $33.2 million of which is due in 2008 and is
included in the $172.3 million of principal identified above.  See
“—Risks Related to Our Debt Financings—We may be in technical default under
certain of our financing arrangements.”




As a
result of the foregoing needs and our combined monthly negative cash flow and
carrying costs of $2.5 million, we will require substantial amounts of new
capital to meet our contractual obligations in 2008, before any discretionary
development.  Our primary expected source of new capital is
borrowing.  However, as noted in greater detail in the risk factor
below, current market conditions have made it more difficult for us to obtain
debt financing timely and on attractive terms or at all.




Because
of the credit market disruption and our liquidity needs, our previously
disclosed development and redevelopment plans and timelines have been adversely
impacted.  This impact will likely delay the point in time at which we
could achieve profitability from operations.  We will continue to
evaluate and adjust as appropriate our development and redevelopment plans and
timelines (both commencement and completion dates) to correlate with adjustments
in the availability of capital and other current and changing market
conditions.  In addition, we are considering actions that would
generate cash sooner or delay or reduce our liquidity needs. These actions
include selling certain of our rental properties and development projects,
delaying or scaling back planned discretionary development, including foregoing
portions of the approximately $11.0 million in uncommitted capital expenditures
identified above, refocusing projects to produce more near-term income and
require less capital, deferring our acquisitions of projects subject to purchase
obligations, and entering into joint ventures in respect of our larger or more
capital intensive development projects.




These
actions may reduce the potential long-term cash flow or value we otherwise could
have recognized from our projects if we were able to execute on our development
plans in place before the credit market disruptions.




We cannot
assure you that we will be able to obtain additional financing or that we will
be able to obtain it on favorable terms or that we will be successful in taking
any of the actions that we are considering to generate cash alternatives to
borrowings or delay or reduce our liquidity needs.  If we are
unsuccessful in obtaining the capital we require on a timely basis, our business
will be significantly harmed and our ability to operate as a going concern may
be adversely affected.




Adverse
developments in the credit markets have adversely affected our ability to
borrow.


Recently,
the residential mortgage market in the United States has experienced a variety
of difficulties and changed economic conditions that have adversely affected the
credit markets generally, including the commercial lending market on which we
depend.  Residential mortgage loans have had a higher than expected
rate of delinquencies resulting in tighter lender-imposed loan underwriting
standards and less favorable loan contract terms and
conditions.  Challenging credit market conditions, initially centered
within the residential mortgage market, have deepened into other credit markets,
including the markets on which we rely for our borrowings.  This
disruption has resulted in less available debt capital and, when debt capital is
available, delays in obtaining financing and lower loan-to-value and
loan-to-cost ratios, which have the effect of requiring us to invest a higher
percentage of equity in our projects in order to obtain financing, and increased
interests rates (relative to the target Federal Funds Rate).  If we
are unable, as a result of negative credit market conditions, to obtain timely
financing on favorable terms, or to obtain financing at all, whether secured or
unsecured, our ability to execute our development, acquisition and other
business plans and our ability to meet our current liquidity needs, and
therefore operate as a going concern, would be adversely
affected.




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Almost
all of our projects are in the greater metropolitan Los Angeles area and
depend upon the Southern California economy, which exposes us to more
concentrated risk, including recession and other economic risks, than if our
projects were in several geographic regions.


Almost
all of our projects are located in the greater metropolitan Los Angeles
area, and a substantial majority of them are in downtown Los Angeles or
nearby areas, which exposes us to more concentrated economic risks than if we
owned projects in several geographic regions. Therefore, economic and other
events that adversely affect this narrow geographic region will have a direct
negative effect on our business and operations. We are susceptible to adverse
developments in the Southern California region, such as adverse developments in
the local industrial, commercial and residential real estate market, including
market declines in real estate values and oversupply of or reduced demand for
such space.  We are also susceptible to business layoffs or
downsizing, industry slowdowns, relocations of businesses, changing
demographics, increased telecommuting, terrorist attacks, earthquakes and other
natural disasters, infrastructure quality issues, California state budgetary
constraints and priorities, increases in real estate and other taxes, costs of
complying with government regulations or increased regulation and other factors.
The California economy, in comparison to other parts of the country, is
negatively affected to a greater extent by changes and downturns in certain
industries, including the entertainment, manufacturing, high technology and
defense industries and in Pacific Rim trading activities. Any adverse
developments in the economy or real estate market in Los Angeles or
Southern California in general would adversely affect us. We cannot assure you
of the continued growth of the Southern California economy or the national
economy or our future growth rate.




Changing
market conditions, especially in the greater metropolitan Los Angeles area
may adversely impact our ability to sell or rent residential units at expected
prices or rents, or at all.


There
will be a significant amount of time before we can develop our residential
projects and offer units available for sale or rent. The market rental value of
a unit in a proposed residential project can vary significantly during this time
due to changing market conditions. Prices of residential units and sales and
rental activities in the Los Angeles market will have a large impact on our
profitability because we conduct substantially all of our business in this
market. These prices or rents could decline from time to time for
market-specific reasons, including adverse economic conditions due to, among
other things, the failure or decline of key industries and employers affecting
the local, regional or national economies. If market conditions were to
deteriorate, we may need to sell or rent residential units at lower prices or
rates than we anticipate, or attempt to convert any for-sale units to for-rent
units, and may not be able to develop or complete projects as proposed. We may
also need to take write-downs of our unit inventories and land holdings if
market values decline. Recently the Los Angeles market has begun to exhibit
signs of decreasing consumer demand, and sales of new and existing homes have
declined. If the prices of residential units or sales or rental activity decline
in the key market in which we operate, our costs may not decline at all or at
the same rate and, as a result, our business, results of operations and
financial condition would be adversely affected




New
developments, redevelopments and acquisitions may fail to perform as we
expect.


We focus
our business on the acquisition and redevelopment of commercial and residential
projects. In deciding whether to acquire, develop or redevelop a particular
property, we make assumptions regarding the expected future performance of that
property. In particular, we estimate the return on our investment based on
expected sale or resale value, or occupancy and rental rates, as applicable. If
the property is unable to achieve the expected resale price, or occupancy and
rental rates, as applicable, depending on our investment strategy for a
particular property, it may fail to perform as we expected in analyzing our
investment. When we acquire a property, we often reposition or redevelop that
property with the goal of increasing profitability. Our estimate of the costs of
repositioning or redeveloping an acquired property may prove inaccurate.
Additionally, we may acquire unimproved land properties not leased or not fully
leased, and any cash flow from existing operations may be insufficient to pay
the operating expenses and debt service associated with that property until the
property is improved or more fully leased.




The
development and redevelopment of projects are highly speculative activities, and
our success depends on our ability to redevelop a majority of our portfolio and
develop many new projects, which may make investing in our stock riskier than
investing in the stock of real estate companies that own stabilized properties
occupied by tenants with long-term leases.


As a
primary part of our business, we develop new projects and redevelop existing
projects. We plan to develop or redevelop a substantial majority of our
portfolio. Many of our projects are several years away from commencing. All of
our projects are subject to national, regional and local economic changes, and
localized demographic and population shifts, each of which could affect the
demand for the specific types of real estate improvements we anticipate
building. In addition, the financial success of each project depends on our
ability to plan and execute the project and, in many cases, on our success in
securing adequate capital to fund the development or redevelopment.




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Before a
project can generate any revenues, material expenditures must be incurred to
acquire land, obtain governmental approvals and construct significant portions
of project infrastructure and sales facilities. It generally may require several
years for a development or redevelopment project, particularly a high-rise
residential project, to achieve cumulative positive cash flow. If we are unable
to develop and market our projects successfully and to generate positive cash
flows from these operations in a timely manner, it will have a material adverse
effect on us.




More
specifically, in connection with the development of new projects and the
redevelopment of existing projects, we will be subject to risks such
as:




•
            deteriorating
      credit markets, which challenge our ability to obtain financing for our
      projects on favorable terms, or at
all;




•
            cyclical
      overbuilding;




•
            cost
      overruns, including increases in the cost of materials because of
      increased global demand (particularly in the price of steel, lumber,
      drywall, copper and concrete, which are significant components of
      construction costs);




•
            difficulties
      in obtaining or failures to obtain land use entitlements, occupancy and
      other government permits and
authorizations;




•      delays
because of a number of factors, including unforeseen circumstances;




•
            changes
      in political views toward the proposed development, redevelopment or
      use;




•
            governmental
      restrictions on the nature or size of a
project;




•
            strikes,
      labor disputes or supply
disruptions;




•
            condemnation
      and taking of any of our projects by the government under eminent
      domain;




•
            shortages
      of qualified trade workers and building
  materials;




•
            development
      costs for projects not pursued to
completion;




•
            earthquakes,
      floods, mudslides, fires, bad weather and other acts of
    God;




•
            design
      and construction defects and unforeseen or underestimated environmental
      and engineering problems;




•
            contractor
      and subcontractor disputes and mechanics’ liens;
  and




•
            lack
      of income until leasing or sale.




Any or
all of these risks could have an adverse affect on our business, operations,
cash flow and ability to increase values for our stockholders. Real estate
companies that own stabilized, fully developed properties are substantially less
affected by many of the specific risks noted above including, but not limited to
declining credit market conditions, failure to obtain land use entitlements,
design and development cost overruns, construction delays, and contractor and
subcontractor disputes. Because these types of real estate companies are less
susceptible to these risks, investing in the stock of those companies may be
less risky than buying our stock.




We
face competition in the Southern California market, which may decrease or
prevent increases in the occupancy and rental rates of our projects, and may
decrease our profitability from sales of our projects.




Our
projects are located in areas that have other warehouse and industrial,
commercial, residential and mixed-use projects, both developed and undeveloped,
which may be more attractive to potential tenants or purchasers. Competition
from other properties may adversely affect our ability to lease or sell our
projects and to increase sales prices or the rentals charged on our leases. If
our competitors offer space at rental rates below current market rates, or below
the rental rates we currently charge our tenants, we may lose existing or
potential tenants, and we may be pressured to reduce our rental rates below
those we currently charge or to offer more substantial rent abatements, tenant
improvements, early termination rights or below-market renewal options in order
to retain tenants when our tenants’ leases expire. We also expect competition in
the acquisition of existing properties and the development of new projects. This
competition could increase prices for properties of the type that we would like
to pursue. As a result, we may not be able, or have the opportunity, to make
suitable investments on favorable terms in the future.




We
compete in our markets with numerous national, regional and local residential
builders. This competition with other builders could reduce the scope of our
residential projects, or cause us to accept reduced margins in order to maintain
sales volume at particular residential projects. Our residential projects will
also compete with resales of existing used or foreclosed homes and residential
units, housing speculators and available rental housing. Increased competitive
conditions in the residential resale or rental market in the region where we
operate could decrease demand for new residential units and increase
cancellations of sales contracts in backlog.




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Many
of our redevelopment projects require municipal authorities to approve or change
land use entitlements, environmental certifications pursuant to the California
Environmental Quality Act and other permits to allow these projects to proceed
in certain areas so that our projects comply with the land use laws in
effect.


Twenty-eight
of our projects are proposed for redevelopment. Substantially all may require
city and other governmental authorities to approve or change land use
entitlements, environmental certifications pursuant to the California
Environmental Quality Act and other permits to allow our projects to proceed.
Land use laws are complex and the approval process is subject to delays, the
discretion of individual governmental bodies and the political process. There is
no guarantee that land use entitlements and other approvals needed for our
projects to proceed will ultimately be approved. If we fail to obtain any
required land use approvals or entitlements, it would harm our ability to
complete certain redevelopment projects.




Our
investment strategy depends on our ability to acquire small, adjacent parcels of
land in order to aggregate the land into one larger property for
redevelopment.


One
aspect of our business is to acquire smaller, adjacent real estate parcels over
time with a view toward later aggregating those smaller parcels into one large
redevelopment project. We cannot assure you that we will be able to carryout
this strategy successfully in all cases, or at all. We may be unable to acquire
additional parcels adjacent to parcels we already own, or we may overpay for
smaller parcels in anticipation of assembling a viable project. Acquiring less
than all of the land we need for a particular redevelopment project will impair
our ability to complete the project as planned. In addition, failure to acquire
all the land needed for a particular project may ultimately result in our
selling the parcels of land that we do own at a loss.




Our
Current Operations





We
may be unable to renew leases or find other lessees, and a majority of our
portfolio’s annualized base rents are set to expire before the end of
2008.


We are
subject to the risks that, upon expiration, leases may not be renewed, the space
subject to such leases may not be relet or the terms of renewal or reletting,
including the cost of required renovations, may be less favorable than expiring
lease terms. As of December 31, 2007, leases representing approximately 20.7% of
the square footage of our owned projects are month-to-month leases, and an
additional approximately 36.7% of the square footage of our owned projects was
available for lease (including space available for lease at rental and
development projects). In addition, leases constituting a substantial portion of
the annualized base rent from our owned projects are scheduled to expire before
the end of 2008. Leases scheduled to expire before the end of 2008, including
the lease with our largest tenant, and existing month-to-month leases, when
taken together, constitute approximately 69.4% of our owned portfolio’s
annualized base rent, or approximately $17.8million out of $25.6
million. If we are unable to promptly renew a significant number of expiring
leases or to promptly relet the space covered by such leases, or if the rental
rates upon renewal or reletting were significantly lower than the then current
rates, our business would be materially and adversely affected. Additionally, we
may incur significant costs to renew expiring leases or lease vacant space. Any
of these factors could cause a decline in our lease revenues, which would harm
our profitability.




In
the future, we may offer for-sale residential units and potential customers may
be unwilling or unable to purchase our residential units at times when
mortgage-financing costs are high or during periods of challenging credit market
conditions.


The
majority of the potential customers for units in our residential projects that
may be for sale in the future will finance their purchases through third-party
lenders. In general, housing demand is adversely affected by increases in
interest rates and by decreases in the availability of mortgage financing as a
result of declining customer credit quality or other issues. Recently, the
residential mortgage market in the United States has experienced a variety of
difficulties and changed economic conditions that may adversely affect the
ability of borrowers to obtain mortgage financing.  Because of higher
than expected rates of delinquencies, many lending institutions have imposed
more stringent loan underwriting standards and less favorable loan contract
terms and conditions.  Because of these market conditions, demand for
our units may decrease as it may be more difficult for potential buyers of our
residential units to obtain the financing necessary to purchase a
unit.




We
are subject to high taxes levied on California real estate, and any increases in
our property taxes, including through the repeal of laws that establish maximum
property tax rates, could adversely affect our business.


Each of
our projects is subject to real and personal property taxes. These taxes on our
projects may increase as tax rates change and as the projects are assessed or
reassessed by taxing authorities, and we will experience reassessments as a
result of the contribution of our projects to us in connection with our IPO and
formation transaction. In addition, owners of California property are subject to
particularly high taxes. If property taxes increase, our business would be
adversely affected.




Voters in
the State of California previously passed Proposition 13, which generally limits
annual real estate tax increases to 2% of assessed value per annum. From time to
time, various groups have proposed repealing Proposition 13, or providing for
modifications such as a “split roll tax,” whereby commercial property, for
example, would be taxed at a higher rate than residential property. Given the
uncertainty, it is not possible to quantify the risk to us of a tax increase or
the resulting financial impact of any increase, but any tax increase would
reduce the amount of cash available for new investment or distribution to
stockholders.




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We
may assume unknown liabilities in connection with the acquisition of
properties.


We have
recently acquired, and have entered into or been assigned and expect to enter
into contracts to acquire, real estate that may be subject to existing
liabilities, some of which may be unknown at the time we acquire the property.
Unknown liabilities might include liabilities for cleanup or remediation of
environmental conditions, claims of tenants, vendors or other persons dealing
with the entities prior to our acquisition of the properties (that had not been
asserted or threatened prior to these acquisitions), tax liabilities and accrued
but unpaid liabilities whether incurred in the ordinary course of business or
otherwise. Our recourse with respect to such liabilities will be limited. The
assumption of existing liabilities in connection with the acquisition of our
properties could have a material adverse affect on our operations and our
ability to develop or redevelop such properties.




We
have sued the sellers of some of the projects for which we have contracts to
purchase in order to enforce those contracts, and we cannot assure you that we
will succeed in such litigation, that we will not need to bring additional suits
against other sellers or that we will succeed in any additional
litigation.


We are
currently involved in one lawsuit against a seller of a project that we have
under contract to acquire for $16.7 million. We believe the seller of this
project has breached its obligations under the contract to sell us the project
according to the terms of the contract. We initiated the lawsuit and have
obtained a judgment against this seller to enforce our rights to purchase the
particular project, which lawsuit is on appeal. During periods when the real
estate market in Southern California is strong, sellers may continue to breach
the terms of contracts with us with the goal of selling the project to another
purchaser at a higher price. While we cannot assure you that we will prevail in
any lawsuit, we intend to vigorously seek judicial enforcement of our rights to
purchase projects for which we have entered into binding acquisition contracts.
Our failure to prevail in any lawsuit we have or may need to bring to enforce
purchase rights could adversely affect our ability to complete planned projects,
which would have an adverse affect on our operations.




We
may have to seek legal remedies to remove existing tenants from projects that we
have planned for redevelopment, which would increase our investment costs,
decrease our profitability for those projects and delay completion of the
redevelopment.


The
execution of our business strategy depends on redevelopment and repositioning of
some of our existing projects. Current tenants of those projects may refuse to
vacate the premises to allow the redevelopment work to commence. Some tenants
may have no legal right to holdover. We take legal action where appropriate to
remove holdover tenants so that our projects proceed. Any negotiations or legal
action with respect to current tenants of redevelopment projects would increase
our costs related to the project and delay its completion.




We
may make errors in determining the creditworthiness of our current or
prospective tenants.


We expect
that substantially all of our leasing revenues will be derived from tenants who
do not have publicly available credit ratings and that a substantial majority of
our leasing revenues will be derived from tenants with very limited credit
histories. For some of these tenants, we expect to analyze the tenants’ credit
by reviewing available financial and other data. We may misinterpret or
incorrectly analyze available credit data. These mistakes may, in part, lead us
to make investments we would not have otherwise made and may ultimately result
in losses on one or more of our investments. Any tenant failures to make lease
payments when due or tenant bankruptcies could result in the termination of the
tenant’s lease and, particularly in the case of a large tenant, in material
losses to us.




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


Our
results of operations and cash flow would be adversely affected if tenants are
unable to pay their rent or otherwise meet their obligations to us. In the event
of default by tenants, we may experience delays and incur substantial costs in
enforcing our rights as landlord. In addition, at any time, a tenant of one of
our projects may seek the protection of bankruptcy laws, which could result in
the rejection and termination of such tenant’s lease. Upon a default, we may not
be able to relet the space at all or on terms that are as favorable to us as the
defaulted lease. We are an accrual basis taxpayer and will have to include in
income and pay tax on rent that has accrued even though it has not been paid by
a tenant. In addition, phantom income tax liability could result for our company
to the extent cash profits are reinvested or expended on non-deductible items
such as the payment of principal on debt. The inability to depend on tenants,
their default and an inability to relet the space on reasonable terms, if at
all, would adversely affect our operations and our cash flows.




Our
tenants may conduct activities at our projects that reduce the value of our
projects.


Because
we have limited control over the operations and activities of our tenants, they
may conduct certain activities that damage the space they lease at one of our
projects or cause a project to be viewed in a negative light. Under our lease
documents, our ability to control the activities of tenants is limited and, in
the event our tenants damage our projects, we may not be able to recoup losses
from them, either due to economic or contractual reasons. These activities could
reduce the value of the projects in which they lease space, which could reduce
the value of our investment, impair our ability to repay debt on the projects or
render it more difficult for us to sell the project or re-lease the space to a
different tenant, any of which would harm our operations and cash
flows.




13
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Risks
Related to Our Debt Financings




Required
payments of principal and interest on borrowings may leave us with insufficient
cash to operate or develop our projects or to pay any dividends to our
stockholders and may expose us to the risk of default under our debt
obligations.


We have
borrowed and will be required to continue to borrow significant amounts in
connection with the development and redevelopment of our projects and any future
acquisitions of properties.  We may in the future be required to enter
into joint venture agreements, sell certain assets, access the capital markets,
or undertake a combination of the foregoing to finance our
operations.




Our
present and future level of debt and the limitations imposed on us by our
present and future debt agreements could have significant adverse consequences,
including the following:




•
            we
      may be required to use a substantial portion of our cash flow from
      operations to pay principal and interest, which reduces the amount
      available for development or acquisition of projects and to pay dividends
      to our stockholders;




•
            we
      may be at a competitive disadvantage compared to our competitors that have
      less debt;




•
            our
      cash flow may be insufficient to meet our required principal and interest
      payments;




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




•
            we
      may be unable to refinance our indebtedness at maturity or may find that
      the refinancing terms may be less favorable than the terms of our original
      indebtedness;




•
            because
      a portion of our debt may bear interest at variable rates, an increase in
      interest rates could materially increase our interest
    expense;




•
            we
      may be forced to dispose of one or more of our projects, possibly on
      disadvantageous terms;




•
            we
      may experience increased vulnerability to economic and industry downturns,
      reducing our ability to respond to changing business and economic
      conditions;




•
            we
      may violate restrictive covenants in our loan documents or otherwise
      default on our obligations, which would entitle the lenders or mortgagees
      to accelerate our debt obligations, collect additional fees and interest
      and foreclose on our projects that secure their loans and receive an
      assignment of lease payments; and




•
            our
      default under any mortgage loan or other debt with cross-default or
      cross-collateralization provisions, if we enter into such arrangements,
      could result in default on other indebtedness or result in the
      foreclosures of other projects we
own.




If the
economic performance of any of our projects declines or we fail to develop and
stabilize our projects as planned, our ability to service our debt could be
adversely affected.




We
may be in technical default under certain of our financing
agreements.


A
significant number of the financing agreements we have entered into in
connection with the acquisition of our properties contain provisions prohibiting
a change of control of the borrower subsidiary and permitting the lenders under
such agreements to accelerate payment of the related debt in the event the
change of control provisions are triggered.  A number of these
provisions relating to aggregate indebtedness of $61.9 million were technically
triggered in connection with our formation transactions at the time of our IPO
due to the transfer of ownership of the borrower subsidiaries to the operating
partnership.  Of the $61.9 million of indebtedness, $33.2 million is
maturing in 2008 and is included in the $172.3 million of debt due in 2008,
which we will need to repay or refinance.  Though no assurances can be
given that one or more of the lenders under the affected financing agreements
will not elect to accelerate payment of the related indebtedness, based on our
belief that we maintain good relations with our lenders, that the affected
financing arrangements reflect current market rates, that we have been paying
all of our obligations under such financings, that such lenders were notified of
our formation transaction and that they have since accepted debt service
payments each month since then, management believes that these provisions will
not have a material adverse effect on our business, financial condition or
results of operations.  If any such indebtedness were accelerated, we
would be required to obtain additional financing and no assurances can be given
that it would be readily available or available on attractive
terms.





Our
organizational documents contain no limitations on the amount of indebtedness we
may incur.


Our
certificate of incorporation and bylaws do not limit the amount of indebtedness
that we or our operating partnership may incur. In addition, we do not have a
policy limiting the amount of debt that we may incur.  Our management
and Board of Directors have discretion to increase the amount of our outstanding
debt at any time without approval by our stockholders. If we incur additional
indebtedness, we may experience increased difficulty in obtaining additional
financing based on our current portfolio, refinancing existing debt on favorable
terms or at all or repaying our outstanding indebtedness.  The terms
of any credit facility we may obtain in the future may require us to maintain
certain leverage ratios that may limit the amount of indebtedness that we may
incur. Failure to obtain additional financing could impede our ability to grow
and develop our business. Our leverage levels also may adversely affect the
market value of shares of our common stock if an investment in our company is
perceived to be more risky than an investment in our peers.




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Mortgage
debt obligations expose us to increased risk of property losses.


Incurring
mortgage and other secured debt obligations increase our risk of property losses
because defaults on indebtedness secured by properties may result in foreclosure
actions initiated by lenders and ultimately our loss of the property securing
any loans for which we are in default. For tax purposes, a foreclosure of any of
our properties would be treated as a sale of the property for a purchase price
equal to the outstanding balance of the debt secured by the mortgage. If the
outstanding balance of the debt secured by the mortgage exceeds our tax basis in
the property, we would recognize taxable income on foreclosure, but would not
receive any cash proceeds.




As we
execute our business plan, we will assume mortgage indebtedness or incur
substantial new mortgage indebtedness with respect to properties that we own or
in connection with property acquisitions.




Our
Company and Management





We
have a near-term expectation of significant growth, and we may not be able to
adapt our management and operational systems to respond to this growth,
including the development and integration of new projects without unanticipated
significant disruption or expense.


In order
to achieve desired and planned business growth, we intend to expand our
development and construction and asset and property management activities
significantly. With the expected growth, we cannot assure you that we will be
able to adapt our management, administrative, accounting and operational
systems, or hire and retain sufficient operational staff to manage our growth
without significant operating disruptions or unanticipated costs. As we develop
additional projects, we will be subject to risks associated with managing new
projects, including project design and construction, tenant retention and
mortgage default. By way of example, we are currently subject to an
administrative proceeding as a result of demolition activity that occurred at
our Vignes Village project without a permit. As a consequence, the Los Angeles
Department of Building and Safety imposed an 18-month ban on future development
at that site that expires in May 2008.  At the time of the demolition,
we were involved in three other demolition projects, and our available
managerial resources failed to oversee adequately the demolition permitting
process for Vignes Village. In addition, new development and construction may
cause disruptions in our operations and divert management’s attention away from
day-to-day operations, which could impair our relationships with our current
tenants and employees.




Our
success depends on key personnel whose continued service is not
guaranteed.


We depend
on the efforts and expertise of our senior executive officers to manage our
day-to-day operations and strategic business direction. In addition, many of our
senior executive officers have strong industry reputations, which aid us in
identifying acquisition and borrowing opportunities, having such opportunities
brought to us, and negotiating with tenants and sellers of properties. The loss
of the services of these key personnel could diminish our relationships with
lenders, existing and prospective tenants, property sellers and industry
personnel and harm our business and our prospects.




We
entered into an agreement with each of our senior executive officers that will
provide him with benefits in the event his employment is terminated by us
without cause or by him for good reason, which benefits could conflict with the
best interest of our stockholders.


We
entered into an agreement with each of our senior executive officers that will
provide him with severance benefits if his employment is terminated by us
without cause or by him for good reason. Certain of these benefits, including a
related tax indemnity in favor of two of our executives, could prevent or deter
a change in control of our company that might involve a premium price for our
common stock or otherwise be in the best interest of our
stockholders.




All
management rights are vested in our Board of Directors, and our stockholders
have limited rights.


Our Board
of Directors is responsible for our management and strategic business direction,
and our senior executive officers are responsible for our day-to-day operations.
Our major policies, including our policies with respect to acquisitions,
leasing, financing, growth, operations, debt limitation and distributions, will
be determined by our Board of Directors. Our Board of Directors may amend or
revise these and other policies from time to time without a vote of our
stockholders.


Our
Chairman and Chief Executive Officer, Richard Meruelo, has pledged his shares of
our common stock as collateral for a loan.
 Our
Chairman and Chief Executive Officer, Richard Meruelo, has pledged his shares of
our common stock as collateral for a loan, the proceeds of which were utilized
by Mr. Meruelo to purchase 3,000,000 shares of our common stock in our initial
public offering at the public offering price.  Upon the occurrence of
an event of default, the lenders would be entitled to declare the loan
immediately due and payable and enforce on the collateral.  Mr.
Meruelo informed us that he is currently negotiating an extension of the loan
and expects to reduce the principal balance of the loan from the proceeds of the
sale of personal real estate that is not a company-owned asset and that is
currently under contract to be sold.  The sale is subject to customary
conditions, including the buyer’s completion of a due diligence investigation to
its satisfaction.  Mr. Meruelo has informed the company that he
expects this sale to close in May 2008, although there is no assurance that any
of the closing conditions will be timely fulfilled or that the transaction will
in fact close.  Under Mr. Meruleo’s loan agreement, it is an event of
default if, among other events, the closing price of our common stock on any day
is less than $3.00.  In this regard, we note that because of the
recent closing price of our common stock, Mr. Meruelo’s loan may be in technical
default.  A copy of Mr. Meruelo’s loan agreement is available publicly
as an exhibit to a Schedule 13D Mr. Meruleo has filed with the
SEC.


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Risks
Related to Our Organization and Structure




We
did not obtain appraisals of our projects that were contributed to us by our
predecessor business in connection with our IPO, and the consideration given by
us in exchange for them was not negotiated at arm’s length and may have exceeded
their fair market value or the value that would have been determined by
third-party appraisals.


We
acquired almost all of our current projects pursuant to a contribution agreement
and merger agreements with entities owned and controlled by our founders. We did
not obtain any third-party appraisals of our projects, nor any independent
third-party valuations or fairness opinions in connection with our formation
transactions. The terms of the contribution agreement and merger agreements
relating to our projects were not negotiated on an arm’s length basis. The terms
of these agreements and the valuation methods used to determine the value of the
projects were determined by our management team, including Messrs. Meruelo and
Maddux, who received total consideration in the formation transactions of
39,652,757 shares of our common stock, excluding shares that we have a
contingent obligation to issue, and $2.8 million in cash as a result of the
contributions and mergers. As a result, the consideration given by us in
exchange for the entities owning our projects in the formation transactions may
have exceeded their fair market value.




Messrs.
Meruelo and Maddux have a controlling vote in certain matters as a result of
their ownership interests in us.


Messrs.
Meruelo and Maddux received shares of our common stock in our formation
transactions, acquired additional shares in our IPO, and were issued a portion
of the shares that we had a contingent obligation to issue, that collectively
constitute a majority of our voting stock. Mr. Meruelo by himself indirectly
holds 44.8% of our voting stock.  Messrs. Meruelo and Maddux may have
interests that differ from those of our public stockholders and may accordingly
vote as stockholders in ways that may not be consistent with the interests of
our public stockholders. This voting control over certain matters, including
decisions relating to the election of our Board of Directors, may have the
effect of delaying, preventing or deterring a change of control of our company,
or could deprive our stockholders of an opportunity to receive a premium for
their common stock as part of a sale of our company.




We
may experience conflicts of interest with our directors and officers relating to
their duties owed both to us and to the limited partners of our operating
partnership, their ownership interests in our operating partnership and their
interests in properties that may compete for the same tenants as our
projects.


Our
directors and officers may have conflicting duties because, in their capacities
as our directors and officers, they have a duty to us and our stockholders and,
in our capacity as general partner of our operating partnership, they have a
fiduciary duty to limited partners. These conflicts of interest could lead to
decisions that are not in the best interest of our stockholders. Conflicts may
arise when the interests of our stockholders and the limited partners of the
operating partnership diverge, particularly in circumstances in which there may
be an adverse tax consequence to the limited partners, such as upon the sale of
certain projects contributed to our operating partnership or the repayment of
indebtedness below certain levels.




We may
also experience conflicts of interest with several members of our senior
management team who have become limited partners in our operating partnership
through the receipt of LTIP units granted under our 2007 Equity Incentive
Plan.




Messrs.
Meruelo and Maddux own interests in projects that were not contributed to us. We
may experience conflicts of interest with these members of our senior management
team to the extent that these properties compete for the same tenants or
customers as our properties or divert their attention away from our
business.




We
are subject to corporate income tax, which may reduce the amount of funds we
have to invest and to pay to you as dividends and we have substantial built-in
taxable income in our assets.


We are
taxed as a regular C corporation for federal income tax purposes. As a result,
our taxable income is subject to the federal corporate income tax, which is
35.0% currently. We are also subject to state and local corporate income taxes.
As a result of our formation transactions, we have substantial built-in taxable
income in our assets. As of January 30, 2007, the estimated inherent gain in the
assets contributed to us in our formation transactions was
$429.4 million.  The federal, state and local taxes we will pay
on our earnings including the tax on the inherent gain (if and when we dispose
of those assets in a taxable transaction), will reduce any funds we may have to
invest or to pay to you as dividends.




We
are a holding company with no direct operations and rely on funds received from
our operating partnership to pay liabilities.


We are a
holding company and conduct all of our operations through our operating
partnership. We do not have, apart from our ownership of our operating
partnership, any independent operations. We rely on distributions from our
operating partnership to meet our debt service and other obligations, including
tax liability on taxable income allocated to us from our operating partnership
(which might not make distributions to the company equal to the tax on such
allocated taxable income). As a result, we will rely on distributions from our
operating partnership to pay any dividends we might declare on our common stock.
The ability of subsidiaries of the operating partnership to make distributions
to the operating partnership, and the ability of our operating partnership to
make distributions to us in turn, will depend on their operating results and on
the terms of any loans that encumber the projects owned by them. Such loans may
contain lockbox arrangements, reserve requirements, financial covenants and
other provisions that restrict the distribution of funds. In the event of a
default under these loans, the defaulting subsidiary would be prohibited from
distributing cash.




In
addition, because we are a holding company, your claims as stockholders are
structurally subordinated to all existing and future liabilities and obligations
(whether or not for borrowed money) of our operating partnership and its
subsidiaries. Therefore, in the event of our bankruptcy, liquidation or
reorganization, the assets of our operating partnership and its subsidiaries
will be able to satisfy the claims of our stockholders only after all of our
operating partnership’s and its subsidiaries’ liabilities and obligations have
been paid in full.  A significant portion of the indebtedness of the
subsidiaries of our operating partnership is secured by real
property.




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As of
March 28, 2008, we own an estimated 99.6% interest in the operating partnership,
which may, in connection with our acquisition of additional properties or
otherwise, issue additional common units of limited partnership interest. Such
issuances would reduce our ownership in our operating partnership. Our
stockholders will not directly own common units of limited partnership interest
of the operating partnership and do not have any voting rights with respect to
any such issuances or other partnership level activities of the operating
partnership.




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


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




•
            vacancies
      on our Board of Directors may only be filled by the remaining
      directors;




•
            only
      the Board of Directors can change the number of
  directors;




•
            our
      directors may adopt, amend or repeal any of our
  bylaws;




•
            the
      affirmative vote of holders of a majority of the total votes eligible to
      be cast in the election of directors is required for stockholders to
      adopt, amend or repeal any of our
bylaws;




•
            there
      is no cumulative voting for
directors;




•
            our
      stockholders are not permitted to act by written consent;
    and




•
            stockholders
      must comply with advance notice procedures to make proposals to be brought
      before stockholder meetings, including nominations of persons for election
      to the Board of Directors.




In
addition, our certificate of incorporation authorizes the Board of Directors to
issue up to 50 million shares of preferred stock. The preferred stock may be
issued in one or more series, the terms of which will be determined at the time
of issuance by our Board of Directors without further action by the
stockholders. These terms may include voting rights, including the right to vote
as a series on particular matters, preferences as to dividends and liquidation,
conversion rights, redemption rights and sinking fund provisions. No shares of
preferred stock are outstanding as of the filing of this report. The issuance of
any preferred stock, however, could diminish the rights of holders of our common
stock, and therefore could reduce the value of our common stock. In addition,
specific rights granted to future holders of preferred stock could be used to
restrict our ability to merge with, or sell assets to, a third party. The
ability of our Board of Directors to issue preferred stock could make it more
difficult, delay, discourage, prevent or make it more costly to acquire or
effect a change in control, thereby preserving the current stockholders’ control
of our comp




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




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




Our
rights and the rights of our stockholders to take action against our directors
and officers are limited, which could limit your recourse in the event of
actions not in our stockholders’ best interests.


Our
certificate of incorporation authorizes us to indemnify our directors and
officers for actions taken by them in those capacities to the extent permitted
by Delaware law.  Our bylaws require us to indemnify each director or
officer who has been successful, on the merits or otherwise, in the defense of
any proceeding to which he or she is made a party by reason of his or her
service to us.  We may also be obligated to fund the defense costs
incurred by our directors and officers.   In addition, our
certificate of incorporation limits the liability of our directors and officers
for money damages, except for liability resulting from any breach of the duty of
loyalty to the corporation or its stockholders, acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
or any transaction in which an improper personal benefit was
derived.  As a result, we and our stockholders may have more limited
rights against our directors and officers than might otherwise
exist.






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If
our operating partnership were to be classified as a “publicly-traded
partnership” under the Internal Revenue Code, our ability to pay distributions
to our stockholders could be adversely affected.
 Our
operating partnership is organized as a partnership for federal income tax
purposes. Even though our operating partnership will not elect to be treated as
an association taxable as a corporation, it may be taxed as a corporation if it
is deemed to be a “publicly-traded partnership” that fails to meet a certain
gross income “safe harbor.” A publicly-traded partnership is a partnership whose
interests are traded on an established securities market or are considered
readily tradable on a secondary market or the substantial equivalent thereof. In
general, for so long as the operating partnership has fewer than 100 partners,
publicly-traded partnership status will be avoided. No assurance can be given
that the Internal Revenue Service would not assert that our operating
partnership constitutes a publicly-traded partnership, or that facts and
circumstances will not develop which could result in our operating partnership
being treated as a publicly-traded partnership. If the Internal Revenue Service
were to assert successfully that our operating partnership is a publicly-traded
partnership, and substantially all of our operating partnership’s gross income
did not consist of specified types of passive income, our operating partnership
would be treated as an association taxable as a corporation and would be subject
to corporate tax at the entity level. In such event, the imposition of a
corporate tax on our operating partnership could reduce the amount of cash
available for distribution to our company and to you if the company and the
operating partnership were not able to be consolidated for federal income tax
purposes.


Risks
Related to the Real Estate Industry




Our
real estate investments are relatively illiquid and their values may
decline.


Real
estate investments are relatively illiquid. Therefore, we are limited in our
ability to reconfigure our real estate portfolio in response to economic
changes.  If we decide to sell any of our projects, our ability to
sell these projects and the prices we receive on their sale will be affected by
the number of potential buyers, the number of competing properties on the market
and other national and local economic and market conditions, as well as whether
the project is leased and if it is leased, the terms of the lease. Our ability
to sell these projects may also depend on changes in interest rates and in the
availability, cost and terms of debt financing as well as ongoing need for
capital improvements, particularly in older buildings.  In addition,
the current state of the credit markets may force us to extend sales and leasing
revenue from our properties from earlier periods to subsequent periods thereby
not eliminating our negative cash flow as quickly as we
anticipate.  As a result, we may be unable to sell our projects for an
extended period of time without incurring a loss.  We may be required
to expend funds to correct defects or make improvements before a project can be
sold. We cannot assure you that we will have funds available to correct those
defects or to make those improvements and as a result our ability to sell the
property could be limited.




The
costs of compliance with or liabilities under environmental laws may harm our
business.


Our
projects may be subject to significant environmental liabilities. An owner of
real property can face strict, joint and several liability for environmental
contamination created by the presence or discharge of petroleum products or
other hazardous or toxic substances on the property. We may face liability
regardless of:




•
            our
      knowledge of the contamination;




•
            the
      timing of the contamination;




•
            the
      cause of the contamination; or




•
            the
      party responsible for the contamination of the
  property.




There may
be unknown or underestimated environmental liabilities associated with our
projects. Most of our projects are on or are adjacent to or near other
properties upon which others, including former owners or operators or tenants of
the properties, have engaged in or may in the future engage in activities that
may release petroleum products or other hazardous or toxic substances. For
instance, some of our projects are at locations where former businesses
conducted industrial and other operations that involved the use, storage or the
release of petroleum products or other hazardous or toxic substances or
generated hazardous waste. Naturally occurring conditions, such as the presence
of methane may also result in environmental liabilities.  Certain
projects have on-going assessment and clean-up efforts or have not yet fully
identified or quantified environmental contamination or potential investigation
or clean-up costs. The presence of or contamination resulting from petroleum
products, or other hazardous or toxic substances on a project or the failure to
properly remediate them may cause a decline in the value of that property and
may adversely affect our ability to develop, sell or rent our projects, and we
may incur substantial remediation or increased development costs. In addition,
persons exposed to petroleum products or other hazardous or toxic substances at
our projects may sue us for personal injury damages.






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We
must also comply with a variety of local, state and federal environmental
statutes, ordinances, rules and regulations affecting the development process,
including with respect to petroleum products or other hazardous or toxic
substances, endangered species, air quality, water supply, biology, archeology
and other potential environmental impacts or effects. These environmental laws
sometimes result in delays, cause us to incur additional costs, or severely
restrict land development and building activity in environmentally sensitive
regions or areas. For example, the presence of petroleum products or hazardous
or toxic substances may limit a project’s use or prevent us from selling
residential units or for-sale commercial units, and we may also be liable, under
applicable laws and regulations or as a result of lawsuits brought by
governmental and private parties, for liabilities relating to contamination on
projects that we have sold in the past.  Environmental laws are
subject to changing interpretations and amendments, and new laws are frequently
adopted.  We cannot predict the impact of any new or amended
environmental laws.




Our projects
may contain or develop harmful mold or contain asbestos or lead, which could
lead to liability for adverse health effects and costs of remediating the
problem.


When
excessive moisture accumulates in buildings or on building materials, mold
growth may occur, particularly if the moisture problem remains undiscovered or
is not addressed over a period of time. Some molds may produce airborne toxins
or irritants. Concern about indoor exposure to mold has been increasing, as
exposure to mold may cause a variety of adverse health effects and symptoms,
including allergic or other reactions. As a result, the presence of significant
mold at any of our projects could require us to undertake a costly remediation
program to contain or remove the mold from the affected project, which would
reduce our operating results. In addition, the presence of significant mold
could expose us to liability from our tenants, their guests, employees of ours
or of our construction contractors, purchasers of our projects and others
if property damage or health concerns arise.




Environmental
laws also govern the presence, maintenance, removal and disposal of certain
building materials, including asbestos and lead-based paint. For instance, laws
may require that owners or operators of certain buildings containing asbestos
(1) properly manage and maintain the asbestos, (2) notify and train
those who may come into contact with asbestos and (3) undertake special
precautions, including removal and disposal, or other abatement, if asbestos
would be disturbed during renovation or demolition of a building. In addition,
lead-based paint must also be managed, abated and disposed of according to the
laws. Such laws may impose civil and criminal fines and penalties on developers
and building owners or operators who fail to comply with these requirements. In
addition, third parties may seek recovery from owners or operators for personal
injury associated with exposure to hazardous substances, such as asbestos or
lead.




Future
terrorist attacks in the United States, such as the attacks that occurred in New
York and Washington, D.C. on September 11, 2001, and other acts of
terrorism or war, whether in the United States or abroad, may result in
declining economic activity and reduced demand for our projects.


A
decrease in demand would make it difficult for us to renew or re-lease our
projects at lease rates equal to or above historical rates. Terrorist activities
also could directly impact the value of our projects through damage, destruction
or loss. To the extent that our tenants are impacted by future attacks, their
businesses similarly could be adversely affected, including their ability to
continue to honor obligations under their existing leases. These types of events
also may adversely affect the markets in which our securities trade. Any one of
these events may cause a decline in the demand for real estate, delay the time
in which our new, renovated or redeveloped projects reach stable occupancy,
increase our operating expenses due to increased physical security and insurance
costs for our projects and limit our access to capital or increase our cost of
raising capital.




We
may experience uninsured and underinsured losses.


We
maintain comprehensive insurance on each of our projects, including liability,
fire and extended coverage, of the type and amount we believe are customarily
obtained in the industry. There are no assurances that such coverage will
continue to be available at reasonable rates. Various types of catastrophic
losses, like earthquakes, hurricanes and floods, environmental or pollution
damage and losses from terrorist activities, may not be insurable or may not be
economically insurable or may be subject to insurance coverage limitations, such
as large deductibles or co-payments. We do not generally obtain terrorism,
earthquake or flood insurance on our projects. We sometimes, but not always,
obtain environmental insurance.  Future lenders may require such
insurance, which would result in substantial additional expense; and our failure
to obtain such insurance could constitute a default under loan
agreements.




All of
our projects are located in Southern California, an area especially subject to
earthquakes, and we do not carry any earthquake insurance. Because most of our
projects are located within downtown Los Angeles, an earthquake there could
materially damage, destroy or impair our projects as well as the use by tenants
of all of these projects or harm our ability to develop, redevelop or sell
affected projects and none of these damages or increased costs would be covered
by insurance. A catastrophic earthquake centered in the downtown area of
Los Angeles could harm our business as a consequence of property damage
sustained in the earthquake, the negative impact thereof on the local economy,
or both.




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In
the event of a substantial loss, our insurance coverage may not be sufficient to
cover the full current market value or replacement cost of our lost investment.
Should an uninsured loss or a loss in excess of insured limits occur, we could
lose all or a portion of the capital we have invested in a project, as well as
the anticipated future revenue from that particular project. In that event, we
might nevertheless remain obligated for any mortgage debt or other financial
obligations related to the project. Inflation, changes in building codes and
ordinances, environmental considerations and other factors might also keep us
from using insurance proceeds to replace or renovate a project after it has been
damaged or destroyed. Under those circumstances, the insurance proceeds we
receive might be inadequate to restore our economic position on the damaged or
destroyed project. The insurance policies contain standard exclusions applicable
to, inter
alia, losses related to pollution, asbestos, mold/fungus, earth movement
and water. Also, some of the policies have been issued by surplus lines insurers
(i.e.,
insurers who are not licensed by the State of California). Some rights and
limitations applicable to coverage under policies issued by insurers licensed by
the State of California are not applicable to coverage under policies issued by
surplus lines insurers. For example, a surplus lines insurer does not
participate in any of the insurance guarantee funds created under California
law. Therefore, these funds would not be available to pay any claims in the
event a surplus lines insurer becomes insolvent or is otherwise unable to pay a
covered claim.




We
are subject to substantial legal and regulatory requirements including
compliance with fire, safety and other regulations regarding the development,
redevelopment and operation of our projects and the protection of the
environment, which may require us to make unanticipated expenditures, and some
regulations could prohibit or restrict some projects.


Our
development and redevelopment business is heavily regulated and subject to
increasing local, state and federal statutes, ordinances, rules and
regulations concerning zoning, resource protection, environmental impacts,
building design, construction and similar matters. These regulations often
provide broad discretion to governmental authorities that regulate these
matters, which can result in unanticipated delays or increases in the cost of a
specified project or a number of projects in particular markets. In addition, we
are subject to laws and regulations related to workers’ health and safety. We
generally are required to obtain permits, entitlements and approvals from local
authorities to commence and complete our development and construction projects.
Such permits, entitlements and approvals may, from time-to-time, be opposed or
challenged by local governments, neighboring property owners or other interested
parties, adding delays, costs and risks of non-approval to the process. In
particular, we are required to obtain the approval of numerous governmental
authorities regulating matters such as permitted land uses, levels of density,
the installation of utility services, zoning, building standards and
environmental protection. Our obligation to comply with the laws and regulations
under which we operate, and our obligation to ensure that our employees,
subcontractors and other agents comply with these laws and regulations, could
delay our projects, cause us to incur substantial costs and prohibit or restrict
our proposed projects.




Our
business is conducted in California, which is one of the most highly regulated
and litigious states in the country. Therefore, our potential exposure to losses
and expenses due to new laws, regulations or litigation may be greater than
other real estate companies with a less significant California
presence.




In
addition, our projects are subject to various other federal, state and local
regulatory requirements, such as state and local fire and life safety
requirements. Local regulations, including municipal or local ordinances and
zoning restrictions, may restrict the use of our properties or otherwise affect
our projects and may require us to obtain approval from local officials or
community standards organizations with respect to our projects, including prior
to undertaking renovations of any of our existing projects or acquiring a new
project. If we fail to comply with various requirements, we might incur
governmental fines or private damage awards. These regulations may cause us to
incur additional costs and may lead to significant delays in our development
projects, which could adversely affect us. In addition, we do not know whether
existing requirements will change or whether future requirements will require us
to make significant unanticipated expenditures.




Compliance
with the Americans with Disabilities Act of 1990 may require us to make
unintended expenditures.


Under the
Americans with Disabilities Act of 1990, or ADA, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. These requirements became effective in 1992.
The ADA and a number of additional U.S. federal, state and local laws may
require modifications to our projects or restrict certain further renovations of
the projects, with respect to access thereto by disabled persons. Noncompliance
with the ADA or these other laws could result in the imposition of fines or an
award of damages to private litigants and an order to correct any non-complying
feature, which may require substantial capital expenditures. We have not
conducted an audit or investigation of all of our projects to determine our
compliance, and we cannot predict the ultimate cost of compliance with the ADA
or other similar legislation. If one or more of our projects is not in
compliance with the ADA or other similar legislation, then we would be required
to incur additional costs to bring the non-complying projects into
compliance.




Risks
Related to the Market for our Common Stock




The
market price and trading volume of our common stock may be volatile, adversely
affecting our stockholders.


We
consummated our IPO in January 2007.  The market price of and trading
volume in our common stock may fluctuate and cause significant price variations
to occur. If the market price of our common stock declines, you may be unable to
resell your shares at or above your purchase price. We cannot assure you that
the market price of our common stock will not fluctuate or decline significantly
in the future. Some of the factors that could negatively affect our share price
or result in fluctuations in the price or trading volume of our common stock
include:


20
 Table of Contents


•
              actual
      or anticipated variations in our quarterly operating results or payment of
      dividends, or the lack thereof;
  •
              changes
      in estimates of our earnings;
  •
              redemptions
      of common units of our operating
partnership;
  •
              adverse
      market reaction to any increased indebtedness that we may incur or any
      deterioration in our ability to obtain financing at all or on attractive
      terms;


•
            future
      issuances of our common or preferred
stock;




•
            publication
      of research reports about us or the real estate
  industry;




•
            additions
      or departures of key management
personnel;




•
            changes
      in market valuations of similar companies;
or




•
            general
      market and economic conditions.




Future
offerings of debt securities, which would rank senior to our common stock upon
liquidation, and future offerings of equity securities, which would dilute our
existing stockholders and may be senior to our common stock for the purposes of
dividend and liquidating distributions, may adversely affect the market price of
our common stock.


In the
future, we may attempt to increase our capital resources by making offerings of
debt or additional offerings of equity securities, including commercial paper,
senior or subordinated notes, convertible notes and series of preferred stock or
common stock. Upon liquidation, holders of our debt securities and shares of
preferred stock, if any, and lenders with respect to other borrowings will
receive a distribution of our available assets prior to the holders of our
common stock. Additional equity offerings may dilute the holdings of our
existing stockholders or reduce the market price of our common stock, or both.
Preferred stock, if issued, could have a preference on liquidating distributions
or a preference on dividend payments or both that could limit our ability to
make a dividend distribution to the holders of our common stock. Because our
decision to issue securities in any future offering will depend on market
conditions and other factors beyond our control, we cannot predict or estimate
the amount, timing or nature of our future offerings. Thus, holders of our
common stock bear the risk of our future offerings reducing the market price of
our common stock and diluting their stock holdings in us.




Future
sales of our common stock could have an adverse effect on our stock
price.


As of
March 28, 2008, there are approximately 86,678,100 shares of our common stock
outstanding (excluding shares that we have a contingent obligation to issue) and
347,825 LTIP units in our operating partnership, which are exchangeable into
shares of our common stock on a one-to-one basis, outstanding. We will issue an
additional 20,000 LTIP units later in 2008. We cannot predict whether future
issuances of shares of our common stock or the availability of shares for resale
in the open market will decrease the market price of our common stock. Our
directors and officers are able to sell an aggregate total of42,972,514 shares of our
common stock (excluding LTIP units), subject to restrictions imposed by federal
securities laws and subject to vesting provisions applicable to 10,000 of those
shares. Sales of substantial numbers of shares of our common stock in the public
market, or the perception that such sales might occur, could adversely affect
the market price of our common stock. We may issue from time to time additional
common stock or common units of our operating partnership convertible into
common stock in connection with the acquisition of properties, and we may grant
demand or piggyback registration rights in connection with these
issuances.




In
the event we are unable to pay dividends, the market price of our common stock
would likely decline. We may also elect to retain profits for future operations,
which could reduce returns to stockholders and the market price of our common
stock.


To date,
we have not declared or paid any dividends. Any dividends will be paid at the
discretion of our Board of Directors and will depend on our earnings, our
financial condition, and other factors that our Board of Directors may deem
relevant from time to time. We cannot assure you that we will be able to pay any
dividends, and we do not expect to declare any dividends in 2008. Our ability to
pay dividends to our stockholders is based on many factors,
including:




•
            our
      ability to complete our projects on favorable terms or at
    all;




•
            our
      success in negotiating favorable lease
terms;




•
            our
      tenants’ ability to perform under their leases;
  and




•
            the
      other risks described in this
report.




We also
cannot assure you that, in the event we pay dividends, the level of our
dividends will increase over time or that the receipt of rental revenue in
connection with future acquisitions of properties will increase our cash
available for dividends to stockholders. Our Board may elect to retain any
profits from operations to fund future operations and growth of the business. In
the event of defaults or lease terminations by our tenants, lease payments could
decrease or cease, which would result in a reduction in cash available for
dividends to our stockholders.  In addition, if financing costs
increase due to the state of the credit markets, our Board may elect to retain
income from operations to fund future developments, which also results in a
reduction in cash available for dividends to our stockholders.  In the
event we are unable or elect not to pay dividends, the market price of our
common stock would likely decline.




Item
1B.                    Unresolved
Staff Comments





None.


21
 Table of Contents


Item
2.                              Properties





At
December 31, 2007, we own or have rights to purchase 27 rental projects and 28
development projects.  Most of the projects are located in or around
the downtown area of Los Angeles, and all of the projects are in Southern
California.





We have a
wide range of project types, including commercial and residential projects. We
believe these projects are well positioned in urban areas undergoing
demographic, structural and/or economic change and present the opportunity to
create value in otherwise obsolete or undervalued properties. Our projects were
selected by our management for the purpose of increasing our return on
investments while also having social benefits such as upgrading existing
infrastructure instead of building new infrastructure, as well as reducing
automobile reliance by locating businesses, customers and employees closer to
each other and to existing public transit systems. This emerging category of
urban infill development is called “Smart Growth” or “Transit Oriented
Development.” By definition, urban infill is the development of vacant land or
redevelopment of underused structures in built-up areas that have infrastructure
and other public services in place. We believe our projects in downtown Los
Angeles and our other projects are well positioned for Smart
Growth.




Our
projects were generally purchased for the purpose of developing, redeveloping,
renovating or repositioning them for what we consider to be a higher and better
use to maximize the return on investment, to create Smart Growth and to provide
the community with social benefits.  Our projects are in various
stages of development. Some of our projects are presently, in our view, at their
highest and best use and are currently operating as rental
projects.  Other projects are currently operating as rental projects,
but we have long-term redevelopment plans for those projects.  These
rental projects are not at what we consider to be their highest and best use and
are classified according to their long-term use rather than the current type of
temporary operations.  In addition, we have projects that are
classified as development projects because they are currently under renovation,
or construction will be commencing shortly.  Incidental revenue is
earned at certain development projects where the construction period has not
begun.




Beginning
approximately two months before our estimated commencement of construction with
respect to a redevelopment project, we begin terminating in-place leases at the
project, whether month-to-month or otherwise, and finalize discussions with
tenants about relocating to another one of our projects. Prior to these lease
terminations, we discuss with tenants the redevelopment plans, and the steps
needed to modify existing leases to month-to-month leases and relocation
possibilities in anticipation of the redevelopment and related
construction.





In light of current and
changing credit market conditions and availability of capital, we are evaluating
and adjusting as appropriate our previously disclosed development and
redevelopment plans, timelines and costs.





As
disclosed in the footnotes below, some of our projects are subject to
build-to-suit contracts. Our custom and practice is to enter into these
contracts on a project-by-project basis with a company called Dynamic Builders.
Typically, we identify a project for development or redevelopment and Dynamic
Builders acquires the project and constructs the improvements according to our
specifications. The final purchase price of each project subject to a
build-to-suit agreement is based on construction costs and, therefore, we may
ultimately pay more, or less, pursuant to a build-to-suit agreement than we
anticipated at the commencement of construction activity.





22
 Table of Contents


Rental
Projects





Presented
below is our rental project portfolio as of December 31,
2007.  Projects not at what we consider to be their highest and best
use are denoted with a footnote.





Rental
      Project
            
            #
      of Projects
            
            
            Net
      Rentable Square Feet
            
            
            %
              Leased
            
            
            Total
              Annualized
              Rents
      (1)
            
            
            Annualized
              Rent
              $/RSF
      (2)Commercial
      Projects788
      S Alameda
            
            
            1
            
            
            
            33,984
            
            
            
            78.1
            %
            
            $
            978,000
            
            
            $
            36.84Washington
      Cold Storage
            
            
            1
            
            
            
            59,000
            
            
            
            100.0
            %
            
            
            1,200,000
            
            
            
            20.34500
      Mateo Street(3)
            
            
            1
            
            
            
            12,938
            
            
            
            100.0
            %
            
            
            122,400
            
            
            
            9.46Meruelo
      Wall Street
            
            
            1
            
            
            
            98,245
            
            
            
            100.0
            %
            
            
            2,074,560
            
            
            
            21.12Washington
      at Central(3)
            
            
            1
            
            
            
            5,479
            
            
            
            25.6
            %
            
            
            18,000
            
            
            
            12.86Southern
      California Institute of Architects
            
            
            1
            
            
            
            81,741
            
            
            
            100.0
            %
            
            
            1,212,000
            
            
            
            14.832000
      San Fernando Road
            
            
            1
            
            
            
            119,381
            
            
            
            100.0
            %
            
            
            2,865,144
            
            
            
            24.00Washington
      Produce Market
            
            
            1
            
            
            
            31,876
            
            
            
            56.3
            %
            
            
            366,000
            
            
            
            20.42905
      E 8th Street(3)
            
            
            1
            
            
            
            32,000
            
            
            
            53.4
            %
            
            
            214,800
            
            
            
            12.563rd
      and Omar Street(3)
            
            
            1
            
            
            
            23,297
            
            
            
            23.2
            %
            
            
            97,080
            
            
            
            17.941919
      Vineburn Avenue(3)
            
            
            1
            
            
            
            122,345
            
            
            
            100.0
            %
            
            
            506,520
            
            
            
            4.141500
      Griffith Avenue(3)
            
            
            1
            
            
            
            50,058
            
            
            
            100.0
            %
            
            
            440,823
            
            
            
            8.814th
      Street Center(3)
            
            
            1
            
            
            
            14,472
            
            
            
            100.0
            %
            
            
            314,824
            
            
            
            21.75Seventh
      Street Produce Market (3)
            
            
            1
            
            
            
            122,120
            
            
            
            62.9
            %
            
            
            3,254,604
            
            
            
            42.40Alameda
      Square(3)(5)
            
            
            1
            
            
            
            1,463,696
            
            
            
            61.0
            %
            
            
            3,556,037
            
            
            
            3.99620
      Gladys Avenue(3)
            
            
            1
            
            
            
            57,354
            
            
            
            100.0
            %
            
            
            517,227
            
            
            
            9.021000
      E Cesar Chavez(3)
            
            
            1
            
            
            
            50,373
            
            
            
            16.8
            %
            
            
            58,200
            
            
            
            6.86306
      North Avenue 21 (3)
            
            
            1
            
            
            
            84,472
            
            
            
            49.8
            %
            
            
            167,465
            
            
            
            3.98Crown
      Commerce Center(3)
            
            
            1
            
            
            
            301,491
            
            
            
            100.0
            %
            
            
            1,785,645
            
            
            
            5.92420
      Boyd Street(3)
            
            
            1
            
            
            
            47,806
            
            
            
            71.7
            %
            
            
            372,564
            
            
            
            10.871800
      E Washington Blvd (3)
            
            
            1
            
            
            
            108,744
            
            
            
            100.0
            %
            
            
            543,180
            
            
            
            5.00230
      W Ave 26th(3)
            
            
            1
            
            
            
            67,971
            
            
            
            31.9
            %
            
            
            152,352
            
            
            
            7.045707
      S Alameda(3)
            
            
            1
            
            
            
            55,729
            
            
            
            82.7
            %
            
            
            166,595
            
            
            
            3.611211
      E Washington Blvd(3)
            
            
            1
            
            
            
            108,000
            
            
            
            74.5
            %
            
            
            384,192
            
            
            
            4.77Total Commercial
      Projects
            
            
            24
            
            
            
            3,152,572
            
            
            
            72.8
            %
            
            
            21,368,211
            
            
            
            9.31Residential
      ProjectsAmerican
      Apartments
            
            
            1
            
            
            
            13,550
            
            
            
            89.3
            %
            
            
            261,793
            
            
            
            21.64Southpark
      Tower - Phase 2 - J Restaurant(3)
            
            See
      Note(4)
            
            
            
            11,829
            
            
            
            100.0
            %
            
            
            425,844
            
            
            
            36.00Center
      Village(3)
            
            
            1
            
            
            
            176,628
            
            
            
            100.0
            %
            
            
            343,200
            
            
            
            1.94Pomona
      Park Village(3)
            
            
            1
            
            
            
            242,042
            
            
            
            3.3
            %
            
            
            96,060
            
            
            
            12.01Total Residential
      Projects
            
            
            3
            
            
            
            444,049
            
            
            
            47.0
            %
            
            
            1,126,897
            
            
            
            5.40Total
      Rental Project Portfolio
            
            
            27
            
            
            
            3,596,621
            
            
            
            69.6
            %
            
            $
            22,495,108
            
            
            $
            8.98





(1)
            Annualized
      rent represents the annualized monthly contractual rent under existing
      leases as of December 31, 2007.


(2)
            Annualized
      rent per rentable square foot (“RSF”) represents annualized rent as
      computed above, divided by the total square footage under lease as of the
      same date.


(3)
            Project
      not currently at what we consider to be its highest and best
      use.  Long-term development plans are in place for this
      project.


(4)
            This
      parcel is part of a larger project that will be redeveloped as part of the
      Southpark Tower project discussed in the "Development Pipeline."


(5)
            There
      is a pending eminent domain proceeding by the Los Angeles County
      Metropolitan Transit Authority against a non-contiguous portion of this
      project located at 1339 E. 7th
Street.


23
 Table of Contents


Development
Projects





Presented
below is our development pipeline as of December 31, 2007.  In
addition, annualized incidental revenue is disclosed for certain projects as
construction has not yet commenced at these sites.  Development
projects are classified by their intended use (residential or commercial) after
construction is complete.


Development
      Project
            
            #
      of Projects
            
            
            Annualized
      Incidental Revenue per YearCommercial
      Projects801
      E 7th Street
            
            
            1
            
            
            $
            216,0002131
      Humboldt Street
            
            See
      Note (1)
            
            
            
            144,000Pomona
      Retail
            
            
            1
            
            
            
            102,000Meruelo
      Baldwin Park
            
            
            1
            
            
            
            50,0001828
      Oak Street (3)
            
            
            1
            
            
            
            -3000
      E Washington Blvd (2)
            
            
            1
            
            
            
            -Gold's
      Gym & Public Storage(2)
            
            
            1
            
            
            
            -Camfield
      Retail Center
            
            
            1
            
            
            
            -American
      Fish (3)
            
            
            1
            
            
            
            -Ceres
      Street Produce Center
            
            
            1
            
            
            
            -Barstow
      Produce Center
            
            
            1
            
            
            
            -Wall
      Street Market (2)
            
            
            1
            
            
            
            -Overland
      Terminal (3)
            
            
            1
            
            
            
            -Musica
      Latina Building
            
            
            1
            
            
            
            -Santa
      Fe Plaza
            
            
            1
            
            
            
            -Total
      Commercial Projects
            
            
            14
            
            
            
            512,000Residential
      ProjectsSouthpark
      Towers
            
            
            1
            
            
            
            423,000Desmond
      Building
            
            
            1
            
            
            
            323,000Ullman
      Tower One
            
            
            1
            
            
            
            245,000Olive
      Street Towers
            
            
            1
            
            
            
            204,000Ullman
      Tower Two
            
            
            1
            
            
            
            180,000Sky
      Arc
            
            
            1
            
            
            
            153,000TransAmerica
      Lofts
            
            
            1
            
            
            
            84,000Union
      Lofts
            
            
            1
            
            
            
            -717
      W 9th Street
            
            
            1
            
            
            
            -Meruelo
      Chinatown Tower
            
            
            1
            
            
            
            -Vignes
      Village
            
            
            1
            
            
            
            -San
      Fernando Court
            
            
            1
            
            
            
            -Citrus
      Gardens
            
            
            1
            
            
            
            -Covina
      Gardens
            
            
            1
            
            
            
            -Total
      Residential Projects
            
            
            14
            
            
            
            1,612,000Total Development
      Pipeline
            
            
            28
            
            
            $
            2,124,000





(1)
            Project
      is currently considered a portion of the 306 N. Avenue 21 project and is
      counted as a rental project.


(2)
            Project
      is currently owned and under redevelopment by a third party in accordance
      with a build-to-suit contract with us.  The final purchase price
      will be based on construction
costs.


(3)
            We
      do not own this project, but have the option to purchase it from an
      unrelated third party, or, in the case of Overland Terminal, from a
      company owned by the parents of Richard
Meruelo.








24
 Table of Contents


Tenants




The
following table sets forth information regarding the 10 largest tenants in our
portfolio of owned projects based on annualized base rent paid or payable as of
December 31, 2007.




Top
Ten Tenants in Our Portfolio of Owned Projects




Tenant
            
            Number of
              Projects
            
            
            Total
      Leased
              Square Feet(1)
            
            
            Percentage
      of Our
              Portfolio’s Total Rentable
              Square
      Feet(1)
            
            
            Annualized
              Base
              Rent(2)
      (3)
            
            
            Percentage
      of Our
              Portfolio’s Annualized
              Base
      Rent (3)American
      Apparel
            
            
            1
            
            
            
            788,273
            
            
            
            19.0
            %
            
            $
            2,971,752
            
            
            
            11.6
            %Federal
      Express Corporation
            
            
            1
            
            
            
            119,381
            
            
            
            2.9
            %
            
            
            2,865,144
            
            
            
            11.2
            %Southern
      California Institute of Architecture
            
            
            1
            
            
            
            81,741
            
            
            
            2.0
            %
            
            
            1,364,772
            
            
            
            5.3
            %Aztlan
      Cold Storage
            
            
            1
            
            
            
            59,000
            
            
            
            1.0
            %
            
            
            1,200,000
            
            
            
            4.7
            %Prestige
      Parking
            
            
            6
            
            
            See
      Note (4)
            
            
            
            0.0
            %
            
            
            1,089,000
            
            
            
            4.2
            %The
      Outdoor Recreation Group
            
            
            1
            
            
            
            122,345
            
            
            
            2.9
            %
            
            
            506,521
            
            
            
            2.0
            %AJSE/Santa
      Fe Fishing Inc
            
            
            1
            
            
            
            87,404
            
            
            
            2.0
            %
            
            
            498,000
            
            
            
            1.9
            %Evergreen
      Fresh Farms, Inc
            
            
            1
            
            
            
            81,661
            
            
            
            2.0
            %
            
            
            487,404
            
            
            
            1.9
            %J
      Lounge Restaurant
            
            
            1
            
            
            
            11,829
            
            
            
            0.3
            %
            
            
            425,844
            
            
            
            1.7
            %Grant
      Parking
            
            
            2
            
            
            See
      Note (4)
            
            
            
            0.0
            %
            
            
            420,000
            
            
            
            1.6
            %Total
            
            
            
            
            
            
            1,351,634
            
            
            
            32.1
            %
            
            $
            11,828,437
            
            
            
            46.1
            %





(1)
            Based
      on total square footage of 4,153,922, which is the total square footage of
      space leased or available or offered for lease at both rental and
      development projects and excludes substantial portions of square footage
      in the projects that are not available or offered for lease because of
      redevelopment or repositioning activities. Parking square footage is not
      included in the calculation.


(2)
            Because
      annualized base rent is not derived from historical results that were
      accounted for in accordance with accounting principles generally accepted
      in the Unites States, historical results differ from the annualized
      amounts.


(3)
            Annualized
      base rent includes parking revenue per tenant’s contracts.  The
      portfolio’s total annualized base rent includes parking revenue for this
      table only.


(4)
            Prestige
      Parking leases parking lots at six projects totaling 283,374 square
      feet.  Grant Parking manages parking lots at two projects
      totaling 89,160 square feet.  Subsequent to year end, the Grant
      Parking management contract was terminated and Prestige Parking leased the
      two lots previously managed by Grant
Parking.








25


Lease
Expirations




The
following table sets forth a summary schedule of the lease expirations for
leases in place as of December 31, 2007 for each of the 10 calendar years
beginning January 1, 2008 at the projects we own and are currently leasing
space at, regardless of the project classification between rental and
development. The information set forth in the table assumes that tenants
exercise no renewal options or early termination rights.




Year
      of Lease Termination
            
            Number
              of Leases
              Expiring
            
            
            Square Footage of
              Expiring
      Leases
            
            
            Percentage
      of
              Total
              Rentable
              Square Feet(1)
            
            
            Annualized
      Base
              Rent of Expiring
              Leases(2)
            
            
            Percentage of Portfolio
              Annualized Base RentMonth
      to Month
            
            
            301
            
            
            
            860,219
            
            
            
            20.7
            %
            
            $
            12,586,391
            
            
            
            49.1
            %2008
            
            
            18
            
            
            
            1,032,784
            
            
            
            24.9
            %
            
            
            5,206,419
            
            
            
            20.3
            %2009
            
            
            6
            
            
            
            161,005
            
            
            
            3.9
            %
            
            
            829,909
            
            
            
            3.2
            %2010
            
            
            8
            
            
            
            230,259
            
            
            
            5.5
            %
            
            
            2,135,340
            
            
            
            8.3
            %2011
            
            
            3
            
            
            
            124,220
            
            
            
            3.0
            %
            
            
            276,840
            
            
            
            1.1
            %2012
            
            
            2
            
            
            
            38,694
            
            
            
            0.9
            %
            
            
            457,179
            
            
            
            1.8
            %Thereafter
            
            
            3
            
            
            
            183,083
            
            
            
            4.4
            %
            
            
            4,141,944
            
            
            
            16.2
            %Total
            
            
            341
            
            
            
            2,630,264
            
            
            
            63.3
            %
            
            $
            25,634,022
            
            
            
            100.0
            %





(1)
            Based
      on total square footage of 4,153,922, which is the total square footage of
      space leased or available or offered for lease at both rental and
      development projects and excludes substantial portions of square footage
      in the projects that are not available or offered for lease because of
      redevelopment or repositioning activities.  Parking square
      footage is not included in the
calculation.


(2)
            Based
      on annualized base rent paid or payable as of December 31, 2007. Because
      annualized base rent is not derived from historical results that were
      accounted for in accordance with U.S. generally accepted accounting
      principles, historical results differ from the annualized
      amounts.  Annualized base rent does not include parking
      income.




Item
3.                              Legal
Proceedings





From time
to time, we are party to various lawsuits, claims and other legal proceedings,
including those identified below, none of which we currently believe are
material. We intend to vigorously seek enforcement of our rights and defend
ourselves in each of these matters.  Recently, we settled all claims
related to our Vignes Village project with the Los Angeles City Attorney's
Office pursuant to which the company plead "no contest" to three misdemeanor
counts with three years probation, and agreed to pay fines and investigation
costs of approximately $250,000.  We also settled all claims related
to our 7th Street
Produce Market project with the Los Angeles City Attorney's Office pursuant to
which the subsidiary of the company that owns the property plead "no contest" to
four misdemeanor counts with three years probation, agreed to pay fines and
investigation costs of approximately $35,000, and agreed to make donations to
various nonprofit organizations in Los Angeles in the amount of
$35,000.  We have settled all other legal proceedings previously
disclosed in our Annual Report on Form 10-K dated December 31, 2006, and
subsequent quarterly filings, except as follows:





With
respect to our project at Overland Terminal, Meruelo Properties, Inc. (an entity
owned by the parents of Richard Meruelo) filed an action on September 22, 2004
in the Superior Court of the County of Los Angeles against the current owner and
seller of the project, Olympic Alameda Ventures, a general partnership, and its
partners to specifically enforce Meruelo Properties’ rights under a purchase
agreement to buy the project. We have agreed to acquire this property from
Meruelo Properties once it is acquired from the seller of the
property.  Meruelo Properties alleged that the seller breached the
purchase agreement by, among other things, failing to satisfy various closing
conditions, and the seller alleged that Meruelo Properties breached the purchase
agreement by failing to close by a certain date, thus permitting seller to
terminate the agreement.  Following a court trial, the court ruled in
favor of Meruelo Properties, judgment has been entered, and the seller has filed
an appeal which is currently pending as of December 31, 2007. During the course
of the litigation, we acquired a 12.5% interest from one of the partners in the
seller, and therefore the net remaining cost to the company to acquire this
project may be reduced accordingly.





26
 Table of Contents


With
respect to our project at Vignes Village, the Los Angeles Department of Building
and Safety, or the Department, initiated an administrative proceeding in May
2006 as a result of the demolition of certain old industrial structures at the
project by an affiliate of our predecessor without a demolition permit. As a
result of such actions, the Department imposed an 18-month development ban
against the property; however, the ban does not limit our ability to process
applications for development on the property.  The ban will expire in
May 2008.





Prior to
the IPO, in November 2004, the company’s predecessor initiated a specific
performance action in the Superior Court of the County of Los Angeles against
the owner of property located at 9901 Alameda Street (a 21-acre property located
in Los Angeles), seeking to enforce an agreement pursuant to which the
predecessor had the right to purchase the property.  In 2005, the
trial court ruled against the company’s predecessor on the grounds that the
owner of the property had properly terminated the agreement prior to the
anticipated closing.  On appeal, the court of appeals reversed the
trial court’s decision and remanded the case to the trial court for a
retrial.  On retrial, the trial court determined that the owner had
breached the purchase agreement in attempting to terminate the agreement early,
and judgment was entered in favor of the company.  Pursuant to the
judgment, the company may purchase the property for $25.0 million, which is the
purchase price originally agreed to in 2004.  On March 26, 2008 we
entered into a purchase and sale agreement pursuant to which we agreed to
acquire and resell this project.  The purchase agreement is subject to
very limited conditions.  We expect this sale to close on March 31,
2008, although there is no assurance that any of the closing conditions will be
timely fulfilled or that the transaction will in fact close.  Assuming
the sale is completed as anticipated, we expect to receive net proceeds (i.e.
after costs of sale are paid) of approximately $7.0
million.


There are
other lawsuits, claims and legal proceedings that arise in the ordinary course
of our business, including tenant eviction proceedings and other tenant
disputes, and personal injury matters, none of which we currently believe are
material. We intend to vigorously seek judicial enforcement of our rights in
these proceedings as well.





Item
4.                              Submission
of Matters to a Vote of Security Holders





There were no matters submitted to a
vote of our stockholders during the fourth quarter of the year ended December
31, 2007.





PART
II





Item
5.                              Market
for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities





Market
Information





Our common stock has been listed and is
traded on the Nasdaq Global Market under the symbol “MMPI” since January 26,
2007.  The following table presents the high and low sales prices for
our common stock as reported by the Nasdaq Global Market for the period from
January 26, 2007 to December 31, 2007.





High
            LowPeriod
      from January 26, 2007 to March 31, 2007
            $         10.90
            $             7.55Quarter
      Ended June 30, 2007
            8.83
            7.11Quarter
      Ended September 30, 2007
            8.29
            4.59Quarter
      Ended December 31, 2007
            6.70
            3.14





The per-share closing price for our
common stock, as reported by the Nasdaq Global Market on March 28, 2008, was
$2.35.





Holders
of Our Common Stock





As of March 28, 2008, there were
approximately 73 record holders of our common stock, including shares held
in “street name” by nominees who are record holders, but excluding employees
that received stock awards under our 2007 Equity Incentive Plan.





27
 Table of Contents


Dividends




We did not pay any cash
dividends during the year ended December 31, 2007 and do not anticipate paying
any for 2008. In addition, we cannot assure you (i) when or whether our
Board of Directors will declare dividends in the future or (ii) of the
amount of any dividends that may be declared in the future.  However,
any determination to pay regular quarterly cash dividends to our stockholders in
the future will be at the discretion of our Board of Directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business conditions and other factors that our Board of
Directors may deem relevant.





Recent
Sales of Unregistered Securities




On December 31, 2007, pursuant
to obligations we entered into in connection with our IPO and formation
transactions, and in consideration of services rendered or to be rendered to the
operating partnership, our operating partnership issued 20,000 LTIP units to
certain of our executive officers.




The LTIP units are
subject to forfeiture provisions that expire ratably on each of the first three
anniversaries of the date of grant. Forfeitability provisions generally will
expire on the death or disability of the officer or the termination of such
officer by us or the operating partnership without cause. The LTIP units were
issued in reliance on an exemption from registration under Section 4(2) of
the Securities Act of 1933 and Regulation D promulgated thereunder. We relied on
the exemption based on representations given by the recipients of the
securities.




LTIP units are a special
class of partnership interests in our operating partnership that initially have
a liquidation value of zero. LTIP units will receive the same quarterly per unit
profit distributions, if any, as common units of our operating partnership,
except for disposition proceeds distributed prior to the corresponding “LTIP
Equalization Date” for such LTIP units, as described below. Common units in our
operating partnership will receive a distribution amount per unit equal to the
dividend amount per share of our common stock. We have not declared or paid any
dividends to date. Upon a certain event that we refer to as the LTIP
Equalization Date, LTIP units may be converted, at the election of the holder,
into one common unit in our operating partnership (or cash, at the election of
our operating partnership). Common units in our operating partnership are
redeemable at the election of the holder for (i) cash equal to the then fair
market value of one share of our common stock, or (ii) at our option, one share
of our common stock.





Use
of Proceeds from Registered Securities





In our
prior Securities and Exchange Commission reports we disclosed how we applied the
proceeds from our IPO (registration no. 333-137457 declared effective January
24, 2007), except for proceeds in the amount of approximately $11.2 million that
remained at September 30, 2007.  During the three months ended
December 31, 2007, our operating partnership used the IPO proceeds that remained
at September 30, 2007 for working capital purposes.


28
 Table of Contents


Performance
Graph





The following graph compares the
cumulative total shareholder return on the Common Stock of Meruelo Maddux
Properties, Inc. from January 26, 2007 (the date upon which our Common Stock
began publicly trading) through December 31, 2007 with the cumulative total
return on the NASDAQ Composite index and an appropriate “peer group” index, the
Dow Jones Wilshire Real Estate Holding & Development Index (assuming the
investment of $100 in our Common Stock and in each of the indexes on January 26,
2007).










The
actual returns displayed in the graph above are as follows:





January
      26, 2007
            
            
            March
      31, 2007
            
            
            June
      30, 2007
            
            
            September
      30, 2007
            
            
            December
      31, 2007Meruelo
      Maddux Properties, Inc.
            
            
            100.00
            
            
            
            82.55
            
            
            
            76.98
            
            
            
            55.75
            
            
            
            37.74NASDAQ
      Composite
            
            
            100.00
            
            
            
            100.30
            
            
            
            107.49
            
            
            
            111.99
            
            
            
            109.26DJ
      Wilshire Real Estate Holding & Development
            
            
            100.00
            
            
            
            103.28
            
            
            
            100.71
            
            
            
            86.88
            
            
            
            72.08





29
 Table of Contents


Item
6.                                Selected
Financial Data





The following tables set forth selected
consolidated financial and operating data for our company and on a combined
historical basis for our predecessor business.  Our company (which was
formed for the purposes of our IPO and is not the predecessor) did not have any
material corporate activity before January 30, 2007, the date on which we
consummated our IPO.  Accordingly, information in the following tables
as of any date or for any period before January 30, 2007 reflects the financial
and operating data for our predecessor business.




The
following summary combined financial and other data for the year ended December
31, 2007 consists of information about our predecessor business for the period
from January 1, 2007 to January 29, 2007 and about our company for the period
from January 30, 2007 to December 31, 2007.  The following summary
combined financial and other data for the years ended December 31, 2006, 2005,
2004 and 2003 reflect the historical financial data of our predecessor business,
which was not a legal entity but a combination of multiple limited liability
companies and corporations previously owned by two affiliates of
Mr. Meruelo and one affiliate of Mr. Maddux. The data for the years
ended December 31, 2006 and 2005 has been derived from audited financial
statements contained elsewhere in this report. The data for the years ended
December 31, 2004 and 2003 has been derived from audited financial statements
not contained in this report. The audited historical combined financial
statements include all adjustments, consisting of normal recurring adjustments,
which we consider necessary for a fair presentation of our financial condition
and the results of operations as of such dates and for such periods under U.S.
generally accepted accounting principles.





The
following financial data should be read in conjunction with the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the audited financial statements and related notes included elsewhere in this
Form 10-K.


30
 Table of Contents


Selected
Consolidated Financial and Other Data


(in
thousands)







The
      Company
            
            
            The
      PredecessorPeriod
      from
              January
      29, 2007 to
              December
      31, 2007
            
            
            Period
      from
              January
      1, 2007 to
              January
      29, 2007
            
            
            Year
      ended December 31,2006
            
            
            2005
            
            
            2004
            
            
            2003Revenue:Rental
      income
            
            $
            21,647
            
            
            $
            1,957
            
            
            $
            22,422
            
            
            $
            16,526
            
            
            $
            11,836
            
            
            $
            8,068Management
      fees
            
            
            260
            
            
            
            12
            
            
            
            285
            
            
            
            602
            
            
            
            142
            
            
            
            138Interest
      income on affiliate notes receivable
            
            
            2,823
            
            
            
            205
            
            
            
            3,614
            
            
            
            2,942
            
            
            
            -
            
            
            
            -Other
      income
            
            
            493
            
            
            
            28
            
            
            
            751
            
            
            
            794
            
            
            
            628
            
            
            
            17325,223
            
            
            
            2,202
            
            
            
            27,072
            
            
            
            20,864
            
            
            
            12,606
            
            
            
            8,379Expenses:Rental
      expenses
            
            
            12,522
            
            
            
            999
            
            
            
            10,104
            
            
            
            7,673
            
            
            
            5,089
            
            
            
            3,433Interest
      expense
            
            
            9,513
            
            
            
            2,205
            
            
            
            25,333
            
            
            
            16,492
            
            
            
            6,188
            
            
            
            2,650Depreciation
      and amortization
            
            
            6,064
            
            
            
            374
            
            
            
            3,982
            
            
            
            2,502
            
            
            
            1,987
            
            
            
            1,344General
      and administrative
            
            
            8,993
            
            
            
            628
            
            
            
            6,045
            
            
            
            4,222
            
            
            
            1,934
            
            
            
            93337,092
            
            
            
            4,206
            
            
            
            45,464
            
            
            
            30,889
            
            
            
            15,198
            
            
            
            8,360Operating
      (loss) income
            
            
            (11,869
            )
            
            
            (2,004
            )
            
            
            (18,392
            )
            
            
            (10,025
            )
            
            
            (2,592
            )
            
            
            19(Loss)
      income from continuing operations
            
            
            (11,869
            )
            
            
            (2,004
            )
            
            
            (18,392
            )
            
            
            (10,025
            )
            
            
            (2,592
            )
            
            
            19Discontinued
      operations:Gain
      on sale of real estate
            
            
            –
            
            
            
            –
            
            
            
            1,329
            
            
            
            -
            
            
            
            3,183
            
            
            
            -Net
      income (loss) before income taxes
            
            
            (11,869
            )
            
            
            (2,004
            )
            
            
            (17,063
            )
            
            
            (10,025
            )
            
            
            591
            
            
            
            19Provision
      (benefit) for income taxes
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income (loss)
            
            $
            (11,869
            )
            
            $
            (2,004
            )
            
            $
            (17,063
            )
            
            $
            (10,025
            )
            
            $
            591
            
            
            $
            19


31
 Table of Contents


Selected
Consolidated Financial and Other Data


The
      Company
            
            
            The
      PredecessorPeriod
      from January 29, 2007 to December 31, 2007
            
            
            Period
      from January 1, 2007 to January 29, 2007
            
            
            Year
      ended December 31,2006
            
            
            2005
            
            
            2004
            
            
            2003Balance
      Sheet Data (at period end):Investments
      in real estate
            
            $
            767,885
            
            
            
            N/A
            
            
            $
            494,809
            
            
            $
            407,649
            
            
            $
            122,190
            
            
            $
            64,669Total
      assets
            
            
            784,180
            
            
            
            N/A
            
            
            
            508,057
            
            
            
            427,352
            
            
            
            125,810
            
            
            
            66,753CalPERS
      and mortgages notes
            
            
            307,394
            
            
            
            N/A
            
            
            
            492,643
            
            
            
            431,141
            
            
            
            109,406
            
            
            
            58,750Total
      liabilities
            
            
            366,998
            
            
            
            N/A
            
            
            
            553,114
            
            
            
            449,733
            
            
            
            119,207
            
            
            
            68,740Owners'
      equity (deficit)
            
            
            417,182
            
            
            
            N/A
            
            
            
            (45,057
            )
            
            
            (22,381
            )
            
            
            6,603
            
            
            
            (1,987
            )Total
      liabilities and stockholders' / owners equity
            
            
            784,180
            
            
            
            N/A
            
            
            
            508,057
            
            
            
            427,352
            
            
            
            125,810
            
            
            
            66,753Other
      Data:EBITDA
      (1)
            
            
            3,708
            
            
            
            575
            
            
            
            12,252
            
            
            
            8,969
            
            
            
            8,766
            
            
            
            4,013Cash
      flows from (used in) :Operating
      activities
            
            
            (7,210
            )
            
            
            226
            
            
            
            (15,852
            )
            
            
            (17,169
            )
            
            
            (1,899
            )
            
            
            1,627Investing
      activities
            
            
            (217,015
            )
            
            
            (3,171
            )
            
            
            (62,261
            )
            
            
            (276,182
            )
            
            
            (56,110
            )
            
            
            (16,745
            )Financing
      activities
            
            
            226,268
            
            
            
            1,551
            
            
            
            70,999
            
            
            
            301,853
            
            
            
            58,815
            
            
            
            15,250Reconciliation
      of EBITDA to Net Loss:Net
      income (loss)
            
            $
            (11,869
            )
            
            $
            (2,004
            )
            
            $
            (17,063
            )
            
            $
            (10,025
            )
            
            $
            591
            
            
            $
            19Plus:Interest
      expense
            
            
            9,513
            
            
            
            2,205
            
            
            
            25,333
            
            
            
            16,492
            
            
            
            6,188
            
            
            
            2,650Depreciation
      and amortization
            
            
            6,064
            
            
            
            374
            
            
            
            3,982
            
            
            
            2,502
            
            
            
            1,987
            
            
            
            1,344Provision
      (benefit) for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -EBITDA
            
            $
            3,708
            
            
            $
            575
            
            
            $
            12,252
            
            
            $
            8,969
            
            
            $
            8,766
            
            
            $
            4,013









(1)
            EBITDA
      is defined as net income (loss) before interest, taxes, depreciation and
      amortization. We believe it is a useful financial performance measure for
      us and for our stockholders and is a complement to net income and other
      financial performance measures provided in accordance with generally
      accepted accounting principles in the United States of America, or GAAP.
      We use EBITDA to measure the financial performance of our operating
      properties because it excludes expenses such as depreciation and
      amortization, taxes and interest expense, which are not indicative of
      operating performance. By excluding interest expense, EBITDA measures our
      financial performance irrespective of our capital structure or how we
      finance our properties and operations. By excluding depreciation and
      amortization expense, which can vary from property to property based on a
      variety of factors unrelated to the properties’ financial performance, we
      can more accurately assess the financial performance of our properties.
      Under GAAP, real estate properties are recorded at historical cost at the
      time of acquisition and are depreciated on a straight line basis. By
      excluding depreciation and amortization, we believe EBITDA provides a
      basis for measuring the financial performance of properties unrelated to
      historical cost. However, because EBITDA excludes depreciation and
      amortization, it does not measure the capital we require to maintain or
      preserve our fixed assets. In addition, because EBITDA does not reflect
      interest expense, it does not take into account the total amount of
      interest we pay on outstanding debt nor does it show trends in interest
      costs due to changes in our borrowings or changes in interest rates.
      EBITDA, as calculated by us, may not be comparable to EBITDA reported by
      other companies that do not define EBITDA exactly as we define the term.
      Because we use EBITDA to evaluate our financial performance, we reconcile
      it to net income (loss), which is the most comparable financial measure
      calculated and presented in accordance with GAAP. EBITDA does not
      represent cash generated from operating activities determined in
      accordance with GAAP, and should not be considered as an alternative to
      operating income or net income determined in accordance with GAAP as an
      indicator of performance or as an alternative to cash flows from operating
      activities as an indicator of
liquidity.






32
 Table of Contents


Item7.                                Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





The
following discussion relates to the consolidated and combined financial
statements of our company and our predecessor business and should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
in this report. Statements included below that are not historical may be
forward-looking statements, including information concerning development timing
and investment amounts. See “Forward-Looking Statements.” These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated. Although the information is based on
our current estimations, actual results could vary. You are cautioned not to
place undue reliance on this information. For a discussion of important risks
related to our business, and an investment in our common stock, see the
discussion under the caption “Risk Factors” above and under the caption “Factors
That May Influence Future Results of Operations” below. References in the
discussion below, unless the context suggests otherwise, “we,” “our,” “us” or
“our company” mean Meruelo Maddux Properties, Inc. and its
subsidiaries.




Overview
and Background






We are a
self-managed, full-service real estate company that develops, redevelops and
owns commercial and residential properties located in downtown Los Angeles and
other densely populated urban areas in California that are undergoing
demographic or economic changes. As of December 31, 2007, we own, lease with
rights to purchase or have rights to acquire interests in 55
projects.




We were
organized on July 5, 2006 to acquire substantially all of the interests and
assets and to succeed to the business of our predecessor, Meruelo Maddux
Properties, which we will collectively refer to herein as our predecessor
business. Our predecessor business was a combination of entities whose
controlling interest was owned by Richard Meruelo and non-controlling interest
was owned by John Charles Maddux. We are structured as a taxable corporation
under Subchapter C of the Internal Revenue Code of 1986, as amended (the
“Code”).




On
January 30, 2007, we consummated our initial public offering (our “IPO”)
and sold to the public 40,000,000 shares of our common stock. On
February 14, 2007, the underwriters of our IPO exercised their option to
purchase an additional 5,550,000 shares of our common stock, and we also issued
275,207 shares to affiliates of Messrs. Meruelo and Maddux that we had a
contingent obligation to issue (we have a remaining obligation to issue up to
2,261,388 shares). As of December 31, 2007, we had 85,837,900 shares of common
stock outstanding. Including proceeds from issuance of shares pursuant to the
over-allotment option, we raised approximately $425.7 million in net proceeds in
our IPO, after the underwriting discount but before expenses related to our
IPO.





In
addition, as of January 30, 2007, the operations of our company are carried on
primarily through Meruelo Maddux Properties, L.P. (the “operating partnership”).
Our company is the sole general partner in the operating partnership. Pursuant
to contribution agreements among us and the owners of our predecessor business,
we received a contribution of interests in real estate properties in exchange
for shares of common stock in our company, cash tax coverage payments and our
assumption of debt and other specified liabilities. Our predecessor business
combined 50 limited liability companies and three S-corporations with their
respective member/ownership interests. In connection with our IPO and our
formation transactions, we acquired entities that own, or that are party to
pending purchase and sale agreements, build-to-suit contracts, options to
purchase and leases in respect of 32 development and redevelopment projects and
22 rental projects.





As of
December 31, 2007, we have 99.6% ownership interests in each of the entities
(which have ownership, leasehold or acquisition rights in respect of the
projects indicated in parentheses) as summarized below.




Rental
Properties:




•
            788
      South Alameda, LLC (788 S. Alameda)




•
            Merco
      Group — 3185 E. Washington Boulevard, LLC (Washington Cold
      Storage)




•
            Meruelo
      Maddux — 500 Mateo Street, LLC (500 Mateo
  Street)




•
            Alameda
      Produce Market, Inc. (Alameda Square & Seventh Street Produce
      Market)




33
 Table of Contents


•
            Meruelo
      Wall Street, LLC (Meruelo Wall
Street)




•
            Merco
      Group — 620 Gladys Avenue, LLC (620 Gladys
  Avenue)




•
            Meruelo
      Maddux Properties — 1919 Vineburn Street, LLC (1919 Vineburn Avenue)




•
            Merco
      Group — 1500 Griffith Avenue, LLC (1500 Griffith
  Avenue)




•
            Santa
      Fe Commerce Center, Inc. (Crown Commerce
Center)




•
            905
      8th
      Street, LLC (905 E. 8th
      Street)




•
            Merco
      Group — 1211 E. Washington Boulevard, LLC (1211 E. Washington
      Blvd. & Washington at Central
Retail)




•
            Meruelo
      Maddux — 3rd &
      Omar Street, LLC (3rd &
      Omar Street)




•
            Merco
      Group, LLC (Sky Arc—Development Project and Southern California Institute
      of Architects—Operating Project)




•
            Santa
      Fe & Washington Market, Inc. (American
  Apartments)




•
            Merco
      Group — 2001-2021 West Mission Boulevard, LLC (Pomona Village and Pomona
      Retail)




•
            Meruelo
      Farms, LLC (Center Village)





•
            Meruelo
      Maddux Properties — 306-330 N. Avenue 21, LLC (2131 Humboldt
      Street)




•
            Merco
      Group — 5707 S. Alameda, LLC (5707 S.
Alameda)




•
            Meruelo Maddux
      — 1000 E. Cesar Chavez, LLC (1000 E. Cesar
  Chavez)





•
            Meruelo
      Maddux Properties — 1800 E. Washington Boulevard, LLC (1800 E. Washington
      Blvd.)





•
            Merco
      Group — Little J, LLC (TransAmerica Lofts – Operating Project and
      Southpark Towers – Development
Project)





•
            Meruelo
      Maddux — 420 Boyd Street, LLC (420 Boyd
Street)





•
            Meruelo
      Maddux — 2000 San Fernando Road (2000 San Fernando
  Road)





•
            Meruelo
      Maddux — 230 W. Avenue 26, LLC (230 W. Ave. 26th)





•
            2640
      Washington Boulevard, LLC (Washington Produce
  Market)





•
            Meruelo
      Maddux — 2415 E. Washington Blvd., LLC (Crown Commerce
    Center)







Real
Estate Held for Development:




•
            Meruelo
      Maddux — 555 Central Avenue, LLC (American
Fish)




•
            Meruelo
      Maddux — 3000 E. Washington Blvd., LLC (3000 E. Washington
      Blvd.)




•
            Meruelo
      Maddux Properties — 2131 Humboldt Street, LLC (2131 Humboldt
      Street)





•
            Merco
      Group — Ceres Street Produce, LLC (Ceres Street Produce
      Market)





•
            Meruelo
      Maddux Properties — 2951 Lenwood Road, LLC (Barstow Produce
      Center)




34
 Table of Contents


•
            Wall
      Street Market, LLC (Wall Street
Market)





•
            Merco
      Group — 1225 E. Washington Boulevard, LLC (Crown Commerce
      Center)




•
            1828
      Oak Street, LLC (1828 Oak Street)




•
            Merco
      Group — 4th
      Street Center, LLC (4th
      Street Center)





•
            Merco
      Group — 2529 Santa Fe Avenue, LLC (Santa Fe
  Plaza)




•
            Merco
      Group — 425 West 11th
      Street, LLC (Desmond Building)




•
            Merco
      Group — 1308 S. Orchard, LLC (Musica Latina
  Building)




•
            Merco
      Group — 801 E. 7th
      Street, LLC (801 E. 7th
      Street)





•
            Merco
      Group — 2035 Camfield Avenue, LLC (Camfield Retail Center and Gold’s
      Gym & Storage)





•
            Merco
      Group — 2040 Camfield Avenue, LLC (Camfield Retail Center and Gold’s
      Gym & Storage)




•
            Merco
      Group — Overland Terminal, LLC (Overland
  Terminal)





•
            Meruelo
      Maddux Properties — 760 S. Hill Street, LLC (The Union
    Lofts)




•
            Meruelo
      Maddux — 845 S. Flower Street, LLC (717 W. 9th
      Street)




•
            Meruelo
      Maddux — 915-949 S. Hill Street, LLC (Ullman Tower
  One)




•
            Meruelo
      Maddux — 817-825 S. Hill Street, LLC (Ullman Tower
  Two)




•
            Merco
      Group — Southpark, LLC (Southpark Towers, TransAmerica Lofts &
      Olive Street Towers)




•
            Meruelo
      Maddux — 336 W. 11th
      Street, LLC (Southpark Towers)




•
            Meruelo
      Chinatown, LLC (Meruelo Chinatown
Village)




•
            Meruelo
      Baldwin Park, LLC (Meruelo Baldwin
Park)




•
            Meruelo
      Maddux Properties — 1060 N. Vignes, LLC (Vignes
  Village)




•
            Meruelo
      Maddux Properties — 1009 North Citrus Avenue, Covina, LLC (Citrus
      Gardens)




•
            Merco
      Group — 146 E. Front Street, LLC (Covina
  Gardens)




•
            Meruelo
      Maddux Properties — 12385 San Fernando Road, LLC (San Fernando
      Court)




Other Entities:




•
            Meruelo
      Maddux Construction, Inc.




•
            Meruelo
      Maddux California Future Fund, LLC





•
            MMP
      Ventures, LLC





•
            Meruelo
      Maddux Properties, LP





•
            Meruelo
      Maddux Management, LLC





•
            Alameda
      North Parking, LLC





•
            Meruelo
      Maddux – Lugo Washington, LLC





35
 Table of Contents


Significant
Financing Transactions




The State
of California Public Employee’s Retirement System, or CalPERS, had been a
substantial investor in our predecessor business. In February 2005, CalPERS had
provided our predecessor business with capital in the form of a revolving credit
facility in the principal amount of approximately $150.0 million. We used a
portion of the net proceeds of our offering to pay all amounts outstanding under
the CalPERS facility, including $34.2 million in accrued interest, and
terminated the facility. We further reduced interest expense by repaying
approximately $111.3 million of net principal mortgage debt secured by our
projects.




Revenue
Base




As of
December 31, 2007 and 2006, we had 27 and 22 projects, respectively, that
were classified as rental properties. We receive revenue primarily from rental
income (including tenant reimbursements) from commercial and industrial
properties, which is included as rental income in the financial statements of
our company and our predecessor business. We also generate a small amount
ofmanagement fee
revenue by providing property management, leasing and development services to
properties that are owned by affiliates. However, our business plan is
distinctive in that we focus on urban infill development and on finding
different, more profitable uses for existing urban properties. Such properties
may have substantial vacancies or unstable occupancies or require major
renovation for a new use. Because we are foremost a redeveloper and the large
majority of our projects are not complete, we do not believe that the results of
our current leasing operations are indicative of the inherent value of our
existing portfolio.





Recent
Developments




In January
2008, we engaged a third party broker to actively market our project at 2000 San
Fernando Road for sale, and concurrently, we classified this project as held for
sale in accordance with SFAS 144.  We entered into a purchase and sale
agreement on March 14, 2008 pursuant to which we agreed to sell this
project.  The purchase agreement is subject to customary conditions,
including the buyer’s completion of a due diligence investigation to its
satisfaction.  We expect this sale to close in April 2008, although
there is no assurance that any of the closing conditions will be timely
fulfilled or that the transaction will in fact close.  Assuming the
sale is completed as anticipated, we expect to receive net sale proceeds (i.e.
after the loan secured by this project and all other costs of sale are paid) in
excess of $26.0 million.  See Note 19 of Item 15 “Financial Schedules
- Notes to Consolidated and Combined Financial Statements” for additional
information.
  On March 26,
2008 we entered into a letter of intent pursuant to which we will
agree to sell substantially our entire project at 801 E. 7th Street,
and concurrently, we classified this project as held for sale in accordance with
SFAS 144.  The purchase agreement would be subject to
customary conditions, including the buyer’s completion of a due diligence
investigation to its satisfaction.  We expect this sale would
close in May 2008, although there is no assurance that any of the closing
conditions would be timely fulfilled or that the transaction would in fact
close.  Assuming the sale is completed as anticipated, we expect to
receive net sale proceeds (i.e. after the loan secured by this project and all
other costs of sale are paid) in excess of $5.0 million.  See Note 19
of Item 15 “Financial Schedules – Notes to Consolidated and Combined Financial
Statements” for additional information.
  On March 26,
2008 we entered into a purchase and sale agreement pursuant to which we agreed
to sell a project we have the right to acquire at 9901 Alameda.  The
purchase agreement is subject to very limited conditions.  We expect
this sale to close on March 31, 2008, although there is no assurance that any of
the closing conditions will be timely fulfilled or that the transaction will in
fact close.  Assuming the sale is completed as anticipated, we expect
to receive net sale proceeds (i.e. after all costs of sale are paid) of
approximately $7.0 million.  See Note 19 of Item 15 “Financial
Schedules – Notes to Consolidated and Combined Financial Statements” for
additional information.
  In our
formation transactions in connection with our IPO, we acquired a contingent note
receivable held by our predecessor business. The obligor on the contingent note
receivable is an entity owned by the two affiliates described above. We refer to
this obligor as the “Taylor Yards entity.” The Taylor Yards entity in turn owns
a property that we refer to as the “Taylor Yards property.” The contingent note
receivable evidences amounts drawn under our predecessor business’ credit
facility provided by CalPERS, which amounts were loaned to the Taylor Yards
entity by our predecessor business to acquire the Taylor Yards property. The
Taylor Yards entity and the Taylor Yards property were not contributed to us as
part of our formation transactions because the Taylor Yards property was, and
remains, subject to condemnation proceedings by the Los Angeles Unified School
District. However, the amount of consideration we delivered in our formation
transactions for our initial projects to the two affiliates of Messrs.
Meruelo and Maddux was effectively reduced by an amount equivalent
to the contingent note receivable.
  
 36
 Table of Contents


Critical
Accounting Policies




Our
discussion and analysis of the financial condition and results of operations of
our company and our predecessor are based upon the consolidated and combined
financial statements, and schedules which have been prepared in accordance with
U.S. generally accepted accounting principles, or GAAP. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions in certain circumstances that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses in the reporting period. Actual
amounts may differ from those estimates and assumptions. We have provided a
summary of our significant accounting policies in Note 2 to the consolidated and
combined financial statements included elsewhere in this report. We have
summarized below those accounting policies that require material subjective or
complex judgments and have the most significant impact on our financial
condition and results of operations. We evaluate these estimates on an ongoing
basis, based upon information currently available and on various assumptions
that we believe are reasonable as of that date.




Real
Estate Held for Development




Real
estate held for development includes land and buildings (at cost) we intend to
or have begun developing.   We start to capitalize costs to real
estate held for development as we take steps required to prepare the property
for its intended use. Project costs associated with the development and
construction of a real estate project, including land, entitlement and building
improvement costs, are capitalized as construction in progress. In addition,
interest, loan fees, real estate taxes, general and administrative expenses that
are directly associated with the development are also capitalized in the period
in which they are incurred. We reduce these capitalized costs for incidental
revenue generated from tenant leases, parking income and movie
shoots.  Once the real estate project is completed and the project is
ready for its intended use, the costs capitalized to construction in progress
and the land and building costs associated with the completed project are
transferred to rental properties on the consolidated balance sheet as the
historical cost of the project.





Rental
Properties




Rental
properties, including land, building improvements and capitalized leasing
commissions, are stated at cost, less accumulated depreciation. We are required
to make subjective assessments as to the useful lives of our assets for purposes
of determining the amount of depreciation to record on an annual basis with
respect to our buildings and building improvements. These assessments are
primarily based upon our decision to either develop or operate a property. For
example, if we determine that we will be developing a property and the building
will be replaced upon commencement of construction, the estimated useful life
will be the time from the date of purchase to the estimated date of demolition.
Upon completion of the development, buildings and building improvements are
depreciated over estimated useful lives ranging from 2 to 39 years. Tenant
improvements are depreciated over the term of the respective tenant leases.
Capitalized lease commissions are amortized over the term of the related
leases.






37
 Table of Contents


Costs
related to the acquisition and improvement of the rental properties are
capitalized, while expenses for repairs and maintenance are charged to
operations as incurred. Certain expenses such as property taxes, utilities and
repair and maintenance costs are chargeable to the tenants as provided in their
lease agreements. Such reimbursements are recorded as rental income in the
consolidated and combined statements of operations. Costs related to terminated
deal costs are expensed when we cease due diligence and related acquisition
efforts.
  The acquisition of real estate
properties is accounted for in accordance with SFAS No. 141, Business Combinations(“SFAS
141”)whereby the
value of real estate acquired is allocated between land, buildings and
improvements, acquired leasing commissions and tenant coordination costs, and to
acquired above- and below-market leases and tenant relationships. The fair value
of tangible assets is determined on an “as-if-vacant” basis based upon
comparable sales and other relevant information obtained in connection with the
acquisition of the property. The estimated fair value of acquired in-place
at-market leases are the costs we would have incurred to lease property to the
occupancy level of the property at the date of acquisition. Such estimate
includes the fair value of leasing commissions and legal costs that would be
incurred to lease the property to this occupancy level. Additionally, we
evaluate the time period over which such occupancy level would be achieved and
include an estimate of the net operating costs (primarily real estate taxes,
insurance and utilities) incurred during the lease-up period, which generally
ranges up to eight to nine months. These allocations have a direct impact on our
results of operations as allocations between land, buildings and improvements
because, if we were to allocate more value to land, there would be no
depreciation with respect to such amount. If we were to allocate more value to
the buildings as opposed to allocating the value of tenant leases, this amount
would be recognized as an expense over a much longer period of time, since the
amounts allocated to buildings are depreciated over the estimated lives of the
buildings whereas amounts allocated to tenant leases are amortized over the
terms of the leases.
  Revenue
Recognition
  Revenue
is recognized in accordance with Staff Accounting Bulletin No. 104 of the
Securities and Exchange Commission, Revenue Recognition (“SAB
104”), as amended. SAB 104 requires that four basic criteria must be met before
revenue can be recognized: persuasive evidence of an arrangement exists; the
delivery has occurred or services rendered; the fee is fixed and determinable;
and collectibility is reasonably assured. All leases are classified as operating
leases and minimum rents are recognized on lease terms exceeding one year on a
straight-line basis over the term of the respective leases. The excess of rents
recognized over amounts contractually due pursuant to the underlying leases is
included in accounts receivable in the consolidated and combined balance sheets.
Recoveries from tenants for common area maintenance expenses, real estate
property taxes and other recoverable operating expenses are recognized as
revenue in the period the associated costs are incurred. In addition, the
company records a capital asset for leasehold improvements constructed by us
that are reimbursed by tenants, with the offsetting amount recorded to deferred
revenue which is included in accrued expenses and other liabilities. The
deferred revenue is amortized as additional rental revenue over the life of the
related lease.


We
maintain an allowance for estimated losses that may result from the inability of
tenants to make required lease payments. If a tenant fails to make contractual
payments beyond any allowance, we may recognize bad debt expense in future
periods equal to the amount of unpaid rent and deferred rent.




Rental
revenue from month-to-month leases or leases with no scheduled rent increases or
other adjustments is recognized on a monthly basis when earned.




Lease
termination fees are recorded when the related leases are canceled and our
company has no continuing obligation to provide services to such former tenants.
Lease termination fees are included in rental revenues and were not material for
the years ended December 31, 2007, 2006 and 2005.




We
recognize gains on sales of real estate pursuant to the provisions of SFAS
No. 66, Accounting for Sales of Real Estate. The specific timing of a sale
is measured against various criteria in SFAS No. 66 related to the terms of
the transaction and any continuing involvement in the form of management or
financial assistance associated with the property. If the sales criteria are not
met, we defer gain recognition and accounts for the continued operations of the
property by applying the finance, installment or cost recovery methods, as
appropriate, until the sales criteria are met.






38
 Table of Contents
 Evaluation
of Asset Impairment
  We
evaluate a property for potential impairment when events or changes in
circumstances indicate that the current book value of the property may not be
recoverable pursuant to SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. In the event that
these periodic assessments result in a determination that the carrying amount of
a property exceeds the sum of the undiscounted cash flows (excluding interest)
that are expected to result from the use and eventual disposition of the
property, we would recognize an impairment loss to the extent the carrying
amount exceeded the estimated fair value of the property. Estimates of expected
future net cash flows are inherently uncertain and are based on assumptions
dependent upon future and current market conditions and events that affect the
ultimate value of the property. These estimates require us to make assumptions
relating to, among other things, future rental rates, tenant allowances,
operating expenditures, property taxes, capital improvements, occupancy levels,
and the estimated proceeds generated from the future sale of the
property.  No impairment was identified at December 31, 2007 or
2006, as projected undiscounted cash flows were sufficient to recover the
current book value, although a change in our strategy or a significant change in
market conditions could require that we recognize an impairment loss, and such a
loss could be material.
  Factors
That May Influence Future Results of Operations
  The
following is a summary of the more significant factors we believe may affect our
results of operations. For a more detailed discussion, see the information under
the caption “Risk Factors” elsewhere in this report.
  Development
and Redevelopment Activities
  We
believe that our development and redevelopment activities present growth
opportunities for us over the next several years. We continually evaluate the
size, timing and scope of our development and redevelopment initiatives and, as
necessary, sales activity to reflect the economic conditions and the real estate
fundamentals that exist. However, development and redevelopment of our projects
is highly speculative and subject to timing, budgeting and other risks,
including cyclical over-building or over-investing within certain real estate
submarkets and changing political situations that may interfere with our
proposed uses of projects. In particular, we are subject to increases in the
costs of materials (especially in the price of steel, lumber, dry wall, copper
and concrete, which are significant components of construction costs) caused by
changing market conditions, including increased global demand. We are also
affected by changes in laws and regulations (including the land use entitlement
processes), particularly in the City of Los Angeles, fiscal policies and zoning
ordinances and the related costs of compliance with laws, their regulations and
policies.  Increases in interest rates will increase our borrowing
costs and our overall development or redevelopment costs for a project. In
addition, customers may be unwilling or unable to purchase our for-sale
residential units at times when mortgage-financing costs are high or as borrower
credit quality declines.  Finally, changes in availability of capital
will affect our ability to develop our projects, including timing and the type
and extent of development. The occurrence of one or more of these events could
adversely affect our financial condition, results of operations and cash
flows.
  Rental
Revenue




The
amount of net rental income generated by our rental properties depends
principally on our ability to maintain the occupancy rates of currently leased
space and to lease currently available space as well as space in newly developed
or redeveloped properties and space available from unscheduled lease
terminations. The amount of rental income we generate also depends on our
ability to maintain or increase rental rates. We operate in the greater Los
Angeles area and, accordingly, market conditions in this area have a significant
impact on our results of operations.





The
amount of rental income is also significantly impacted by our ability to attract
and retain large tenants in our properties.  Our top 10 tenants
comprise 46.1% of our annualized base rental revenues as of December 31,
2007.  In addition, our largest tenant is American Apparel, who leases
788,273 square feet of industrial space as of December 31, 2007. This lease
represents 11.6% of our annualized base rental revenue for the year ended
December 31, 2007, but expires on December 31, 2008. In addition, we
have one other tenant, FedEx, whose lease represents 11.2% of our annualized
base rental revenue as of December 31, 2007. The FedEx lease expires in October
2014; however FedEx has the option to extend the term of the lease for an
additional five years.  No other tenant comprises more than 10.0% of
our portfolio’s total rentable square feet or annualized base rental
revenues.





39
 Table of Contents


Effect
of Credit Market Disruptions





Our
primary objective is to maximize return on investment through development and
redevelopment activities, and these activities require significant amounts of
capital.  The current disruption in the credit markets has made it
more difficult for us to obtain debt financing.  It has also caused us
to evaluate additional sources of capital and cash flow. This disruption has or
may affect us in a number of ways, including by:




•
            making
      it more difficult for us to obtain financing on attractive terms,
      resulting in lower loan-to-value ratios and loan-to-cost ratios, higher
      interest rates and generally less available debt
  capital;




•
            creating
      the need to evaluate and adjust as appropriate our previously disclosed
      development and redevelopment plans and timelines (both commencement and
      completion dates) to correlate with adjustments in the availability of
      capital and other current and changing market
  conditions;




•
            increasing
      our projected development costs and the percentage and therefore amount of
      equity we are required to contribute to our
  projects;




•
            moving
      sales and leasing revenue from our properties from earlier periods to
      subsequent periods, thereby not eliminating our negative cash flow as
      quickly as we anticipate and as a result reducing our liquidity more than
      anticipated;




•
            leading
      us to decide to sell certain assets that we believe have reached near-term
      maximum value or which are not central to our development or redevelopment
      plans, or which are otherwise in the best interests of the company to
      sell;




•
            leading
      us to enter into joint venture agreements with respect to certain of our
      more capital intensive projects;




•
            leading
      us to seek debt or equity-linked capital available to public companies
      and




•
            leading
      us to refocus certain previously anticipated longer-term development
      projects to produce more near-term income through leasing the project and
      thereby reducing capital outflows through the redevelopment process and
      increasing near-term cash flow.




Scheduled
Lease Expirations




Our
ability to re-lease space subject to expiring leases will impact our results of
operations and is affected by economic and competitive conditions in our markets
as well as the desirability of our individual properties. As of December 31,
2007, approximately 1.5 million square feet, or 36.7% of the square footage held
for lease, of our portfolio of wholly-owned rental and development projects was
available for lease. To allow for flexibility in our redevelopment strategy, we
generally seek to execute month-to-month leases with tenants in our properties
that have not yet been developed to what we consider to be their highest and
best use. As of December 31, 2007, month-to-month leases represent approximately
49.1% of the annualized base rent of our portfolio of owned projects. The
following table sets forth a summary schedule of lease expirations for leases in
place at our owned projects as of December 31, 2007:




Year
      of Lease Termination
            
            Number
              of Leases
              Expiring
            
            
            Square Footage of
              Expiring
      Leases
            
            
            Percentage
      of
              Total
              Rentable
              Square Feet(1)
            
            
            Annualized
      Base
              Rent of Expiring
              Leases(2)
            
            
            Percentage of Portfolio
              Annualized Base RentMonth
      to Month
            
            
            301
            
            
            
            860,219
            
            
            
            20.7
            %
            
            $
            12,586,391
            
            
            
            49.1
            %2008
            
            
            18
            
            
            
            1,032,784
            
            
            
            24.9
            %
            
            
            5,206,419
            
            
            
            20.3
            %2009
            
            
            6
            
            
            
            161,005
            
            
            
            3.9
            %
            
            
            829,909
            
            
            
            3.2
            %2010
            
            
            8
            
            
            
            230,259
            
            
            
            5.5
            %
            
            
            2,135,340
            
            
            
            8.3
            %2011
            
            
            3
            
            
            
            124,220
            
            
            
            3.0
            %
            
            
            276,840
            
            
            
            1.1
            %2012
            
            
            2
            
            
            
            38,694
            
            
            
            0.9
            %
            
            
            457,179
            
            
            
            1.8
            %Thereafter
            
            
            3
            
            
            
            183,083
            
            
            
            4.4
            %
            
            
            4,141,944
            
            
            
            16.2
            %Total
            
            
            341
            
            
            
            2,630,264
            
            
            
            63.3
            %
            
            $
            25,634,022
            
            
            
            100.0
            %





(1)
            Based
      on total square footage of 4,153,922, which is the total square footage of
      space leased or available or offered for lease at both rental and
      development projects and excludes substantial portions of square footage
      in the projects that are not available or offered for lease because of
      redevelopment or repositioning activities.  Parking square
      footage is not included in the
calculation.


(2)
            Based
      on annualized base rent paid or payable as of December 31, 2007. Because
      annualized base rent is not derived from historical results that were
      accounted for in accordance with U.S. generally accepted accounting
      principles, historical results differ from the annualized
      amounts.  Annualized base rent does not include parking
      income.




40
 Table of Contents


Results
of Operations




Executive
Summary




When
reviewing this document, it is important to be aware that the company became a
publicly owned entity on January 30, 2007.




Our
operating results for the year ended December 31, 2007, were in line with
management’s expectations. We are first and foremost a development company, and
while we seek to maximize net rental revenues, our primary objective is to
maximize return on investment through development and redevelopment activities.
In light of the current and changing credit market conditions and availability
of capital, we are evaluating and adjusting as appropriate our previously
disclosed development and redevelopment plans, timelines and costs. We have
completed construction work on the residential portion of our Union Lofts
project and began leasing the project in March 2008.  We are
continuing the construction work on the restaurant/lounge space, which we
anticipate will be completed by the end of 2008.  The
restaurant/lounge space has already been leased.  We have also
continued construction activity on a 214 residential unit tower at 717 W. Ninth
Street, which we anticipate will be completed in 2009.




The IPO
significantly affected our results for the year ended December 31, 2007 as
compared to the year ended December 31, 2006 during which period our predecessor
business operated. We used IPO proceeds to pay down existing mortgage debt and
to pay off the CalPERS mezzanine loan facility incurred by our predecessor
business as was contemplated in connection with our IPO. This has substantially
reduced interest expense for the current year. We have also used IPO proceeds to
acquire eight properties, three of which are identified here as rental
properties. In addition, we acquired four parcels attached to existing rental
properties and placed them in service upon purchase.  These
acquisitions, together with acquisitions of rental properties during 2006, have
affected the comparability of rental income as well as rental expenses. A
portion of the IPO proceeds was invested in a money market account throughout
the year, increasing our interest income compared to the prior year
period.




While we
have seen an increase in revenue from rental properties during the year ended
December 31, 2007 in comparison to the year ended December 31, 2006, this may
not be a predictable measure of our performance for the future. The majority of
our assets were acquired with development or redevelopment plans in mind and
only seven of the 27 rental projects have a current use that is unlikely to
be altered within the next five years. We classify a property as either a rental
property or as real estate held for development. Some properties classified as
real estate held for development may generate cash flow (for example, from
parking operations), but such cash flow is ancillary to the development and is
not reported as rental income but instead is offset against costs that are
capitalized.




Most of
the properties categorized as rental properties were acquired in part or in
whole for their redevelopment potential, and, as our market area continues to
undergo significant change, we believe the redevelopment potential of rental
properties will increase. See below for additional information regarding our
acquisition and development activities.




Ongoing
redevelopment activity at rental properties, or portions thereof, will continue
to change gross rental property income on a portfolio-wide basis until such time
that the majority of our current development pipeline has been fully developed.
This has the effect of temporarily reducing net operating income in certain
cases until such time as the development or redevelopment projects are completed
and leased.




During
the year ended December 31, 2007 we experienced rental income declines at
Seventh Street Produce Market due to county health department enforcement
actions at this project. These enforcement actions resulted in a number of our
tenants being forced to cease operations and ultimately leave their tenanted
space. We believe these declines will be temporary and ultimately reversed as we
implement a plan of best-practices tenant education as well as a physical
rehabilitation for this facility.  The triple net lease with Rockwell
Collins at Pomona Village expired on January 31, 2007 causing revenue to decline
and operating expenses to increase.  We also began to reserve for
potential property tax increases that may result from our formation
transactions.




41
 Table of Contents


In
addition to these factors, we experienced several significant changes in our
accounting as a result of our IPO that affect the comparability of our results.
These changes include certain purchase accounting adjustments recorded under
Statement of Financial Standard (SFAS) No. 141, Business Combinations,for
the fair value of real estate, which affect depreciation and amortization
expense. In addition, the adjustments increasing the fair value of the real
estate subsequently increased our deferred income tax liabilities and paid in
capital.






Acquisition
and development activities





The
comparability of our results of operations is significantly affected by our
development and acquisition activities in 2007 and 2006. At December 31, 2006,
we owned interests in 22 rental projects and 32 projects held as real estate for
development. At December 31, 2007, we owned interests in 27 rental projects and
28 projects held as real estate for development.





Between January 1, 2007 and December
31, 2007, we acquired or placed in service the following five rental
projects.





Projects
            Acquisition
      or
                Conversion
      Date
            
            Square
                FootageWashington
      Produce Market (2640 Washington Blvd)
            3/7/2007
            
            
            31,876230
      W. Avenue 26th
            4/1/2007
            
            
            67,9712000
      San Fernando Road
            4/2/2007
            
            
            119,381420
      Boyd Street
            6/27/2007
            
            
            47,8064th
      Street Center
            9/30/2007
            
            
            14,472Total
            
            
            
            281,506





In
addition, between January 1, 2007 and December 31, 2007, we acquired or placed
in service additional parcels attached to the following current rental
projects.


Projects
            Date
      of Addition
            
            Square
              FootageCrown
      Commerce Center
            1/26/2007
            
            
            18,500905
      E 8th
      Street
            3/23/2007
            
            
            3,597Center
      Village
            3/27/2007
            
            
            66,135620
      Gladys Avenue
            4/13/2007
            
            
            49,959Total
            
            
            
            138,191





42
 Table of Contents


Comparison
of the year ended December 31, 2007 to year ended December 31, 2006




The
following table reflects our consolidated and combined statements of operations
for the years ended December 31, 2007 and 2006 (in thousands):




Year
      Ended December 31,2007(1)
            
            
            Predecessor
              2006
            
            
            Increase
      (Decrease)Revenue:Rental
      income
            
            $
            23,604
            
            
            $
            22,422
            
            
            $
            1,182
            
            
            
            5.3
            %Management
      fees
            
            
            272
            
            
            
            285
            
            
            
            (13
            )
            
            
            -4.6
            %Interest
      income
            
            
            3,028
            
            
            
            3,614
            
            
            
            (586
            )
            
            
            -16.2
            %Other
      income
            
            
            521
            
            
            
            751
            
            
            
            (230
            )
            
            
            -30.6
            %27,425
            
            
            
            27,072
            
            
            
            353
            
            
            
            1.3
            %Expenses:Rental
      expenses
            
            
            13,521
            
            
            
            10,104
            
            
            
            3,417
            
            
            
            33.8
            %Interest
      expense
            
            
            11,718
            
            
            
            25,333
            
            
            
            (13,615
            )
            
            
            -53.7
            %Depreciation
      and amortization
            
            
            6,438
            
            
            
            3,982
            
            
            
            2,456
            
            
            
            61.7
            %General
      and administrative
            
            
            9,621
            
            
            
            6,045
            
            
            
            3,576
            
            
            
            59.2
            %41,298
            
            
            
            45,464
            
            
            
            (4,166
            )
            
            
            -9.2
            %Operating
      Loss
            
            
            (13,873
            )
            
            
            (18,392
            )
            
            
            4,519
            
            
            
            24.6
            %Discontinued
      operations:Gain
      on sale of real estate
            
            
            -
            
            
            
            1,329
            
            
            
            (1,329
            )
            
            
            -100.0
            %Loss
      before income taxes
            
            $
            (13,873
            )
            
            $
            (17,063
            )
            
            $
            3,190
            
            
            
            18.7
            %





(1)
            For
      purposes of comparison, 2007 amounts include the predecessor results for
      the period from January 1, 2007 to January 29, 2007 and our company
      results for the period from January 30, 2007 to December 31,
      2007.




Rental income. Rental income
increased by $1.2 million, or 5.3%, to $23.6 million for the year ended December
31, 2007 compared to $22.4 million for the year ended December 31, 2006. An
increase of $2.8 million is attributable to rental operations at 2000 San
Fernando Road, the J restaurant and 788 S. Alameda, which had limited or no
operation in the prior year. We also had increased rental income from other
properties of $1.8 million offset by rental declines at Pomona Village and
Seventh Street Produce Market of $3.2 million, which include the
previously-discussed Rockwell Collins lease expiration at Pomona Village and
occupancy decreases at the Seventh Street Produce Market that are a result of
health department actions.




Management fees. Management
fees decreased by $0.01 million, or 4.6%, to $0.27 million for the year ended
December 31, 2007 compared to $0.28 million for the year ended December 31,
2006. The decrease is due to the reduction in fees applicable to the Taylor
Yards property. We reduced management fees on June 30, 2006 due to the
condemnation proceedings and the fact that developing activities ceased
partially offset by an increase in construction services to affiliated entities
during 2007.




Interest income. Interest
income decreased by $0.6 million, or 16.2%, to $3.0 million for the year ended
December 31, 2007 compared to $3.6 million for the year ended December 31, 2006.
An increase of $2.2 million is attributable to interest income from investing
the funds from our IPO offset by a decrease in the interest income from
affiliate note receivable of $2.8 million, which is due to a decrease in the
interest rate from 18.0% to 4.77% pursuant to an agreement with the affiliated
parties.




Other
income.  Other income, which is primarily composed of leasing
our space to businesses in the entertainment industry for filming, decreased by
$0.2 million, or 30.6%, to $0.5 million for the year ended December 31, 2007
compared to $0.7 million for the year ended December 31, 2006. The decrease is
attributable to fewer filming contracts in the current year compared to the
prior year.





43
 Table of Contents


Rental expenses. Rental
expenses increased by $3.4 million, or 33.8%, to $13.5 million for the year
ended December 31, 2007 compared to $10.1 million for the year ended December
31, 2006. The increase of $1.7 million is attributable to the operation of
rental properties placed in service during 2006 or 2007 and which had limited or
no operations during the year ended December 31, 2006. In addition, as a result
of the previously discussed Rockwell Collins triple net lease expiration at
Pomona Village, rental expenses increased by approximately $0.5
million.  Finally, we began accruing for estimated property tax
contingencies resulting from our formation transactions.




Interest expense. Interest
expense decreased by $13.6 million, or 53.7%, to $11.7 million for year ended
December 31, 2007 compared to $25.3 million for the year ended December 31,
2006. The decrease is due to the payoff of the CalPERS credit facility and other
mortgage debt instruments from our IPO proceeds and the cessation of
amortization of loan costs associated with the CalPERS note.




Depreciation and amortization
expense. Depreciation and amortization expense increased by $2.4 million,
or 61.7%, to $6.4 million for the year ended December 31, 2007 compared to $4.0
million for the year ended December 31, 2006. This increase is primarily due to
increased real estate values as a result of property acquisitions and the
purchase of additional interests in the current portfolio. In addition, during
the current year, we reclassified certain amounts between land and building and
improvements, which resulted in increased depreciation expense.  See
Note 4 of the “Note to the Consolidated and Combined Financial Statements” in
Item 15 of this report for more information.




General and administrative expenses.General and administrative expenses increased by $3.6 million, or 59.2%,
to $9.6 million for the year ended December 31, 2007 compared to $6.0 million
for the year ended December 31, 2006 as a result of our IPO in the current
year.  Since the IPO, we have added staff and infrastructure to
accommodate the requirements of becoming a public company, which resulted in
increased compensation and administrative costs such as director fees, director
and officer insurance, investor relations fees and transfer agent
costs.  We have also incurred significantly higher consulting and
professional fees associated with corporate governance and compliance with SEC
regulations (i.e. Sarbanes-Oxley, audit fees).  In addition, we
implemented the 2007 Equity Incentive Plan, which resulted in stock compensation
expense, which was not present in the prior period.




Gain on sale of real estate.
Gain on sale of real estate decreased by $1.3 million for the year December 31,
2007 compared to the year ended December 31, 2006, due to the sale of Leonis
Cold Storage to an unrelated third party in May 2006. There were no sales during
2007.





Results
of Operations of Predecessor Business




Our
predecessor’s combined results of operations for the years ended December 31,
2006 and 2005 reflect the operations of acquired properties from the respective
dates of acquisition. Our predecessor business and affiliates closed on 36
properties during 2005 and eight during 2006. The table below summarizes the
combined results of operations of our predecessor business (in
thousands):





44
 Table of Contents


Year
      Ended December 31,2006
              
              
              2005
              
              
              Increase
      (Decrease)Revenue:Rental
      income
              
              $
              22,422
              
              
              $
              16,526
              
              
              $
              5,896
              
              
              
              35.7
              %Management
      fees
              
              
              285
              
              
              
              602
              
              
              
              (317
              )
              
              
              -52.6
              %Other
      income
              
              
              751
              
              
              
              794
              
              
              
              (43
              )
              
              
              -5.3
              %23,458
              
              
              
              17,922
              
              
              
              5,536
              
              
              
              30.9
              %Expenses:Rental
      expenses
              
              
              10,104
              
              
              
              7,673
              
              
              
              2,431
              
              
              
              31.7
              %Interest
      expense
              
              
              25,333
              
              
              
              16,492
              
              
              
              8,841
              
              
              
              53.6
              %Depreciation
      and amortization
              
              
              3,982
              
              
              
              2,502
              
              
              
              1,480
              
              
              
              59.2
              %General
      and administrative
              
              
              6,045
              
              
              
              4,222
              
              
              
              1,823
              
              
              
              43.2
              %45,464
              
              
              
              30,889
              
              
              
              14,575
              
              
              
              47.2
              %Operating
      Loss
              
              
              (22,006
              )
              
              
              (12,967
              )
              
              
              (9,039
              )
              
              
              69.7
              %Interest income on affiliate notes receivable
              
              
              3,614
              
              
              
              2,942
              
              
              
              672
              
              
              
              22.8
              %Loss from continuing operations
              
              
              (18,392
              )
              
              
              (10,025
              )
              
              
              (8,367
              )
              
              
              83.5
              %Discontinued
      operations:Gain
      on sale of real estate
              
              
              1,329
              
              
              
              -
              
              
              
              1,329
              
              
              
              100.0
              %Loss
      before income taxes
              
              $
              (17,063
              )
              
              $
              (10,025
              )
              
              $
              (7,038
              )
              
              
              70.2
              %


Historical
Results of Operations




Comparison
of year ended December 31, 2006 to year ended December 31, 2005




Rental
income.    Rental income increased by $5.9 million,
or 35.7%, to $22.4 million for the year ended December 31, 2006 compared to
$16.5 million for the year ended December 31, 2005. An increase of $1.6 million
is attributable to having a full year of operations for Center Village, Pomona
Village, Pomona Retail, 620 Gladys Avenue and 1500 Griffith for the year ended
December 31, 2006 compared to approximately 10 months during the prior year.
Another $2.1 million is due to the purchase during the second half of 2005 of
the Southern California Institute of Architecture building, 1919 Vineburn Avenue
and a portion of 2131 Humboldt Street. Also an increase of $1.4 million is
attributable to the completion of the Washington Cold Storage and 788 S Alameda
projects in 2006.




Management
fees.    Management fees decreased by $0.3 million,
or 52.6%, to $0.3 million for the year ended December 31, 2006 compared to $0.6
million for the year ended December 31, 2005. The decrease is primarily
attributable to a one-time consulting fee for the sale of property owned by
Homero and Belinda Meruelo during 2005 with no corresponding consulting fee
during 2006.




45
 Table of Contents


Other
income.    Interest and other income decreased by
$0.04, or 5.3%, to $0.75 million for the year ended December 31, 2006 compared
to $0.79 million for the year ended December 31, 2005. The decrease is primarily
due to generating less income from temporarily leasing properties for filming
offset by an increase in non-rental operating income from the Coffee Beanery, a
coffee franchise we operate at one of our projects.




Operating
expenses.    Operating expenses related to rental
properties increased by $2.4 million, or 31.7%, to $10.1 million for the year
ended December 31, 2006 compared to $7.6 million for the year ended
December 31, 2005. The increase is due to operating Center Village, Pomona
Village, Pomona Retail, Washington Cold Storage, and other projects for more
months during 2006 than during 2005.




Interest
expense.    Interest expense increased by $8.8
million, or 53.6%, to $25.3 million for the year ended December 31, 2006
compared to $16.5 million for year ended December 31, 2005. The increase is due
to a higher amount of debt on more properties over the previous year and an
increase in the effective interest rate primarily attributable to the CalPERS
note.




Depreciation and
amortization expense.    Depreciation and
amortization expense increased by $1.5 million, or 59.2%, to $4.0 million for
the year ended December 31, 2006 compared to $2.5 million for the year ended
December 31, 2005. This increase was due to additional depreciation and
amortization expense resulting from property acquisitions.




General and
administrative expenses.    General and
administrative expenses increased by $1.8 million, or 43.2%, to $6.0 million for
the year ended December 31, 2006 compared to $4.2 million for the year ended
December 31, 2005. The increase is due increased salary for the administrative
staff and related expenses as more acquisitions were completed.




Interest income
on affiliate notes receivable.    Interest income
increased by $0.7 million, or 22.8%, to $3.6 million for the year ended December
31, 2006 compared to $2.9 million for the year ended December 31, 2005. The
increase is primarily attributable to having a full year of interest on the
affiliate note receivable from Taylor Yards for the year ended December 31, 2006
versus nine and one-half months for 2005. Another reason for the increase is
that in January 2006 the note receivable from Taylor Village increased due to
the purchase of an adjacent property.




Gain on sale of
real estate.    Gain on sale of real estate increased
by $1.3 million for the year ended December 31, 2006 compared to the year ended
December 31, 2005, due to the sale of a development property (Leonis Cold
Storage) to an unrelated third party in May 2006. Our predecessor business did
not sell any properties during in 2005.





Liquidity
and Capital Resources






As of
December 31, 2007, we had cash and cash equivalents of approximately $3.0
million.




The
following table sets forth certain information with respect to our outstanding
indebtedness as of December 31, 2007 (in thousands):




Principal
              Balance
            
            
            Weighted
      Average Interest Rate
            
            
            Current
              Principal
      DueFixed
      rate mortgage debt
            
            $
            131,981
            
            
            
            6.94
            %
            
            $
            81,659Variable
      rate mortgage debt
            
            
            175,413
            
            
            
            7.86
            %
            
            
            90,682Total
      consolidated debt
            
            $
            307,394
            
            
            
            7.47
            %
            
            $
            172,341







46
 Table of Contents




The
following table sets forth additional information with respect to our
outstanding indebtedness as of December 31, 2007 (in thousands):




Project Name
            
            Interest
              Rate
            
            Maturity
              Date(1)
            
            Principal
            
            
            Annual Debt
      Service(2)
            
            
            Balance at
              MaturitySeventh
      Street Produce Market/Alameda Square
            
            
            6.75
            %
            11/30/2008
            
            $
            50,445
            
            
            $
            4,718
            
            
            $
            49,207Meruelo
      Wall Street
            
            
            6.25
            %
            7/5/2008
            
            
            20,721
            
            
            
            1,700
            
            
            
            20,481Santa
      Fe Commerce Center
            
            
            7.48
            %
            9/5/2011
            
            
            10,314
            
            
            
            913
            
            
            
            9,719Seventh
      Street Produce Market/Alameda Square
            
            
            8.00
            %
            11/30/2008
            
            
            9,989
            
            
            
            937
            
            
            
            9,8583185
      E Washington Blvd.
            
            
            6.93
            %
            4/13/2016
            
            
            9,707
            
            
            
            152
            
            
            
            8,3351800
      E. Washington Blvd.
            
            
            7.49
            %
            10/1/2017
            
            
            9,100
            
            
            
            682
            
            
            
            9,1002131
      Humboldt Street
            
            
            6.50
            %
            1/1/2011
            
            
            7,000
            
            
            
            455
            
            
            
            7,000420
      Boyd Street
            
            
            7.49
            %
            6/15/2012
            
            
            5,950
            
            
            
            446
            
            
            
            5,950Santa
      Fe Plaza
            
            
            7.49
            %
            10/1/2017
            
            
            3,165
            
            
            
            265
            
            
            
            2,7621500
      Griffith Ave.
            
            
            7.00
            %
            1/24/2013
            
            
            3,000
            
            
            
            210
            
            
            
            3,000905
      8th Street
            
            
            7.50
            %
            1/15/2009
            
            
            1,950
            
            
            
            146
            
            
            
            1,950500
      Mateo Street
            
            
            7.00
            %
            3/1/2011
            
            
            640
            
            
            
            180
            
            
            
            0TOTAL
      FIXED RATE DEBT
            
            
            
            
            
            
            
            131,981
            
            
            
            10,804
            
            
            
            127,362Union
      Lofts Mini Permanent Loan
            
            1-Month
      LIBOR plus 1.65%
            
            3/1/2009
            
            
            25,721
            
            
            
            1,671
            
            
            
            28,720Southpark
      Towers (3)
            
            Prime
            
            1/14/2008
            
            
            25,000
            
            
            
            1,813
            
            
            
            25,000Sky
      Arc
            
            Prime
      plus .75%
            
            4/1/2008
            
            
            19,000
            
            
            
            1,568
            
            
            
            19,0002000
      San Fernando Road
            
            3-Month
      Libor plus 2.75%
            
            4/1/2012
            
            
            13,474
            
            
            
            1,184
            
            
            
            12,925Ullman
      Tower One (4)
            
            Prime
            
            2/1/2008
            
            
            11,275
            
            
            
            817
            
            
            
            11,275Southern
      California Institute of Architecture
            
            Prime
      plus .25%
            
            8/1/2011
            
            
            10,197
            
            
            
            941
            
            
            
            9,888Barstow
      Produce Center Construction Loan
            
            Prime
      plus .50%
            
            1/9/2013
            
            
            9,030
            
            
            
            836
            
            
            
            8,3321875
      W Mission Blvd.
            
            6-Month
      Libor plus 6.25%
            
            3/29/2024
            
            
            8,665
            
            
            
            1,159
            
            
            
            1,826Center
      Village
            
            Prime
      plus 1.0%
            
            10/1/2008
            
            
            7,000
            
            
            
            595
            
            
            
            7,000Ullman
      Tower Two
            
            Prime
            
            5/1/2008
            
            
            6,397
            
            
            
            464
            
            
            
            6,397Barstow
      Produce Center Construction Loan
            
            Prime
      plus 1.0%
            
            1/9/2010
            
            
            6,180
            
            
            
            585
            
            
            
            6,0182640
      Washington Boulevard
            
            Prime
      plus .50%
            
            12/5/2012
            
            
            6,150
            
            
            
            570
            
            
            
            5,6841919
      Vineburn Street
            
            Prime
      plus 1.0%
            
            7/1/2008
            
            
            5,500
            
            
            
            468
            
            
            
            5,500Olive
      Street Towers (5)
            
            Prime
            
            3/1/2008
            
            
            5,340
            
            
            
            414
            
            
            
            5,340620
      Gladys Avenue (6)
            
            Prime
            
            4/1/2008
            
            
            5,157
            
            
            
            425
            
            
            
            5,390801
      E. 7th Street (7)
            
            Prime
            
            3/1/2008
            
            
            4,400
            
            
            
            363
            
            
            
            4,400Meruelo
      Farms
            
            Prime
            
            11/7/2010
            
            
            3,350
            
            
            
            243
            
            
            
            3,3503rd
      & Omar Street
            
            Prime
      plus .25%
            
            8/15/2010
            
            
            2,599
            
            
            
            218
            
            
            
            2,5332415
      E. Washington Blvd.
            
            Prime
            
            11/15/2008
            
            
            978
            
            
            
            71
            
            
            
            990TOTAL
      VARIABLE RATE DEBT
            
            
            
            
            
            
            
            175,413
            
            
            
            14,405
            
            
            
            169,568TOTAL
      CONSOLIDATED DEBT
            
            
            
            
            
            
            $
            307,394
            
            
            $
            25,209
            
            
            $
            296,930





(1)
            Maturity
      date represents the date on which the principal amount is due and payable,
      assuming no payments have been made in advance of the maturity
      date.


(2)
            Annual
      debt service includes payments made for principal and
      interest.  Variable rate interest is calculated based on the
      respective rate as of December 31, 2007.  The six-month LIBOR
      was 5.50%, the three-month LIBOR was 5.23%, the one-month LIBOR was 4.85%
      and the Prime rate was 7.25%


(3)
            Lender
      extended the maturity date to July 14, 2008 upon our request for the same
      principal amount with the same interest
terms.


(4)
            Lender
      extended the maturity date to April 30, 2008 upon our request for the same
      principal amount with the same interest
terms.


(5)
            Lender
      extended the maturity date to May 1, 2008 upon our request for the same
      principal amount with the same interest
terms.


(6)
            Lender
      extended the maturity date to September 1, 2008 upon our request for the
      same principal amount with the same interest
  terms.


(7)
            Lender
      extended the maturity date to October 1, 2008 upon our request for the
      same principal amount with the same interest
  terms.







As of
December 31, 2007, we had approximately $172.3 million in principal
indebtedness maturing within one year. We do not intend to reserve funds to
retire this debt upon maturity. We will instead seek to refinance this debt at
maturity. Of the $172.3 million in principal, approximately $46.0 million was
scheduled to mature in the first quarter of 2008, before the filing of this
report.  We arranged with the lenders of the $46.0 million in
principal to extend the maturity dates of the related notes to the second or
third quarter of 2008 on the same interest terms.  Our weighted
average interest rate decreased from 7.77% as of September 30, 2007 to 7.47% as
of December 31, 2007.




As of
December 31, 2007, our notes payable secured by real estate represented 47.1% of
our total market capitalization, of $652.1 million.  We define debt to
total market capitalization as (x) notes payable secured by real estate from our
consolidated balance sheet divided by (y) the sum of (i) notes payable secured
by real estate plus (ii) the market value of the shares
outstanding.  Using our notes payable secured by real estate and our
total assets from our consolidated balance sheet as of December 31, 2007, our
debt-to-total assets ratio is 39.2%.




47
 Table of Contents


We are a
development company, are not currently generating positive operating cash flow
and require significant capital to satisfy contractual purchase and development
commitments, to pay indebtedness maturing over the next year and to pursue
discretionary development.




As of
December 31, 2007, our book value of real estate held for development was
approximately $461.8 million, and the current carrying costs associated with our
development projects is approximately $2.0 million per
month.  Carrying costs consist primarily of interest, property taxes
and development staff salaries, all of which are capitalized.  In
addition to the ongoing carrying costs we incur for our development properties,
we have incurred a monthly loss in after tax cash flow of approximately $0.5
million per month since becoming a public company.  Through sales of
properties and improved operations, we expect our after tax cash flow to be
positive for 2008.




Our
liquidity requirements for 2008 consist primarily of the following:




·
            Approximately
      $78.0 million in development commitments relating to our 717 W 9th Street
      project.




·
            Approximately
      $172.3 million to satisfy those of our borrowings that mature in 2008 (see
      “—Contractual Commitments” below).




·
            Approximately
      $95.8 million to acquire three of our projects that are currently subject
      to purchase rights (3000 E. Washington Blvd., Gold’s Gym and Overland
      Terminal).  We believe that we can delay our acquisition of
      these projects for several months, if we were to elect to do so.  We
      could not be legally compelled to complete such purchases, but in the
      event we did not complete such purchases, we would forfeit deposits
      aggregating $12.7 million.




·
            Approximately
      $11.0 million of planned but uncommitted (i.e, discretionary) capital
      improvements to our operating
properties.






·
            Approximately
      $24.0 million in interest, real property tax and other costs to carry our
      development projects, before any on-site development
    activity.






In
addition, we are subject to an aggregate of approximately $9.0 million in
purchase obligations (net of deposits) to acquire three other development
projects (Wall Street Market, American Fish and 1828 Oak
Street).   We currently expect to acquire and concurrently sell
the American Fish and 1828 Oak Street projects.  We have arranged with
Dynamic Builders, the counterparty to our purchase obligation on Wall Street
Market, to market and sell the Wall Street Market project to another
party.




Lastly,
we note that certain of our lenders may have the ability to accelerate
indebtedness of ours totaling $61.9 million, or $33.2 million of which is due in
2008 and is included in the $172.3 million of borrowing described
above.  See “Risk Factors—Risks Related to Our Debt Financings—We may
be in technical default under certain of our financing
arrangements.”




The
disruption in the credit markets has made it more difficult for us to obtain
needed debt financing.  For example, lenders are more frequently
requiring enterprise-level guarantees for debt financing, are taking longer to
make lending decisions and are generally applying more stringent underwriting
standards.  Nevertheless, in general, we expect our regional and local
market lenders to continue to provide us with debt financing
opportunities.  We also expect to enter into debt financing
transactions with lenders during 2008 with respect to which we do not currently
have a credit relationship.  Whether with respect to regional, local
or other lenders, we expect that lenders’ more stringent underwriting standards
will lengthen the period to close lending transactions and will decrease
loan-to-value ratios.




During
2008, we have benefited, and expect to continue to benefit for the remainder of
the year, from interest rate reduction actions taken by the Federal Reserve in
its efforts to moderate the credit market disruptions, which have
correspondingly lowered the interest rates on some of our variable rate
notes.




Our expected cash sources to fund our
liquidity requirements for the balance of 2008 consist of the
following:






·
            Net
      operating income from our operating properties, including revenues from
      3000 E. Washington Blvd., Gold’s Gym and Overland Terminal, which will be
      classified as rental properties and generate revenue after
      acquisition.






48
 Table of Contents


·
            Long-term
      borrowings secured by 3000 E. Washington Blvd., Gold’s Gym and Overland
      Terminal, we may enter into concurrently with their
      acquisition.






·
            Proceeds
      from the sale of certain of our rental properties and development projects
      that we now intend to sell.  We have entered into a purchase and
      sale agreement to sell our 2000 San Fernando Road
      property.  This purchase and sale agreement is subject to
      customary conditions, including the buyers’ completion of a due diligence
      investigation to its satisfaction.  This sale is scheduled to
      close in April 2008, although there is no assurance that the closing
      conditions will be timely fulfilled or that the transaction will in fact
      close.  Assuming the sale is completed as anticipated, we expect
      to receive net sale proceeds (i.e., after the loan secured by this project
      and all other costs of sale have been paid) in excess of $26.0
      million.  We are currently negotiating with other buyers with
      regard to the sale of certain other
properties.






·
            Refinancings
      of the approximately $172.3 million in debt maturing in
      2008.  We expect to accomplish this primarily with the existing
      lenders of the debt and with local and regional lenders with which we have
      relationships, although we also expect to have the opportunity to
      refinance a portion of this debt with lenders with respect to which we do
      not currently have a credit
relationship.






In addition, we are actively pursuing
additional cash sources in 2008 and considering actions that would delay or
reduce our liquidity needs. These actions include:






·
            Improving
      net operating income from our rental properties, including by revising
      certain of our development plans to convert development projects into
      smaller scale income-producing projects that will generate revenue
      sooner.






·
            Delaying
      or scaling back discretionary development, including foregoing portions of
      the approximately $11.0 million in uncommitted capital expenditures
      identified above.






·
            Obtaining
      a construction loan for our 717 W. 9th
      Street project.  We have a non-binding term sheet from a third
      party for a construction loan for this project, and we are currently
      negotiating the definitive, binding loan documents.  While we
      can make no assurances, we expect this proposed loan to close no later
      than April 2008.






·
            Obtaining
      borrowings secured by our unencumbered properties. The borrowings may take
      the form of a corporate-level secured credit facility as well as asset by
      asset financings consistent with our past financing
      practices.  During the fourth quarter of 2007 we closed nine
      loans with total loan proceeds of $116.3 million.  Seven of
      those loans were refinancings and two were loans secured by previously
      unencumbered assets.






·
            Entering
      into joint ventures in respect of our larger or more capital intensive
      development projects.






·
            Issuing
      debt or equity-linked debt to private or public capital markets
      investors.






Based on
the foregoing and the additional actions we are considering, our management
believes that we will have sufficient capital to satisfy our liquidity needs
over the next 12 months.





Contractual
Obligations




The
following table provides information with respect to our contractual obligations
at December 31, 2007, including the maturities (not including extensions) and
scheduled principal and interest payments of our secured debt and provides
information about the minimum commitments due in connection with our
construction costs and purchase obligations.


49
 Table of Contents





Payments due
      by periodLess than
              1 year(1)
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            More
      than
              5 years
            
            
            TotalContractual Obligation at December 31,
      2007Notes
      payable secured by real estate
            
            $
            172,341
            
            
            $
            41,796
            
            
            $
            52,900
            
            
            $
            40,357
            
            
            $
            307,394Interest
      payments on notes payable(2)
            
            
            16,530
            
            
            
            16,526
            
            
            
            10,701
            
            
            
            15,284
            
            
            
            59,041Construction
      obligations (3)
            
            
            77,963
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            77,963Other
      purchase contracts or option agreements to acquire real estate(4)
            
            
            104,771
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            104,771$
            371,605
            
            
            $
            58,322
            
            
            $
            63,601
            
            
            $
            55,641
            
            
            $
            549,169(1)These
      amounts include all payments due in calendar 2008.
              
              (2)Computes
      interest on variable rate debt using the respective interest rates in
      place as of December 31, 2007.As of December 31,
      2007, the six-month LIBOR was 5.50%, the three-month LIBOR was 5.23%, the
      one-month LIBOR was 4.85% and the Prime rate was 7.25%.
              
              (3)Based
      upon executed contracts with general contractors as of December 31,
      2007.
              
              (4)Net
      of deposits previously paid. Our obligation to acquire the projects
      is not absolute; however; if we do not complete the acquisitions, we will
      forfeit the deposits and other costs we have made as liquidated
      damages which total $15.0 million as of December 31,
      2007.








Off-Balance
Sheet Arrangements




At
December 31, 2007, we did not have any guarantee contracts, retained or
contingent interests in transferred assets, obligations under derivative
instruments, obligations arising out of variable interests in unconsolidated
entities, or other off-balance sheet arrangements.




Cash
Flows




Comparison
of the year ended December 31, 2007 to the year ended December 31,
2006




Cash and
cash equivalents were $3.0 million as of December 31, 2007 and $2.4 million as
of December 31, 2006.  For purposes of comparison, the following
discussion regarding 2007 amounts include the predecessor results for the period
from January 1, 2007 to January 29, 2007 and our company results for the period
from January 30, 2007 to December 31, 2007.




Net cash
used in operating activities decreased by $8.9 million to $7.0 million for the
year ended December 31, 2007 compared to $15.9 million for the year ended
December 31, 2006.  The decrease is primarily due to lower interest
costs paid, which is a direct result of our repayment of debt with the net
proceeds of our IPO.




Net cash
used in investing activities increased by $157.9 million to $220.2 million for
the year ended December 31, 2007 compared to $62.3 million for the year ended
December 31, 2006.  As a result of the net proceeds received from our
IPO, we repaid $32.6 million in deferred interest on the CalPERS credit facility
and acquired additional real estate of $66.4 million.  In addition, we
actively continued our planned construction of our development properties,
primarily Union Lofts and 717 W 9th Street,
which resulted in an increase of $49.7 million in costs over the prior
year.




Net cash
provided by financing activities increased by $156.8 million to $227.8 million
for year ended December 31, 2007 compared to $71.0 million for the year ended
December 31, 2006.  The increase is primarily attributable to the
$455.5 million of proceeds received from our IPO partially offset by the
repayment of the $150.0 million CalPERS credit facility, the net payments on
notes payable secured by real estate of $35.2 million and costs and expenses
related to our offering of $36.2 million.





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 Table of Contents


Cash
Flows of Predecessor Business




Comparison
of the year ended December 31, 2006 to the year ended December 31,
2005




Cash and
cash equivalents were $2.4 million as of December 31, 2006 and $9.5 million as
of December 31, 2005.




Net cash
used in operating activities decreased by $1.3 million to $15.9 million for the
year ended December 31, 2006 compared to $17.2 million for the year ended
December 31, 2005. The decrease is primarily a result of the net change in
operating assets and liabilities and an increase in depreciation and
amortization partially offset by an increase in net loss and a gain on the sale
of real estate.




Net cash
used in investing activities decreased by $213.9 million to $62.3 million for
the year ended December 31, 2006 compared to $276.2 million for the year ended
December 31, 2005. Most of this decrease or $211.8 million resulted from
acquiring properties costing $37.0 million during 2006, as compared to $248.8
million in the earlier year. The decrease also is due to proceeds from the sale
of real estate during 2006 offset by an increase in capitalized costs, escrow
deposits and improvements.




Net cash
provided by financing activities decreased by $230.9 million to $71.0 million
for the year ended December 31, 2006 compared to $301.8 million for the year
ended December 31, 2005. A decrease of $150.0 million is a result of obtaining
funding on the CalPERS note during 2005 with no funding during 2006. Also a
decrease of $81.0 million is attributable to obtaining less net proceeds from
notes secured by real estate during 2006 than 2005.





Other
Supplemental Data




Industry
analysts generally consider earnings before interest, taxes, depreciation and
amortization (“EBITDA”) and after tax cash flows (“ATCF”) as alternative
measures of performance for public companies.




EBITDA is
defined as net income (loss) before interest, taxes, depreciation and
amortization. We believe it is a useful financial performance measure for us and
for our stockholders and is a complement to net income and other financial
performance measures provided in accordance with generally accepted accounting
principles in the United States of America, or GAAP. We use EBITDA to measure
the financial performance of our operating properties because it excludes
expenses such as depreciation and amortization, taxes and interest expense,
which are not indicative of operating performance. By excluding interest
expense, EBITDA measures our financial performance irrespective of our capital
structure or how we finance our properties and operations. By excluding
depreciation and amortization expense, which can vary from property to property
based on a variety of factors unrelated to the properties’ financial
performance, we can more accurately assess the financial performance of our
properties. Under GAAP, real estate properties are recorded at historical cost
at the time of acquisition and are depreciated on a straight line basis. By
excluding depreciation and amortization, we believe EBITDA provides a basis for
measuring the financial performance of properties unrelated to historical cost.
However, because EBITDA excludes depreciation and amortization, it does not
measure the capital we require to maintain or preserve our fixed assets. In
addition, because EBITDA does not reflect interest expense, it does not take
into account the total amount of interest we pay on outstanding debt nor does it
show trends in interest costs due to changes in our borrowings or changes in
interest rates. EBITDA, as calculated by us, may not be comparable to EBITDA
reported by other companies that do not define EBITDA exactly as we define the
term. Because we use EBITDA to evaluate our financial performance, we reconcile
it to net income (loss), which is the most comparable financial measure
calculated and presented in accordance with GAAP. EBITDA does not represent cash
generated from operating activities determined in accordance with GAAP, and
should not be considered as an alternative to operating income or net income
determined in accordance with GAAP as an indicator of performance or as an
alternative to cash flows from operating activities as an indicator of
liquidity.




51
 Table of Contents


Below is
a reconciliation of our net income (loss), as presented elsewhere in this
section under the “Results from Operations” to EBITDA (in
thousands):


Year
      ended December 31,Consolidated
      and Combined2007(1)
            
            
            2006
            
            
            2005Reconciliation
      of Net Loss to EBITDA:Net
      loss
            
            
            (13,873
            )
            
            
            (17,063
            )
            
            
            (10,025
            )Plus:Interest
      expense
            
            
            11,718
            
            
            
            25,333
            
            
            
            16,492Depreciation
      and amortization
            
            
            6,438
            
            
            
            3,982
            
            
            
            2,502Provision
      (Benefit) for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —EBITDA
            
            $
            4,283
            
            
            $
            12,252
            
            
            $
            8,969





(1)
            For
      purposes of comparison, 2007 amounts include the predecessor results for
      the period from January 1, 2007 to January 29, 2007 and our company
      results for the period from January 30, 2007 to December 31,
      2007.





ATCF is
defined as net income (loss) excluding the following: i) deferred income tax
expense, ii) non-cash charges for depreciation and amortization, iii)
amortization of loan costs, iv) the adjustment to recognize rental revenue using
the straight-line method; and v) the adjustment to rental revenue to reflect the
fair market value of rents. We believe it is a useful financial performance
measure for us and for our stockholders and is a complement to net income and
other financial performance measures provided in accordance with GAAP. We use
ATCF as an assessment of performance of our operations in period to period
comparisons and for financial planning purposes.  Because we use ATCF
to evaluate our financial performance, we reconcile it to net income (loss),
which is the most comparable financial measure calculated and presented in
accordance with GAAP. ATCF does not represent cash generated from operating
activities determined in accordance with GAAP and should not be considered as an
alternative to operating income or net income determined in accordance with GAAP
as an indicator of performance or as an alternative to cash flows from operating
activities as an indicator of liquidity.





Below is
a reconciliation of our net loss to ATCF (in thousands):





Year
      ended December 31,Consolidated
      and Combined2007(1)
            
            
            2006
            
            
            2005Reconciliation
      of Net Loss to ATCF:Net
      loss
            
            
            (13,873
            )
            
            
            (17,063
            )
            
            
            (10,025
            )Plus:Provision
      (benefit) for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —Depreciation
      and amortization
            
            
            6,438
            
            
            
            3,982
            
            
            
            2,502Amortization
      of loan costs
            
            
            408
            
            
            
            1,090
            
            
            
            660Non-cash
      compensation expense
            
            
            1,628
            
            
            
            —
            
            
            
            —Straight-line
      rent adjustment
            
            
            (463
            )
            
            
            (6
            )
            
            
            (304
            )ATCF
            
            $
            (5,862
            )
            
            $
            (11,997
            )
            
            $
            (7,167
            )


(1)
            For
      purposes of comparison, 2007 amounts include the predecessor results for
      the period from January 1, 2007 to January 29, 2007 and our company
      results for the period from January 30, 2007 to December 31,
      2007.





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 Table of Contents


Impact
of Inflation, Changing Prices and Economic Conditions




Residential
projects


The
market value of a unit in a proposed residential project can vary significantly
due to changing market conditions, and there may be a significant amount of time
before we can develop our residential projects and offer units available for
sale or rent.




Commercial
projects


Many of
our commercial leases provide for fixed base rent increases and operating
expense reimbursements.  We believe that inflationary increases may be
at least partially offset by these contractual rent increases and expense
reimbursements.





Total
portfolio


Prices of
residential units and sales and commercial rental activities in the Los Angeles
market have a large impact on our profitability because we conduct substantially
all of our business in this market. These prices or rents could decline from
time to time for market-specific reasons, including adverse economic conditions
due to, among other things, the failure or decline of key industries and
employers affecting the local, regional or national economies. If the prices of
residential units or sales or commercial rental activity decline in the key
market in which we operate, our business, results of operations and financial
condition would be materially adversely affected.





Recent
Accounting Pronouncements





In June
2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in
Income Taxes (FIN 48), to create a single model to address accounting for
uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes,
by prescribing a minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We adopted FIN 48 on
January 1, 2007. Based on our evaluation, we have concluded that there are
no significant uncertain tax positions requiring recognition in our financial
statements at December 31, 2007.




In
September 2006, the FASB issued Statement No. 157,Fair Value Measurements
(“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets
and liabilities. This statement clarifies the principle that fair value should
be based on the assumptions that market participants would use when pricing the
asset or liability. SFAS 157 establishes a fair value hierarchy, giving the
highest priority to quoted prices in active markets and the lowest priority to
unobservable data. SFAS 157 applies whenever other standards require assets or
liabilities to be measured at fair value. This statement is effective in fiscal
years beginning after November 15, 2007. In February 2008, the FASB issued
FASB Staff Position SFAS 157-1, Application of FASB Statement No.
157 to FASB Statement 13 and Other Accounting Pronouncements that Address Fair
Value Measurements for Purposes of Lease Classification or Measurement Under
Statement 13 (“FSP SFAS 157-1”).  FSP FAS 157-1 defers the
effective date of SFAS 157 for all non-financial assets and non-financial
liabilities, except for those that are recognized or disclosed at fair value in
the financial statements on a recurring basis.  FSP SFAS 157-1 also
excludes certain leasing transactions accounted for under Statement of Financial
Accounting Standards No. 13, Accounting for Leases from
the scope of SFAS 157.  We are currently evaluating the effect the
adoption of SFAS 157 and FSP SFAS 157-1 may have on our financial position
and results of operations.




In February 2007, the FASB
issued FAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement No. 115.  This
standard permits entities to choose to measure many financial instruments and
certain other items at fair value and is effective for the first fiscal year
beginning after November 15, 2007.  We do not expect to elect the fair
value measurement option for any financial assets or liabilities at the present
time.





In
December 2007, the FASB issued FAS No. 141 (Revised 2007), Business Combinations
(“SFAS 141R”).  SFAS 141R will significantly change the accounting for
business combinations.  Under SFAS 141R, an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited
exceptions.  SFAS 141R also includes a substantial number of new
disclosure requirements.  SFAS 141R applies prospectively to business
combinations occurring in any reporting period beginning on or after December
15, 2008.  We are currently evaluating the effect the adoption
of SFAS 141R will have on our financial position and results of
operations.


53
 Table of Contents





Item7A.                      Quantitative
and Qualitative Disclosures About Market Risk





Quantitative
and Qualitative Disclosures About Market Risk




We are
exposed to market risks related to fluctuations in interest rates on mortgage
loans and other forms of debt financing. For fixed rate debt, changes in
interest rates generally affect the fair value of the debt instrument, but not
our earnings or cash flows. Conversely, for variable rate debt, changes in
interest rates generally do not impact the fair value of the debt instrument,
but may affect our future earnings and cash flows.




The
following tables set forth our debt obligations outstanding and their maturities
as of December 31, 2007 (in thousands):





Principal
      due by year2008
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            2012
            
            
            Thereafter
            
            
            TotalFixed
      rate debt instruments
            
            $
            81,659
            
            
            $
            2,454
            
            
            $
            504
            
            
            $
            17,161
            
            
            $
            6,130
            
            
            $
            24,073
            
            
            $
            131,981Variable
      rate debt instruments
            
            
            90,682
            
            
            
            26,356
            
            
            
            12,482
            
            
            
            10,424
            
            
            
            19,185
            
            
            
            16,284
            
            
            
            175,413Total
      Debt
            
            $
            172,341
            
            
            $
            28,810
            
            
            $
            12,986
            
            
            $
            27,585
            
            
            $
            25,315
            
            
            $
            40,357
            
            
            $
            307,394Weighted
      average interest rate
            
            
            7.3
            %
            
            
            6.6
            %
            
            
            7.8
            %
            
            
            7.6
            %
            
            
            7.9
            %
            
            
            6.9
            %
            
            
            7.5
            %




We
calculate the fair value of our notes payable based on a currently available
market rate; assuming the loans are outstanding through maturity and considering
the collateral.  In determining the current market rate for fixed rate
debt, a market spread is added to the quoted yields on federal government
treasury securities with similar maturity dates to debt.  At December 31,
2007, the aggregate fair value of our our secured notes payable is estimated to
be approximately equal to $308.7 million.  As of December 31, 2006, the
estimated fair value of the note payable and the CalPERS credit facility was
approximately $492.6 million.




As of
December 31, 2007, we had approximately $175.4 million in variable rate
financing outstanding, which represented approximately 57.1% of consolidated
total indebtedness. If interest rates were to increase by 75 basis points, or
approximately 10% of our weighted average rate, the combined increase in
interest expense and capitalized interest would decrease our cash flows by
approximately $1.3 million annually.




Item8.                   Financial
Statements and Supplementary Data





The required response under this Item
is submitted in a separate section of this Report. See Listing to the Financial
Statements at Item 15 on page F-1.





Item9.                  Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure


None.





Item9A(T).          Controls
and Procedures





Evaluation
of Disclosure Controls and Procedures




We maintain
disclosure controls and procedures to ensure that material information relating
to us, including our consolidated subsidiaries, is made known to the officers
who certify our financial reports and to the members of senior management and
the Board of Directors.




Based on
management’s evaluation as of December 31, 2007, our principal executive officer
and principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934) are effective to ensure that the information required to
be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms.





54
 Table of Contents


Management’s
Report on Internal Control over Financial Reporting





As defined in SEC Rules 13a-15(f) and
15d-15(f), internal control over financial reporting is a process designed by,
or under the supervision of, our principal executive officer and principal
financial officer, and effected by our Board of Directors, management and other
personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.  Internal
control over financial reporting includes policies and procedures that i)
pertain to the maintenance of records that, in reasonable detail accurately and
fairly reflect our transactions and assets, ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with
authorizations of management and directors; and iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of assets that could have a material effect on the
consolidated financial statements.





Our management is responsible for
establishing and maintaining adequate internal control over financial
reporting.  We have used the framework set forth in the SEC Release
No. 34-55929 Commission
Guidance Regarding Management’s Report on Internal Control Over Financial
Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of
1934(“Release
No. 34-55929”).  Our internal control over financial reporting is
supported by written policies and procedures and by an appropriate segregation
of responsibilities and duties.  Based on our evaluation, which
included participation by our principal executive and principal financial
officers, conducted using the guidance set forth in Release No. 34-55929, our
management has concluded that our internal control over financial reporting was
effective as of December 31, 2007.





Changes
in Internal Control over Financial Reporting





There have been no significant changes
that occurred during the fourth quarter of the year covered by this report in
our internal control over financial reporting identified in connection with the
evaluation referenced above that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





No
Auditor Report on Internal Control over Financial Reporting





This annual report on Form 10-K does
not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting.  Our internal
control over financial reporting was  not subject to attestation by
our registered public accounting firm pursuant to temporary rules of the SEC
that permit us to provide only management’s report in this annual
report.





Item
9B.                      Other
Information.





Not applicable.


55
 Table of Contents


PART
III





Item
10.                        Directors,
Executive Officers and Corporate Governance





The information required by Item 10 is
incorporated by reference to our definitive Proxy Statement for our 2008 annual
stockholders’ meeting.





Item
11.                        Executive
Compensation





The information required by Item 11 is
incorporated by reference to our definitive Proxy Statement for our 2008 annual
stockholders’ meeting.





Item
12.                        Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters





The information required by Item 12 is
incorporated by reference to our definitive Proxy Statement for our 2008 annual
stockholders’ meeting.





Item13.                       Certain
Relationships and Related Transactions, and Director Independence





The information required by Item 13 is
incorporated by reference to our definitive Proxy Statement for our 2008 annual
stockholders’ meeting.





Item
14.                      Principal
Accountant Fees and Services





The information required by Item 14 is
incorporated by reference to our definitive Proxy Statement for our 2008 annual
stockholders’ meeting.


56
 Table of Contents


PART IV





Item15.                          Exhibits
and Financial Statement Schedules





The
following documents are filed as part of this Annual Report on Form 10-K and
begin at page F-1:





(a)           1.           Financial
Statements




Meruelo
      Maddux Properties, Inc. and Subsidiary (the “Company”) and Meruelo Maddux
      Properties (the “Predecessor”):Report
      of Independent Registered Public Accounting FirmConsolidated
      Balance Sheet of the Company as of December 31, 2007 and Combined Balance
      Sheet of the Predecessor as of December 31, 2006Consolidated
      Statement of Operations of the Company for the Period from January 30,
      2007 through December 31, 2007 and Combined Statements of Operations of
      the Predecessor for the Period from January 1, 2007 through January 29,
      2007 and for the Years Ended December 31, 2006 and
2005.Consolidated
      Statement of Stockholders’ Equity (Deficit) of the Company for the Period
      from January 30, 2007 through December 31, 2007 and the Combined
      Statements of Owners’ Equity (Deficit) of the Predecessor for the Period
      from January 1, 2007 through January 29, 2007 and the Years ended December
      31, 2006 and 2005Consolidated
      Statement of Cash Flow of the Company for the Period from January 30, 2007
      through December 31, 2007 and the Combined Statements of Cash Flow of the
      Predecessor for the Period from January 1, 2007 through January 29, 2007
      and for the Years Ended December 31, 2006 and 2005Notes
      to Consolidated and Combined Financial StatementsSchedule
      III – Consolidated Real Estate and Accumulated
  Depreciation





2.
            Financial
      Statement Schedules





Schedule
III – Real Estate and Accumulated Depreciation





All other
schedules for which provision is made in Regulation S-X are either not required
to be included herein under the related instructions or are inapplicable or the
related information is included in the footnotes to the applicable financial
statement and, therefore, have been omitted.


57
 Table of Contents


3.
            Exhibits


Exhibit
              Number
            
            Description
      of Exhibit3.1
            
            Form
      of Amended and Restated Certificate of Incorporation (1)3.2
            
            Form
      of Bylaws (1)4
            
            Form
      of Common Stock Certificate  (1)10.1
            
            Form
      of Amended and Restated Agreement of Limited Partnership of Meruelo Maddux
      Properties, L.P.(1)10.2
            
            2007
      Equity Incentive Plan* (1)10.3
            
            Form
      of LTIP Unit Agreement* (1)10.4
            
            Form
      of Restricted Stock Agreement* (1)10.5
            
            Form
      of Employment Agreement with Mr. Meruelo* (1)10.6
            
            Form
      of Employment Agreement with Mr. Maddux* (1)10.7
            
            Form
      of Employment Agreement with Mr. Beckemeyer* (1)10.8
            
            Form
      of Employment Agreement with Mr. Skaggs* (1)10.9
            
            Form
      of Employment Agreement with Mr. McGonagle* (1)10.10
            
            Form
      of Employment Agreement with Mr. Nielsen* (1)10.11
            
            Form
      of Employment Agreement with Mr. Echemendia* (1)10.12
            
            Contribution
      Agreement dated September 19, 2006, by and among Meruelo Maddux
      Properties, Inc., Meruelo Maddux Properties, L.P., Richard Meruelo, as
      Trustee of the Richard Meruelo Living Trust U/D/T dated September 15,
      1989, Merco Group – Roosevelt Building, LLC, and Sunstone Bella Vista, LLC
      (1)10.13
            
            Merger
      Agreement dated September 19, 2006, by and among Meruelo Maddux
      Properties, Inc., Santa Fe & Washington Market, Inc., Santa Fe &
      Washington Market, LLC, and Richard Meruelo, as Trustee of the Richard
      Meruelo Living Trust U/D/T dated September 15, 1989 (1)10.14
            
            Merger
      Agreement dated September 19, 2006, by and among Meruelo Maddux
      Properties, Inc., Alameda Produce Market, Inc., Alameda Produce Market,
      LLC, Richard Meruelo, as Trustee of the Richard Meruelo Living Trust U/D/T
      dated September 15, 1989 (1)10.15
            
            Form
      of Indemnification Agreement between Meruelo Maddux Properties, Inc. and
      its directors and officers (1)10.16
            
            Form
      of Registration Rights Agreement (1)10.17
            
            Form
      of Non-Competition Agreement with Messrs. Meruelo and Maddux (1)10.18
            
            First
      Amendment to Contribution Agreement dated as of September 19, 2006,
      by and among Meruelo Maddux Properties, Inc., Meruelo Maddux Properties,
      L.P., Richard Meruelo, as Trustee of the Richard Meruelo Living Trust
      U/D/T dated September 15, 1989, Merco Group – Roosevelt
      Building, LLC, and Sunstone Bella Vista, LLC (1)10.19
            
            First
      Amendment to Merger Agreement dated as of September 19, 2006, by and
      among Meruelo Maddux Properties, Inc., Alameda Produce Market, Inc.,
      Alameda Produce Market, LLC, and Richard Meruelo, as Trustee of the
      Richard Meruelo Living Trust U/D/T dated September 15, 1989 (1)21
            
            List
      of subsidiaries23
            
            Consent
      of Ernst & Young LLP, Independent Registered Public Accounting
      Firm24.1
            
            Power
      of Attorney (included in Part IV of this Annual Report on Form
      10-K)31.1
            
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
            
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by
      Section 906 of the Sarbanes-Oxley Act of 200232.2
            
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by
      Section 906 of the Sarbanes-Oxley Act of 2002*
            
            Represents
      management contract or compensatory plan or agreement.(1
            )
            Previously
      filed as an exhibit to the Registrant’s Registration Statement on Form
      S-11 (No. 333-137457) and incorporated herein by
  reference.


58
 Table of Contents


SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) 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.




Meruelo Maddux Properties,
      Inc.Date:
      March 28, 2008
              By:
              /s/ Richard
      MerueloRichard
      MerueloChief
      Executive Officer and Chairman of the Board of Directors


KNOW ALL MEN BY THESE PRESENTS, that
we, the undersigned officers of Meruelo Maddux Properties, Inc., hereby
severally constitute Richard Meruelo, John Charles Maddux and Fred Skaggs, and
each of them singly, our true and lawful attorneys with full power to them, and
each of them singly, to sign for us and in our names in the capacities indicated
below, the Form 10-K filed herewith and any and all amendments to said Form
10-K, and generally to do all such things in our names and in our capacities as
officers and directors to enable Meruelo Maddux Properties, Inc. to comply with
the provisions of the Securities Exchange Act of 1934, as amended and all
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorneys, or any of
them, to said Form 10-K and any and all amendments thereto.





Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and dates
indicated.





Date                                                                           Signature





March
      28, 2008
            /s/ Richard Meruelo
              Richard
      Meruelo
            Chief
      Executive Officer (Principal Executive Officer) and Chairman of the Board
      of DirectorsMarch
      28, 2008
            /s/ John Charles Maddux
              John
      Charles Maddux
            DirectorMarch
      28, 2008
            /s/ Lynn Beckemeyer
              Lynn
      Beckemeyer
            DirectorMarch
      28, 2008
            /s/ John B. Hansen
              John
      B. Hansen
            DirectorMarch
      28, 2008
            /a/ Philip S. Payne
              Philip
      S. Payne
            DirectorMarch
      28, 2008
            /s/ Richard Garcia Polanco
              Richard
      Garcia Polanco
            DirectorMarch
      28, 2008
            /s/ Anthony A. Williams
              Anthony
      A. Williams
            DirectorMarch
      28, 2008
            /s/ Fred Skaggs
              Fred
      Skaggs
            Chief
      Financial Officer (Principal Financial Officer and Principal Accounting
      Officer)





59
 Table of Contents


INDEXTO FINANCIAL STATEMENTS











Meruelo
      Maddux Properties, Inc. and Subsidiaries and Meruelo Maddux Properties
      Predecessor:
            
            PageReport of Independent Registered Public Accounting
      Firm
            
            
            F-2Consolidated Balance Sheet of the Company as of December 31,
      2007 and Combined Balance Sheet of the Predecessor as of December 31,
      2006
            
            
            F-3Consolidated Statement of Operations of the Company for the
      Period from January 30, 2007 through December 31, 2007 and Combined
      Statements of Operations of the Predecessor for the Period from January 1,
      2007 through January 29, 2007 and for the Years Ended December 31, 2006
      and 2005
            
            
            F-4Consolidated Statement of Stockholders’ Equity (Deficit) of the
      Company for the Period from January 30, 2007 through December 31, 2007 and
      the Combined Statements of Owners’ Equity (Deficit) of the Predecessor for
      the Period from January 1, 2007 through January 29, 2007 and the Years
      ended December 31, 2006 and 2005
            
            
            F-5Consolidated Statement of Cash Flow of the Company for the
      Period from January 30, 2007 through December 31, 2007 and the Combined
      Statements of Cash Flow of the Predecessor for the Period from January 1,
      2007 through January 29, 2007 and for the Years Ended December 31, 2006
      and 2005
            
            
            F-6Notes to Consolidated and Combined Financial
      Statements
            
            
            F-7Schedule III – Consolidated Real Estate and Accumulated
      Depreciation
            
            
            F-24





F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






The Board
of Directors and Stockholders of
 Meruelo
Maddux Properties, Inc.
  We have
audited the accompanying consolidated balance sheet of Meruelo Maddux
Properties, Inc. (the “Company”) as of December 31, 2007, and the combined
balance sheet of Meruelo Maddux Properties predecessor (the “predecessor”), as
defined in Note 1, as of December 31, 2006 and the related consolidated
statements of operations, stockholders’ equity (deficit), and cash flows for the
period from January 30, 2007 through December 31, 2007 (representing the
Company), and  the combined statements of operations, owners’ equity
(deficit), and cash flows for the period from January 1, 2007 through January
29, 2007 (representing the predecessor), and for the years ended
December 31, 2006, and December 31, 2005 (representing the
predecessor). Our audits also included the financial statement schedule listed
in the Index to Financial Statements. These consolidated and combined financial
statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s or its predecessor’s internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s or its predecessor’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Meruelo Maddux
Properties, Inc. at December 31, 2007 and the combined financial
position of Meruelo Maddux Properties predecessor at December 31, 2006, and
the consolidated results of their operations and their cash flows for the period
from January 30, 2007 through December 31, 2007 (representing the Company),
and for the period from January 1, 2007 through January 29, 2007 (representing
the predecessor), and for the years ended December 31, 2006 and
December 31, 2005 (representing the predecessor), in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
  /s/ Ernst &
Young LLP
 Los
Angeles, California
 March 20,
2008


F-2
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





CONSOLIDATEDAND COMBINED BALANCE SHEETS


(In
thousands, except for share data)




Meruelo
      Maddux Properties, Inc.
            
            
            PredecessorDecember
      31, 2007
            
            
            December
      31, 2006AssetsCash
      and cash equivalents
            
            $
            3,030
            
            
            $
            2,381Restricted
      cash
            
            
            7,104
            
            
            
            2,327Accounts
      receivable, net of allowance for doubtful accounts of $0.5 million in 2007
      and $1.3 million in 2006
            
            
            2,610
            
            
            
            2,103Rental
      properties, net
            
            
            306,096
            
            
            
            216,972Real
      estate held for development
            
            
            461,789
            
            
            
            277,837Other
      assets, net
            
            
            3,551
            
            
            
            6,437Total
      Assets
            
            $
            784,180
            
            
            $
            508,057Liabilities
      and Stockholders’ EquityAccounts
      payable
            
            $
            8,585
            
            
            $
            7,081Accrued
      expenses and other liabilities
            
            
            9,918
            
            
            
            49,163Due
      to affiliates, net
            
            
            -
            
            
            
            4,227Notes
      payable secured by real estate
            
            
            307,394
            
            
            
            342,643Note
      payable to CalPERS
            
            
            -
            
            
            
            150,000Deferred
      taxes, net
            
            
            41,101
            
            
            
            -Total
      liabilities
            
            $
            366,998
            
            
            $
            553,114Commitments
      and contingencies
            
            
            –
            
            
            
            –Common
      stock, $.01 par value, 200,000,000 shares authorized, 85,837,900 shares
      issued and outstanding as of December 31, 2007
            
            
            858
            
            
            
            4Additional
      paid in capital
            
            
            442,407
            
            
            
            11,663Affiliate
      notes receivable
            
            
            (14,214
            )
            
            
            (24,673
            )Retained
      earnings (deficit)
            
            
            (11,869
            )
            
            
            (32,051
            )Total
      stockholders' equity (deficit)
            
            
            417,182
            
            
            
            (45,057
            )Total
      liabilities and stockholders' equity
            
            $
            784,180
            
            
            $
            508,057





F-3
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS


(In
thousands, except for share data)





Meruelo
      Maddux Properties, Inc.
            
            
            PredecessorPeriod
      Jan 30, 2007 through Dec 31, 2007
            
            
            Period
      Jan 1, 2007 through Jan 29, 2007
            
            
            Year
      Ended
              December
      31, 2006
            
            
            Year
      Ended
              December
      31, 2005RevenueRental
      income
            
            $
            21,647
            
            
            $
            1,957
            
            
            $
            22,422
            
            
            $
            16,526Management
      fees
            
            
            260
            
            
            
            12
            
            
            
            285
            
            
            
            602Interest
      income
            
            
            2,823
            
            
            
            205
            
            
            
            3,614
            
            
            
            2,942Other
      income
            
            
            493
            
            
            
            28
            
            
            
            751
            
            
            
            794Total
      Revenue
            
            
            25,223
            
            
            
            2,202
            
            
            
            27,072
            
            
            
            20,864ExpensesRental
      expenses
            
            
            12,522
            
            
            
            999
            
            
            
            10,104
            
            
            
            7,673Interest
      expense
            
            
            9,513
            
            
            
            2,205
            
            
            
            25,333
            
            
            
            16,492Depreciation
      and amortization
            
            
            6,064
            
            
            
            374
            
            
            
            3,982
            
            
            
            2,502General
      and administrative
            
            
            8,993
            
            
            
            628
            
            
            
            6,045
            
            
            
            4,222Total
      Expenses
            
            
            37,092
            
            
            
            4,206
            
            
            
            45,464
            
            
            
            30,889Operating
      loss
            
            
            (11,869
            )
            
            
            (2,004
            )
            
            
            (18,392
            )
            
            
            (10,025
            )Discontinued
      operations:Gain
      on sale of real estate
            
            
            -
            
            
            
            -
            
            
            
            1,329
            
            
            
            -Loss
      before income taxes
            
            
            (11,869
            )
            
            
            (2,004
            )
            
            
            (17,063
            )
            
            
            (10,025
            )Provision
      (benefit) for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      loss
            
            $
            (11,869
            )
            
            $
            (2,004
            )
            
            $
            (17,063
            )
            
            $
            (10,025
            )Basic
      and diluted loss per share
            
            
            (0.14
            )
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/AWeighted
      average common shares outstanding - basic and diluted
            
            
            85,218,110
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A








See
accompanying notes to the consolidated and combined financial
statements.


F-4
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





CONSOLIDATEDAND COMBINED STATEMENT OF STOCKHOLDERS’
EQUITY


(In
thousands, except per share data)





Number
      of Shares
            
            
            Common
      Stock
            
            
            Additional
      Paid-in Capital
            
            
            Affiliate
      Notes Receivable
            
            
            Stockholders'
      Equity (Deficit)
            
            
            TotalThe
      PredecessorBalance
      at January 1, 2005
            
            
            -
            
            
            $
            4
            
            
            $
            11,562
            
            
            $
            -
            
            
            $
            (4,963
            )
            
            $
            6,603Contributions
            
            
            -
            
            
            
            -
            
            
            
            100
            
            
            
            -
            
            
            
            -
            
            
            
            100Distributions
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Affiliate
      Notes Receivable, net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (19,059
            )
            
            
            -
            
            
            
            (19,059
            )Net
      income (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (10,025
            )
            
            
            (10,025
            )Balance
      at December 31, 2005
            
            
            -
            
            
            
            4
            
            
            
            11,662
            
            
            
            (19,059
            )
            
            
            (14,988
            )
            
            
            (22,381
            )Contributions
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Distributions
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Affiliate
      Notes Receivable, net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,614
            )
            
            
            -
            
            
            
            (5,614
            )Net
      income (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (17,063
            )
            
            
            (17,063
            )Balance
      at December 31, 2006
            
            
            -
            
            
            
            4
            
            
            
            11,662
            
            
            
            (24,673
            )
            
            
            (32,051
            )
            
            
            (45,058
            )Contributions
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Distributions
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Affiliate
      Notes Receivable, net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (693
            )
            
            
            -
            
            
            
            (693
            )Net
      income (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,004
            )
            
            
            (2,004
            )Balance
      at January 29, 2007
            
            
            -
            
            
            
            4
            
            
            
            11,662
            
            
            
            (25,366
            )
            
            
            (34,055
            )
            
            
            (47,755
            )The
      CompanyReclassify
      Predecessor common stock and owners' deficit
            
            
            -
            
            
            
            (4
            )
            
            
            11,462
            
            
            
            -
            
            
            
            34,055
            
            
            
            45,513Net
      proceeds from sale of common stock
            
            
            85,202,957
            
            
            
            852
            
            
            
            418,444
            
            
            
            -
            
            
            
            -
            
            
            
            419,296Issuance
      of unvested restricted common stock
            
            
            359,736
            
            
            
            3
            
            
            
            3,594
            
            
            
            -
            
            
            
            -
            
            
            
            3,597Issuance
      of contingent shares
            
            
            275,207
            
            
            
            3
            
            
            
            (2,755
            )
            
            
            2,752
            
            
            
            -
            
            
            
            -Affiliate
      Notes Receivable, net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,400
            
            
            
            -
            
            
            
            8,400Net
      income (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (11,869
            )
            
            
            (11,869
            )Balance
      at December 31, 2007
            
            
            85,837,900
            
            
            $
            858
            
            
            $
            442,407
            
            
            $
            (14,214
            )
            
            $
            (11,869
            )
            
            $
            417,182







See
accompanying notes to the consolidated and combined financial
statements.


F-5
 
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MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOW


(In
thousands)





Period
      Jan 30, 2007
              thru
      Dec 31, 2007
            
            
            Period
      Jan 1, 2007
              thru
      Jan 29, 2007
            
            Year
      Ended
              Dec
      31, 2006
            
            Year
      Ended
              Dec
      31, 2005Cash
      flows from operating activities:Net
      loss
            
            $
            (11,869
            )
            
            $
            (2,004
            )
            $
            (17,063
            )
            $
            (10,025
            )Adjustments
      to reconcile net income (loss) to net cashprovided
      by operating activities:Gain
      on sale of real estate
            
            
            -
            
            
            
            -
            
            
            (1,329
            )
            
            -Depreciation
      and amortization
            
            
            6,064
            
            
            
            374
            
            
            3,982
            
            
            2,502Stock-based
      compensation expense
            
            
            1,628
            
            
            
            -
            
            
            -
            
            
            -Interest
      income on affiliate notes receivable
            
            
            (626
            )
            
            
            (205
            )
            
            (3,614
            )
            
            (2,942
            )Amortization
      of deferred loan costs
            
            
            333
            
            
            
            75
            
            
            1,090
            
            
            660Excess
      tax benefit from stock-based compensation
            
            
            (667
            )
            
            
            -
            
            
            -
            
            
            -Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (1,374
            )
            
            
            167
            
            
            (434
            )
            
            (312
            )Other
      assets
            
            
            (255
            )
            
            
            126
            
            
            (885
            )
            
            (6,706
            )Accounts
      payable
            
            
            (3,063
            )
            
            
            1,398
            
            
            1,483
            
            
            (1,090
            )Accrued
      expenses and other liabilities
            
            
            2,619
            
            
            
            295
            
            
            918
            
            
            744Net
      cash (used in) provided by operating activities
            
            
            (7,210
            )
            
            
            226
            
            
            (15,852
            )
            
            (17,169
            )Cash
      flows from investing activities:Acquisition
      of real estate
            
            
            (101,607
            )
            
            
            (1,875
            )
            
            (37,059
            )
            
            (248,843
            )Expenditures
      for improvements to real estate
            
            
            (74,924
            )
            
            
            (4,368
            )
            
            (29,575
            )
            
            (26,115
            )Proceeds
      from sale of real estate
            
            
            -
            
            
            
            -
            
            
            5,476
            
            
            -Payment
      of deferred interest on notes payable to CalPERS
            
            
            (32,635
            )
            
            
            -
            
            
            -
            
            
            -Change
      in restricted cash
            
            
            (5,057
            )
            
            
            280
            
            
            (1,103
            )
            
            (1,224
            )Net
      cash provided by (used in) investing activities
            
            
            (214,223
            )
            
            
            (5,963
            )
            
            (62,261
            )
            
            (276,182
            )Cash
      flows from financing activities:Proceeds
      from equity offering
            
            
            455,500
            
            
            
            -
            
            
            -
            
            
            -Payment
      of offering costs
            
            
            (35,985
            )
            
            
            (273
            )
            
            -
            
            
            -Contribution
      from predecessor
            
            
            -
            
            
            
            -
            
            
            -
            
            
            100Distribution
      to predecessor
            
            
            (2,752
            )
            
            
            -
            
            
            -
            
            
            -Investment
      in affiliate notes receivable
            
            
            625
            
            
            
            (487
            )
            
            9,153
            
            
            (15,964
            )Proceeds
      from (payments of) amounts due to affiliates
            
            
            (5,628
            )
            
            
            1,401
            
            
            3,162
            
            
            (4,018
            )Proceeds
      from notes payable
            
            
            114,855
            
            
            
            910
            
            
            155,716
            
            
            252,759Principal
      payments on notes payable
            
            
            (151,014
            )
            
            
            -
            
            
            (97,032
            )
            
            (81,024
            )Repayment
      of CalPERS note payable
            
            
            (150,000
            )
            
            
            -
            
            
            -
            
            
            150,000Excess
      tax benefit from stock-based compensation
            
            
            667
            
            
            
            -
            
            
            -
            
            
            -Net
      cash provided by financing activities
            
            
            226,268
            
            
            
            1,551
            
            
            70,999
            
            
            301,853Net
      increase (decrease) in cash and cash equivalents
            
            
            2,043
            
            
            
            (1,394
            )
            
            (7,114
            )
            
            8,502Cash
      and cash equivalents at beginning of period
            
            
            987
            
            
            
            2,381
            
            
            9,495
            
            
            993Cash
      and cash equivalents at end of period
            
            $
            3,030
            
            
            $
            987
            
            $
            2,381
            
            $
            9,495Supplemental
      disclosure of cash flow information:Cash
      paid for interest, net of amounts capitalized
            
            
            40,939
            
            
            
            2,130
            
            
            15,938
            
            
            7,861Supplemental
      disclosure of noncash investing and financing activities:Accrual
      for real estate improvements and purchases included in real estate held
      for development
            
            
            9,640
            
            
            
            40,619
            
            
            38,660
            
            
            13,497Fair
      market value of rental properties acquired from minority interests of
      predecessor
            
            
            (25,657
            )
            
            
            -
            
            
            -
            
            
            -Fair
      market value of real estate held for development acquired from minority
      interests of predecessor
            
            
            (64,479
            )
            
            
            -
            
            
            -
            
            
            -Decrease
      in affiliate notes receivable due to Taylor Yards bond
    release
            
            
            8,400
            
            
            
            -
            
            
            -
            
            
            -Accounts
      receivable from minority interests of predecessor included in additional
      paid in capital
            
            
            700
            
            
            
            -
            
            
            -
            
            
            -Unamortized
      predecessor loan costs included in additional paid in
    capital
            
            
            2,425
            
            
            
            -
            
            
            -
            
            
            -Recognition
      of deferred revenue related to affiliate note receivable
            
            
            2,752
            
            
            
            -
            
            
            -
            
            
            -Deferred
      tax adjustment related to rental properties
            
            
            8,954
            
            
            
            -
            
            
            -
            
            
            -Deferred
      tax adjustment related to real estate held for development
            
            
            (13,099
            )
            
            
            -
            
            
            -
            
            
            -




See
accompanying notes to the consolidated and combined financial
statements.


F-6
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS





December 31,
2007





1.
ORGANIZATION AND DESCRIPTION OF THE BUSINESS






In
this report, unless the context suggests otherwise, references to “our company,”
“we,” “us” and “our” mean Meruelo Maddux Properties, Inc. and its
subsidiaries.




We were
formed to succeed certain operations of the Meruelo Maddux predecessor,
referenced herein as our “predecessor” or our “predecessor business”, which was
not a legal entity but rather a combination of entities and operations whose
owners were Richard Meruelo, Maria Meruelo and John Charles Maddux and were
collectively doing business as Meruelo Maddux, an owner, developer and acquirer
of industrial, commercial and residential properties.  We were
incorporated in Delaware on July 5, 2006 in anticipation of our initial public
offering of common stock (our “IPO”), which was consummated on January 30, 2007
concurrently with the consummation of various formation
transactions.   The formation transactions and IPO were designed
to (i) allow us to acquire and continue the operations of our predecessor
business, (ii) pay down existing mortgage debt, (iii) payoff a
mezzanine loan facility from the State of California Public Employees’
Retirement System, or CalPERS, (iv) provide capital for future
acquisitions, (v) fund future development costs, and (vi) establish a
capital reserve for general corporate purposes. Prior to the formation
transactions our company (which was formed for the purposes of our IPO and is
not the predecessor) did not have any meaningful operating
activity.  Accordingly,
as a result of the formation transactions, our consolidated financial statements
are not comparable to the combined financial statements of the
predecessor.


We
commenced substantial operations upon completion our IPO and sold to the public
40,000,000 shares of our common stock at $10.00 per share. On February 14,
2007, the underwriters of our IPO exercised their option to purchase an
additional 5,550,000 shares of our common stock at $10.00 per share. Including
the shares issued in the over-allotment option, we raised approximately $425.7
million in proceeds in our IPO, after the underwriting discount but before
expenses related to the IPO. Our company’s operations are predominantly carried
on through, and its assets are owned though, Meruelo Maddux Properties, L.P.,
which we refer to as our operating partnership. As of December 31, 2007, we held
a 99.6% interest in our operating partnership. We are structured as a taxable
corporation under Subchapter C of the Internal Revenue Code of 1986, as amended
(the “Code”).  As of December 31, 2007, the total number of shares of
our common stock outstanding was 85,837,900.




We are a self-managed, full-service
real estate company that develops, redevelops and owns commercial and
residential properties located in downtown Los Angeles and other densely
populated urban areas in California.  We focus on properties that have
alternate, more profitable uses achievable through major renovation,
redevelopment or development. Our projects are predominantly located in a
densely urban, multi-ethnic environment and involve numerous local entitlement,
property assemblage and physical challenges.




We are
committed to responsible property investing that has economic, environmental and
social benefits. Our development activities include urban infill projects that
are expected to meet the demands of urban communities and that utilize or
upgrade existing infrastructure instead of creating new infrastructure. Many of
our projects will locate businesses, customers and employees close to each other
and close to existing public transit systems.




As of
December 31, 2007, we own, lease with rights to purchase and have rights to
acquire interests in 27 rental projects and 28 projects held for real estate
development. Most of our projects are located in or around the downtown area of
Los Angeles, and all of our projects are in Southern
California.  Prior to our IPO and related formation transactions, the
predecessor business owned substantially 100% of the combined interests (whether
ownership, lease or purchase right interests) in our projects through limited
liability companies and S-corporations


F-7
 
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MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Basis
of Presentation




The
accompanying financial statements of Meruelo Maddux Properties, Inc. are
presented on a consolidated basis and include all of the accounts of our
company, our operating partnership and the subsidiaries of our operating
partnership, all of which we control. The exchange of entities or interests held
by Richard Meruelo in our formation transactions was accounted for as a
reorganization of entities under common control and, accordingly, related assets
and liabilities were reflected at their historical cost basis. The acquisition
of the interests held by John Charles Maddux in our formation transactions was
accounted for as a purchase and, accordingly, the related assets and liabilities
were reflected at their fair market value. Our predecessor business was a
combination of entities whose controlling interest was owned by Richard Meruelo
and non-controlling interest was owned by John Charles Maddux. The accompanying
combined financial statements represent the historical financial statements of
our predecessor. All significant intercompany balances and transactions have
been eliminated in the consolidated or combined financial
statements.




Cash
and Cash Equivalents




Cash and
cash equivalents consist of highly liquid investments with original maturities
of three months or less when acquired.




Restricted
Cash




Restricted
cash consists of interest reserves and tax impounds required under the related
loan agreements.




Rents
and Other Receivables




Our
company maintains an allowance for doubtful accounts that may result from the
inability of tenants to make required payments. We specifically analyze accounts
receivable and historical bad debt, tenant creditworthiness and current economic
trends when evaluating the adequacy of the allowance for doubtful accounts. In
addition, if a tenant fails to make contractual payments beyond any allowance,
we may recognize bad debt expense in future periods equal to the amount of
unpaid rent and deferred rent.




Rental
Properties




Rental
properties, including land, building improvements and capitalized leasing
commissions, are stated at cost, less accumulated depreciation. Depreciation is
being provided on a straight-line basis over the estimated useful lives of the
assets. Buildings and building improvements are depreciated over 39 years, and
tenant improvements over the term of the respective tenant leases. Capitalized
lease commissions are amortized over the term of the related
leases.




Costs
related to the acquisition and improvement of the rental properties are
capitalized, while expenses for repairs and maintenance are charged to
operations as incurred. Certain expenses such as property taxes, utilities and
repair and maintenance costs are chargeable to the tenants as provided in their
lease agreements. Such reimbursements are recorded as rental income in the
combined statement of operations. Costs related to terminated deal costs are
expensed when we cease due diligence and related acquisition
efforts.




The
acquisition of real estate properties is accounted for in accordance with SFAS
No. 141,Business
Combinations whereby the value of real estate acquired is allocated
between land, buildings and improvements, acquired leasing commissions and
tenant coordination costs, and to acquire above- and below-market leases and
tenant relationships. The fair value of tangible assets is determined on an
“as-if-vacant” basis based upon comparable sales and other relevant information
obtained in connection with the acquisition of the property. The estimated fair
value of acquired in-place at-market leases are the costs we would have incurred
to lease property to the occupancy level of the property at the date of
acquisition. Such estimate includes the fair value of leasing commissions and
legal costs that would be incurred to lease the property to this occupancy
level. Additionally, we evaluate the time period over which such occupancy level
would be achieved and include an estimate of the net operating costs (primarily
real estate taxes, insurance and utilities) incurred during the lease-up period,
which generally ranges up to 8-9 months. These allocations have a direct impact
on our results of operations as allocations between land, buildings and
improvements because, if we were to allocate more value to land, there would be
no depreciation with respect to such amount. If we were to allocate more value
to the buildings as opposed to allocating the value of tenant


F-8
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)





leases,
this amount would be recognized as an expense over a much longer period of time,
since the amounts allocated to buildings are depreciated over the estimated
lives of the buildings whereas amounts allocated to tenant leases are amortized
over the terms of the leases.




Real
Estate Held for Development




Real
estate held for development includes land and buildings (at cost) we intend to
or have begun developing. Project costs associated with the development and
construction of a real estate project are capitalized as construction in
progress. In addition, interest, loan fees, real estate taxes, general and
administrative expenses that are directly associated with the development are
also capitalized in the period in which they are incurred. Once the real estate
project is completed, the costs capitalized to construction in progress and the
land and building costs associated with the completed project are transferred to
rental properties on the consolidated balance sheet as the historical cost of
the project.




Real
Estate Held for Sale or Disposition




We
account for properties held for disposition or properties that are sold during
the period in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets(“SFAS 144”). An asset is classified as an
asset held for disposition when it meets the requirements of SFAS 144,
which include, among other criteria, the approval of the sale of the asset, the
asset has been marketed for sale and we expect that the sale will likely occur
within the next 12 months. Upon classification of an asset as held for
disposition, the net book value of the asset, excluding long-term debt, is
included in discontinued operations for all periods presented.




Impairment
of Long-Lived Assets




Management
assesses whether there has been impairment in the value of its long-lived assets
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount to the undiscounted future cash
flows expected to be generated by the asset. If the current carrying value
exceeds the estimated undiscounted cash flows, an impairment loss is recorded
equal to the difference between the asset’s current carrying value and its value
based on the discounted estimated future cash flows. Assets to be disposed of
are reported at the lower of the carrying amount or fair value, less costs to
sell. Based on such periodic assessments, no indications of impairment were
identified as of December 31, 2007 and 2006.




Deferred
Loan Costs




Costs
incurred in issuing secured notes payable are capitalized. Deferred loan costs
are included in other assets in the balance sheets. The deferred loan costs are
amortized to interest expense over the life of the related loan. Any unamortized
amounts upon early repayment of secured notes payable are written off to
amortization expense in the period of repayment. Unamortized amounts on loans
repaid in connection with the formation transactions were written off against
additional paid in capital.  We have reclassified to interest expense
deferred loan cost amortization of $1.1 million and $0.6 million for the years
ended December 31, 2006 and 2005, respectively, to conform to our 2007
presentation, which includes $0.4 million of deferred loan cost amortization in
interest expense.




Revenue
Recognition




Revenue
is recognized in accordance with Staff Accounting Bulletin No. 104 of the
Securities and Exchange Commission, Revenue Recognition(SAB 104), as amended. SAB 104 requires that four basic
criteria must be met before revenue can be recognized: persuasive evidence of an
arrangement exists; the delivery has occurred or services rendered; the fee is
fixed and determinable; and collectibility is reasonably assured. All leases are
classified as operating leases and minimum rents are recognized on lease terms
exceeding one year on a straight-line basis over the term of the respective
leases. The impact of the straight line rent adjustment increased revenue by
$0.5 million, $0.0 million and $0.3 million for the years ended December 31,
2007, 2006 and 2005.  The excess of rents recognized over amounts
contractually due pursuant to the underlying leases is included in accounts
receivable in the consolidated or combined balance sheets. Recoveries from
tenants for common area maintenance expenses, real estate property taxes and
other recoverable operating expenses are recognized as revenue in the period the
associated costs are incurred. Accordingly,
we recognized recovery revenue of $0.9 million, $1.0 million and $0.5 million
for the years ended December 31, 2007, 2006 and 2005.In addition,
the company records a capital asset for leasehold improvements constructed by us
that are reimbursed by tenants, with the offsetting amount recorded to deferred
revenue which is included in accrued expenses and other liabilities. The
deferred revenue is amortized as additional rental revenue over the life of the
related lease.


F-9
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)







Rental
revenue from month-to-month leases or leases with no scheduled rent increases or
other adjustments is recognized on a monthly basis when earned.





Lease
termination fees are recorded when the related leases are canceled and the
company has no continuing obligation to provide services to such former tenants.
Lease termination fees are included in rental revenues and were not material for
the years ended December 31, 2007, 2006 and 2005.




We
recognize gains on sales of real estate pursuant to the provisions of SFAS
No. 66, Accounting for
Sales of Real Estate (“SFAS 66”). The specific timing of a sale is
measured against various criteria in SFAS 66 related to the terms of the
transaction and any continuing involvement in the form of management or
financial assistance associated with the property. If the sales criteria are not
met the company defers gain recognition and accounts for the continued
operations of the property by applying the finance, installment or cost recovery
methods, as appropriate, until the sales criteria are met.




Income
Taxes




We are
subject to federal income taxes in the United States, the State of California
and local jurisdictions in which we operate. We account for income taxes
according to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
(“SFAS 109”). SFAS 109 requires the recognition of deferred tax assets, net
of applicable reserves, related to net operating loss carryforwards and certain
temporary differences. The standard requires recognition of a future tax benefit
to the extent that realization of such benefit is more likely than not.
Otherwise, a valuation allowance is applied.




Segment
Disclosure




SFAS
No. 131, Disclosures
about Segments of an Enterprise and Related Information, established
standards for disclosure about operating segments and related disclosures about
products and services, geographic areas and major customers. Our company
currently operates in one business segment: the acquisition, development,
ownership, and management of commercial real estate (whether office, commercial,
or residential). Additionally, our company operates in one geographic area:
California.




The
products and services offered include rental of office, commercial, and
residential space to tenants, parking and other tenant services.




Fair
Value of Financial Instruments




Our
estimates of the fair value of financial instruments at December 31, 2007 and
2006, respectively, were determined using available market information and
appropriate valuation methods.  Considerable judement is necessary to
interpret market data and develop estimated fair value.  The use of
different market assumptions or estimation methods may have a material effect on
the estimated fair value amounts.





The carrying
amounts for cash and cash equivalents, restricted cash, accounts receivable,
other assets, accounts payable, accrued expenses and other liabilities
approximate fair value because of the short-term nature of these
instruments.




We calculate
the fair value of our notes payable based on a currently available market rate;
assuming the loans are outstanding through maturity and considering the
collateral.  In determining the current market rate for fixed rate debt, a
market spread is added to the quoted yields on federal government treasury
securities with similar maturity dates to debt.  At December 31, 2007, the
aggregate fair value of our our secured notes payable is estimated to be
approximately equal to $308.7 million.  As of December 31, 2006, the
estimated fair value of the note payable and the CalPERS credit facility was
approximately $492.6 million.




Equity Offering
Costs




Underwriting
commissions and costs and expenses from our January 30, 2007 IPO are
reflected as a reduction to additional paid-in-capital.




Earnings
(loss) per Share




Basic
earnings (loss) per share is calculated based on the weighted average number of
shares outstanding during the period. The computation of dilutive earnings
(loss) per share includes the effect of the vesting of unvested restrictive
stock and long-term incentive plan units (“LTIP units”) that have been granted,
all calculated using the treasury stock method. The


F-10
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)







effect of
the vesting of unvested restricted stock and LTIP units that have been granted
is not dilutive for the period from January 30 through December 31,
2007.





Share-Based
Compensation




We have
awarded stock-based compensation to employees and members of our Board of
Directors in the form of restricted shares and LTIP units. These awards are
accounted for under FAS No. 123R (revised 2004), Share-Based Payment(FAS 123R). This pronouncement requires that we estimate the fair
value of the awards and recognize this value over the requisite vesting period.
Accordingly, restricted shares are accounted for based on their fair market
value at the date of grant and amortized over the vesting period. We used a
third-party consultant to estimate the fair value of our LTIP units. The fair
value is based on the market value of our common shares on the date of the grant
and a discount for post-vesting probabilities and other
restrictions.




Estimates
Used in the Preparation of Financial Statements




The
preparation of financial statements, in conformity with U.S. generally-accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Included as part of management’s estimates and assumptions is our ability to
continue as a going concern which takes into account certain significant
conditions and events, including our ability to repay or refinance short-term
debt, and to obtain appropriate entitlements to proceed with planned development
activities. Additionally, management’s plans include estimates and assumptions
which may be impacted by changes in economic conditions, including interest
rates, construction costs and real estate values. Actual results could
significantly differ from those estimates.




3.
ACQUISITION OF MINORITY INTERESTS




In
connection with the IPO formation transactions, the company acquired the
non-controlling minority interests in the predecessor owned by John Charles
Maddux. The acquisition cost, net of cash acquired of such minority interests,
was approximately $53.2 million and was accounted for as a purchase in
accordance with SFAS 141. The following summarizes the final allocation of
estimated fair values at the date of acquisition and reflects the “step-up” to
the carrying values previously recorded on the books on the Predecessor (in
thousands):





Land
            
            $
            85,433Building
      and improvements
            
            
            4,703Deferred
      tax liabilities
            
            
            (36,955
            )Net
      acquisition cost
            
            $
            53,181





4.
RENTAL PROPERTIES






Rental
properties consist of the following:




December
      31, 2007
            
            
            December 31,
      2006Rental
      properties
            
            (in
      thousands)Land
            
            $
            187,281
            
            
            $
            92,406Building
      and improvements
            
            
            138,440
            
            
            
            138,725325,721
            
            
            
            231,131Less:
      Accumulated depreciation
            
            
            (19,625
            )
            
            
            (14,159
            )$
            306,096
            
            
            $
            216,972


F-11
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)





4.
RENTAL PROPERTIES (Continued)




We have
27 rental properties as of December 31, 2007, and 24 as of December 31,
2006, all which are located in Southern California. During the second
quarter of 2007, we reclassified certain amounts between land and building and
improvements, which did not have a material impact to the consolidated financial
statements for the current year, or the previously reported combined financial
statements for fiscal years 2006 and 2005.  Depreciation expense on
buildings and building improvements was approximately $5.7 million, $3.3
million and $2.4 million for the years ended December 31, 2007, 2006, and 2005,
respectively.







5.
REAL ESTATE HELD FOR DEVELOPMENT






Real
estate held for development consists of the following:




December
      31, 2007
            
            
            December 31,
      2006Real
      estate held for development
            
            (in
      thousands)Land
            
            $
            280,039
            
            
            $
            171,158Building
      and improvements
            
            
            14,560
            
            
            
            16,761Construction
      in process
            
            
            167,190
            
            
            
            89,918$
            461,789
            
            
            $
            277,837





As of
December 31, 2007 and  2006, we owned 28 and 30 properties held for
real estate development respectively, and construction in process includes costs
related to ongoing build-to-suit construction agreements and other acquisition
deposits totaling $12.7 million and $10.1 million, respectively, (See
Note 14). Interest capitalized for the years ended December 31, 2007, 2006,
and 2005 was approximately $15.3 million, $33.6 million and $14.7 million,
respectively.






6.
OTHER ASSETS




Other
assets consist of the following:





December 31,
              2007
            
            
            December 31,
              2006Other
      assets
            
            (in
      thousands)Deferred
      loan costs
            
            $
            1,921
            
            
            $
            5,420Intangible
      assets – in-place leases
            
            
            1,209
            
            
            
            1,209Machinery
      and equipment
            
            
            2,191
            
            
            
            1,637Deposits
      and prepaid expenses
            
            
            1,088
            
            
            
            1,216Other
            
            
            281
            
            
            
            3106,690
            
            
            
            9,792Accumulated
      amortization and depreciation
            
            
            (3,139
            )
            
            
            (3,355
            )$
            3,551
            
            
            $
            6,437





F-12
 
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MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)





7.
ACCRUED EXPENSES AND OTHER LIABILITIES





Accrued
expenses and other liabilities consist of the following:





December
      31, 2007
            
            
            December 31,
      2006Accrued
      expenses and other liabilities
            
            (in
      thousands)Accrued
      interest – CalPERS note
            
            $
            —
            
            
            $
            31,565Deferred
      revenue – Taylor Yards
            
            
            —
            
            
            
            11,152Accrued
      interest – mortgage debt
            
            
            1,769
            
            
            
            1,962Tenant
      security deposits
            
            
            2,016
            
            
            
            1,854Accrued
      property taxes
            
            
            1,349
            
            
            
            1,348Accrued
      stock compensation
            
            
            1,873
            
            
            
            —Other
            
            
            2,911
            
            
            
            1,282$
            9,918
            
            
            $
            49,163








8.
NOTES PAYABLE SECURED BY REAL ESTATE




Fixed
rate mortgage notes and variable rate mortgage notes consist of the following
(in thousands):




Project
      Name
            
            Interest
      Rate
            
            Maturity
      Date
            
            12/31/2007
            
            
            12/31/2006Fixed
      rate mortgage notes:Seventh
      Street Produce Market/Alameda Square
            
            
            6.75
            %
            November
      30,2008
            
            $
            50,445
            
            
            $
            51,829Meruelo
      Wall Street
            
            
            6.25
            %
            July
      5, 2008
            
            
            20,721
            
            
            
            21,122Crown
      Commerce Center
            
            
            7.48
            %
            September
      5, 2011
            
            
            10,314
            
            
            
            10,458Seventh
      Street Produce Market/Alameda Square
            
            
            8.00
            %
            November
      30, 2008
            
            
            9,989
            
            
            
            10,000Washington
      Cold Storage
            
            
            6.93
            %
            April
      13, 2016
            
            
            9,707
            
            
            
            9,8591800
      E. Washington Blvd.
            
            
            7.49
            %
            October1,2017
            
            
            9,100
            
            
            
            -2131
      Humboldt Street
            
            
            6.50
            %
            January
      1,2011
            
            
            7,000
            
            
            
            7,000420
      Boyd Street
            
            
            7.49
            %
            June15,
      2012
            
            
            5,950
            
            
            
            -Santa
      Fe Plaza
            
            
            7.49
            %
            October
      1, 2017
            
            
            3,165
            
            
            
            -1500
      Griffith Avenue
            
            
            7.00
            %
            January
      24, 2013
            
            
            3,000
            
            
            
            3,000905
      E. 8th Street
            
            
            7.50
            %
            January
      15, 2009
            
            
            1,950
            
            
            
            1,950500
      Mateo Street
            
            
            7.00
            %
            March
      1, 2011
            
            
            640
            
            
            
            8041800
      E. Washington Blvd.(1)
            
            
            12.00
            %
            October
      27, 2007
            
            
            -
            
            
            
            8,250South
      Park Towers(1)
            
            
            18.00
            %
            September
      30, 2007
            
            
            -
            
            
            
            18,550Meruelo
      Wall Street(1)
            
            
            12.00
            %
            January
      13, 2007
            
            
            -
            
            
            
            3,782Transamerica
      Lofts(1)
            
            
            9.00
            %
            February
      25, 2015
            
            
            -
            
            
            
            697Musica
      Latina(1)
            
            
            9.77
            %
            November
      1, 2008
            
            
            -
            
            
            
            650Transamerica
      Lofts(1)
            
            
            8.00
            %
            April
      1, 2008
            
            
            -
            
            
            
            312Seventh
      Street Produce Market/Alameda Square(1)
            
            
            9.261
            %
            December
      15, 2007
            
            
            -
            
            
            
            13Seventh
      Street Produce Market/Alameda Square(1)
            
            
            9.159
            %
            September
      15, 2007
            
            
            -
            
            
            
            9Seventh
      Street Produce Market/Alameda Square(1)
            
            
            9.94
            %
            May
      8, 2007
            
            
            -
            
            
            
            9Total
      Fixed Rate Mortgage Notes
            
            
            
            
            
            
            $
            131,981
            
            
            $
            148,294


F-13
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)





8.
NOTES PAYABLE SECURED BY REAL ESTATE (Continued)





Variable
      rate mortgage notes:Union
      Lofts Mini Permanent Loan
            1-Month
      LIBOR plus 1.65%
            March
      1, 2009
            
            $
            25,721
            
            
            $
            13,871South
      Park Towers(2)
            Prime
            January
      14, 2008
            
            
            25,000
            
            
            
            25,000Sky
      Arc
            Prime
      plus .75%
            April
      1, 2008
            
            
            19,000
            
            
            
            19,0002000
      San Fernando Road
            3-Month
      LIBOR plus 2.75%
            April
      1, 2012
            
            
            13,474
            
            
            
            -Ullman
      Tower One(3)
            Prime
            February
      1, 2008
            
            
            11,275
            
            
            
            10,583Southern
      California Institute of Architecture
            Prime
      plus .25%
            August
      1, 2011
            
            
            10,197
            
            
            
            10,271Barstow
      Produce Center Construction Loan
            Prime
      plus .50%
            January
      9, 2013
            
            
            9,030
            
            
            
            4,3771875
      W. Mission Blvd.
            6-Month
      Libor plus 6.25%
            March
      29, 2024
            
            
            8,665
            
            
            
            -Center
      Village
            Prime
      plus1.0%
            October
      1, 2008
            
            
            7,000
            
            
            
            7,000Ullman
      Tower Two
            Prime
            May
      1, 2008
            
            
            6,397
            
            
            
            6,388Barstow
      Produce Center Construction Loan
            Prime
      plus1.0%
            January
      9, 2010
            
            
            6,180
            
            
            
            -Washington
      Produce Market
            Prime
      plus.50%
            December
      5, 2012
            
            
            6,150
            
            
            
            -1919
      Vineburn Avenue
            Prime
      plus 1.0%
            July
      1, 2008
            
            
            5,500
            
            
            
            5,500Olive
      Street Towers(4)
            Prime
            March
      1, 2008
            
            
            5,340
            
            
            
            5,218620
      Gladys Avenue(5)
            Prime
            April
      1, 2008
            
            
            5,157
            
            
            
            -801
      E. 7th Street(6)
            Prime
            March
      1, 2008
            
            
            4,400
            
            
            
            -Meruelo
      Farms
            Prime
            November
      7, 2010
            
            
            3,350
            
            
            
            -3rd
      & Omar
            Prime
      plus .25%
            August
      15, 2010
            
            
            2,599
            
            
            
            2,6192415
      Washington Blvd.
            Prime
            November
      15, 2008
            
            
            978
            
            
            
            -788
      S. Alameda Square(1)
            Prime
      plus .50%
            March
      26, 2007
            
            
            -
            
            
            
            6,033Meruelo
      Chinatown Village(1)
            Prime
      plus 1.0%
            April1
      4, 2007
            
            
            -
            
            
            
            5,000San
      Fernando Court(1)
            Prime
      plus .50%
            November
      30, 2007
            
            
            -
            
            
            
            4,0161211
      E. Washington Blvd.(1)
            Prime
      plus .50%
            May
      1, 2015
            
            
            -
            
            
            
            3,8631500
      Griffith Avenue(1)
            Prime
      plus .25%
            March
      1, 2007
            
            
            -
            
            
            
            3,347South
      Park Towers(1)
            Prime
      plus .25%
            March
      1, 2007
            
            
            -
            
            
            
            3,1071000
      E. Cesar Chavez(1)
            Prime
      plus .25%
            March
      1, 2007
            
            
            -
            
            
            
            2,475230
      W. Avenue 26th(1)
            Prime
      plus .25%
            April
      1, 2007
            
            
            -
            
            
            
            2,255Citrus
      Gardens(1)
            Prime
      plus .25%
            August
      1, 2007
            
            
            -
            
            
            
            2,1634th
      Street Center(1)
            Prime
      plus 1.0%
            February
      22, 2007
            
            
            -
            
            
            
            2,000Seventh
      Street Produce Market/Alameda Square(1)
            Prime
      plus 1.0%
            October
      12, 2011
            
            
            -
            
            
            
            1,894Vignes
      Village(1)
            Prime
      plus .25%
            March
      15, 2007
            
            
            -
            
            
            
            1,8282131
      Humboldt Street(1)
            Prime
      plus .25%
            April
      15, 2007
            
            
            -
            
            
            
            1,8155707
      S. Alameda(1)
            Prime
      plus .25%
            April
      1, 2007
            
            
            -
            
            
            
            1,8041211
      E. Washington Blvd.(1)
            Prime
      plus .50%
            July
      1, 2015
            
            
            -
            
            
            
            1,6592131
      Humboldt Street(1)
            Prime
      plus .25%
            February
      1, 2007
            
            
            -
            
            
            
            1,2364th
      Street Center(1)
            Prime
      plus .25%
            November
      1, 2007
            
            
            -
            
            
            
            1,102500
      Mateo Street(1)
            Prime
      plus 1.0%
            June
      23, 2007
            
            
            -
            
            
            
            1,000Ceres
      Street Produce Center(1)
            Prime
      plus .25%
            February
      15, 2007
            
            
            -
            
            
            
            9472131
      Humboldt Street(1)
            Prime
      plus .25%
            March
      1, 2007
            
            
            -
            
            
            
            914American
      Apartments(1)
            Prime
      plus 2.0%
            September
      10, 2007
            
            
            -
            
            
            
            855620
      Gladys Avenue(1)
            Prime
      plus .25%
            April
      1, 2007
            
            
            -
            
            
            
            842American
      Apartments(1)
            Prime
      plus 1.0%
            December
      1, 2008
            
            
            -
            
            
            
            833Covina
      Village(1)
            Prime
      plus .50%
            June
      28, 2008
            
            
            -
            
            
            
            786American
      Apartments(1)
            Prime
      plus 1.50%
            August
      1, 2007
            
            
            -
            
            
            
            690620
      Gladys Avenue(1)
            Prime
      plus .25%
            March
      16, 2007
            
            
            -
            
            
            
            639230
      W. Avenue 26th(1)
            Prime
      plus .25%
            February
      15, 2007
            
            
            -
            
            
            
            4611000
      E. Cesar Chavez(1)
            Prime
      plus .25%
            September
      15, 2011
            
            
            -
            
            
            
            3251000
      E. Cesar Chavez(1)
            Prime
      plus .25%
            March
      1, 2007
            
            
            -
            
            
            
            248Pomona
      Village and Pomona Retail(1)
            Prime
      plus 1.0%
            April
      1, 2007
            
            
            -
            
            
            
            14,063717
      W. 9th Street(1)
            Prime
      plus 1.0%
            March
      20, 2007
            
            
            -
            
            
            
            9,325Desmond
      Building(1)
            Prime
      plus 1.0%
            May
      1, 2007
            
            
            -
            
            
            
            7,000Total
      Variable Rate Mortgage Notes
            
            
            
            $
            175,413
            
            
            $
            194,352GRAND
      TOTAL
            
            
            
            $
            307,394
            
            
            $
            342,646





(1)
            Note
      repaid with the net proceeds of the
IPO.


(2)
            Lender
      extended the maturity date to July 14, 2008 upon our request for the same
      principal amount with the same interest
terms.


(3)
            Lender
      extended the maturity date to April 30, 2008 upon our request for the same
      principal amount with the same interest
terms.


(4)
            Lender
      extended the maturity date to May 1, 2008 upon our request for the same
      principal amount with the same interest
terms.


(5)
            Lender
      extended the maturity date to September 1, 2008 upon our request for the
      same principal amount with the same interest
  terms.


(6)
            Lender
      extended the maturity date to October 1, 2008 upon our request for the
      same principal amount with the same interest
  terms.







F-14
 
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MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)








8.
NOTES PAYABLE SECURED BY REAL ESTATE (Continued)





As of
December 31, 2007, principal payments due for mortgage notes are as
follows:




2008
            
            $
            172,3412009
            
            
            28,8102010
            
            
            12,9862011
            
            
            27,5852012
            
            
            25,315Thereafter
            
            
            40,357$
            307,394




As of
December 31, 2007, the Prime rate was 7.25%.  In addition, we have
three loans that are calculated using the one-month LIBOR rate, the six-month
LIBOR rate and the three-month LIBOR rate.  The LIBOR rates in place
at December 31, 2007 for these loans were 4.85%, 5.50% and 5.23%,
respectively.  As of December 31, 2006, the three-month LIBOR in
effect was 5.23% and the Prime rate was 8.25%. The weighted average interest
rate of our debt was 7.47% and 11.51% at December 31, 2007 and 2006,
respectively.





At
December 31, 2007 and 2006, the carrying value of the real estate securing the
fixed and variable rate mortgages was approximately $502.8 million and $472.4
million, respectively.




Several
of the mortgage notes for properties held for development have an interest
reserve with the respective lender. These reserves generally cover the estimated
interest carrying costs during the mortgage term. As interest accrues it is
added to the note balance up to the amount of the interest reserve. At December
31, 2007 and 2006, there was approximately $0.5 million and $7.1 million,
respectively, in the various interest reserve accounts.




As of
December 31, 2007, several of our financing agreements totaling approximately
$61.9 million were in technical default of certain change in control provisions
permitting lenders to accelerate payment of the related debt.  Such
provisions were technically triggered at the time of our IPO due to the transfer
of ownership of the borrower subsidiaries to the operating
partnership.  However, to date, no lenders have requested any such
acceleration of payment nor is any expected based on the nature of this
violation and on recent discussions with our lenders.




Twelve of
our mortgage notes are coming due within one year. For these maturing notes, we
are actively engaged in extending, refinancing or seeking construction
financing.




9.
NOTE PAYABLE TO CalPERS






On
February 11, 2005, our predecessor business entered into an agreement with
CalPERS and obtained a mezzanine loan facility in the original principal amount
of $150.0 million to acquire and develop Southern California real
estate.




The
interest rate was 18%. The facility required monthly interest-only payments at a
fixed 6.5% pay rate. The remaining 11.5% fixed interest was deferred until the
maturity date of the loan facility. At December 31, 2006, we had drawn
$150.0 million from the CalPERS facility. The term of the loan was five years
(maturing in February 2010), with two options to extend for one year each at the
election of our predecessor business.




At
December 31, 2006, our predecessor business owed CalPERS approximately
$181.6 million in principal and accrued interest. During 2006, we made interest
payments to CalPERS of approximately $9.9 million. On January 30, 2007 in
connection with our IPO, we paid all outstanding principal and accrued interest
of approximately $184.2 million under the revolving CalPERS credit
facility.






F-15
 
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MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)





10.
RENTAL INCOME





Rental
income consists of fixed minimum rents, contingent rents and reimbursements from
tenants of common area maintenance expenses and real estate taxes under
noncancelable operating lease agreements.




Minimum
future rental receipts, excluding any reimbursement of expenses or contingent
rents, due to us for the years succeeding December 31, 2007, are as follows
(in thousands):





2008
            
            $
            13,0022009
            
            
            8,7392010
            
            
            7,8752011
            
            
            6,0782012
            
            
            5,427Thereafter
            
            
            3,560$
            44,681





11.
LOSS PER SHARE




The
following is a summary of the elements used in calculating basic and diluted
loss per share (in thousands except for share data):




Period
              January 30, 2007
              to
      December 31, 2007Net
      loss attributable to common shares
            
            $
            (11,869
            )Weighted
      average common shares outstanding – basic
            
            
            85,218,110Net
      loss per share - basic and diluted
            
            $
            (0.14
            )




For the
period January 30, 2007 through December 31, 2007, the potentially dilutive
shares were not included in the loss per share calculation as their effect is
antidilutive.







12.
EQUITY INCENTIVE PLAN




On
January 30, 2007, we adopted an equity incentive plan. The purpose of the
2007 Equity Incentive Plan is to provide us with the flexibility to use
restricted stock, LTIP units and other awards as part of an overall compensation
package to provide compensation to attract and retain qualified personnel. The
LTIP units are interests in the operating partnership that, upon the allocation
of profits from the operating partnership over time, may be converted into the
operating partnership’s common units (a “Partnership Common Unit”) and
consequently, become redeemable by the holder on a one-for-one basis for cash
equal to the value of a share of our common stock or, at the Company’s election,
a share of the Company’s common stock. We have initially reserved 2,277,500
shares of our common stock for the issuance of awards under our equity incentive
plan. From the initial reservation, there remains 1,569,929 unissued shares
of our common stock under our equity incentive plan as of December 31,
2007.  The number of shares reserved under our equity incentive plan is
also subject to adjustment in the event of a stock split, stock dividend or
other change in our capitalization. Generally, shares that are forfeited or
canceled from awards under our equity incentive plan will be available for
future awards.




Restricted Stock




On
January 30, 2007, pursuant to our equity incentive plan, the Company
awarded 314,436 shares of restricted stock to non-executive employees. An
additional 80,800 shares of restricted stock were issued subsequently through
December 31, 2007. Restricted stock issued to non-executive employees vests
one-third on each of the first, second and third anniversary dates of the grant.
Also on January 30, 2007, an initial grant of 10,000 shares of restricted stock
was issued to non-employee directors, which vest on the second annual meeting of
the shareholders following the year of grant, subject to the director’s
continued service through the day immediately preceding such meeting. During the
period from January 30, 2007 through December 31, 2007, 45,500 shares of
non-executive employee restricted stock were forfeited.


F-16
 
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MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)





12.
EQUITY INCENTIVE PLAN (Continued)




As of
December 31, 2007, there was approximately $2.6 million of total unrecognized
compensation cost related to the non-vested portion of restricted stock under
the equity incentive plan, of which approximately $0.6 million relates to
non-executive employees at development properties and is capitalized over the
vesting term. The cost is expected to be recognized over a weighted average
period of 2.1 years. The fair value of restricted shares outstanding as of
December 31, 2007 was approximately $3.6 million.





Restricted
      Stock
            
            Number of Restricted
              Stock
      Shares
            
            
            Weighted Average
              Issuance
      Date
              Fair
      ValueOutstanding
      at January 1, 2007
            
            
            —
            
            
            
            —Issued
            
            
            405,236
            
            
            $
            10.09Forfeited
            
            
            (45,500
            )
            
            
            (10.10
            )Outstanding
      at December 31, 2007
            
            
            359,736
            
            
            $
            10.09




Long-term
Incentive Units




Under our
equity incentive plan, our operating partnership issued to certain executives an
aggregate of 327,835 LTIP units on January 30, 2007. These LTIP units are
subject to a two-year restriction period during which the LTIP units and the
Partnership Common units (into which the LTIP units are convertible) are
prohibited from being redeemed or transferred, and vest over three years subject
to certain continuing employment requirements.  On December 31, 2007,
our operating partnership issued certain executives an aggregate of 20,000 LTIP
units pursuant to their employment agreements.




During
the period from January 30, 2007 through December 31, 2007, compensation
expense related to LTIPs was approximately $0.8 million. As of December 31,
2007, there was approximately $1.8 million of total unrecognized compensation
cost related to the LTIP units under the equity incentive plan.




LTIP
      Units
            
            Number
      of Units
            
            
            Weighted
      Average Grant
              Date
      Fair ValueOutstanding
      at January 1, 2007
            
            
            —
            
            
            
            —Granted
            
            
            347,835
            
            
            $
            7.43Vested
            
            
            —
            
            
            
            —Outstanding
      at December 31, 2007
            
            
            347,835
            
            
            $
            7.43





F-17
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)





13.  QUARTERLY
FINANCIAL DATA (Unaudited)





Presented below is a summary of our
consolidated and our Predecessor’s combined quarterly financial data for the
years ended December 31, 2007 and 2006 (in thousands except per share
data).





Predecessor
            
            
            Consolidated
      Financial StatementsPeriod
      from January 1, 2007 to January 29, 2007
            
            
            Period
      from January 30, 2007 to March 31, 2007
            
            
            Quarter
      Ended June 30, 2007
            
            
            Quarter
      Ended September 30, 2007
            
            
            Quarter
      Ended December 31, 2007Total
      revenue
            
            $
            2,202
            
            
            $
            4,954
            
            
            $
            6,688
            
            
            $
            6,651
            
            
            $
            6,929Net
      loss
            
            
            (2,004
            )
            
            
            (1,543
            )
            
            
            (3,619
            )
            
            
            (4,070
            )
            
            
            (2,637
            )Loss
      per share – basic and diluted
            
            
            N/A
            
            
            
            (0.02
            )
            
            
            (0.04
            )
            
            
            (0.05
            )
            
            
            (0.03
            )Weighted
      average shares outstanding – basic and diluted
            
            
            N/A
            
            
            
            84,045,736
            
            
            
            85,478,164
            
            
            
            85,478,164
            
            
            
            85,478,164








Predecessor
      Financial StatementsQuarter
      EndedMarch
      31, 2006
            
            
            June
      30, 2006
            
            
            September
      30, 2006
            
            
            December
      31, 2006Total
      revenue
            
            $
            6,175
            
            
            $
            7,080
            
            
            $
            6,418
            
            
            $
            7,401Loss
      from continuing operations
            
            
            (3,266
            )
            
            
            (5,547
            )
            
            
            (3,151
            )
            
            
            (6,426
            )Net
      loss
            
            $
            (3,266
            )
            
            $
            (4,218
            )
            
            $
            (3,151
            )
            
            $
            (6,426
            )





14.
COMMITMENTS AND CONTINGENCIES






We have
an ongoing build-to-suit construction agreement with Dynamic Builders that
allows us to identify a property for development and Dynamic Builders will
acquire the property and construct the improvements according to our
specifications. The purchase prices upon completion of these projects vary
according to construction costs. As of December 31, 2007 and 2006, our aggregate
purchase prices upon project completion with Dynamic Builders totaled
approximately $88.9 million and $120.9 million, respectively, of which $12.4
million and $6.0 million, respectively, had been paid in deposits and included
in real estate held for development. We intend to close on the remaining
contracts when such projects are completed, which is expected to occur within
the next year.




As of
December 31, 2007 and 2006, we had other purchase contracts or agreements to
acquire real estate development properties from third parties with aggregate
contract prices of $9.0 million and $61.5 million, respectively.




As of
December 31, 2006, we had two purchase contracts with the parents of
Richard Meruelo to acquire land for $20.0 million and $17.0 million in Pomona
and Los Angeles, California, respectively.  As of December 31, 2007,
the acquisition for the Los Angeles project for $17.0 million had not been
completed, but a deposit of $0.25 million has been made and we have acquired a
12.5% interest in the seller entity which may reduce the remaining amounts to be
paid.  We completed the purchase of Pomona for $20.0 million in July
2007.




As of
December 31, 2007, we had a $0.15 million irrevocable standby letter of credit
outstanding to guarantee our obligations related to environmental remediation
activities at our Vignes Village project.  The beneficiary may draw upon
the letter of credit in the event of contractual default by us relating to the
obligation.  The letter of credit has a maturity date of June 2008, at
which time we expect to have completed the environmental remediation and
satisfied our obligations.




Our
commitments and contingencies include the usual obligations of real estate
owners, operators and developers incurred in the normal course of business. In
the opinion of management, the resolution of these matters will have no material
impact on our consolidated financial position or results of operations. We
maintain cash at insured financial institutions. The combined account balances
at each institution periodically exceed FDIC insurance coverage and, as a
result, there is a concentration of credit risk related to amounts in excess of
FDIC insurance coverage. Management believes that the risk is not
significant.


F-18
 
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MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)





15.
RELATED-PARTY TRANSACTIONS






As of
December 31, 2007, we did not owe Richard Meruelo or entities affiliated with
him any funds. As of December 31, 2006, we owed Richard Meruelo or entities
affiliated with him approximately $4.5 million related to net advances received
for operational and development activities. These amounts have been included in
the consolidated balance sheet under due to affiliates, net. As of December 31,
2007 and December 31, 2006, we were contingently owed approximately $22.6
million and $24.7 million respectively pursuant to an affiliates note receivable
pursuant to an arrangement with two of our affiliates indirectly owned by
Messrs. Richard Meruelo and John Charles Maddux. As discussed in greater detail
below, this arrangement does not involve any borrowing by the two affiliates
from us. Rather, the arrangement is akin to an “earnout,” pursuant to which we
may issue common stock to the affiliates.




In our
formation transactions in connection with our IPO, we acquired a note receivable
held by our predecessor business. The obligor on the note receivable is an
entity owned by the two affiliates described above. We refer to this obligor as
the “Taylor Yards entity.” The Taylor Yards entity in turn owns a property that
we refer to as the “Taylor Yards property.” The note receivable evidences
amounts drawn under our predecessor business’ credit facility provided by
CalPERS, which amounts were loaned to the Taylor Yards entity by our predecessor
business to acquire the Taylor Yards property. The Taylor Yards entity and the
Taylor Yards property were not contributed to us as part of our formation
transactions because the Taylor Yards property was, and remains, subject to
condemnation proceedings by the Los Angeles Unified School District. However,
the amount of consideration we delivered in our formation transactions for our
initial projects to the two affiliates was effectively reduced by an
amount equivalent to the note receivable.


Pursuant to
the arrangement, we agreed that, if and when amounts owing under the contingent
note receivable are paid and are no longer subject to litigation risk, we would
issue to affiliates of Messrs. Meruelo and Maddux a total number of shares of
common stock having a value equal to such payments (valuing the common stock for
this purpose at the per share price in our IPO), plus pay their interest at the
“applicable federal rate” in effect from the date of the IPO closing through the
date of the stock issuance. On February 14, 2007, in consideration of payments
made under the contingent note receivable, we issued a total of 275,207 shares
pursuant to the contingent issuance arrangement. In addition, on March 10, 2008,
we issued 840,000 shares to affiliates of Mssrs. Meruelo and Maddux that we had
a contingent obligation to issue based on amounts that were previously paid to
our company by the Taylor Yards entity and that have since become no longer
subject to litigation risk.  As a result of such litigation risk being
removed, the company has no contingent or other obligation to return such
amounts received.  Any further payment of the contingent note
receivable and any further contingent issuance of stock depends on the amount of
the condemnation proceeds for the Taylor Yards property.  We have a
remaining obligation to issue up to 1,421,423 additional shares if and when
amounts owing under the contingent note receivable are paid and no longer
subject to litigation risk.




The
contingent note receivable originally carried the same interest rate, repayment
terms and maturity date as the CalPERS credit facility (See Note 9). The net
proceeds from our IPO were used to pay off the CalPERS credit facility on
January 30, 2007, including amounts drawn in connection with the contingent
note receivable. In connection with the CalPERS pay off, we reduced the interest
rate on the note receivable to 4.77%. As of December 31, 2007 and
December 31, 2006, the contingent note receivable from affiliates has been
included as a reduction of owners’ equity (deficit) in the combined or
consolidated balance sheets.




Following
our IPO, we continue to provide legal services to the Taylor Yards entity under
a new services agreement with the Taylor Yards entity effective as of January
30, 2007. Fees generated under the new agreement for the period January 30, 2007
thru December 31, 2007 totaled $38,500.  Any other services provided
to Richard Meruelo or entities affiliated with him are billed directly to
Mr. Meruelo and included in management fees in the consolidated statements
of operations.




We
provide property management, leasing and development services to properties that
are owned by a related party, namely Homero and Belinda Meruelo, the parents of
Richard Meruelo. Management fees generated for the years ended December 31,
2007, 2006 and 2005 totaled $0.2 million, $0.2 million and $0.6 million
respectively. Because of the nature and extent of transactions with affiliates,
the accompanying consolidated financial statements may or may not be indicative
of the condition that would have existed or the results of operations that would
have occurred if our predecessor business had operated without such
affiliates.


F-19
 
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MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)








16.
INCOME TAXES




The
Company’s operations are carried on through the operating partnership and its
subsidiaries. The operating partnership is not subject to income tax, and all of
the taxable income, gains, losses, deductions and credits are passed through to
its partners. We are responsible for our share of taxable income or loss of the
operating partnership allocated to us in accordance with the operating
partnership’s Agreement of Limited Partnership. As of December 31, 2007, we held
a 99.6% capital interest in the operating partnership. For the period from
January 30, 2007 through December 31, 2007, we were allocated 100% of the losses
from the operating partnership for financial reporting purposes.




Prior to
the IPO, the Predecessor was organized and operated as a series of limited
liability companies, partnerships and S corporations for income tax
purposes.  Accordingly, its members, rather than the Predecessor, were
subject to federal and state income taxes on their respective share of the
Predecessor’s taxable income.  Accordingly, there was no provision for
income taxes recorded for the periods prior to January 30, 2007 for the
Predecessor.




As
described in Footnote 3, we recorded a deferred tax liability of $41.1 million
in connection with the IPO mainly attributable to differences in the basis of
assets acquired in the transaction for financial reporting and tax reporting
purposes.




The
current and deferred income tax provision is zero for the period ended December
31, 2007.




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes.  The significant components of deferred tax assets and
liabilities at December 31, 2007 consist of the following (in
thousands):







Deferred
      tax assets:NOL
      carryforwards
            
            $
            7,473State
      taxes
            
            
            2,737Allowance
      accounts
            
            
            121Deferred
      compensation
            
            
            748Prepaid
      rent
            
            
            6811,147Less:
      valuation allowance
            
            
            (4,796
            )Net deferred tax assets
            
            
            6,351Deferred
      tax liabilities:Property
      and equipment basis
            
            $
            (43,517
            )Capitalized
      interest
            
            
            (3,225
            )Deferred
      rent
            
            
            (203
            )Other
            
            
            (507
            )Total deferred tax
      liabilities
            
            
            (47,452
            )Net
      deferred tax asset (liability)
            
            $
            (41,101
            )





F-20
 
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MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)


16.
INCOME TAXES (Continued)





The
differences between the total income tax provision or (benefit) for financial
statement purposes and income taxes computed using the federal income tax rate
of 35% for the period ended December 31, 2007 were as follows:







Federal
      tax on pretax income (loss) at statutory rates
            
            
            35.00
            %State
      tax, net of federal benefit
            
            
            5.70
            %Permanent
      items
            
            
            (0.29
            )%Valuation
      allowance
            
            
            (40.41
            )%Provision
      for income taxes
            
            
            0.0
            %




As of
December 31, 2007, we had total net operating loss carryforwards for federal and
state income tax purposes of $17.0 million each, which expire in 2027 and 2017
for federal and state purposes, respectively.  We have also
established a valuation allowance of $4.8 million to reduce deferred tax assets
to the amounts considered realizable at December 31, 2007.





17.  TENANT
CONCENTRATIONS




The
tenants in our commercial properties for rent consist largely of wholesalers and
manufacturers.  A significant portion of our and the Predecessor’s
rental revenues were generated from our largest tenant, American
Apparel.  The revenue recognized related to this tenant was greater
than 10% of consolidated and combined rental revenue for the years ended
December 31, 2007, 2006 and 2005 was as follows (in thousands):







2007
            
            
            2006
            
            
            2005American
      Apparel
            
            $
            2,882
            
            
            $
            2,691
            
            
            $
            2,679







18.
RECENT ACCOUNTING PRONOUNCEMENTS






In June
2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in
Income Taxes (FIN 48), to create a single model to address accounting for
uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes,
by prescribing a minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We adopted FIN 48 on
January 1, 2007. Based on our evaluation, we have concluded that there are
no significant uncertain tax positions requiring recognition in our financial
statements at December 31, 2007.




In
September 2006, the FASB issued Statement No. 157,Fair Value Measurements
(“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets
and liabilities. This statement clarifies the principle that fair value should
be based on the assumptions that market participants would use when pricing the
asset or liability. SFAS 157 establishes a fair value hierarchy, giving the
highest priority to quoted prices in active markets and the lowest priority to
unobservable data. SFAS 157 applies whenever other standards require assets or
liabilities to be measured at fair value. This statement is effective in fiscal
years beginning after November 15, 2007. In February 2008, the FASB issued
FASB Staff Position SFAS 157-1, Application of FASB Statement No.
157 to FASB Statement 13 and Other Accounting Pronouncements that Address Fair
Value Measurements for Purposes of Lease Classification or Measurement Under
Statement 13 (“FSP SFAS 157-1”).  FSP FAS 157-1 defers the
effective date of SFAS 157 for all non-financial assets and non-financial
liabilities, except for those that are recognized or disclosed at fair value in
the financial statements on a recurring basis.  FSP SFAS 157-1 also
excludes certain leasing transactions accounted for under Statement of Financial
Accounting Standards No. 13, Accounting for Leases from
the scope of SFAS 157.  We are currently evaluating the effect the
adoption of SFAS 157 and FSP SFAS 157-1 may have on our financial position
and results of operations.




In
February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No.
115.  This standard permits entities to choose to measure many
financial instruments and certain other items at fair value and is effective for
the first fiscal year beginning after November 15, 2007.  We do not
expect to elect the fair value measurement option for any financial assets or
liabilities at the present time.





F-21
 
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MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


(Continued)





18.
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)





In
December 2007, the FASB issued FAS No. 141 (Revised 2007), Business Combinations
(“SFAS 141R”).  SFAS 141R will significantly change the accounting for
business combinations.  Under SFAS 141R, an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited
exceptions.  SFAS 141R also includes a substantial number of new
disclosure requirements.  SFAS 141R applies prospectively to business
combinations occurring in any reporting period beginning on or after December
15, 2008.  We are currently evaluating the effect the adoption
of SFAS 141R will have on our financial position and results of
operations.





19.
SUBSEQUENT EVENTS (Unaudited)




In
January 2008, we engaged a third party broker to actively market our project at
2000 San Fernando Road for sale.  In accordance with SFAS 144, we
classified the project as held for sale in January 2008, subsequent to year
end.  The major classes of assets and liabilities of this project as
of December 31, 2007 are as follows (in thousands):







Land
            
            $
            17,794Building
      and improvements
            
            
            2,219Accumulated
      depreciation
            
            
            (555
            )Net
      real estate assets
            
            
            19,458Accounts
      receivable
            
            
            271Other
      assets, net
            
            
            35Total
      assets
            
            $
            19,764Prepaid
      rent received, accrued expenses and
      other  liabilities
            
            $
            248Mortgage
      notes payable
            
            $
            13,474





On March
14, 2008, we entered into a purchase and sale agreement pursuant to which we
agreed to sell this project.  The purchase agreement is subject to
customary closing conditions, including the buyer’s completion of a due
diligence investigation to its satisfaction.  We expect this sale to
close in April 2008, although there is no assurance that any of the closing
conditions will be timely fulfilled or that the transaction will in fact
close.  Assuming the sale is completed as anticipated, we expect to
receive net sale proceeds (i.e. after the loan secured by this project and all
other costs of sale are paid) in excess of $26.0 million.




On March
26, 2008 we entered into a letter of intent pursuant to which we
agreed to sell substantially our entire project at 801 E. 7th
Street.  We expect to enter into a purchase agreement within a week,
and the purchase agreement would be subject to customary conditions,
including the buyer’s completion of a due diligence investigation to its
satisfaction.  We expect this sale would close in May 2008, although
there is no assurance that any of the closing conditions would be timely
fulfilled or that the transaction would in fact close.  Assuming the
sale is completed as anticipated, we expect to receive net sale proceeds (i.e.
after the loan secured by this project and all other costs of sale are paid) of
approximately $5.0 million. In accordance with SFAS 144, we classified the
project as held for sale in March 2008, subsequent to year end.  The
major classes of assets and liabilities of this project as of December 31, 2007
are as follows (in thousands):
  
 Land
              
              $
              6,497Construction
      in progress
              
              
              2,721Total
      real estate held for development
              
              
              9,218Accounts
      receivable
              
              
              3Total
      assets
              
              $
              9,221Accrued
      expenses and other  liabilities
              
              $
              42Mortgage
      notes payable
              
              $
              4,400
  F-22
 Table of Contents
 MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR
 
 NOTES
TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 (Continued)
 19. SUBSEQUENT EVENTS (Unaudited)
(Continued)   On March
26, 2008 we entered into a purchase and sale agreement pursuant to which we
agreed to sell a project we have the right to acquire at 9901
Alameda.  The purchase agreement is subject to very limited
conditions.  We expect this sale to close on March 31, 2008, although
there is no assurance that any of the closing conditions will be timely
fulfilled or that the transaction will in fact close.  Assuming the
sale is completed as anticipated, we expect to receive net proceeds (i.e. after
all costs of sale are paid) of approximately $7.0 million.
  In our
formation transactions in connection with our IPO, we acquired a contingent note
receivable held by our predecessor business. The obligor on the contingent note
receivable is an entity owned by the two affiliates described above. We refer to
this obligor as the “Taylor Yards entity.” The Taylor Yards entity in turn owns
a property that we refer to as the “Taylor Yards property.” The contingent note
receivable evidences amounts drawn under our predecessor business’ credit
facility provided by CalPERS, which amounts were loaned to the Taylor Yards
entity by our predecessor business to acquire the Taylor Yards property. The
Taylor Yards entity and the Taylor Yards property were not contributed to us as
part of our formation transactions because the Taylor Yards property was, and
remains, subject to condemnation proceedings by the Los Angeles Unified School
District. However, the amount of consideration we delivered in our formation
transactions for our initial projects to the two affiliates of Messrs.
Meruelo and Maddux was effectively reduced by an amount equivalent
to the contingent note receivable.
  Pursuant to the
arrangement, we agreed that, if and when amounts owing under the contingent note
receivable are paid and are no longer subject to litigation risk, we would issue
to affiliates of Messrs. Meruelo and Maddux a total number of shares of
common stock having a value equal to such payments (valuing the common stock for
this purpose at the per share price in our IPO), plus pay their interest at the
“applicable federal rate” in effect from the date of the IPO closing through the
date of the stock issuance. On February 14, 2007, in consideration of payments
made under the contingent note receivable, we issued a total of 275,207 shares
pursuant to the contingent issuance arrangement. In addition, on March 10, 2008,
we issued 840,000 shares to affiliates of Mssrs. Meruelo and Maddux that we had
a contingent obligation to issue based on amounts that were previously paid to
our company by the Taylor Yards entity and that have since become no longer
subject to litigation risk.  As a result of such litigation risk being
removed, the company has no contingent or other obligation to return such
amounts received.  Any further payment of the contingent note
receivable and any further contingent issuance of stock depends on the amount of
the condemnation proceeds for the Taylor Yards property.  We have a
remaining obligation to issue up to 1,421,423 additional shares if and when
amounts owing under the contingent note receivable are paid and no longer
subject to litigation risk.
   F-23
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC.





SCHEDULE III





CONSOLIDATED
REAL ESTATE AND ACCUMULATED DEPRECIATION


AS
OF DECEMBER 31, 2007 (in thousands)





Initial
      Cost
            
            
            Cost
      Capitalized Subsequent to Original Acquisition
            
            
            Gross
      Carrying Amount at December 31, 2007Project/Property
      Name
            
            Encumbrances
      at December 31, 2007
            
            
            Land
            
            
            Building
      & Improvements
            
            
            Land
            
            
            Building
      & Improvements
            
            
            Land
            
            
            Building
      & Improvements
            
            
            Total
            
            
            Accumulated
      Depreciation at December 31, 2007
            
            
            Year
      Built / Renovated
            
            
            Year
              Acquired(1)Center
      Village
            
            
            10,350
            
            
            
            16,370
            
            
            
            989
            
            
            
            6,509
            
            
            
            52
            
            
            
            22,879
            
            
            
            1,041
            
            
            
            23,920
            
            
            
            416
            
            
            1937
            
            
            2005717
      W. 9th Street
            
            
            -
            
            
            
            21,106
            
            
            
            309
            
            
            
            -
            
            
            
            36,532
            
            
            
            21,106
            
            
            
            36,841
            
            
            
            57,947
            
            
            
            -
            
            
            
            -
            
            
            20051500
      Griffith Avenue
            
            
            3,000
            
            
            
            6,857
            
            
            
            4,888
            
            
            
            -
            
            
            
            15
            
            
            
            6,857
            
            
            
            4,903
            
            
            
            11,760
            
            
            
            356
            
            
            1978
            
            
            2005Barstow
      Produce Center
            
            
            15,210
            
            
            
            2,598
            
            
            
            5,398
            
            
            
            -
            
            
            
            14,046
            
            
            
            2,598
            
            
            
            19,444
            
            
            
            22,042
            
            
            
            -
            
            
            1974
            
            
            2005Pomona
      Park Village/Pomona Retail
            
            
            8,665
            
            
            
            38,349
            
            
            
            2,804
            
            
            
            22,633
            
            
            
            1,492
            
            
            
            60,982
            
            
            
            4,296
            
            
            
            65,278
            
            
            
            1,463
            
            
            1985
            
            
            2005The
      Union Lofts
            
            
            25,721
            
            
            
            1,914
            
            
            
            8,843
            
            
            
            -
            
            
            
            28,596
            
            
            
            1,914
            
            
            
            37,439
            
            
            
            39,353
            
            
            
            -
            
            
            1928
            
            
            2005Washington
      Cold Storage
            
            
            9,707
            
            
            
            3,122
            
            
            
            9,110
            
            
            
            -
            
            
            
            33
            
            
            
            3,122
            
            
            
            9,143
            
            
            
            12,265
            
            
            
            389
            
            
            2006
            
            
            2006Wall
      Street Market
            
            
            
            
            
            
            122
            
            
            
            -
            
            
            
            -
            
            
            
            3,137
            
            
            
            122
            
            
            
            3,137
            
            
            
            3,259
            
            
            
            -
            
            
            
            -
            
            
            
            -Washington
      Produce Market
            
            
            6,150
            
            
            
            126
            
            
            
            -
            
            
            
            3,196
            
            
            
            6,257
            
            
            
            3,322
            
            
            
            6,257
            
            
            
            9,579
            
            
            
            142
            
            
            2007
            
            
            2007Citrus
      Gardens
            
            
            -
            
            
            
            4,124
            
            
            
            -
            
            
            
            -
            
            
            
            2,390
            
            
            
            4,124
            
            
            
            2,390
            
            
            
            6,514
            
            
            
            -
            
            
            
            -
            
            
            2005Covina
      Gardens
            
            
            -
            
            
            
            1,801
            
            
            
            -
            
            
            
            -
            
            
            
            768
            
            
            
            1,801
            
            
            
            768
            
            
            
            2,569
            
            
            
            -
            
            
            1970
            
            
            2004San
      Fernando Court
            
            
            -
            
            
            
            9,520
            
            
            
            -
            
            
            
            538
            
            
            
            2,908
            
            
            
            10,058
            
            
            
            2,908
            
            
            
            12,966
            
            
            
            -
            
            
            
            -
            
            
            2005Southern
      California Institute of Architects
            
            
            10,197
            
            
            
            3,164
            
            
            
            12,146
            
            
            
            -
            
            
            
            -
            
            
            
            3,164
            
            
            
            12,146
            
            
            
            15,310
            
            
            
            467
            
            
            1907
            
            
            2004Sky
      Arc
            
            
            19,000
            
            
            
            27,269
            
            
            
            -
            
            
            
            -
            
            
            
            13,473
            
            
            
            27,269
            
            
            
            13,473
            
            
            
            40,742
            
            
            
            -
            
            
            
            -
            
            
            2004Meruelo
      Baldwin Park
            
            
            -
            
            
            
            6,139
            
            
            
            268
            
            
            
            -
            
            
            
            1,839
            
            
            
            6,139
            
            
            
            2,107
            
            
            
            8,246
            
            
            
            -
            
            
            
            -
            
            
            2007Meruelo
      Wall Street
            
            
            20,721
            
            
            
            17,738
            
            
            
            13,937
            
            
            
            -
            
            
            
            137
            
            
            
            17,738
            
            
            
            14,074
            
            
            
            31,812
            
            
            
            1,417
            
            
            2000
            
            
            20045707
      S Alameda
            
            
            -
            
            
            
            3,568
            
            
            
            -
            
            
            
            420
            
            
            
            667
            
            
            
            3,988
            
            
            
            667
            
            
            
            4,655
            
            
            
            21
            
            
            1944
            
            
            2005Vignes
      Village
            
            
            -
            
            
            
            11,071
            
            
            
            -
            
            
            
            -
            
            
            
            2,009
            
            
            
            11,071
            
            
            
            2,009
            
            
            
            13,080
            
            
            
            -
            
            
            
            -
            
            
            20051211
      E Washington Blvd/Washington at Central
            
            
            -
            
            
            
            2,508
            
            
            
            4,881
            
            
            
            -
            
            
            
            192
            
            
            
            2,508
            
            
            
            5,073
            
            
            
            7,581
            
            
            
            316
            
            
            1951
            
            
            20054th
      Street Center
            
            
            -
            
            
            
            6,035
            
            
            
            53
            
            
            
            -
            
            
            
            1,067
            
            
            
            6,035
            
            
            
            1,120
            
            
            
            7,155
            
            
            
            7
            
            
            1919
            
            
            2005Desmond
      Building
            
            
            -
            
            
            
            13,786
            
            
            
            -
            
            
            
            -
            
            
            
            4,199
            
            
            
            13,786
            
            
            
            4,199
            
            
            
            17,985
            
            
            
            -
            
            
            1917
            
            
            2005620
      Gladys Ave
            
            
            5,157
            
            
            
            3,148
            
            
            
            145
            
            
            
            10,008
            
            
            
            429
            
            
            
            13,156
            
            
            
            574
            
            
            
            13,730
            
            
            
            213
            
            
            1986
            
            
            2005801
      E 7th Street
            
            
            4,400
            
            
            
            6,496
            
            
            
            1,504
            
            
            
            -
            
            
            
            1,219
            
            
            
            6,496
            
            
            
            2,723
            
            
            
            9,219
            
            
            
            -
            
            
            1951
            
            
            2007Ceres
      Street Produce Center
            
            
            -
            
            
            
            2,122
            
            
            
            -
            
            
            
            -
            
            
            
            961
            
            
            
            2,122
            
            
            
            961
            
            
            
            3,083
            
            
            
            -
            
            
            1977
            
            
            20051000
      E Cesar Chavez
            
            
            -
            
            
            
            4,563
            
            
            
            1,025
            
            
            
            -
            
            
            
            757
            
            
            
            4,563
            
            
            
            1,782
            
            
            
            6,345
            
            
            
            88
            
            
            1960
            
            
            2005230
      W Ave 26th
            
            
            -
            
            
            
            3,646
            
            
            
            2,008
            
            
            
            649
            
            
            
            434
            
            
            
            4,295
            
            
            
            2,442
            
            
            
            6,737
            
            
            
            47
            
            
            1945
            
            
            20051919
      Vineburn Avenue
            
            
            5,500
            
            
            
            4,388
            
            
            
            3,616
            
            
            
            -
            
            
            
            16
            
            
            
            4,388
            
            
            
            3,632
            
            
            
            8,020
            
            
            
            186
            
            
            1984
            
            
            20052131
      Humboldt Street
            
            
            -
            
            
            
            3,049
            
            
            
            249
            
            
            
            -
            
            
            
            12
            
            
            
            3,049
            
            
            
            261
            
            
            
            3,310
            
            
            
            145
            
            
            1946
            
            
            2005Olive
      Street Towers
            
            
            5,340
            
            
            
            13,039
            
            
            
            -
            
            
            
            -
            
            
            
            1,449
            
            
            
            13,039
            
            
            
            1,449
            
            
            
            14,488
            
            
            
            -
            
            
            
            -
            
            
            2005500
      Mateo Street
            
            
            640
            
            
            
            1,728
            
            
            
            530
            
            
            
            -
            
            
            
            -
            
            
            
            1,728
            
            
            
            530
            
            
            
            2,258
            
            
            
            26
            
            
            1953
            
            
            2006420
      Boyd Street
            
            
            5,950
            
            
            
            7,988
            
            
            
            612
            
            
            
            -
            
            
            
            -
            
            
            
            7,988
            
            
            
            612
            
            
            
            8,600
            
            
            
            102
            
            
            
            1922/1990
            
            
            20073rd
      & Omar Street
            
            
            2,599
            
            
            
            4,338
            
            
            
            375
            
            
            
            -
            
            
            
            15
            
            
            
            4,338
            
            
            
            390
            
            
            
            4,728
            
            
            
            23
            
            
            1958
            
            
            20052131
      Humboldt Street
            
            
            7,000
            
            
            
            19,609
            
            
            
            -
            
            
            
            -
            
            
            
            3,957
            
            
            
            19,609
            
            
            
            3,957
            
            
            
            23,566
            
            
            
            -
            
            
            1990
            
            
            2005Ullman
      Tower One
            
            
            11,275
            
            
            
            25,141
            
            
            
            -
            
            
            
            -
            
            
            
            5,443
            
            
            
            25,141
            
            
            
            5,443
            
            
            
            30,584
            
            
            
            -
            
            
            
            -
            
            
            2005South
      Park Towers
            
            
            25,000
            
            
            
            47,292
            
            
            
            -
            
            
            
            -
            
            
            
            17,663
            
            
            
            47,292
            
            
            
            17,663
            
            
            
            64,955
            
            
            
            -
            
            
            
            -
            
            
            2005TransAmerica
      Lofts
            
            
            -
            
            
            
            5,458
            
            
            
            -
            
            
            
            1,698
            
            
            
            1,626
            
            
            
            7,156
            
            
            
            1,626
            
            
            
            8,782
            
            
            
            473
            
            
            1970
            
            
            2004Ullman
      Tower Two
            
            
            6,397
            
            
            
            14,923
            
            
            
            -
            
            
            
            -
            
            
            
            3,007
            
            
            
            14,923
            
            
            
            3,007
            
            
            
            17,930
            
            
            
            -
            
            
            
            -
            
            
            20051800
      E Washington Blvd.
            
            
            9,100
            
            
            
            6,877
            
            
            
            5,046
            
            
            
            44
            
            
            
            34
            
            
            
            6,921
            
            
            
            5,080
            
            
            
            12,001
            
            
            
            152
            
            
            1921
            
            
            2006788
      S Alameda
            
            
            -
            
            
            
            2,799
            
            
            
            -
            
            
            
            10
            
            
            
            5,936
            
            
            
            2,809
            
            
            
            5,936
            
            
            
            8,745
            
            
            
            223
            
            
            2006
            
            
            2003Meruelo
      Chinatown Towers
            
            
            -
            
            
            
            5,273
            
            
            
            -
            
            
            
            -
            
            
            
            1,790
            
            
            
            5,273
            
            
            
            1,790
            
            
            
            7,063
            
            
            
            -
            
            
            
            -
            
            
            2003Alameda
      Square
            
            
            32,834
            
            
            
            3,920
            
            
            
            13,729
            
            
            
            65
            
            
            
            5,109
            
            
            
            3,985
            
            
            
            18,838
            
            
            
            22,823
            
            
            
            5,164
            
            
            1923
            
            
            1998Seventh
      Street Produce Market
            
            
            27,600
            
            
            
            2,043
            
            
            
            12,646
            
            
            
            -
            
            
            
            9,487
            
            
            
            2,043
            
            
            
            22,133
            
            
            
            24,176
            
            
            
            4,608
            
            
            1923
            
            
            1998Crown
      Commerce Center
            
            
            11,292
            
            
            
            4,274
            
            
            
            10,380
            
            
            
            -
            
            
            
            (165
            )
            
            
            4,274
            
            
            
            10,215
            
            
            
            14,489
            
            
            
            2,203
            
            
            1988
            
            
            2000American
      Apartments
            
            
            -
            
            
            
            506
            
            
            
            1,002
            
            
            
            -
            
            
            
            (232
            )
            
            
            506
            
            
            
            770
            
            
            
            1,276
            
            
            
            165
            
            
            1906
            
            
            1999905
      E 8th Street
            
            
            1,950
            
            
            
            893
            
            
            
            1,768
            
            
            
            456
            
            
            
            2,123
            
            
            
            1,349
            
            
            
            3,891
            
            
            
            5,240
            
            
            
            258
            
            
            2004
            
            
            2003Musica
      Latina Building
            
            
            -
            
            
            
            200
            
            
            
            418
            
            
            
            -
            
            
            
            649
            
            
            
            200
            
            
            
            1,067
            
            
            
            1,267
            
            
            
            -
            
            
            1926
            
            
            1990Overland
      Terminal
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,608
            
            
            
            -
            
            
            
            3,608
            
            
            
            3,608
            
            
            
            -
            
            
            1921
            
            
            
            -3000
      E Washington Blvd.
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,591
            
            
            
            8,228
            
            
            
            2,591
            
            
            
            8,228
            
            
            
            10,819
            
            
            
            -
            
            
            
            -
            
            
            
            -American
      Fish
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,224
            
            
            
            -
            
            
            
            1,224
            
            
            
            1,224
            
            
            
            -
            
            
            1981
            
            
            
            -Santa
      Fe Plaza
            
            
            3,165
            
            
            
            4,027
            
            
            
            1,742
            
            
            
            -
            
            
            
            145
            
            
            
            4,027
            
            
            
            1,887
            
            
            
            5,914
            
            
            
            -
            
            
            2007
            
            
            20071828
      Oak Street
            
            
            -
            
            
            
            181
            
            
            
            -
            
            
            
            -
            
            
            
            919
            
            
            
            181
            
            
            
            919
            
            
            
            1,100
            
            
            
            -
            
            
            1925
            
            
            
            -2000
      San Fernando Road
            
            
            13,474
            
            
            
            17,794
            
            
            
            2,219
            
            
            
            -
            
            
            
            -
            
            
            
            17,794
            
            
            
            2,219
            
            
            
            20,013
            
            
            
            555
            
            
            1998
            
            
            2007Camfield
      Retail Center/Gold's Gym
            
            
            -
            
            
            
            5,500
            
            
            
            -
            
            
            
            -
            
            
            
            1,899
            
            
            
            5,500
            
            
            
            1,899
            
            
            
            7,399
            
            
            
            -
            
            
            
            -
            
            
            2007307,394
            
            
            
            418,502
            
            
            
            122,640
            
            
            
            48,817
            
            
            
            197,551
            
            
            
            467,319
            
            
            
            320,191
            
            
            
            787,510
            
            
            
            19,625





(1)
            Includes
      non-cash purchase accounting adjustments made as a result of the
      IPO.


(2)
            The
      indicated year in this column is the first year in which an acquisition of
      a parcel constituting part of the entity’s project closed, if the closing
      occurred on or before December 31, 2007. If no closing occurred on or
      before December 31, 2007, no year is indicated in this column. However, in
      many cases, parcels were placed under option or other purchase arrangement
      before the indicated year as part of the land assemblage process, often
      several years before the closing. In such cases, the parcels were held, or
      are currently held, subject to the purchase rights and acquired, or will
      be acquired, upon later exercise of the
rights.


F-24
 
 Table of Contents


MERUELO
MADDUX PROPERTIES, INC. AND MERUELO MADDUX PROPERTIES PREDECESSOR





SCHEDULE
III





CONSOLIDATED
AND COMBINED REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued, in
thousands)




The
following table reconciles the historical cost of our and the Predecessor’s
investments in real estate from January 1, 2005 through December 31,
2007:




Years
      Ended December 31,2007
            
            
            2006
            
            
            2005Real
      Estate AssetsBalance,
      beginning of period
            
            $
            508,968
            
            
            $
            418,501
            
            
            $
            130,620Non-cash
      purchase accounting adjustments (1)
            
            
            94,281
            
            
            
            —
            
            
            
            —Additions
      – property acquisitions
            
            
            100,237
            
            
            
            37,059
            
            
            
            248,843–
      improvements (2)
            
            
            84,024
            
            
            
            58,884
            
            
            
            39,038Deductions
      – property dispositions
            
            
            —
            
            
            
            (5,476
            )
            
            
            —Balance,
      end of period
            
            $
            787,510
            
            
            $
            508,968
            
            
            $
            418,501Accumulated
      DepreciationBalance,
      beginning of period
            
            $
            14,159
            
            
            $
            10,852
            
            
            $
            8,430Additions
      – depreciation
            
            
            5,662
            
            
            
            3,307
            
            
            
            2,422Deductions
      – disposals
            
            
            (196
            )
            
            
            —
            
            
            
            —Balance,
      end of period
            
            $
            19,625
            
            
            $
            14,159
            
            
            $
            10,852





(1)
            Represents
      purchase accounting adjustments made to the asset base due to the
      IPO.


(2)
            Includes
      non-cash accruals for capital
items.




Depreciation
of real estate assets reflected in the statements of operations is calculated
over the estimated
original lives of the assets as follows:







Building
      and improvements
            39
      yearsTenant
      improvements
            Term of respective
      leaseTenant
      origination costs
            Term
      of respective lease


F-25
 
 Table of
Contents