##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended September 30, 2007
 o
    
    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 1-31824
 FIRST POTOMAC REALTY TRUST
  MARYLAND
    
    37-1470730(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 7600 Wisconsin Avenue, 11 th Floor, Bethesda, MD 20814
 (301) 986-9200
 þ o
  o þ o
 o þ




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##### 



FIRST POTOMAC REALTY TRUST
FORM 10-Q
 INDEX
 PagePart I: Financial InformationItem 1. Financial StatementsConsolidated balance sheets as of September 30, 2007 (unaudited) and December 31, 2006
    
    
    3Consolidated statements of operations (unaudited) for the three and nine months ended September 30, 2007 and 2006
    
    
    4Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2007 and 2006
    
    
    5Notes to consolidated financial statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35Part II: Other InformationItem 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36Signatures
 2




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##### 



FIRST POTOMAC REALTY TRUST
 September 30, 2007
    
    
    December 31, 2006(unaudited)Assets:Rental property, net
    
    $
    975,539
    
    
    $
    884,882Cash and cash equivalents
    
    
    4,210
    
    
    
    41,367Escrows and reserves
    
    
    12,146
    
    
    
    11,139Accounts and other receivables, net of
allowance for doubtful accounts of $636
and $334, respectively
    
    
    3,901
    
    
    
    4,212Accrued straight-line rents, net of
allowance for doubtful accounts of $43
and $41, respectively
    
    
    6,249
    
    
    
    4,973Deferred costs, net
    
    
    11,945
    
    
    
    9,006Prepaid expenses and other assets
    
    
    7,711
    
    
    
    6,191Intangible assets, net
    
    
    30,347
    
    
    
    32,797Total assets
    
    $
    1,052,048
    
    
    $
    994,567Liabilities:Mortgage loans
    
    $
    392,220
    
    
    $
    391,393Exchangeable senior notes, net of discount
    
    
    122,656
    
    
    
    122,234Senior notes
    
    
    75,000
    
    
    
    75,000Secured term loan
    
    
    50,000
    
    
    
    Unsecured revolving credit facility
    
    
    25,100
    
    
    
    Accounts payable and accrued expenses
    
    
    13,191
    
    
    
    8,898Accrued interest
    
    
    5,395
    
    
    
    2,420Rents received in advance
    
    
    3,311
    
    
    
    3,196Tenant security deposits
    
    
    5,407
    
    
    
    4,965Deferred market rent
    
    
    9,741
    
    
    
    8,883Total liabilities
    
    
    702,021
    
    
    
    616,989Minority interests
    
    
    11,802
    
    
    
    13,992Shareholders equity:Common shares, $0.001 par value, 100,000
common shares authorized: 24,251 and 24,127
shares issued and outstanding, respectively
    
    
    24
    
    
    
    24Additional paid-in capital
    
    
    429,555
    
    
    
    430,271Dividends in excess of accumulated earnings
    
    
    (91,354
    )
    
    
    (66,709
    )Total shareholders equity
    
    
    338,225
    
    
    
    363,586Total liabilities and shareholders equity
    
    $
    1,052,048
    
    
    $
    994,567
  3




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##### 



FIRST POTOMAC REALTY TRUST
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Rental
    
    $
    26,109
    
    
    $
    22,865
    
    
    $
    76,823
    
    
    $
    64,277Tenant reimbursements and other
    
    
    5,077
    
    
    
    4,264
    
    
    
    15,028
    
    
    
    12,450Total revenues
    
    
    31,186
    
    
    
    27,129
    
    
    
    91,851
    
    
    
    76,727Operating expenses:Property operating
    
    
    6,730
    
    
    
    5,536
    
    
    
    19,456
    
    
    
    14,652Real estate taxes and insurance
    
    
    2,933
    
    
    
    2,257
    
    
    
    8,396
    
    
    
    6,578General and administrative
    
    
    2,362
    
    
    
    2,436
    
    
    
    7,949
    
    
    
    7,500Depreciation and amortization
    
    
    9,915
    
    
    
    9,174
    
    
    
    30,255
    
    
    
    24,993Total operating expenses
    
    
    21,940
    
    
    
    19,403
    
    
    
    66,056
    
    
    
    53,723Operating income
    
    
    9,246
    
    
    
    7,726
    
    
    
    25,795
    
    
    
    23,004Other expenses (income):Interest expense
    
    
    9,137
    
    
    
    7,155
    
    
    
    26,261
    
    
    
    20,998Interest and other income
    
    
    (123
    )
    
    
    (175
    )
    
    
    (489
    )
    
    
    (743
    )Loss on interest rate lock agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    671Loss on early retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121Total other expenses
    
    
    9,014
    
    
    
    6,980
    
    
    
    25,772
    
    
    
    21,047Income from continuing operations before
minority interests
    
    
    232
    
    
    
    746
    
    
    
    23
    
    
    
    1,957Minority interests
    
    
    (7
    )
    
    
    (28
    )
    
    
    (3
    )
    
    
    (95
    )Income from continuing operations
    
    
    225
    
    
    
    718
    
    
    
    20
    
    
    
    1,862Discontinued operations:Income from operations of disposed property
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    376Gain on sale of disposed property
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,475Minority interests in discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (386
    )Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,465Net income
    
    $
    225
    
    
    $
    718
    
    
    $
    20
    
    
    $
    9,327Income per share  basic:Income from continuing operations
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.09Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.35Net income
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.44Weighted average common shares outstanding -
basic
    
    
    24,068
    
    
    
    23,168
    
    
    
    24,045
    
    
    
    21,257Income per share  diluted:Income from continuing operations
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.09Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.34Net income
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.43Weighted average common shares outstanding -
diluted
    
    
    24,192
    
    
    
    23,444
    
    
    
    24,239
    
    
    
    21,530
  4




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##### 



FIRST POTOMAC REALTY TRUST
 Nine Months Ended September 30,2007
    
    
    2006Cash flows from operating activitiesNet income
    
    $
    20
    
    
    $
    9,327Adjustments to reconcile net income to net cash provided by
operating activities:Discontinued operations:Gain on sale of property disposed
    
    
    
    
    
    
    (7,475
    )Depreciation and amortization
    
    
    
    
    
    
    3Minority interests
    
    
    
    
    
    
    386Depreciation and amortization
    
    
    30,824
    
    
    
    25,266Bad debt expense (recovery)
    
    
    397
    
    
    
    (58
    )Stock based compensation
    
    
    1,123
    
    
    
    1,344Amortization of deferred market rent
    
    
    (1,299
    )
    
    
    (1,705
    )Amortization of deferred financing costs and bond discount
    
    
    1,237
    
    
    
    655Amortization of rent abatement
    
    
    850
    
    
    
    146Minority interests
    
    
    3
    
    
    
    95Loss from early retirement of debt
    
    
    
    
    
    
    121Changes in assets and liabilities:Escrows and reserves
    
    
    (1,007
    )
    
    
    (1,709
    )Accounts and other receivables
    
    
    (46
    )
    
    
    (250
    )Accrued straight-line rents
    
    
    (1,316
    )
    
    
    (648
    )Prepaid expenses and other assets
    
    
    (2,016
    )
    
    
    (2,509
    )Tenant security deposits
    
    
    442
    
    
    
    690Accounts payable and accrued expenses
    
    
    1,771
    
    
    
    451Accrued interest
    
    
    2,975
    
    
    
    1,716Rent received in advance
    
    
    115
    
    
    
    (316
    )Deferred costs
    
    
    (3,316
    )
    
    
    (1,355
    )Total adjustments
    
    
    30,737
    
    
    
    14,848Net cash provided by operating activities
    
    
    30,757
    
    
    
    24,175Cash flows from investing activitiesPurchase deposit on future acquisitions
    
    
    
    
    
    
    (500
    )Proceeds from sale of real estate assets
    
    
    
    
    
    
    14,939Additions to rental property
    
    
    (15,523
    )
    
    
    (6,793
    )Additions to construction in process
    
    
    (8,704
    )
    
    
    (2,381
    )Acquisition of land parcels
    
    
    (5,436
    )
    
    
    (716
    )Acquisition of rental property and associated intangible assets
    
    
    (72,592
    )
    
    
    (168,041
    )Net cash used in investing activities
    
    
    (102,255
    )
    
    
    (163,492
    )Cash flows from financing activitiesFinancing costs
    
    
    (2,307
    )
    
    
    (2,087
    )Proceeds from debt
    
    
    124,500
    
    
    
    168,300Proceeds from issuance of stock, net
    
    
    
    
    
    
    90,057Repayments of debt
    
    
    (57,455
    )
    
    
    (96,578
    )Dividends to shareholders
    
    
    (24,665
    )
    
    
    (19,983
    )Distributions to minority interests
    
    
    (799
    )
    
    
    (1,082
    )Redemption of partnership units
    
    
    (5,229
    )
    
    
    Stock option exercises
    
    
    296
    
    
    
    535Net cash provided by financing activities
    
    
    34,341
    
    
    
    139,162Net decrease in cash and cash equivalents
    
    
    (37,157
    )
    
    
    (155
    )Cash and cash equivalents, beginning of period
    
    
    41,367
    
    
    
    3,356Cash and cash equivalents, end of period
    
    $
    4,210
    
    
    $
    3,201
  5




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##### 



FIRST POTOMAC REALTY TRUST
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) Description of Business
    (2) Summary of Significant Accounting Policies
 (a) Principles of Consolidation
    (b) Use of Estimates
  6




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##### 



(c) Revenue Recognition
 Accounting for Leases
  (d) Cash and Cash Equivalents
  (e) Escrows and Reserves
  (f) Rental Property
  Buildings
    
    39 yearsBuilding improvements
    
    5 to 15 yearsFurniture, fixtures and equipment
    
    5 to 15 yearsTenant improvements
    
    Shorter of the useful lives of the
assets or the terms of the related
leases
    7




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##### 



Capitalization of Interest Cost
 (g) Purchase Accounting
  
    
    value of leases based on the leasing origination costs at the date of the acquisition,
which approximates the market value of the lease origination costs had the in-place leases
been originated on the date of acquisition; the value of in-place leases represents
absorption costs for the estimated lease-up period in which vacancy and foregone revenue
are incurred;
    
    the value of above and below market in-place leases based on the present values (using a
discount rate that reflects the risks associated with the leases acquired) of the
difference between the contractual rent amounts and market rents over the remaining
non-cancelable lease terms, ranging from one to twenty years; and
    
    the intangible value of tenant or customer relationships.
  (h) Intangible Assets
 Business Combinations
  8




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##### 



Goodwill and Other Intangibles
 (i) Derivatives and Hedging
    (j) Income Taxes
  (k) Minority Interests
   9




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##### 



(l) Earnings Per Share
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator for basic and diluted per share
calculations:Income from continuing operations
    
    $
    225
    
    
    $
    718
    
    
    $
    20
    
    
    $
    1,862Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,465Net income
    
    $
    225
    
    
    $
    718
    
    
    $
    20
    
    
    $
    9,327Denominator for basic and diluted per share
calculations:Weighted average shares outstanding  basic:
    
    
    24,068
    
    
    
    23,168
    
    
    
    24,045
    
    
    
    21,257Effect of dilutive shares:Employee stock options and non-vested shares
    
    
    124
    
    
    
    276
    
    
    
    194
    
    
    
    273Denominator for diluted per share amounts
    
    
    24,192
    
    
    
    23,444
    
    
    
    24,239
    
    
    
    21,530Income per share  basic:Continuing operations
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.09Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.35Net income
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.44Income per share  diluted:Continuing operations
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.09Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.34Net income
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.43
 (m) Share-Based Compensation
 Share-Based Payment,
  10




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##### 



Stock Options Summary
   WeightedAverageRemaining
    
    
    AggregateWeighted Average
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term
    
    
    ValueOutstanding, December 31, 2006
    
    
    588,283
    
    
    $
    17.73
    
    
    7.2 years
    
    $
    6,693,254Granted
    
    
    86,850
    
    
    
    29.12Exercised
    
    
    (938
    )
    
    
    21.36Forfeited
    
    
    (8,519
    )
    
    
    26.37Outstanding, March 31, 2007
    
    
    665,676
    
    
    $
    19.10
    
    
    7.3 years
    
    $
    6,347,994Granted
    
    
    
    
    
    
    Exercised
    
    
    (1,262
    )
    
    
    17.14Forfeited
    
    
    (4,189
    )
    
    
    26.55Outstanding, June 30, 2007
    
    
    660,225
    
    
    $
    19.06
    
    
    7.1 years
    
    $
    3,445,267Granted
    
    
    
    
    
    
    Exercised
    
    
    (17,500
    )
    
    
    15.00Forfeited
    
    
    (2,031
    )
    
    
    27.70Outstanding, September 30, 2007
    
    
    640,694
    
    
    $
    19.14
    
    
    6.8 years
    
    $
    2,602,019Exercisable, September 30, 2007
    
    
    481,112
    
    
    $
    16.74
    
    
    6.3 years
    
    $
    2,565,767Options expected to vest,
September 30, 2007
    
    
    145,704
    
    
    $
    26.20
    
    
    8.4 years
    
    $
    36,252
 Option Exercises
    2007Risk-free interest rate
    
    
    4.48% - 4.70
    %Expected volatility
    
    
    21.0
    %Expected dividend yield
    
    
    4.71
    %Weighted average expected life of options
    
    5 years
 11




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##### 



Non-vested share awards
    WeightedNon-vested
    
    
    Average GrantShares

    
    

    Date Fair ValueNon-vested at December 31, 2006
    
    
    102,111
    
    
    $
    23.31Granted
    
    
    
    
    
    
    Vested
    
    
    (3,000
    )
    
    
    26.84Non-vested at March 31, 2007
    
    
    99,111
    
    
    
    23.20Granted
    
    
    78,980
    
    
    
    21.85Vested
    
    
    (3,000
    )
    
    
    26.84Non-vested at June 30, 2007
    
    
    175,091
    
    
    
    22.53Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Non-vested at September 30, 2007
    
    
    175,091
    
    
    $
    22.53
  2007
    
    2006Risk-free interest rate
    
    
    4.74
    %
    
    
    5.28
    %Volatility
    
    
    23
    %
    
    
    21
    %Market
average return (fifty-seven years of S&P 500)
    
    
    9.05
    %
    
    
    8.94
    %Total expected return
    
    
    6.3
    %
    
    
    6.6
    %
  (n) Application of New Accounting Standards
 Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109 Accounting for Income Taxes
 12




---



##### 



Fair Value Measurements
  (3) Rental Property
  September 30, 2007
    
    
    December 31, 2006Land
    
    $
    236,629
    
    
    $
    215,004Buildings and improvements
    
    
    762,353
    
    
    
    687,901Construction in process
    
    
    11,103
    
    
    
    6,980Tenant improvements
    
    
    36,948
    
    
    
    27,958Furniture, fixtures and equipment
    
    
    9,903
    
    
    
    9,8801,056,936
    
    
    
    947,723Less: accumulated depreciation
    
    
    (81,397
    )
    
    
    (62,841
    )$
    975,539
    
    
    $
    884,882
 (a) Development and Redevelopment Activity
   13




---



##### 



(b) Acquisitions
  Leased andOccupied at
    
    
    AggregateSeptember
    
    
    PurchaseLocation
    
    Acquisition Date
    
    Property Type
    
    Square Feet1
    
    
    30, 20071
    
    
    PriceGreenbrier Circle Corporate
Center
    
    Chesapeake, VA
    
    1/9/2007
    
    Business Park
    
    
    229,163
    
    
    
    90
    %
    
    $
    25,539Greenbrier Technology Center I
    
    Chesapeake, VA
    
    1/9/2007
    
    Business Park
    
    
    95,843
    
    
    
    83
    %
    
    
    10,669Pine Glen
    
    Richmond, VA
    
    2/20/2007
    
    Business Park
    
    
    86,720
    
    
    
    100
    %
    
    
    5,400Ammendale Commerce Center
    
    Beltsville, MD
    
    3/28/2007
    
    Business Park
    
    
    53,611
    
    
    
    100
    %
    
    
    10,411Rivers Bend Center II
    
    Chester, VA
    
    5/1/2007
    
    Business Park
    
    
    302,400
    
    
    
    92
    %
    
    
    17,544Annapolis Commerce Park East
    
    Annapolis, MD
    
    6/18/2007
    
    Office
    
    
    101,302
    
    
    
    99
    %
    
    
    19,048869,039
    
    
    
    
    
    
    $
    88,611
 
 1
    
    Excludes a 75,747 square foot vacant building located at Ammendale Commerce Center,
which was taken out of service upon acquisition. The building is currently being redeveloped.   Land
    
    $
    20,940Acquired tenant improvements
    
    
    2,487Building and improvements
    
    
    60,735In-place leases intangible
    
    
    5,321Acquired leasing commissions
    
    
    1,085Customer relations intangible
    
    
    3Above-market leases acquired
    
    
    840Total assets acquired
    
    
    91,411Below-market leases acquired
    
    
    (2,800
    )Debt assumed
    
    
    (8,883
    )Net assets acquired
    
    $
    79,728
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Pro forma total revenues
    
    $
    31,186
    
    
    $
    31,230
    
    
    $
    93,776
    
    
    $
    93,710Pro forma income (loss)
from continuing
operations
    
    
    270
    
    
    
    (367
    )
    
    
    (331
    )
    
    
    (1,095
    )Pro forma basic and
diluted income (loss)
per share from
continuing operations
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.05
    )
 14




---



##### 



(4) Discontinued Operations
   2006Revenue
    
    $
    443Income from operations of disposed property
    
    
    376Gain on sale of disposed property
    
    
    7,475
 (5) Debt
  September 30,
    
    
    December 31,2007
    
    
    2006Mortgage debt, effective interest rates ranging from 5.13% to 8.53%
maturing at various dates through June 2021
    
    $
    392,220
    
    
    $
    391,393Exchangeable senior notes, net of discount, effective interest rate of
4.45%, matures December 2011
    
    
    122,656
    
    
    
    122,234Series A senior notes, effective interest rate of 6.41%, matures June 2013
    
    
    37,500
    
    
    
    37,500Series B senior notes, effective interest rate of 6.55%, matures June 2016
    
    
    37,500
    
    
    
    37,500Term loan, with a variable interest rate of LIBOR + 1.10%, matures August
2010
    
    
    50,000
    
    
    
    Credit facility, with a variable interest rate of LIBOR + 1.20%, matures
April 2010
    
    
    25,100
    
    
    
    $
    664,976
    
    
    $
    588,627
 15




---



##### 



(a) Mortgage Debt
  Contractual
    
    
    Effective
    
    
    
    Earliest
    
    
    
    ContractualInterest
    
    
    Interest
    
    
    
    Maturity
    
    
    
    Maturity
    
    
    September 30,
    
    
    December 31,Property
    
    Rate
    
    
    Rate
    
    
    Date
    

    Date
    
    2007
    
    
    2006Hanover Business Center Building B1
    
    
    4.00
    %
    
    
    8.00
    %
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    1,941Herndon Corporate Center
    
    
    5.11
    %
    
    
    5.66
    %
    
    April 2008
    
    April 2008
    
    
    8,567
    
    
    
    8,654Norfolk Commerce Park II
    
    
    6.90
    %
    
    
    5.28
    %
    
    August 2008
    
    August 2008
    
    
    7,259
    
    
    
    7,453Suburban Maryland Portfolio2
    
    
    6.71
    %
    
    
    5.54
    %
    
    September 2008
    
    September 2028
    
    
    74,146
    
    
    
    75,841Glenn Dale Business Center
    
    
    7.83
    %
    
    
    5.13
    %
    
    May 2009
    
    May 2009
    
    
    8,581
    
    
    
    8,8254200 Tech Court
    
    
    8.07
    %
    
    
    8.07
    %
    
    October 2009
    
    October 2029
    
    
    1,758
    
    
    
    1,776Park Central I
    
    
    8.00
    %
    
    
    5.66
    %
    
    November 2009
    
    November 2009
    
    
    5,048
    
    
    
    5,2164212 Tech Court
    
    
    8.53
    %
    
    
    8.53
    %
    
    June 2010
    
    June 2010
    
    
    1,715
    
    
    
    1,730Park Central II
    
    
    8.32
    %
    
    
    5.66
    %
    
    November 2010
    
    November 2010
    
    
    6,267
    
    
    
    6,474Enterprise Center
    
    
    8.03
    %
    
    
    5.20
    %
    
    December 2010
    
    December 2030
    
    
    18,937
    
    
    
    19,410Indian Creek Court
    
    
    7.80
    %
    
    
    5.90
    %
    
    January 2011
    
    January 2031
    
    
    13,292
    
    
    
    13,559403 and 405 Glenn Drive
    
    
    7.60
    %
    
    
    5.50
    %
    
    July 2011
    
    July 2011
    
    
    8,854
    
    
    
    9,0374612 Navistar Drive
    
    
    7.48
    %
    
    
    5.20
    %
    
    July 2011
    
    July 2031
    
    
    13,673
    
    
    
    13,978Campus at Metro Park North
    
    
    7.11
    %
    
    
    5.25
    %
    
    February 2012
    
    February 2032
    
    
    25,076
    
    
    
    25,5941434 Crossways Blvd Building II
    
    
    7.05
    %
    
    
    5.38
    %
    
    August 2012
    
    August 2012
    
    
    10,615
    
    
    
    10,854Crossways Commerce Center
    
    
    6.70
    %
    
    
    6.70
    %
    
    October 2012
    
    October 2012
    
    
    25,468
    
    
    
    25,727Newington Business Park Center
    
    
    6.70
    %
    
    
    6.70
    %
    
    October 2012
    
    October 2012
    
    
    16,065
    
    
    
    16,229Prosperity Business Center
    
    
    6.25
    %
    
    
    5.75
    %
    
    January 2013
    
    January 2013
    
    
    3,888
    
    
    
    3,966Aquia Commerce Center I
    
    
    7.28
    %
    
    
    7.28
    %
    
    February 2013
    
    February 2013
    
    
    752
    
    
    
    8311434 Crossways Blvd Building I
    
    
    6.25
    %
    
    
    5.38
    %
    
    March 2013
    
    March 2013
    
    
    9,050
    
    
    
    9,225Linden Business Center
    
    
    6.01
    %
    
    
    5.58
    %
    
    October 2013
    
    October 2013
    
    
    7,548
    
    
    
    7,645Owings Mills Business Center
    
    
    5.85
    %
    
    
    5.75
    %
    
    March 2014
    
    March 2014
    
    
    5,764
    
    
    
    5,829Annapolis Commerce Park East
    
    
    5.74
    %
    
    
    6.25
    %
    
    June 2014
    
    June 2014
    
    
    8,861
    
    
    
    Plaza 500,
Van Buren Business    Park, Rumsey
Center, Snowden Center, Greenbrier Technology
Center II, Norfolk Business Center and
Alexandria Corporate Park
    
    
    5.19
    %
    
    
    5.19
    %
    
    August 2015
    
    August 2015
    
    
    100,000
    
    
    
    100,000Hanover Business Center:Building D
    
    
    8.88
    %
    
    
    6.63
    %
    
    August 2015
    
    August 2015
    
    
    985
    
    
    
    1,055Building C
    
    
    7.88
    %
    
    
    6.63
    %
    
    December 2017
    
    December 2017
    
    
    1,383
    
    
    
    1,452Chesterfield Business Center:Buildings C,D,G and H
    
    
    8.50
    %
    
    
    6.63
    %
    
    August 2015
    
    August 2015
    
    
    2,562
    
    
    
    2,740Buildings A,B,E and F
    
    
    7.45
    %
    
    
    6.63
    %
    
    June 2021
    
    June 2021
    
    
    2,861
    
    
    
    2,954Gateway Centre Building I
    
    
    7.35
    %
    
    
    5.88
    %
    
    November 2016
    
    November 2016
    
    
    1,684
    
    
    
    1,786Airpark Business Center
    
    
    7.45
    %
    
    
    6.63
    %
    
    June 2021
    
    June 2021
    
    
    1,561
    
    
    
    1,612Total Mortgage Debt
    
    
    
    
    
    
    5.60
    %3
    
    
    
    
    
    
    
    
    
    $
    392,220
    
    
    $
    391,393
 
 1
    
    During the second quarter, the Company prepaid the outstanding mortgage encumbering
Hanover Business Center  Building B for $1.9 million of available cash. The mortgage was due to
mature on June 15, 2016 and had a fixed interest rate of 4.0% at the time of prepayment, which was
scheduled to convert to a variable interest rate on the date of prepayment. Deferred financing
costs associated with the mortgage were inconsequential and no prepayment penalties were incurred
on the transaction.2
    
    The Suburban Maryland Portfolio consists of the following properties: Deer Park
Center, 6900 English Muffin Way, Gateway Center, Gateway West, 4451 Georgia Pacific, 20270
Goldenrod Lane, 15 Wormans Mill Court, Girard Business Center, Girard Place, Old Courthouse
Square, Patrick Center, 7561 Lindbergh Drive, West Park and Woodlands Business Center.3
    
    Weighted average interest on total mortgage debt. (b) Term Loan
   (c) Credit Facility
  16




---



##### 



(6) Segment Information
    Three Months Ended September 30, 2007Maryland
    
    
    Northern Virginia
    
    
    Southern Virginia
    
    
    ConsolidatedNumber of properties
    
    
    26
    
    
    
    19
    
    
    
    26
    
    
    
    71Number of buildings
    
    
    63
    
    
    
    48
    
    
    
    53
    
    
    
    164Square feet
    
    
    3,363,914
    
    
    
    2,978,479
    
    
    
    5,060,182
    
    
    
    11,402,575Total revenues
    
    $
    10,218
    
    
    $
    10,339
    
    
    $
    10,629
    
    
    $
    31,186Property operating expense
    
    
    (1,824
    )
    
    
    (2,080
    )
    
    
    (2,826
    )
    
    
    (6,730
    )Real estate taxes and insurance
    
    
    (951
    )
    
    
    (1,004
    )
    
    
    (978
    )
    
    
    (2,933
    )Total property operating income
    
    $
    7,443
    
    
    $
    7,255
    
    
    $
    6,825
    
    
    
    21,523Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,915
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,137
    )General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,362
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    225Total assets
    
    $
    387,470
    
    
    $
    322,705
    
    
    $
    305,171
    
    
    $
    1,052,048
 Three Months Ended September 30, 2006Maryland
    
    
    Northern Virginia
    
    
    Southern Virginia
    
    
    ConsolidatedNumber of properties
    
    
    23
    
    
    
    19
    
    
    
    20
    
    
    
    62Number of buildings
    
    
    56
    
    
    
    49
    
    
    
    43
    
    
    
    148Square feet
    
    
    2,796,455
    
    
    
    3,071,780
    
    
    
    4,139,825
    
    
    
    10,008,060Total revenues
    
    $
    8,719
    
    
    $
    9,800
    
    
    $
    8,610
    
    
    $
    27,129Property operating expense
    
    
    (1,694
    )
    
    
    (2,024
    )
    
    
    (1,818
    )
    
    
    (5,536
    )Real estate taxes and insurance
    
    
    (768
    )
    
    
    (673
    )
    
    
    (816
    )
    
    
    (2,257
    )Total property operating income
    
    $
    6,257
    
    
    $
    7,103
    
    
    $
    5,976
    
    
    
    19,336Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,174
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,155
    )General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,436
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    718Total assets
    
    $
    335,941
    
    
    $
    311,260
    
    
    $
    208,004
    
    
    $
    910,129
  17




---



##### 



Nine Months Ended September 30, 2007Maryland
    
    
    Northern Virginia
    
    
    Southern Virginia
    
    
    ConsolidatedTotal revenues
    
    $
    29,906
    
    
    $
    30,759
    
    
    $
    31,186
    
    
    $
    91,851Property operating expense
    
    
    (5,732
    )
    
    
    (6,415
    )
    
    
    (7,309
    )
    
    
    (19,456
    )Real estate taxes and insurance
    
    
    (2,698
    )
    
    
    (2,777
    )
    
    
    (2,921
    )
    
    
    (8,396
    )Total property operating income
    
    $
    21,476
    
    
    $
    21,567
    
    
    $
    20,956
    
    
    
    63,999Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,255
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,261
    )General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,949
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    486Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    20
 Nine Months Ended September 30, 2006Maryland
    
    
    Northern Virginia
    
    
    Southern Virginia
    
    
    ConsolidatedTotal revenues
    
    $
    24,410
    
    
    $
    29,331
    
    
    $
    22,986
    
    
    $
    76,727Property operating expense
    
    
    (4,383
    )
    
    
    (5,622
    )
    
    
    (4,647
    )
    
    
    (14,652
    )Real estate taxes and insurance
    
    
    (2,088
    )
    
    
    (2,323
    )
    
    
    (2,167
    )
    
    
    (6,578
    )Total property operating income
    
    $
    17,939
    
    
    $
    21,386
    
    
    $
    16,172
    
    
    
    55,497Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,993
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,998
    )General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,500
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144
    )Income from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,465Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,327
 (7) Supplemental Disclosure of Cash Flow Information
  2007
    
    2006Cash paid for interest, net
    
    $
    24,360
    
    
    $
    20,434Non-cash investing and financing activities:Issuance of common shares to trustees
    
    
    
    
    
    
    137Debt assumed in connection with acquisitions of
real estate
    
    
    8,883
    
    
    
    25,764Conversion of Operating Partnership units into
common shares
    
    
    362
    
    
    
    6,694Issuance of Operating Partnership units in exchange
for real estate property
    
    
    1,701
    
    
    
    
     18




---



##### 



The following discussion and analysis of the Companys financial condition and results of
operations should be read in conjunction with the financial statements and notes thereto appearing
elsewhere in this Form 10-Q . The discussion and analysis is derived from the consolidated
operating results and activities of First Potomac Realty Trust.
   Executive Summary
   Significant Third Quarter Transactions
 (a) Development and Redevelopment Activity
  19




---



##### 




    
    Crossways Commerce Center I  a 46,392 square foot two-story building addition is
under construction. The development costs incurred to date include architectural design,
site and building engineering, earthwork, concrete, steel, masonry, mechanical, glass,
roof, fire protection, electrical and plumbing. The Company has leased approximately
50% of the building and anticipates placing the leased portion in service during the
fourth quarter of 2007;
    
    Sterling Park Business Center  The Company began development efforts on approximately
25% of the total developable land at the property. Site planning for two business park
buildings is complete, and a 57,900 square foot building has been designed. Development
costs incurred to date include overall master and site planning, geotechnical and wetland
studies, architectural, structural, earthwork, storm water management, permit processing
and engineering design for one building. Additional development costs are being incurred
on several access roads required for the overall project acceptance and completion;
    
    1400 Cavalier Boulevard  a 96,000 square foot warehouse building is under
construction. The development costs incurred to date include site engineering, building
design, earthwork, concrete, steel masonry, roof, EIFS, painting and site work;
    
    Ammendale Commerce Center  redevelopment of a 75,747 square foot business park
building. Development costs incurred through September 30, 2007 include architectural
and engineering schematic development; and
    
    Enterprise Parkway  redevelopment of 80,000 square foot multi-tenanted office space.
Development costs incurred through September 30, 2007 include hallway renovation,
architectural and engineering design.
  (b) Other Activity
 
    
    The Company executed new leases for 254,585 square feet, including 163,089 square feet
at Enterprise Parkway, 23,591 square feet at Gateway 270 West and 20,120 square feet at
1400 Cavalier Boulevard. Rent will commence under the terms of these new leases over the
next two quarters;
    
    The Company renewed leases for 315,944 square feet, to existing tenants, which include
73,640 square feet at English Muffin Way, 40,000 square feet at Rivers Bend Center and
34,750 square feet at 4451 Georgia Pacific;
    
    On August 7, 2007, the Company entered into a $50.0 million Secured Term Loan
with Key Bank, N.A. The loan, which matures in August 2010, has a one-year extension
option and can be expanded to $100 million. Borrowings on the loan bear interest at 70 to
125 basis points over LIBOR, depending on the Companys overall leverage. The proceeds
from the loan were used to pay down a portion of the Companys unsecured revolving credit
facility and the related interest; and
    
    On August 14, 2007, the Company acquired a parcel of undeveloped land at 7501
Whitepine Road in Chesterfield County, Virginia for $0.4 million. The three-acre site is
adjacent to the Chesterfield Business Center and is zoned for a 35,700 square foot
warehouse.
 Critical Accounting Policies and Estimates
  20




---



##### 



Revenue Recognition
   Investments in Real Estate and Real Estate Entities
   Buildings
    
    39 yearsBuilding improvements
    
    5 to 15 yearsFurniture, fixtures and equipment
    
    5 to 15 yearsTenant improvements
    
    Shorter of the useful lives of the assets or the terms of the related leasesLease related intangible assets
    
    Term of related lease
   21




---



##### 



Purchase Accounting
  
    
    value of leases based on the leasing origination costs at the date of the acquisition,
which approximates the market value of the lease origination costs had the in-place leases
been originated on the date of acquisition; the value of in-place leases represents
absorption costs for the estimated lease-up period in which vacancy and foregone revenue
are incurred;
    
    the value of above and below market in-place leases based on the present values (using a
discount rate that reflects the risks associated with the leases acquired) of the
difference between the contractual rent amounts and market rents over the remaining
non-cancelable lease terms, ranging from one to twenty years; and
    
    the intangible value of tenant or customer relationships.
  Stock Compensation
 Share-Based Payment
 Results of Operations
 Comparison of the Three and Nine Months Ended September 30, 2007 to the Three and Nine Months
Ended September 30, 2006
  2007 Acquisitions
  2006 Acquisitions
   22




---



##### 



Total Revenues
  Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006
    
    Increase
    
    Change
    
    Increase
    
    ChangeRental
    
    $
    26,109
    
    
    $
    22,865
    
    
    $
    76,823
    
    
    $
    64,277
    
    
    $
    3,244
    
    
    
    14
    %
    
    $
    12,546
    
    
    
    20
    %Tenant reimbursements & other
    
    $
    5,077
    
    
    $
    4,264
    
    
    $
    15,028
    
    
    $
    12,450
    
    
    $
    813
    
    
    
    19
    %
    
    $
    2,578
    
    
    
    21
    %
 Rental Revenue
   Tenant Reimbursements and Other Revenues
   23




---



##### 



Total Expenses
 Property Operating Expenses
  Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006
    
    Increase
    
    Change
    
    Increase
    
    ChangeProperty operating
    
    $
    6,730
    
    
    $
    5,536
    
    
    $
    19,456
    
    
    $
    14,652
    
    
    $
    1,194
    
    
    
    22
    %
    
    $
    4,804
    
    
    
    33
    %Real estate taxes & insurance
    
    $
    2,933
    
    
    $
    2,257
    
    
    $
    8,396
    
    
    $
    6,578
    
    
    $
    676
    
    
    
    30
    %
    
    $
    1,818
    
    
    
    28
    %
   Other Operating Expenses
  Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006
    
    Decrease
    
    Change
    
    Increase
    
    ChangeGeneral and
administrative
    
    $
    2,362
    
    
    $
    2,436
    
    
    $
    7,949
    
    
    $
    7,500
    
    
    $
    74
    
    
    
    3
    %
    
    $
    449
    
    
    
    6
    %
   24




---



##### 



Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006
    
    Increase
    
    Change
    
    Increase
    
    ChangeDepreciation and
amortization
    
    $
    9,915
    
    
    $
    9,174
    
    
    $
    30,255
    
    
    $
    24,993
    
    
    $
    741
    
    
    
    8
    %
    
    $
    5,262
    
    
    
    21
    %
  Other Expense
  Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006
    
    Increase
    
    Change
    
    Increase
    
    ChangeInterest expense
    
    $
    9,137
    
    
    $
    7,155
    
    
    $
    26,261
    
    
    $
    20,998
    
    
    $
    1,982
    
    
    
    28
    %
    
    $
    5,263
    
    
    
    25
    %
   25




---



##### 



Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006
    
    Decrease
    
    Change
    
    Decrease
    
    ChangeInterest and other
income
    
    $
    123
    
    
    $
    175
    
    
    $
    489
    
    
    $
    743
    
    
    $
    52
    
    
    
    30
    %
    
    $
    254
    
    
    
    34
    %
   Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006
    
    Change
    
    Change
    
    Decrease
    
    ChangeLoss on interest-rate
lock agreement
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    671
    
    
    $
    
    
    
    
    
    
    
    $
    671
    
    
    
    
   Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006
    
    Change
    
    Change
    
    Decrease
    
    ChangeLoss on early
retirement of debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    121
    
    
    $
    
    
    
    
    
    
    
    $
    121
    
    
    
    
  26




---



##### 



Minority Interests
  Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    

    Percent(amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006
    
    Decrease
    
    Change
    
    Decrease
    
    ChangeMinority interests
    
    $
    7
    
    
    $
    28
    
    
    $
    3
    
    
    $
    95
    
    
    $
    21
    
    
    
    75
    %
    
    $
    92
    
    
    
    97
    %
  Income from Discontinued Operations
  Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent(amounts in thousands)
    
    2007
    
    2006
    
    2007
    
    2006
    
    Change
    
    Change
    
    Decrease
    
    ChangeIncome from
discontinued
operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,465
    
    
    $
    
    
    
    
    
    
    
    $
    7,465
    
    
    
    
  Liquidity and Capital Resources
    27




---



##### 



Cash Flows
  Nine Months Ended September 30,(amounts in thousands)
    
    2007
    
    2006
    
    ChangeCash provided by operating activities
    
    $
    30,757
    
    
    $
    24,175
    
    
    $
    6,582Cash used in investing activities
    
    $
    (102,255
    )
    
    $
    (163,492
    )
    
    $
    61,237Cash provided by financing activities
    
    $
    34,341
    
    
    $
    139,162
    
    
    $
    (104,821
    )
    Same Property Net Operating Income
  28




---



##### 



Comparison of the Three and Nine months Ended September 30, 2007 to September 30, 2006
  Total Same Property Portfolio
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    $
    
    
    %
    
    
    September 30,
    
    
    $
    
    
    %(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeNumber of properties (1)
    
    
    59
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    51
    
    
    
    
    
    
    
    Same property revenueRental
    
    $
    21,838
    
    
    $
    22,301
    
    
    $
    (463
    )
    
    
    (2.1
    )
    
    $
    57,866
    
    
    $
    58,271
    
    
    $
    (405
    )
    
    
    (0.7
    )Tenant reimbursements
    
    
    4,310
    
    
    
    4,014
    
    
    
    296
    
    
    
    7.4
    
    
    
    11,624
    
    
    
    11,385
    
    
    
    239
    
    
    
    2.1Total same property revenue
    
    
    26,148
    
    
    
    26,315
    
    
    
    (167
    )
    
    
    (0.6
    )
    
    
    69,490
    
    
    
    69,656
    
    
    
    (166
    )
    
    
    (0.2
    )Same property operating expensesProperty
    
    
    5,468
    
    
    
    5,424
    
    
    
    44
    
    
    
    0.8
    
    
    
    14,386
    
    
    
    13,620
    
    
    
    766
    
    
    
    5.6Real estate taxes and insurance
    
    
    2,500
    
    
    
    2,165
    
    
    
    335
    
    
    
    15.5
    
    
    
    6,261
    
    
    
    5,863
    
    
    
    398
    
    
    
    6.8Total same property operating
expenses
    
    
    7,968
    
    
    
    7,589
    
    
    
    379
    
    
    
    5.0
    
    
    
    20,647
    
    
    
    19,483
    
    
    
    1,164
    
    
    
    6.0Same property net operating income
    
    $
    18,180
    
    
    $
    18,726
    
    
    $
    (546
    )
    
    
    (2.9
    )
    
    $
    48,843
    
    
    $
    50,173
    
    
    $
    (1,330
    )
    
    
    (2.7
    )Reconciliation to net incomeSame property net operating income
    
    $
    18,180
    
    
    $
    18,726
    
    
    
    
    
    
    
    
    
    
    $
    48,843
    
    
    $
    50,173Non-comparable net operating income
    
    
    3,343
    
    
    
    610
    
    
    
    
    
    
    
    
    
    
    
    15,156
    
    
    
    5,324General and administrative expenses
    
    
    (2,362
    )
    
    
    (2,436
    )
    
    
    
    
    
    
    
    
    
    
    (7,949
    )
    
    
    (7,500
    )Depreciation and amortization
    
    
    (9,915
    )
    
    
    (9,174
    )
    
    
    
    
    
    
    
    
    
    
    (30,255
    )
    
    
    (24,993
    )Other expenses, net
    
    
    (9,014
    )
    
    
    (6,980
    )
    
    
    
    
    
    
    
    
    
    
    (25,772
    )
    
    
    (21,047
    )Minority interests
    
    
    (7
    )
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (95
    )Discontinued operations (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,465Net income
    
    $
    225
    
    
    $
    718
    
    
    
    
    
    
    
    
    
    
    $
    20
    
    
    $
    9,327
 Occupied at September 30,
    
    Occupied at September 30,2007
    
    2006
    
    2007
    
    2006Same Properties
    
    
    88.3
    %
    
    
    88.3
    %
    
    
    88.6
    %
    
    
    88.2
    %Non-comparable Properties(3)
    
    
    86.7
    %
    
    
    68.6
    %
    
    
    86.9
    %
    
    
    83.6
    %Total
    
    
    88.1
    %
    
    
    87.4
    %
    
    
    88.1
    %
    
    
    87.4
    %
 
 (1)
    
    Represents properties owned for the entirety of the periods presented.(2)
    
    Discontinued operations represent income from 6600 Business Parkway, which was sold in May
2006.(3)
    
    Non-comparable Properties include: Gateway 270 West, Davis Drive, Indian Creek Court, Gateway
II, Owings Mills Commerce Center, Park Central, Greenbrier Circle Corporate Center, Greenbrier
Technology Center I, Pine Glen, Ammendale Commerce Center, Rivers Bend Center II, John Marshall
Highway (Building II) and Annapolis Commerce Park East. In addition, non-comparable properties for
the nine months ended September 30, 2007 also include: Rivers Bend Center, Northridge I & II,
Crossways I, Sterling Park Business Center, 1408 Stephanie Way, Airpark Business Center,
Chesterfield Business Center and Hanover Business Center. 29




---



##### 



Maryland
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    $
    
    
    %
    
    
    September 30,
    
    
    $
    
    
    %(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeNumber of properties (1)
    
    
    21
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    21
    
    
    
    
    
    
    
    Same property revenueRental
    
    $
    6,520
    
    
    $
    6,724
    
    
    $
    (204
    )
    
    
    (3.0
    )
    
    $
    19,699
    
    
    $
    19,718
    
    
    $
    (19
    )
    
    
    (0.1
    )Tenant reimbursements
    
    
    1,367
    
    
    
    1,264
    
    
    
    103
    
    
    
    8.1
    
    
    
    4,138
    
    
    
    3,961
    
    
    
    177
    
    
    
    4.5Total same property revenue
    
    
    7,887
    
    
    
    7,988
    
    
    
    (101
    )
    
    
    (1.3
    )
    
    
    23,837
    
    
    
    23,679
    
    
    
    158
    
    
    
    0.7Same property operating expensesProperty
    
    
    1,361
    
    
    
    1,601
    
    
    
    (240
    )
    
    
    (15.0
    )
    
    
    4,605
    
    
    
    4,322
    
    
    
    283
    
    
    
    6.5Real estate taxes and insurance
    
    
    721
    
    
    
    684
    
    
    
    37
    
    
    
    5.4
    
    
    
    2,070
    
    
    
    2,004
    
    
    
    66
    
    
    
    3.3Total same property operating
expenses
    
    
    2,082
    
    
    
    2,285
    
    
    
    (203
    )
    
    
    (8.9
    )
    
    
    6,675
    
    
    
    6,326
    
    
    
    349
    
    
    
    5.5Same property net operating income
    
    $
    5,805
    
    
    $
    5,703
    
    
    $
    102
    
    
    
    1.8
    
    
    $
    17,162
    
    
    $
    17,353
    
    
    $
    (191
    )
    
    
    (1.1
    )Reconciliation to total
property operating income:Same property net operating income
    
    $
    5,805
    
    
    $
    5,703
    
    
    
    
    
    
    
    
    
    
    $
    17,162
    
    
    $
    17,353Non-comparable net operating income
    
    
    1,638
    
    
    
    554
    
    
    
    
    
    
    
    
    
    
    
    4,314
    
    
    
    586Total property operating income
    
    $
    7,443
    
    
    $
    6,257
    
    
    
    
    
    
    
    
    
    
    $
    21,476
    
    
    $
    17,939
 Occupied at September 30,
    
    Occupied at September 30,2007
    
    2006
    
    2007
    
    2006Same Properties
    
    
    91.5
    %
    
    
    93.2
    %
    
    
    91.5
    %
    
    
    93.2
    %Non-comparable Properties (2)
    
    
    81.9
    %
    
    
    66.5
    %
    
    
    81.9
    %
    
    
    66.5
    %Total
    
    
    89.4
    %
    
    
    89.3
    %
    
    
    89.4
    %
    
    
    89.3
    %
 
 (1)
    
    Represents properties owned for the entirety of the periods presented.(2)
    
    Non-comparable Properties include: Gateway 270 West, Indian Creek Court, Owings Mills Commerce
Center, Ammendale Commerce Center and Annapolis Commerce Park East. 30




---



##### 



Northern Virginia
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    $
    
    
    %
    
    
    September 30,
    
    
    $
    
    
    %(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeNumber of properties (1)
    
    
    18
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    17
    
    
    
    
    
    
    
    Same property revenueRental
    
    $
    8,422
    
    
    $
    8,505
    
    
    $
    (83
    )
    
    
    (1.0
    )
    
    $
    24,316
    
    
    $
    24,383
    
    
    $
    (67
    )
    
    
    (0.3
    )Tenant reimbursements
    
    
    1,498
    
    
    
    1,212
    
    
    
    286
    
    
    
    23.6
    
    
    
    4,005
    
    
    
    4,047
    
    
    
    (42
    )
    
    
    (1.0
    )Total same property revenue
    
    
    9,920
    
    
    
    9,717
    
    
    
    203
    
    
    
    2.1
    
    
    
    28,321
    
    
    
    28,430
    
    
    
    (109
    )
    
    
    (0.4
    )Same property operating expensesProperty
    
    
    1,931
    
    
    
    2,004
    
    
    
    (73
    )
    
    
    (3.6
    )
    
    
    5,765
    
    
    
    5,515
    
    
    
    250
    
    
    
    4.5Real estate taxes and insurance
    
    
    1,002
    
    
    
    666
    
    
    
    336
    
    
    
    50.5
    
    
    
    2,487
    
    
    
    2,175
    
    
    
    312
    
    
    
    14.3Total same property operating
expenses
    
    
    2,933
    
    
    
    2,670
    
    
    
    263
    
    
    
    9.9
    
    
    
    8,252
    
    
    
    7,690
    
    
    
    562
    
    
    
    7.3Same property net operating income
    
    $
    6,987
    
    
    $
    7,047
    
    
    $
    (60
    )
    
    
    (0.9
    )
    
    $
    20,069
    
    
    $
    20,740
    
    
    $
    (671
    )
    
    
    (3.2
    )Reconciliation to total property
operating incomeSame property net operating income
    
    $
    6,987
    
    
    $
    7,047
    
    
    
    
    
    
    
    
    
    
    $
    20,069
    
    
    $
    20,740Non-comparable net operating income
    
    
    268
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    1,498
    
    
    
    646Total property operating income
    
    $
    7,255
    
    
    $
    7,103
    
    
    
    
    
    
    
    
    
    
    $
    21,567
    
    
    $
    21,386
 Occupied at September 30,
    
    Occupied at September 30,2007
    
    2006
    
    2007
    
    2006Same Properties
    
    
    89.6
    %
    
    
    90.6
    %
    
    
    89.3
    %
    
    
    91.0
    %Non-comparable Properties(2)
    
    
    84.6
    %
    
    
    86.2
    %
    
    
    93.3
    %
    
    
    82.4
    %Total
    
    
    89.5
    %
    
    
    90.5
    %
    
    
    89.5
    %
    
    
    90.5
    %
 
 (1)
    
    Represents properties owned for the entirety of the periods presented.(2)
    
    Non-comparable Properties include: Davis Drive and John Marshall Highway (Building II) for the
three months ended September 30, 2007 and Sterling Park Business Center, Davis Drive and John
Marshall Highway (Building II) for the nine months ended September 30, 2007. 31




---



##### 



Southern Virginia
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    $
    
    
    %
    
    
    September 30,
    
    
    $
    
    
    %(dollars in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeNumber of properties (1)
    
    
    20
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    13
    
    
    
    
    
    
    
    Same property revenueRental
    
    $
    6,896
    
    
    $
    7,072
    
    
    $
    (176
    )
    
    
    (2.5
    )
    
    $
    13,851
    
    
    $
    14,170
    
    
    $
    (319
    )
    
    
    (2.3
    )Tenant reimbursements
    
    
    1,445
    
    
    
    1,538
    
    
    
    (93
    )
    
    
    (6.0
    )
    
    
    3,481
    
    
    
    3,377
    
    
    
    104
    
    
    
    3.1Total same property revenue
    
    
    8,341
    
    
    
    8,610
    
    
    
    (269
    )
    
    
    (3.1
    )
    
    
    17,332
    
    
    
    17,547
    
    
    
    (215
    )
    
    
    (1.2
    )Same property operating expensesProperty
    
    
    2,176
    
    
    
    1,819
    
    
    
    357
    
    
    
    19.6
    
    
    
    4,016
    
    
    
    3,783
    
    
    
    233
    
    
    
    6.2Real estate taxes and insurance
    
    
    777
    
    
    
    815
    
    
    
    (38
    )
    
    
    (4.7
    )
    
    
    1,704
    
    
    
    1,684
    
    
    
    20
    
    
    
    1.2Total same property operating
expenses
    
    
    2,953
    
    
    
    2,634
    
    
    
    319
    
    
    
    12.1
    
    
    
    5,720
    
    
    
    5,467
    
    
    
    253
    
    
    
    4.6Same property net operating income
    
    $
    5,388
    
    
    $
    5,976
    
    
    $
    (588
    )
    
    
    (9.8
    )
    
    $
    11,612
    
    
    $
    12,080
    
    
    $
    (468
    )
    
    
    (3.9
    )Reconciliation to total
property operating incomeSame property net operating income
    
    $
    5,388
    
    
    $
    5,976
    
    
    
    
    
    
    
    
    
    
    $
    11,612
    
    
    $
    12,080Non-comparable net operating income
    
    
    1,437
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,344
    
    
    
    4,092Total property operating income
    
    $
    6,825
    
    
    $
    5,976
    
    
    
    
    
    
    
    
    
    
    $
    20,956
    
    
    $
    16,172
 Occupied at September 30,
    
    Occupied at September 30,2007
    
    2006
    
    2007
    
    2006Same Properties
    
    
    85.5
    %
    
    
    83.9
    %
    
    
    85.2
    %
    
    
    81.3
    %Non-comparable Properties(2)
    
    
    90.4
    %
    
    
    
    %
    
    
    87.9
    %
    
    
    89.8
    %Total
    
    
    86.4
    %
    
    
    83.9
    %
    
    
    86.4
    %
    
    
    83.9
    %
 
 (1)
    
    Represents properties owned for the entirety of the periods resented.(2)
    
    Non-comparable Properties include: Gateway II, Park Central, Greenbrier Circle Corporate
Center, Greenbrier Technology Center I, Pine Glen and Rivers Bend Center II. In addition,
non-comparable properties for the nine months ended September 30, 2007 also include: Rivers Bend
Center, Northridge I & II, Crossways I, 1408 Stephanie Way, Airpark Business Center, Chesterfield
Business Center and Hanover Business Center. 32




---



##### 



Contractual Obligations
  Dividends and Distributions
   Funds From Operations
    33




---



##### 



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(amounts in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    225
    
    
    $
    718
    
    
    $
    20
    
    
    $
    9,327Add: Depreciation and
amortization of real
estate assets
    
    
    9,915
    
    
    
    9,174
    
    
    
    30,255
    
    
    
    24,993Add: Discontinued
operations
depreciation and
amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Add: Minority interests
    
    
    7
    
    
    
    28
    
    
    
    3
    
    
    
    481Less: Gain on sale of
disposed property
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,475
    )FFO available to
common shareholders
and unitholders
    
    $
    10,147
    
    
    $
    9,920
    
    
    $
    30,278
    
    
    $
    27,329Weighted average
number of diluted
common shares and
Operating Partnership
units outstanding
    
    
    25,004
    
    
    
    24,446
    
    
    
    25,037
    
    
    
    22,634
 Forward Looking Statements
      34




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##### 



PART II: OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  35




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##### 



Item 6. Exhibits
 No.
    
    Description3.1
    
    Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit
3.1 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed
with the SEC on October 1, 2003.3.2
    
    Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the
SEC on October 1, 2003.4.1
    
    Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated
September 15, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Registration
Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003.4.2
    
    Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006).4.3
    
    Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016
(incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006).4.4
    
    Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited
Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22,
2006 (incorporated by reference to Exhibit 4.3 to the Registrants Current Report on Form 8-K filed
on June 23, 2006).4.5
    
    Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference
to Exhibit 4.4 to the Registrants Current Report on Form 8-K filed on June 23, 2006).4.6
    
    Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the
Registrants Current Report on Form 8-K filed on June 23, 2006).4.7
    
    Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited
Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on
December 12, 2006).4.8
    
    Form of First Potomac Realty
Investment Limited Partnership
4.0% Exchangeable Senior Note due
2011 (incorporated by reference
to Exhibit 4.2 to the
Registrants Current Report on
Form 8-K filed on December 12,
2006).10.1
    
    Secured Term Loan Agreement, dated
August 7, 2007, by and between First
Potomac Realty Investment Limited
Partnership and Key Bank National
Association (incorporated by
reference to Exhibit 10.1 to the
Registrants Current Report on Form
8-K filed on August 10, 2007).10.2
    
    Amendment No. 1 to Secured Term Loan Agreement, dated as of
September 30, 2007, by and between First Potomac Realty Investment Limited Partnership, Key Bank National
Association and PNC Bank, National Association.31.1
    
    Certification of Chief Executive
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.)32.2
    
    Certification of Chief Financial
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.)
 36




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##### 



FIRST POTOMAC REALTY TRUSTDate: November 9, 2007
    /s/ Douglas J. DonatelliDouglas J. DonatelliChairman of the Board and Chief Executive OfficerDate: November 9, 2007
    /s/ Barry H. BassBarry H. BassExecutive Vice President and Chief Financial
Officer 37




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##### 



EXHIBIT INDEX
 No.
    
    Description3.1
    
    Amended and Restated Declaration of Trust of the Registrant (incorporated by reference to Exhibit
3.1 to the Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed
with the SEC on October 1, 2003.3.2
    
    Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrants Registration Statement on Form S-11 (Registration No. 333-107172), as filed with the
SEC on October 1, 2003.4.1
    
    Amended and Restated Agreement of Limited Partnership of First Potomac Realty Investment, L.P. dated
September 15, 2003 (incorporated by reference to Exhibit 3.3 to the Registrants Registration
Statement on Form S-11 (Registration No. 333-107172), as filed with the SEC on October 1, 2003.4.2
    
    Form of First Potomac Realty Investment Limited Partnership 6.41% Senior Notes, Series A, due 2013
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006).4.3
    
    Form of First Potomac Realty Investment Limited Partnership 6.55% Senior Notes, Series B, due 2016
(incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K as filed
with the SEC
on June 23, 2006).4.4
    
    Note Purchase Agreement by and among the Registrant, First Potomac Realty Investment Limited
Partnership and the several Purchasers listed on the signature pages thereto, dated as of June 22,
2006 (incorporated by reference to Exhibit 4.3 to the Registrants Current Report on Form 8-K filed
on June 23, 2006).4.5
    
    Trust Guaranty, entered into by the Registrant, dated as of June 22, 2006 (incorporated by reference
to Exhibit 4.4 to the Registrants Current Report on Form 8-K filed on June 23, 2006).4.6
    
    Subsidiary Guaranty, dated as of June 22, 2006 (incorporated by reference to Exhibit 4.5 to the
Registrants Current Report on Form 8-K filed on June 23, 2006).4.7
    
    Indenture, dated as of December 11, 2006, by and among First Potomac Realty Investment Limited
Partnership, the Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on
December 12, 2006).4.8
    
    Form of First Potomac Realty
Investment Limited Partnership
4.0% Exchangeable Senior Note due
2011 (incorporated by reference
to Exhibit 4.2 to the
Registrants Current Report on
Form 8-K filed on December 12,
2006).10.1
    
    Secured Term Loan Agreement, dated
August 7, 2007, by and between First
Potomac Realty Investment Limited
Partnership and Key Bank National
Association (incorporated by
reference to Exhibit 10.1 to the
Registrants Current Report on Form
8-K filed on August 10, 2007).10.2
    
    Amendment No. 1 to Secured Term Loan Agreement, dated as of
September 30, 2007, by and between First Potomac Realty Investment Limited Partnership, Key Bank National
Association and PNC Bank, National Association.31.1
    
    Certification of Chief Executive
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial
Officer pursuant to Rule
13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.)32.2
    
    Certification of Chief Financial
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002 (This exhibit shall not
be deemed filed for purposes of
Section 18 of the Securities
Exchange Act of 1934, as amended, or
otherwise subject to the liability
of that section. Further, this
exhibit shall not be deemed to be
incorporated by reference into any
filing under the Securities Act of
1933, as amended, or the Securities
Exchange Act of 1934, as amended.)