##### 



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 March 31, 2006
 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 Large Accelerated Filer
    
    þ Accelerated Filer
    
    o Non-Accelerated Filer
 o þ




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##### 



FIRST POTOMAC REALTY TRUST
FORM 10-Q
 INDEX
 PagePart I: Financial InformationItem 1. Financial StatementsCondensed consolidated balance sheets as of March 31, 2006 (unaudited) and December 31, 2005
    
    
    3Condensed consolidated statements of operations (unaudited) for the three months ended March 31, 2006 and 2005
    
    
    4Condensed consolidated statements of cash flows (unaudited) for the three months ended March 31, 2006 and 2005
    
    
    5Notes to condensed consolidated financial statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25Part II: Other InformationItem 1.
Legal Proceedings
    
    
26Item 1A.
Risk Factors


26Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds


26Item 3.
Defaults Upon Senior Securities


26Item 4.
Submission of Matters to a Vote of Security Holders


26Item 5.
Other Information
    
    
    26Item 6. Exhibits
    
    
    26Signatures
 2




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##### 



FIRST POTOMAC REALTY TRUST
  March 31, 2006(unaudited)
    
    
    December 31, 2005Assets:Rental property, net
    
    $
    741,539
    
    
    $
    668,730Assets held for sale
    
    
    7,378
    
    
    
    Cash and cash equivalents
    
    
    5,191
    
    
    
    3,356Escrows and reserves
    
    
    10,652
    
    
    
    9,818Accounts and other receivables, net of
allowance for doubtful accounts of $259 and
$339, respectively
    
    
    3,353
    
    
    
    2,705Accrued straight-line rents, net of
allowance for doubtful accounts of $56 and
$35, respectively
    
    
    3,523
    
    
    
    3,638Deferred costs, net
    
    
    7,120
    
    
    
    6,676Prepaid expenses and other assets
    
    
    3,161
    
    
    
    3,322Intangible assets, net
    
    
    32,540
    
    
    
    29,518Total assets
    
    $
    814,457
    
    
    $
    727,763Liabilities:Mortgage loans
    
    $
    367,651
    
    
    $
    369,266Credit facility
    
    
    68,000
    
    
    
    26,999Term loan
    
    
    50,000
    
    
    
    Accounts payable and accrued expenses
    
    
    4,265
    
    
    
    4,734Accrued interest
    
    
    2,596
    
    
    
    1,618Rents received in advance
    
    
    3,220
    
    
    
    2,932Tenant security deposits
    
    
    4,178
    
    
    
    3,973Deferred market rent
    
    
    8,444
    
    
    
    7,281Total liabilities
    
    
    508,354
    
    
    
    416,803Minority interests
    
    
    16,354
    
    
    
    21,629Shareholders equity:Common stock, $0.001 par value, 100,000,000
shares authorized: 20,431,255 and 20,072,755
shares issued and outstanding, respectively
    
    
    20
    
    
    
    20Additional paid-in capital
    
    
    344,103
    
    
    
    338,564Dividends in excess of accumulated earnings
    
    
    (54,374
    )
    
    
    (49,253
    )Total shareholders equity
    
    
    289,749
    
    
    
    289,331Total liabilities and shareholders equity
    
    $
    814,457
    
    
    $
    727,763
  3




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##### 



FIRST POTOMAC REALTY TRUST
  Three Months EndedMarch 31,2006
    
    
    2005Revenues:Rental
    
    $
    20,319
    
    
    $
    13,895Tenant reimbursements and other
    
    
    4,055
    
    
    
    2,240Total revenues
    
    
    24,374
    
    
    
    16,135Operating expenses:Property operating
    
    
    4,702
    
    
    
    2,997Real estate taxes and insurance
    
    
    2,172
    
    
    
    1,360General and administrative
    
    
    2,534
    
    
    
    1,871Depreciation and amortization
    
    
    7,863
    
    
    
    5,041Total operating expenses
    
    
    17,271
    
    
    
    11,269Operating income
    
    
    7,103
    
    
    
    4,866Other expenses (income):Interest expense
    
    
    6,590
    
    
    
    4,429Interest and other income
    
    
    (403
    )
    
    
    (15
    )Total other expenses
    
    
    6,187
    
    
    
    4,414Income from continuing operations before minority interests
    
    
    916
    
    
    
    452Minority interests
    
    
    (52
    )
    
    
    (40
    )Income from continuing operations
    
    
    864
    
    
    
    412Discontinued operations:Income from operations of property held for sale
    
    
    259
    
    
    
    125Minority interests in discontinued operations
    
    
    (15
    )
    
    
    (11
    )Income from discontinued operations
    
    
    244
    
    
    
    114Net income
    
    $
    1,108
    
    
    $
    526Basic and diluted net income per share:Income from continuing operations
    
    $
    0.04
    
    
    $
    0.03Income from discontinued operations
    
    
    0.01
    
    
    
    0.01Net income per share
    
    $
    0.05
    
    
    $
    0.04Weighted
average common shares outstanding  basic
    
    
    20,168
    
    
    
    14,238Weighted
average common shares outstanding  diluted
    
    
    20,403
    
    
    
    14,412
  4




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##### 



FIRST POTOMAC REALTY TRUST
  Three Months EndedMarch 31,2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    1,108
    
    
    $
    526Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    7,921
    
    
    
    5,286Non-cash stock-based compensation
    
    
    460
    
    
    
    82Bad debt (recovery) expense
    
    
    (34
    )
    
    
    129Amortization of deferred market rent
    
    
    (543
    )
    
    
    (265
    )Amortization of deferred financing costs
    
    
    209
    
    
    
    Amortization of rent abatement
    
    
    45
    
    
    
    Minority interests
    
    
    67
    
    
    
    51Changes in assets and liabilities:Escrows and reserves
    
    
    (834
    )
    
    
    (1,693
    )Accounts and other receivables
    
    
    (592
    )
    
    
    (313
    )Accrued straight-line rents
    
    
    (395
    )
    
    
    (343
    )Prepaid expenses and other assets
    
    
    79
    
    
    
    384Tenant security deposits
    
    
    205
    
    
    
    203Accounts payable and accrued expenses
    
    
    (396
    )
    
    
    (809
    )Accrued interest
    
    
    978
    
    
    
    386Rent received in advance
    
    
    288
    
    
    
    158Deferred costs
    
    
    (508
    )
    
    
    (224
    )Total adjustments
    
    
    6,950
    
    
    
    3,032Net cash provided by operating activities
    
    
    8,058
    
    
    
    3,558Cash flows from investing activitiesPurchase deposit on future acquisitions
    
    
    
    
    
    
    (1,750
    )Additions to rental property
    
    
    (941
    )
    
    
    (477
    )Acquisition of rental property and associated intangible assets
    
    
    (86,921
    )
    
    
    (11,743
    )Acquisition of land parcels
    
    
    (714
    )
    
    
    Net cash used in investing activities
    
    
    (88,576
    )
    
    
    (13,970
    )Cash flows from financing activitiesFinancing costs
    
    
    (480
    )
    
    
    Proceeds from debt
    
    
    110,500
    
    
    
    15,000Repayments of debt
    
    
    (21,114
    )
    
    
    (45,817
    )Distributions to minority interests
    
    
    (432
    )
    
    
    (361
    )Dividends to shareholders
    
    
    (6,230
    )
    
    
    (3,696
    )Proceeds from issuance of common shares, net
    
    
    
    
    
    
    44,979Stock option exercises
    
    
    109
    
    
    
    Net cash provided by financing activities
    
    
    82,353
    
    
    
    10,105Net increase (decrease) in cash and cash equivalents
    
    
    1,835
    
    
    
    (307
    )Cash and cash equivalents, beginning of the period
    
    
    3,356
    
    
    
    2,532Cash and cash equivalents, end of the period
    
    $
    5,191
    
    
    $
    2,225
  5




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##### 



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




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##### 



(e) Revenue Recognition
 Accounting for Leases
  (f) Cash and Cash Equivalents
  (g) Escrows and Reserves
  (h) Rental Property
  Buildings
    
    39 yearsBuildings 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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##### 



(i) Purchase
Accounting
 Business Combinations
  
    origination value of leases based on the unamortized capitalized leasing 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 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 including
 amounts related to the reimbursement of fixed operating costs and market rents over the remaining non-cancelable lease terms, ranging from one to eleven years;
    the intangible value of tenant or customer relationships; and
    the value of in-place leases represents absorption costs for the estimated lease-up period in which vacancy and foregone revenue are incurred.  (j) Intangible Assets
 Business Combinations
  Goodwill and Other Intangibles
 (k) Income Taxes
  (l) Minority Interests
  8




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##### 



(m) Earnings Per Share
   2006
    
    
    2005Numerator for basic and diluted per share calculations:Income from continuing operations
    
    $
    864
    
    
    $
    412Income from discontinued operations
    
    
    244
    
    
    
    114Dividends on nonvested shares
    
    
    (17
    )
    
    
    (16
    )Net income
    
    $
    1,091
    
    
    $
    510Denominator for basic per share calculations:Weighted average shares outstanding  basic
    
    
    20,168
    
    
    
    14,238Denominator for diluted per share calculations:Weighted average shares outstanding  diluted
    
    
    20,173
    
    
    
    14,238Effect of dilutive shares:Employee stock options and nonvested shares
    
    
    230
    
    
    
    174Denominator for diluted per share amounts
    
    
    20,403
    
    
    
    14,412Basic and diluted net income per share:Continuing operations
    
    $
    0.04
    
    
    $
    0.03Discontinued operations
    
    
    0.01
    
    
    
    0.01Net income
    
    $
    0.05
    
    
    $
    0.04
 (n) Share Based Compensation
 Share-Based Payment
 Accounting for Stock Based
Compensation Accounting for Stock Issued to
Employees
 9




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##### 



Option Awards
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term
    
    
    ValueOutstanding, December 31, 2005
    
    
    588,095
    
    
    $
    15.49Granted
    
    
    66,650
    
    
    
    26.60Exercised
    
    
    (7,000
    )
    
    
    15.54Forfeited
    
    
    (3,000
    )
    
    
    23.31Outstanding, March 31, 2006
    
    
    644,745
    
    
    $
    17.70
    
    
    8.0 years
    
    $
    6,558,819Exercisable, March 31, 2006
    
    
    250,595
    
    
    $
    15.83
    
    
    7.7 years
    
    $
    3,113,629
   10




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##### 



2006
    
    2005Weighted average risk free interest rate
    
    
    4.31
    %
    
    
    3.68
    %Expected volatility
    
    
    21.0
    %
    
    
    15.4
    %Expected dividend yield
    
    
    5
    %
    
    
    5
    %Weighted average expected life of options
    
    5 years
    
    5 years
 Nonvested share awards
    Weighted-Average GrantNonvested shares
    
    Shares
    
    
    Date Fair ValueNonvested at December 31, 2005
    
    
    56,124
    
    
    $
    26.40Granted
    
    
    5,167
    
    
    $
    26.60Vested
    
    
    (19,198
    )
    
    $
    26.45Forfeited
    
    
    
    
    
    
    Nonvested at March 31, 2006
    
    
    42,093
    
    
    $
    26.40
   Three Months EndedMarch 31, 2005Net income, as reported
    
    $
    526Add: total stock-based compensation
included in reported net income
    
    
    82Deduct: total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
minority interests
    
    
    (140
    )Pro forma net income
    
    $
    468Net income per share, as reported  basic
and diluted
    
    $
    0.04Pro forma net income per share  basic and
diluted
    
    $
    0.03
 11




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##### 



(2) Rental Property
  March 31, 2006
    
    
    December 31, 2005Land
    
    $
    178,742
    
    
    $
    153,762Buildings and improvements
    
    
    577,887
    
    
    
    529,842Construction in process
    
    
    273
    
    
    
    Tenant improvements
    
    
    20,865
    
    
    
    17,558Furniture, fixtures and equipment
    
    
    9,833
    
    
    
    9,794787,600
    
    
    
    710,956Less: accumulated depreciation
    
    
    (46,061
    )
    
    
    (42,226
    )$
    741,539
    
    
    $
    668,730
 Acquisitions
      Acquiredtenant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Above andimprovements
    
    
    
    
    
    
    In-place
    
    
    Customer
    
    
    (below)and
    
    
    Building and
    
    
    leases
    
    
    relations
    
    
    market leases(in thousands)
    
    Land
    
    
    commissions
    
    
    improvements
    
    
    intangible
    
    
    intangible
    
    
    acquired, net
    
    
    TotalRivers Bend Center
    
    $
    3,153
    
    
    $
    1,976
    
    
    $
    24,816
    
    
    $
    2,130
    
    
    $
    
    
    
    $
    (729
    )
    
    $
    31,346Northridge I & II
    
    
    1,172
    
    
    
    870
    
    
    
    6,683
    
    
    
    628
    
    
    
    
    
    
    
    (460
    )
    
    
    8,893Crossways I
    
    
    2,657
    
    
    
    769
    
    
    
    10,981
    
    
    
    1,183
    
    
    
    16
    
    
    
    12
    
    
    
    15,618Sterling Park
Business Center
    
    
    19,898
    
    
    
    376
    
    
    
    10,418
    
    
    
    732
    
    
    
    
    
    
    
    (360
    )
    
    
    31,064$
    26,880
    
    
    $
    3,991
    
    
    $
    52,898
    
    
    $
    4,673
    
    
    $
    16
    
    
    $
    (1,537
    )
    
    $
    86,921
  12




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##### 



Three Months EndedMarch 31,(amounts in thousands, except per share amounts)
    
    2006
    
    2005Pro forma total revenues
    
    $
    24,977
    
    
    $
    24,476Pro forma net income
    
    
    488
    
    
    
    339Pro forma basic and diluted net income per share
    
    $
    0.02
    
    
    $
    0.02
 (3) Discontinued Operations and Assets Held for Sale
 Accounting for the Impairment or Disposal of Long-Lived Assets
  Three Months EndedMarch 31,2006
    
    2005Revenues
    
    $
    307
    
    
    $
    293Income from discontinued operations
    
    $
    244
    
    
    $
    114
  Land
    
    $
    2,614Building and improvements
    
    
    5,260Accumulated depreciation
    
    
    (1,107
    )Accrued straight-line rents
    
    
    489Deferred costs, net
    
    
    107Other assets, net
    
    
    15Assets held for sale
    
    $
    7,378
 (4) Mortgage Loans and Other Debt
  March 31,
    
    
    December 31,2006
    
    
    2005Mortgage debt with interest rates ranging from 5.13%
to 8.53% maturing at various dates through November
2016
    
    $
    367,651
    
    
    $
    369,266Credit facility with a variable rate of LIBOR + 1.70%
    
    
    68,000
    
    
    
    26,999Term loan with a variable rate of LIBOR + 1.45%
    
    
    50,000
    
    
    
    $
    485,651
    
    
    $
    396,265
 13




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##### 



(a) Mortgage Debt
  March 31,
    
    
    December 31,2006
    
    
    20054200 Tech Court, 8.07%, matures October 2009.
    
    $
    1,792
    
    
    $
    1,7984212 Tech Court, 8.53% matures June 2010.
    
    
    1,744
    
    
    
    1,748Crossways Commerce Center, 6.70%, matures October 2012.
    
    
    25,969
    
    
    
    26,054Newington Business Park Center, 6.70%, matures October 2012.
    
    
    16,381
    
    
    
    16,435Interstate Plaza, 7.45%, effective interest rate of 5.30%, matures January 2007.
    
    
    8,477
    
    
    
    8,546Herndon Corporate Center, 5.11%, effective interest rate of 5.66%, matures April 2008.
    
    
    8,737
    
    
    
    8,764Aquia Commerce Center, 6.50%, matures February 2013.
    
    
    906
    
    
    
    931Suburban Maryland Portfolio, 6.71%, effective interest rate of 5.54%, matures September 2008.
    
    
    77,481
    
    
    
    78,012Norfolk Commerce Park II, 6.90%, effective interest rate of 5.28%, matures August 2008.
    
    
    7,639
    
    
    
    7,7004612 Navistar Drive, 7.48%, effective interest rate of 5.20%, matures July 2011.
    
    
    14,274
    
    
    
    14,371Campus at Metro Park North, 7.11%, effective interest rate of 5.25%, matures February 2012.
    
    
    26,096
    
    
    
    26,259Plaza 500, Van Buren Office Park, Rumsey Center, Snowden Center, Greenbrier Technology Center, Norfolk
Business Center and Alexandria Corporate Park, 5.19%, matures August 2015.
    
    
    100,000
    
    
    
    100,000Enterprise Center, 8.03%, effective interest rate of 5.20%, matures December 2010.
    
    
    19,864
    
    
    
    20,016Glenn Dale Business Center, 7.83%, effective interest rate of 5.13%, matures May 2009.
    
    
    9,058
    
    
    
    9,128Gateway Centre Manassas, 7.35%, effective interest rate of 5.88%, matures November 2016.
    
    
    1,883
    
    
    
    1,9051434 Crossways Blvd, 6.25% and 7.05%, effective interest rate of 5.38%, matures March 2013 and August 2012.
    
    
    20,472
    
    
    
    20,605403 and 405 Glenn Drive, 7.60%, effective interest rate of 5.50%, matures July 2011.
    
    
    9,213
    
    
    
    9,265Linden Business Center, 6.01%, effective interest rate of 5.58%, matures October 2013.
    
    
    7,736
    
    
    
    7,760Owings Mills Business, Center 5.85%, effective interest rate of 5.75%, matures March 2014.
    
    
    5,890
    
    
    
    5,911Prosperity Business Center, 6.25%, effective interest rate of 5.75%, matures January 2013.
    
    
    4,039
    
    
    
    4,058$
    367,651
    
    
    $
    369,266
 (b) Credit Facility
    (c) Term Loan
  14




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##### 



(5) Segment Information
  (6) Supplemental Disclosure of Cash Flow Information
  2006
    
    2005Cash paid for interest
    
    $
    6,195
    
    
    $
    4,221Non-cash investing and financing activities:Issuance of common shares to trustees
    
    
    137
    
    
    
    56Conversion
of operating partnership units into common shares
    
    
    4,910
    
    
    
    
  15




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##### 



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 First Quarter Transactions
 
    
    Acquired the following properties:
 ¡
    
    On January 19, 2006, the Company acquired Rivers Bend Center, a
four-building, 492,400-square-foot multi-tenanted flex/warehouse property in
Chester, Virginia, for $31.2 million. The acquisition was funded with borrowings
under the Companys credit facility.¡
    
    On January 19, 2006, the Company acquired Northridge I & II, a
two-building, 140,390-square-foot multi-tenanted flex/industrial property in
Ashland, Virginia, for $8.8 million. The acquisition was funded with borrowings
under the Companys credit facility.¡
    
    On February 10, 2006, the Company acquired Crossways I, a
143,398-square-foot flex/office property in Chesapeake, Virginia, for $15.5 million.
The acquisition was funded with borrowings under the Companys credit facility.¡
    
    On February 27, 2006, the Company acquired Sterling Park Business Center,
a 127,814-square-foot flex/office property and an additional 42.5 acres of
developable land zoned for light industrial and office use in Sterling, Virginia,
for $30.9 million. The acquisition was funded with borrowings under a $50 million
term loan.
 16




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##### 



Other Activity
 
    
    Reached a definitive agreement to sell 6600 Business Parkway;
    
    On February 27, 2006, the Company entered into a $50.0 million Term Loan Agreement
with Key Bank, N.A. The loan has a five-year term maturing in March 2011 with interest
payable at a variable interest rate of LIBOR plus a spread determined by the Companys
leverage levels;
    
    Recognized as other income a $0.3 million recovery from a bankruptcy claim against a
former tenant.
 Critical Accounting Policies and Estimates
   Revenue Recognition
   Investments in Real Estate and Real Estate Entities
   Buildings
    
    39 yearsBuildings 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
  17




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##### 



Accounting for the
Impairment or Disposal of Long-Lived Assets
 Purchase Accounting
 ,
 
    
    origination value of leases based on the unamortized capitalized leasing 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 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 including amounts related to the
reimbursement of fixed operating costs and market rents over the remaining non-cancelable
lease terms, ranging from one to eleven years;
    
    the intangible value of tenant or customer relationships; and
    
    the value of in-place leases represents absorption costs for the estimated lease-up
period in which vacancy and foregone revenue are incurred.
  Results of Operations
 Comparison of the Three Months Ended March 31, 2006 to the Three Months Ended March 31, 2005
  2006 Acquisitions
  18




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##### 



2005 Acquisitions
   Total Revenues
  Three Months EndedMarch 31,
    
    
    
    
    
    Percent(amounts in thousands)
    
    2006
    
    2005
    
    Increase
    
    ChangeRental revenue
    
    $
    20,319
    
    
    $
    13,895
    
    
    $
    6,424
    
    
    
    46
    %Tenant reimbursements & other
    
    
    4,055
    
    
    
    2,240
    
    
    
    1,815
    
    
    
    81
    %
 Rental Revenues
  Tenant Reimbursement and Other Revenues
  Total Expenses
 Property Operating Expenses
  Three Months EndedMarch 31,
    
    
    
    
    
    Percent(amounts in thousands)
    
    2006
    
    2005
    
    Increase
    
    ChangeProperty operating expenses
    
    $
    4,702
    
    
    $
    2,997
    
    
    $
    1,705
    
    
    
    57
    %Real estate taxes & insurance
    
    
    2,172
    
    
    
    1,360
    
    
    $
    812
    
    
    
    60
    %
 19




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##### 



Other Operating Expenses
  Three Months EndedMarch 31,
    
    
    
    
    
    Percent(amounts in thousands)
    
    2006
    
    2005
    
    Increase
    
    ChangeGeneral & administrative
    
    $
    2,534
    
    
    $
    1,871
    
    
    $
    663
    
    
    
    35
    %
   Three Months EndedMarch 31,
    
    
    
    
    
    Percent(amounts in thousands)
    
    2006
    
    2005
    
    Increase
    
    ChangeDepreciation & amortization
    
    $
    7,863
    
    
    $
    5,041
    
    
    $
    2,822
    
    
    
    56
    %
  Interest Expense
  Three Months EndedMarch 31,
    
    
    
    
    
    Percent(amounts in thousands)
    
    2006
    
    2005
    
    Increase
    
    ChangeInterest expense
    
    $
    6,590
    
    
    $
    4,429
    
    
    $
    2,161
    
    
    
    49
    %
 20




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##### 



Minority Interests
  Three Months EndedMarch 31,
    
    
    
    
    
    Percent(amounts in thousands)
    
    2006
    
    2005
    
    Increase
    
    ChangeMinority interests
    
    $
    52
    
    
    $
    40
    
    
    $
    12
    
    
    
    30
    %
  Income from Discontinued Operations
 Three Months EndedMarch 31,(amounts in thousands)
    
    2006
    
    
    2005Income from operations of property held for sale
    
    $
    259
    
    
    $
    125Minority interests in discontinued operations
    
    
    (15
    )
    
    
    (11
    )Income from discontinued operations
    
    $
    244
    
    
    $
    114
 Accounting for the Impairment or Disposal of Long-Lived Assets
 Liquidity and Capital Resources
   21




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##### 



Cash Flows
  Three Months EndedMarch 31,(Amounts in thousands)
    
    2006
    
    2005
    
    IncreaseCash provided by operating activities
    
    $
    8,058
    
    
    $
    3,558
    
    
    $
    4,500Cash used in investing activities
    
    
    (88,576
    )
    
    
    (13,970
    )
    
    
    (74,606
    )Cash provided by financing activities
    
    
    82,353
    
    
    
    10,105
    
    
    
    72,248
 22




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##### 



Dividends and Distributions
    Funds From Operations
    23




---



##### 



Funds From OperationsThree Months Ended March 31,(amounts in thousands)
    
    2006
    
    
    2005Net income
    
    $
    1,108
    
    
    $
    526Add: Real estate depreciation and
amortization
    
    
    7,863
    
    
    
    5,041Discontinued operations
depreciation and amortization
    
    
    3
    
    
    
    36Minority interests
    
    
    67
    
    
    
    51FFO available to common share and
unitholders
    
    $
    9,041
    
    
    $
    5,654Weighted average number of diluted
common shares and Operating Partnership units
outstanding
    
    
    21,675
    
    
    
    15,801
 Forward Looking Statements
  24




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##### 



25




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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.
  Douglas J. Donatelli
    
    $
    325,000Nicholas R. Smith
    
    
    250,000Barry H. Bass
    
    
    240,000James H. Dawson
    
    
    240,000Joel F. Bonder
    
    
    225,000Timothy M. Zulick
    
    
    185,000Michael H.
Comer
    
    
    170,000
 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, 2003.10.1
    
    Agreement between First Potomac Realty Investment Limited Partnership
and Louis T. Donatelli, dated as of February 28,2006 (incorporated by
reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K as filed with the SEC on March 7, 2006).10.2
    
    Agreement and Plan of Merger by and between First Potomac Management
Inc. and First Potomac Realty Trust, dated as of February 28, 2006
(incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K as filed with the SEC on March 7, 2006).10.3
    
    2006 Base Salary Compensation.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.)
 26




---



##### 



FIRST POTOMAC REALTY TRUSTDate: May 10, 2006
    
    
    
    /s/ Douglas J. DonatelliDouglas J. DonatelliPresident and Chief Executive OfficerDate: May 10, 2006
    
    
    
    /s/ Barry H. BassBarry H. BassExecutive Vice President and Chief Financial Officer
 27




---



##### 



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, 2003.10.1
    
    Agreement between First Potomac Realty Investment Limited Partnership
and Louis T. Donatelli, dated as of February 28,2006 (incorporated by
reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K as filed with the SEC on March 7, 2006).10.2
    
    Agreement and Plan of Merger by and between First Potomac Management
Inc. and First Potomac Realty Trust, dated as of February 28, 2006
(incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K as filed with the SEC on March 7, 2006).10.3
    
    2006 Base Salary Compensation.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.)