##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---

FORM 10-K/A



---



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



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

Commission file number 000-50727

For the fiscal year ended December 31,
2005



---

ARC
CORPORATE REALTY TRUST, INC.

(Exact name of registrant as specified in its charter)



---



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

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

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

Class A Common Stock

(Title of Class)



---

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

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

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

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

As of March 1, 2006, the aggregate market value
of shares of Class A Common Stock held by non affiliates of the registrant was $37,560,936.

The number of shares of the
registrants shares of Class A common stock, $.001 par value, outstanding as of March 1, 2006 was 3,181,540.

EXPLANATORY NOTE

ARC Corporate Realty Trust, Inc. (the Company) is filing this Amendment No. 2 on Form 10-K/A
(Amendment No. 2) to amend our previously filed Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on March 1, 2006 and as initially amended by Amendment
No. 1 on Form 10-K/A. The purpose of this Amendment No. 2 is to respond to comments received from the Securities and Exchange Commission. Specifically, the Company has amended its disclosures in Item 6, Item 7, Item 8 and
regarding the effectiveness of its disclosure controls and procedures contained in Item 9A pursuant to Item 307 of Regulation S-K.



---



---

##### Table of Contents

TABLE OF CONTENTS



|         |  |            |  |                                                                                                              |  |     
|-------- |  | ---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |            |  |                                                                                                              |  | Page
|Part I   |  |            |  |                                                                                                              |  |     
|         |  |            | 
|         |  | Item 1.    |  | Business                                                                                                     |  | 2   
|         |  |            | 
|         |  | Item 2.    |  | Properties                                                                                                   |  | 4   
|         |  |            | 
|         |  | Item 3.    |  | Legal Proceedings                                                                                            |  | 21  
|         |  |            | 
|         |  | Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 21  
|         |  |            | 
|Part II  |  |            |  |                                                                                                              |  |     
|         |  |            | 
|         |  | Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 22  
|         |  |            | 
|         |  | Item 6.    |  | Selected Financial Data                                                                                      |  | 24  
|         |  |            | 
|         |  | Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 25  
|         |  |            | 
|         |  | Item 7A.   |  | Quantitative and Qualitative Disclosure About Market Risk                                                    |  | 34  
|         |  |            | 
|         |  | Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 35  
|         |  |            | 
|         |  | Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 63  
|         |  |            | 
|         |  | Item 9A.   |  | Controls and Procedures                                                                                      |  | 63  
|         |  |            | 
|         |  | Item 9B.   |  | Other Information                                                                                            |  | 63  
|         |  |            | 
|Part III |  |            |  |                                                                                                              |  |     
|         |  |            | 
|         |  | Item 10.   |  | Directors and Executive Officers of the Registrant                                                           |  | 64  
|         |  |            | 
|         |  | Item 11.   |  | Executive Compensation                                                                                       |  | 66  
|         |  |            | 
|         |  | Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                                               |  | 68  
|         |  |            | 
|         |  | Item 13.   |  | Certain Relationships and Related Transactions                                                               |  | 69  
|         |  |            | 
|         |  | Item 14.   |  | Principal Accounting Fees and Services                                                                       |  | 71  
|         |  |            | 
|Part IV  |  |            |  |                                                                                                              |  |     
|         |  |            | 
|         |  | Item 15.   |  | Exhibits, Financial Statement Schedules                                                                      |  | 72  
|         |  |           
|         |  | Signatures |  | 73                                                                                                          
|         |  |            | 
|         |  | Ex-31.1:   |  | Certification                                                                                                |  |     
|         |  | Ex-31.2:   |  | Certification                                                                                                |  |     
|         |  | Ex-32.1:   |  | Certification                                                                                                |  |     
|         |  | Ex-32.2:   |  | Certification                                                                                                |  |     



1



---

##### Table of Contents

PART I

ITEM 1. BUSINESS

Cautionary Statements Concerning Forward-Looking Statements

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

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-K/A may not occur and our actual results could differ materially from those anticipated or implied in the forward-looking
statements.

General

ARC Corporate Realty Trust®, Inc., a Maryland corporation (ACRT), was formed in June 1993 and qualifies to be taxed as a real estate investment trust (REIT) under federal tax laws. ACRT is managed by its advisor, ARC
Capital Advisors, L.P., an affiliate of Mr. Ambrosi, ACRTs Chairman, President and a director. The advisor performs services for ACRT pursuant to the terms of an advisory agreement. Such services include serving as ACRTs investment
and financial advisor and providing consultation, analysis and supervision of ACRTs activities in acquiring, financing, managing and disposing of properties. The advisor also performs and supervises the various administrative duties of ACRT,
such as maintaining its books and records.

On February 8, 2006 the board of directors approved the adoption of a Plan of Liquidation
and Dissolution (the Plan). The Plan is subject to the approval of ACRTs Common stockholders, by two-thirds vote. ACRT intends to sell its real estate properties on an orderly basis, to pay or provide for its liabilities and to
distribute its remaining cash to its shareholders.

Business Strategy

ACRTs principal business strategy is the acquisition of credit lease properties throughout the United States. Credit lease properties are general
purpose retail, office and industrial properties which are each leased to one or more creditworthy tenants under a long term lease. The leases require tenants to pay most or all of the operating costs of the property, including, but not limited to,
real estate taxes and insurance, and generally provide for periodic fixed increases in base rent or additional rent based on some index tied to inflation or a percentage of tenant sales.

Each investment is secured by both the direct corporate obligation of the creditworthy tenant as well as the underlying value of the real estate.

Acquisitions are carefully selected and are diversified with respect to property type, tenant, industry segment and geographic location.
Lease expirations and debt maturities have been strategically staggered.

ACRT pursues three primary acquisition strategies:



| | (1) | acquiring properties subject to existing leases;
| | --- | ------------------------------------------------



| | (2) | cooperating with creditworthy companies or developers on build-to-suit transactions; and
| | --- | ----------------------------------------------------------------------------------------



| | (3) | structuring purchase-leaseback transactions with creditworthy companies.
| | --- | ------------------------------------------------------------------------



2



---

##### Table of Contents

Acquisitions are made directly or through investments in joint ventures, partnerships or other real
estate companies. ACRT may also lend money or structure a transaction in a way that will be treated legally as a loan by ACRT and be secured by the underlying value of the real estate.

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

On June 30, 2005 the Agreement became subject to termination. On November 30, 2005 ACRT entered into a Termination and Release
Agreement with the Purchaser. The Termination and Release Agreement called for the payment of $150,000 to ACRT from the deposit escrow and an additional payment to ACRT of $37,450 as reimbursement of survey and other costs related to the Agreement.
In exchange ACRT released the Purchaser from any further obligations under the Agreement.

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



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

ACRT anticipates that the sale of these investments will close in 2006. Based on the current sales
prices, ACRT anticipates that these investments will be sold for amounts in excess of their carrying amounts and, therefore, will result in a gain for financial reporting purposes.

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

On February 8, 2006 the board of directors approved the adoption of a Plan of Liquidation and Dissolution (the Plan). The Plan is
subject to the approval of ACRTs Common stockholders, by two-thirds vote. ACRT intends to sell its real estate properties on an orderly basis, to pay or provide for its liabilities and to distribute its remaining cash to its shareholders.

Financing Strategy

ACRT acquires property on an all-cash basis, by borrowing a portion of the purchase price through non-recourse, long-term fixed rate financing or by drawing upon ACRTs secured credit facility. Long-term fixed
rate financing will generally approximate 65% of the purchase price. ACRT believes that leverage will enhance shareholder returns and is appropriate for credit lease properties because the income has historically been reliable and predictable.
Aggregate borrowings may not exceed 75% of the value of all properties, as determined by ACRT, unless such excess is approved by a majority of the Independent Directors.

ACRT intends to hold its properties for an extended time (generally, at least five years), but may sell earlier if ACRT concludes that it would be advantageous to ACRT and the shareholders to do so.

On February 8, 2006 the board of directors approved the adoption of a Plan of Liquidation and Dissolution (the Plan). The Plan is
subject to the approval of ACRTs Common stockholders, by two-thirds vote. ACRT intends to sell its real estate properties on an orderly basis, to pay or provide for its liabilities and to distribute its remaining cash to its shareholders.

Other

ACRT operates in one industry segment, investments in credit lease properties.



3



---

##### Table of Contents

ITEM 2. PROPERTIES

As of December 31, 2005, ACRT had 28 leases with credit tenants in 20 properties
located within, or in a suburb of, the following markets: Atlanta, Georgia; Charlotte, North Carolina; Memphis, Tennessee; New York City, New York; Rochelle Park, New Jersey; Paramus, New Jersey; Woodcliff Lake, New Jersey; Philadelphia,
Pennsylvania; Fort Washington, Pennsylvania; Levittown, Pennsylvania; Kansas City, Kansas (Overland Park, Kansas); Plymouth, Indiana; Wichita, Kansas; San Antonio, Texas; and Sacramento, California.

The following is a summary of ACRTs properties as of December 31, 2005. The 2005 Annual Base Rent represents the cash rents received for the
year ended December 31, 2005. For additional information, see Description of Properties.



|                                 |  |                     |  |           |  |               |  |                            |           |                             |      |                         |     
|-------------------------------- |  | ------------------- |  | --------- |  | ------------- |  | -------------------------- | --------- | --------------------------- | ---- | ----------------------- | ----
|Tenant                           |  | Location            |  | Type      |  | SquareFootage |  | 2005 Cash RentReceived (1) |           | PrimaryLease TermExpiration |      | ExtensionOptionsThrough
|AT&T Wireless                    |  | Norcross, GA        |  | Office    |  | 22,359        |  | $                          | 269,868   |                             | 2008 |                         | None
|A.C. Moore                       |  | Montgomeryville, PA |  | Retail    |  | 25,497        |  |                            | 425,892   |                             | 2013 |                         | 2028
|Babies R Us                      |  | Paramus, NJ         |  | Retail    |  | 39,220        |  |                            | 253,110   |                             | 2018 |                         | 2043
|BCBSS                            |  | Rochelle Park, NJ   |  | Office    |  | 80,000        |  |                            | 928,202   |                             | 2014 |                         | None
|Bed Bath & Beyond                |  | Overland Park, KS   |  | Retail    |  | 50,028        |  |                            | 328,638   |                             | 2011 |                         | 2026
|Borders Books                    |  | Overland Park, KS   |  | Retail    |  | 30,000        |  |                            | 177,123   |                             | 2011 |                         | 2036
|CaroMont(2)                      |  | Charlotte, NC area  |  | Office    |  | 45,430        |  |                            | 598,412   |                             | 2015 |                         | 2035
|Circuit City                     |  | Wichita, KS         |  | Retail    |  | 37,591        |  |                            | 284,145   |                             | 2017 |                         | 2042
|GART Sports(4)                   |  | Sacramento, CA      |  | Retail    |  | 40,145        |  |                            | 515,216   |                             | 2015 |                         | 2035
|Giant Food, Inc.                 |  | Levittown, PA       |  | Retail    |  | 40,100        |  |                            | 66,406    |                             | 2007 |                         | None
|Great Atlantic & Pacific Tea Co. |  | Woodcliff Lake, NJ  |  | Retail    |  | 70,000        |  |                            | 191,858   |                             | 2021 |                         | 2061
|Hollywood Video                  |  | Marietta, GA        |  | Retail    |  | 7,488         |  |                            | 154,388   |                             | 2011 |                         | 2021
|L.A. Fitness                     |  | Fort Washington, PA |  | Retail    |  | 41,000        |  |                            | 370,800   |                             | 2018 |                         | 2033
|Levitz Furniture(5)              |  | Paramus, NJ         |  | Retail    |  | 91,103        |  |                            | 438,118   |                             | 2019 |                         | None
|National Amusements, Inc.        |  | New York, NY        |  | Retail    |  | 74,282        |  |                            | 809,674   |                             | 2019 |                         | 2044
|OfficeMax                        |  | Lilburn, GA         |  | Retail    |  | 23,532        |  |                            | 229,437   |                             | 2016 |                         | 2036
|OfficeMax                        |  | Wichita, KS         |  | Retail    |  | 30,446        |  |                            | 205,237   |                             | 2012 |                         | 2037
|Sears                            |  | San Antonio, TX     |  | Retail    |  | 34,414        |  |                            | 310,586   |                             | 2010 |                         | 2020
|The Sports Authority(4)          |  | Lilburn, GA         |  | Retail    |  | 43,393        |  |                            | 357,992   |                             | 2016 |                         | 2036
|Thomasville Furniture            |  | Montgomeryville, PA |  | Retail    |  | 15,544        |  |                            | 248,868   |                             | 2013 |                         | 2023
|Toys R Us(3)                     |  | New York, NY        |  | Retail    |  | 63,702        |  |                            | 472,881   |                             | 2019 |                         | 2039
|United Technologies, Inc.        |  | Plymouth, IN        |  | Indus.    |  | 105,600       |  |                            | 375,000   |                             | 2010 |                         | 2015
|Wade Odell Wade                  |  | Paramus, NJ         |  | Warehouse |  | 23,355        |  |                            | 74,672    |                             | 2007 |                         | None
|Walgreens Co.(3)                 |  | Memphis, TN         |  | Retail    |  | 14,294        |  |                            | 158,775   |                             | 2012 |                         | 2042
|                                 |  |                     |  |           |  |               |  |                            |           |                             |      |                         |     
|TOTAL:                           |  |                     |  |           |  | 1,048,523     |  | $                          | 8,245,298 |                             |      |                         |     
|                                 |  |                     |  |           |  |               |  |                            |           |                             |      |                         |     

---

|(1) | Represents ACRTs share of the cash rent received as of December 31, 2005. ACRT
only owns partial interests in the following properties: BCBSS (51%); Bed Bath & Beyond (49.95%); Borders Books (49.95%); Circuit City (70%); Great Atlantic and Pacific Tea Co. (11.2%); LA Fitness (50%); National Amusements Inc. (40%);
OfficeMax (70%); Toys R Us (40%); Levitz Furniture (40%); Babies R Us (40%); Wade Odell Wade (40%); and Giant Food (20%).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Four locations in the greater Charlotte, North Carolina area.
|--- | -------------------------------------------------------------

|(3) | Contains two leases.
|--- | --------------------

|(4) | In 2003, GART Sports and The Sports Authority merged.
|--- | -----------------------------------------------------

|(5) | Levitz declared bankruptcy under Chapter 11 of the U.S. Bankruptcy code and did not make
their October 2005 rent payment. All other rent payments have been made.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



4



---

##### Table of Contents

Description of Properties

A.C. Moore and Thomasville Furniture/Montgomery Property

Description. The Montgomeryville property is located in Montgomeryville, Pennsylvania at Route 309 and Stump Road and is located directly in
front of a 500,000 square foot shopping center anchored by Target, Giant Food, Barnes and Noble, Comp USA and Bed Bath and Beyond, effectively making it an out parcel to this larger development. The property is approximately 62% leased to A.C. Moore
for an initial term of 10 years and approximately 38% leased to Thomasville Furniture for an initial term of 10 years. A.C. Moore occupies 25,497 square feet and Thomasville Furniture occupies 15,544 square feet. The property is a 41,041 square foot
retail facility on approximately 3.2 acres of land and was constructed in 2003. Parking is provided for approximately 180 spaces.

A.C. Moore Lease. The property is approximately 62% leased to A.C. Moore for use as a retail facility. The initial term of the 10 year lease commenced in January 2004 and expires in December 2013. The tenant has four
successive options to extend the term for additional periods of five years each. Base rent for the initial term is $433,449 per year. During the first year of the initial term the tenant receives a rent credit of $187,500. Base rent increases by
approximately 5% for the first option period and approximately 10% for each subsequent option period. Tenant must maintain casualty and liability insurance. The tenant must reimburse ACRT for its pro rata share of real estate taxes and common area
charges. ACRT is responsible for roof, roof drainage, exterior walls and structure.

Thomasville Lease.The property is
approximately 38% leased to Thomasville for use as a retail facility. The initial term of the 10 year lease commenced in January 2004 and expires in December 2013. The tenant has 2 successive options to extend the term for additional periods of five
years each. Base rent for the first five years of the initial term is $248,868 per year and increases to $273,750 per year for the last five years of the initial term. The base rent increases to $301,125 and $331,300 per year for the first and
second option periods, respectively. Tenant must maintain casualty and liability insurance. The tenant must reimburse ACRT for its pro rata share of real estate taxes and common area charges. ACRT is responsible for roof, HVAC, structure and slab.

Acquisition. On December 31, 2003, ACRT, through a wholly owned subsidiary, acquired the property for an aggregate
purchase price of $6,900,000.

AT&T Wireless/Norcross (Atlanta) Property

Description. The property is located within the Oakbrook Business Park in Norcross (Atlanta), Georgia, and is leased to AT&T Wireless
PCS, Inc. for an initial term of 12 years. The building is a 22,359 square foot one-story brick, masonry and glass structure that was constructed in 1996 on approximately two acres of land. Parking is provided for 57 spaces.

Lease. The property is 100% leased to AT&T Wireless PCS, Inc., a wholly owned subsidiary of AT&T Corporation, for an initial term
of 12 years for general office purposes. The initial term of the lease commenced in June 1996 and expires in May 2008. The base rent is $212,411 and the rent increases approximately 10% every three years. The tenant is responsible for all real
estate taxes, insurance, utilities and expenses of the building with the exception of roof and structural repairs.

Acquisition. On April 24, 1996, ACRT, through a wholly owned subsidiary, acquired the property for cash by purchasing the sellers right to acquire the property for $1,800,750. The seller is an affiliate of ACRT and
was established specifically for this transaction. The transaction and all of its material terms were approved by the Directors (including a majority of the Independent Directors).

BCBSS/Rochelle Park Property

Description. The property is located in Rochelle Park, New Jersey at the intersection of Route 17 and Passaic Street in the Park 17 Office Center. The location is approximately one-half mile from the
intersection of Route 17, Route 4, the Garden State Parkway, and the Garden State Regional Mall. The property is leased to the Bergen County Board of Social Services (BCBSS) for an initial term of 19 years. The building was built in 1989
on 2.543 acres of land and contains three levels of office space, totaling 80,000 square feet and parking on two levels. Total parking on the premises is 312 spaces.

Lease. The property is 100% leased to the BCBSS for use as an office building. BCBSS is an independent corporate government agency established by Bergen County in 1932 to provide social services for
Bergen County and is funded by the county, state and federal governments. The initial lease term of approximately 15 years commenced on October 1, 1989. However, pursuant to an amendment to the lease in 1993, the tenant exercised all of its
renewal options so that the lease now expires on September 30, 2014. The rent was $1,540,000 per year through September 1999; is currently $1,820,000 per year through September 2009; and will be $1,840,000 per year through September 2014. The
landlord was responsible for a



5



---

##### Table of Contents

refurbishment allowance in October 2004 not to exceed $500,000. The tenant is responsible for utilities, all operating expenses in excess of the base year
amount of $190,565 and real estate taxes in excess of the base year amount of $105,271. The tenant has a right of first refusal with respect to a sale of the building.

Acquisition. In August 1995, ACRT acquired a 51% interest in Rochelle Park Investors, LP, a limited partnership, which acquired the property from WLL Real Estate Limited Partnership on August 30,
1995, for a purchase price of $11,780,000. The general partner, Rochelle Park/GP, LLC, is an affiliate of the Advisor and is responsible for the day-to-day management of the partnership and works with the Advisor in managing the property. There is
no duplication of fees paid to the general partner and Advisor in this regard. ACRT converted its ownership of the limited partnership to a 51% tenant-in-common interest in March 2003, which is accounted for under the equity method of accounting.

The partnership acquired the property with non-recourse financing of $8,500,000 at the rate of 8% per year with amortization over
22.17 years secured by the property. The loan matures on September 1, 2005.

In April 2003, ACRT became a party to a new variable rate
mortgage totaling $11,500,000, of which ACRTs share is 51%, and used the proceeds to repay the existing mortgage on the property. The new mortgage carries a variable interest rate at 205 basis points over the 30-day LIBOR and matures on
April 2, 2008. In April 2003, ACRT became a party to an interest rate cap agreement and an interest rate swap transaction, which effectively caps 50% of the interest rate of the mortgage at 7.0% and fixes the other 50% of the interest rate at
5.4%. The refinancing resulted in approximately $2,300,000 of net proceeds to be distributed to ACRT to be used for working capital and investment purposes.

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

Barnes and Noble/Philadelphia Pennsylvania, Property

Description. The property is located on approximately 0.4 acres on Rittenhouse Square between 18thand 17thStreet in
Philadelphia, Pennsylvania. The property is owned through a condominium ownership and is 100% leased under a long-term lease to Barnes and Noble Inc. The property was constructed in 1925, renovated in 1994 and is 22,743 square feet.

Lease. The initial lease term of 20 years commenced in 1997 and expires in March 2017. The rent per square foot for 2004 is $27.20. The
tenant is responsible for its pro rata share of real estate taxes, insurance, utilities and expenses of the building. ACRT is responsible for structural repairs including roof, slab and foundation.

Acquisition. On March 4, 2004, ACRT, through a wholly owned subsidiary, acquired the property for a purchase price of $7,067,000. An
option to purchase the property from the third party owner was originally held by an affiliate of the Chairman and President of ACRT. The purchase price included $1,000,000, which was paid to that affiliate by ACRT in connection with the assignment
of the option to ACRT. The property was acquired using a $5,300,000 mortgage with interest at LIBOR plus 220 basis points and matures in March 2014. In addition, at the time of acquisition ACRT entered into an interest rate cap for 50% of the
outstanding balance of the mortgage with M&T Bank, which effectively caps the interest rate at 9.2% and a interest swap on 50% of the outstanding balance of the mortgage at a fixed rate of 4.41%.

Disposition. On August 10, 2005 ACRT sold the property for $7,734,375.

Borders Books and Bed Bath & Beyond/Overland Park Property

Description. The property is located at the intersection of 119th Street and Metcalf Avenue in Overland Park (Kansas City), Kansas, and is
part of a shopping center, which presently includes a Chilis restaurant, a Boston Market restaurant, an Old Navy clothing store, an Ethan Allen furniture store and a multiplex movie theater. The property is 63% leased to Bed Bath and Beyond of
Overland Park, Inc. for an initial term of 15 years and 37% leased to Borders Inc. for an initial term of 15 years. Bed Bath & Beyond occupies 50,028 square feet and Borders Books occupies 30,000 square feet. The property is an 80,028
square foot retail facility on 7.168 acres of land and was constructed in 1995. Parking is provided for approximately 516 spaces.

Bed Bath & Beyond Lease. The property is approximately 63% leased to Bed Bath & Beyond of Overland Park, Inc. for use as a retail facility. The lease is guaranteed by the parent company, Bed Bath &
Beyond, Inc. The initial lease term of 15 years commenced in August 1995 and expires in January 2011. The tenant has three successive options to extend the term of the lease for additional periods of five years each with rent increases of 10% for
each five-year period. Base rent was $575,322 and the rent increased to $632,854 in year six and will increase to $695,889 in year eleven for the duration of the term. The tenant is responsible for maintenance of its premises. ACRT is responsible
for structural elements including the



6



---

##### Table of Contents

roof, flashings, exterior walls and floor slab and all utility lines and connections servicing the premises but located outside thereof. Maintenance of HVAC
systems was ACRTs responsibility for the first twelve months and thereafter is the tenants sole responsibility. The tenant must pay its pro-rata share of common area charges and will reimburse ACRT for its pro-rata share of real estate
taxes and insurance premiums. The tenant is responsible for all utility usage charges.

The tenant has been granted an exclusive with
respect to several of the parcels comprising the shopping center for its sale of linens and domestics, bathroom accessories, housewares, home furnishings, wall and floor coverings, decorative accessories, closet and shelving systems, and other items
typically sold in Bed Bath & Beyond stores. Other merchants in the parcels affected by the restrictions may sell the same items on an incidental basis.

Borders Inc. Lease. The property is 37% leased to Borders, Inc. for use as a retail facility. The lease to Borders, Inc. is guaranteed by the parent company, Borders Group Inc. The initial lease term of
15 years commenced in November 1995 and expires in January 2011. The tenant has five successive options to extend the term for additional periods of five years each with rent increases of 7.5% for each five year period. Initial base rent was
$330,000 and the rent increased to $354,000 in year six and will increase to $381,000 in year eleven for the duration of the term. In addition, supplemental annual rent is paid to ACRT in repayment of an improvement allowance granted to the tenant
at an interest rate of 10.5% per year over the initial term of the lease in equal monthly installments.

The tenant is responsible for
maintenance of the premises with the exception of the roof, floor slab, parapets, flashing, outer walls, capital improvements, structural portions, and underground utility installations, electrical conduits and wire. The tenant must reimburse ACRT
for the tenants pro-rata share of common area charges, real estate taxes and insurance premiums. With regard to common area maintenance and real estate taxes, the tenant received a Most Favored Tenant status whereby the tenant will
receive the most favorable terms of any tenant on the property. The tenant is responsible for all utility charges.

The tenant has been
granted an exclusive on the property for the sale of books, periodicals, video products and/or music products unless the subject matter is directly related but ancillary to the primary use of another tenant and not more than 100 square feet are
devoted to the display of such items.

Acquisition. On August 20, 1996, ACRT acquired a 49.95% interest in TMD
Development, L.L.C., a Kansas limited liability company (TMD), which owns the fee title to the property, for $1,223,503, subject to the first mortgage loan described below. The interest was acquired from three unaffiliated individuals
who continue to own the remaining 50.05% of the TMD interests. ACRT has obtained the agreement of certain of the holders of the remaining interests that they will agree to vote with ACRT on certain matters affecting the property. The day-to-day
management of the property is performed by an entity controlled by the members who control the remaining interests. ACRT has a right of first offer and right of first refusal if the remaining TMD members desire to sell all or a portion of the
remaining interests.

The property was acquired subject to a mortgage, which had a principal balance at the time of closing of $7,572,994.
Interest is payable on outstanding principal at a rate of 7.78% per year and amortization is based upon a 30-year schedule. The loan matures in March 2006. ACRT plans to refinance the mortgage using a line of credit.

CaroMont/Charlotte Area Properties

Description. The properties consist of four medical office buildings located in the Greater Charlotte, North Carolina metropolitan area. Specific information concerning the size, location and material
lease terms are summarized in the table below. Each property is 100% leased to CaroMont Medical Group, Inc. for a term of 15 years. Each property consists of a single story building constructed from masonry and glass with a steel frame. Parking for
each property meets or exceeds municipal requirements.

Leases. Each property is 100% leased to CaroMont Medical Group, Inc.
for medical, dental and general office purposes pursuant to four separate leases. The leases commenced January 2001 and expire in December 2015. The rent shown below is net to ACRT as the tenant is responsible for all real estate taxes, insurance
premiums, utilities and all other building operation expenses. The tenant is also responsible for performing all on-site maintenance of the properties.

The initial annual rent is increased by 1.5% in each subsequent year. Each lease offers the tenant two ten-year renewal options with the annual rental continuing to increase at the aforesaid specified rate.



7



---

##### Table of Contents

Each lease grants the tenant an option to expand the building at a lease rate which is based upon
prevailing interest rates, amortization schedules and ACRTs cost of financing such expansion at the time the tenant exercises its expansion option. In the event the premises are expanded, ACRT has the right to extend the term of the particular
lease so that a minimum of fifteen years remain on the term. The tenant has a right of first offer in the event ACRT wishes to sell a property.



|                                                  |  |                  |  |                      |  |            |  |                  |        
|------------------------------------------------- |  | ---------------- |  | -------------------- |  | ---------- |  | ---------------- | -------
|Location                                          |  | Lot Size (acres) |  | Building Size (s.f.) |  | Lease Term |  | 2005 Annual Rent
|2711 X-Ray Dr. CaroMont Hosp. Campus Gastonia, NC |  | 3.38             |  | 18,654               |  | 15 years   |  | $                | 257,383
|209 Park St. Belmont, NC                          |  | 2.57             |  | 14,829               |  | 15 years   |  | $                | 188,868
|700 N. Main St. Stanley, NC                       |  | 3.12             |  | 8,323                |  | 15 years   |  | $                | 106,005
|214 N. Cleveland Ave. Kings Mountain, NC          |  | 3.10             |  | 3,624                |  | 15 years   |  | $                | 46,156 

Acquisition. In December 2000, ACRT, through separate wholly owned limited liability
companies, acquired seven properties in a sale-leaseback transaction from the tenant, CaroMont Medical Group, Inc. and Gaston Memorial Hospital, Incorporated for an aggregate purchase price of $7,800,000.

Financing. On December 7, 2001, ACRT entered into a mortgage totaling $4,500,000. This mortgage carries a variable interest rate of
225 basis points over LIBOR and matures in December 2011.

Disposition.In 2001, ACRT sold three of the original seven
properties for $1,724,206, net of closing costs and broker commissions.

Circuit City and OfficeMax/Wichita
Property

Description. The property is located at the intersection of Kellogg Drive (Highway 54) and Ridge Road
in Wichita, Kansas, and is part of a shopping center which presently includes a Kohls department store. The property is approximately 55% leased to Circuit City Stores, Inc. for an initial term of 20 years and approximately 45% leased to
OfficeMax, Inc. for an initial term of 15 years. Circuit City occupies 37,591 square feet and OfficeMax occupies 30,446 square feet. The property is a 68,037 square foot retail facility on 5.92 acres of land and was constructed in 1996. Parking is
provided for 574 spaces.

Circuit City Lease. The property is 55% leased to Circuit City for use as a retail facility. The
initial lease term of approximately 20 years commenced in November 1996 and expires in January 2017. Tenant has five successive options to extend the term of the lease for additional periods of five years each. Initial base rent was $368,392 and the
rent increased in year six to $405,983, and increases every five years thereafter by the lesser of 10% or the percentage increase in the Consumer Price Index. The increases to base rent during the renewal terms are determined by the same formula.
The tenant is responsible for maintenance of its premises excluding the structural elements and roof. The tenant must also pay its pro-rata share of common area charges and will reimburse ACRT for its pro-rata share of real estate taxes. The tenant
is responsible for all utility usage charges and insurance premiums.

The tenant has been granted an exclusive in the shopping center for
the sale of consumer, office and automotive electronics products, computer hardware or software and entertainment media, cellular telephones, and household appliances, subject only to the rights of Kohls, a tenant in an adjacent shopping
center not owned by ACRT.

OfficeMax Lease. The property is 45% leased to OfficeMax, Inc. to be used as a retail facility.
The initial lease term of 15 years commenced in February 1997 and expires in January 2012. The tenant has five successive options to extend the term for additional periods of five years each. Initial base rent was $277,972 and the rent increased to
$293,195 in year six and will increase to $308,418 in year eleven for the duration of the term. Rent during the extension periods increase approximately 4.7% for each five-year period. The tenant is responsible for maintenance of the premises with
the exception of the roof, structural elements and parking lot repairs and in the final three years of the lease. ACRT is responsible for HVAC and sprinkler replacement. The tenant must reimburse ACRT for the tenants proportionate share of
common area maintenance costs, insurance premiums and real estate taxes. With regard to special assessments, the tenant has a cap of $.16 per square foot and no liability for payments after 1999. The sellers agreed to fund any shortfall on account
of the tenants cap on special assessments. See Acquisition below.



8



---

##### Table of Contents

The tenant has been granted an exclusive in the shopping center for the sale of office, home office,
school or business supplies or equipment; office furniture, electronics and copy center. The lease, however, recognizes the priority of Circuit Citys and Kohls pre-existing use. There is a possibility that the exclusive rights granted to
OfficeMax against the portion of the shopping center occupied by Kohls would not be enforceable against a subsequent tenant occupying Kohls premises after a termination of the Kohls lease. In the event the OfficeMax exclusive is
violated, tenant has the right to terminate the lease or pay a reduced rental. If this occurs, the sellers agreed to subordinate their right to distributions such that ACRT would get all of the cash flow from the property, including the
sellers portion thereof. See Acquisition. OfficeMax also has a co-tenancy clause, which allows it to pay a reduced rental in the event both Circuit City and Kohls no longer occupy the shopping center and no suitable
replacement can be found.

Acquisition. On December 31, 1996, ACRT, through a wholly owned subsidiary, acquired a 70%
interest in Rebox Development, L.L.C., a Kansas limited liability company (Rebox), which owns the fee title to the property, for $891,695, with ACRT taking title subject to the first mortgage loan described below. The interest was
acquired from three unaffiliated individuals who continue to own the remaining 30% of the Rebox interests. ACRT has control over the disposition of Reboxs assets and the property. The day-to-day management of the property is provided by an
entity controlled by the sellers.

With respect to the OfficeMax lease, the sellers have agreed to fund to Rebox any amounts owed on
account of special assessments in the event Rebox is unable to pass said costs through to OfficeMax. ACRT has a right of offset against distributions due to the sellers in the event the sellers fail to fund this obligation. The sellers have also
agreed to subordinate their right to receive distributions in the event OfficeMax exercises certain of its rights with respect to its exclusive. ACRT has a right of first offer and right of first refusal if the sellers desire to sell all or a
portion of their remaining interests.

The property was acquired subject to a first mortgage loan which has a principal balance of
$4,900,000. Interest is payable on outstanding principal at a rate of 8.65% per year and amortization is based upon a 25-year schedule. The loan matures in March 2008, at which time a balloon payment of $3,734,983 will be required.

Federal Express/Memphis Property

Description. The property is located in the MIAC Industrial Park at the intersection of Memphis International Airport Center Drive and Prescott Boulevard. The property is adjacent to Memphis
International Airport and is approximately one-half mile from Federal Express World Headquarters. The property is 100% leased to Federal Express Corporation for an initial term of ten years. The property is a 30,000 square foot one-story brick,
glass, and concrete tilt wall steel frame structure on 4.13 acres which was constructed in 1994. The paved parking area has 145 spaces.

Lease. The property is 100% leased to Federal Express Corporation for use as an office/training center. The initial lease term of approximately 10 years commenced in February 1994 and expired in February 2004. The tenant had
one renewal option of five years. The rent is $279,300 per year during the first five years of the initial term and $296,100 during the final five years of the initial term. On January 15, 2004, ACRT entered into a lease extension on this
property through February 14, 2009 at the following rents: February 2004 to February 2007, $210,000 per year and February 2007 to February 2009, $240,000 per year. In addition, ACRT is obligated to pay a tenant improvement allowance of $146,971
to the tenant. The tenant is responsible for utilities, non-structural maintenance and repairs, insurance, common area maintenance, landscaping and property taxes.

Federal Express has the option during the initial term of the lease to lease an addition to the building of up to 7,500 square feet to be erected in order to enlarge the floor area of the building; provided, however,
that if the tenant exercises its right to expand on or after the eighth anniversary of the commencement date, tenant must simultaneously exercise its option to renew. The basic rent under the lease will be increased by an amount mutually agreeable
to landlord and tenant for the period from the date of completion of the expansion.

Acquisition. In June 1994, ACRT, through
a wholly owned subsidiary, acquired the property from an unaffiliated third party for a purchase price of $2,650,000.

Disposition. On March 25, 2004, ACRT entered into an agreement to sell this property. The property was sold on April 30, 2004 for approximately $2,325,000.



9



---

##### Table of Contents

GART Sports/Sacramento Property

Description. The Sacramento property is located in Sacramento, California at 1700 Challenge Way (a/k/a 1700 Arden Way) and located across
from the Arden Way regional mall. The property is 100% leased to GART Sports Company (GART), the successor by merger to Sportmart, Inc., for an initial term of 20 years for use as a retail facility. The store, on the 2.97 acre property,
is a 40,145 square foot one-story concrete block structure, with a wood and stucco veneer, which was constructed in 1985. The paved parking area has 112 spaces with the right to use additional parking spaces at the adjacent site.

Lease. The property is 100% leased to GART for use as a retail sale facility for sporting goods, athletic apparel and related goods. In
2003, GART merged with The Sports Authority. The initial lease term of approximately 20 years commenced in August 1994 and expires in January 2015. The tenant has two renewal options of 10 years each. The base rent was $462,250 per year until
January 31, 2005 and then increased on February 1, 2005 based upon a formula tied to increases in the Consumer Price Index to a maximum of $520,031 for the duration of the initial lease term. The tenant is responsible for utilities,
structural and non-structural maintenance and repairs, insurance, common area maintenance, landscaping and property taxes.

The tenant has
been granted a right of first offer, effective after the second lease year, in the event landlord desires to sell the property. ACRT is obligated to first offer the tenant the right to purchase the property on terms and conditions that ACRT would
accept on the open market. If the tenant declines to purchase the property, ACRT has the right to sell the property to any third party on substantially the same terms and conditions offered to the tenant within 120 days after notice of the
tenants decision not to purchase. If the 120 day period expires, or if ACRT wishes to sell the property on terms and conditions which are materially different, ACRT must again offer the property to the tenant.

ACRT is prohibited from entering into a lease with another tenant for a use involving the sale of sporting goods, sports apparel and athletic footwear
within a two-mile radius of the property. In the event of a taking by the state through eminent domain or other similar action of (1) any portion of the building, (2) 15% of the parking area, or (3) which results in a permanent denial
of access from Arden Way, the lease provides for payment of the first $5,160,000 of any condemnation award to ACRT, and for the excess to be split evenly between ACRT and the tenant.

Acquisition. On December 1, 1994, ACRT, through a wholly owned subsidiary, acquired the property from an unaffiliated third party for
a purchase price of $4,550,000.

On December 31, 2002, ACRT entered into a new variable rate mortgage totaling $4,414,500 and utilized
a portion of the proceeds to repay the existing mortgage on the property. The refinancing resulted in approximately $1,307,000 of net proceeds being distributed to ACRT, which were used for working capital and investment purposes. The new mortgage
carries a variable interest rate of 206 basis points over 30-day LIBOR and matures on December 31, 2007. On January 15, 2003, ACRT entered into an interest rate cap transaction with PNC Bank which effectively caps the interest rate on the
mortgage at 7.45%.

Great Atlantic and Pacific Tea Co./Woodcliff Lake, New Jersey Property

Description. The property is located on approximately 7.26 acres at 500 Chestnut Ridge Road, Woodcliff Lake, New Jersey. The
70,000 square foot property is 100% leased under a long-term lease to The Great Atlantic and Pacific Tea Co.

Lease. The
property is 100% leased to the Great Atlantic and Pacific Tea Co. for an initial term of 25 years commencing in February 1996. The rent per square foot for 2004 is $24.47. The tenant is responsible for real estate taxes, insurance, utilities and
expenses of the building.

Acquisition. On March 31, 2004, ACRT acquired an 11.2% limited partnership interest in the
partnership, which owns the property, from an existing partner for a purchase price of $691,000.

Hollywood
Video/Marietta (Atlanta) Property

Description. The property is located at Route 120 and Barrett Parkway in
Marietta (Atlanta), Georgia. The property is an out parcel of a shopping center, which is anchored by a Target store. The property is leased to Hollywood Entertainment Corporation for an initial term of 15 years. The 7,488 square foot retail
facility on 0.75 acres of land is constructed of brick, masonry and glass and was completed in December 1996. There is on-site parking with 46 spaces.



10



---

##### Table of Contents

Lease. The property is 100% leased to Hollywood Entertainment Corporation for use as a
Hollywood Video store. The initial lease term of 15 years commenced in December 1996 and expires in December 2011. The tenant has two fiveyear renewal options. The initial annual base rent was $138,031 for the first five years with an
adjustment in year six to $154,388, which was based upon the percentage increase in the Consumer Price Index for All Urban Consumers, provided that the increase did not exceed 12% of the annual rent during the first five-year period. Annual base
rent during the renewal terms are determined in accordance with the same formula. The tenant is responsible for all real estate taxes, insurance premiums, utilities, operating expenses and roof and structure maintenance.

Acquisition. On March 31, 1997, ACRT, through a wholly owned subsidiary, acquired the property for cash for a purchase price of
$1,315,000.

LA Fitness/Ft. Washington Property

Description. The property is located in Ft. Washington, Montgomery County, Pennsylvania on seven acres of land at the intersection of
Virginia Drive and Office Center Drive. The approximately 41,000 square foot building was completed in December 2003 and is leased to L.A. Fitness with a January 2004 rent commencement date. There is on-site parking with 289 spaces.

Lease.The property is 100% leased to L.A. Fitness International. The initial lease term of fifteen years commenced in January 2004. The
tenant has three five-year renewal options at an increased rental. The base rent for years one through five is $741,600. The rent increases every five years by the lesser of CPI or 10%. The tenant is responsible for all property expenses and real
estate taxes.

Acquisition.In December 2002, ACRT acquired a 50% limited partnership interest in Fort Washington Fitness,
LP, a Pennsylvania limited partnership, for a cash investment of $1,000,000 plus its pro-rata share of Fort Washington Fitness, LPs obligation under the construction and permanent loan. The remaining 50% partnership interest in Fort Washington
Fitness, LP is held by Cedar Shopping Centers, Inc., an NYSE-listed REIT (CDR). The day-to-day management of the property will be performed by an entity controlled by Cedar. ACRT is entitled to a 12% preferred return on its equity
investment and has a priority with respect to refinancing and sale proceeds distributed to the partners. ACRT has a right of first refusal and tag-along rights if Cedar desires to sell all or a portion of the property or Cedars interest in the
partnership. ACRT also can force a sale of the property after 2006 and at anytime under certain circumstances.

The property was acquired
subject to a combination construction/permanent mortgage in the amount of $5,000,000. The interest rate during construction is 275 basis points over 90-day LIBOR with a floor rate of 5.75%. The three year mini-permanent loan is at 275 basis points
over 90-day LIBOR with a floor rate of 5.75%. The principal and interest payment schedule is based upon a 25-year amortization.

Proposed Transaction.ACRT expects to sell this property to its joint venture partner in the first half of 2006, as discussed in Item 1. Business Strategy above.

Toys R Us and National Amusements, Inc./New York City Property

Description. The property is located in New York City (Queens), New York on the Whitestone Expressway at the intersection of 28thAvenue. The property is leased to Toys R Us under two separate leases for a Toys R Us and Kids R Us facility and National
Amusements, Inc. In 2003, Kids R Us announced it would cease operations. It closed this location on May 1, 2004, and subsequently subleased this location to Office Depot. The property was built and completed in July 1999 and consists of
approximately 139,000 square feet located on 9.75 acres of land. The building has two levels with the movie theater occupying the entire second level. There are 1,200 spaces available for parking including off-site parking.

Toys R Us Leases. The property is approximately 45% leased to Toys R Us NY LLC for use as a retail facility. Toys R Us executed two
separate leases, one for 43,999 square feet for use as a Toys R Us store and the other for 19,703 square feet for use as a Kids R Us store. The leases are guaranteed by the parent company, Toys R Us Delaware, Inc. The initial lease term of 20 years
commenced upon the completion of construction in July 1999 and expires in July 2019. The tenant has four successive options to extend the term of the leases for additional periods of five years each with rent increases for each five-year period.
Minimum base rent initially is $1,082,934 per year for years 1 through 5 and the rent increases to the lesser of:



| |  | the product of the minimum base rent for year one and twice the percentage increase in the Consumer Price Index or
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | the following minimum base rentals:
| | - | -----------------------------------



| |  | $1,191,227 per year for years 6 through 11;
| | - | -------------------------------------------



11



---

##### Table of Contents

| |  | $1,310,350 per year for years 11 through 15; and
| | - | ------------------------------------------------



| |  | $1,441,576 per year for years 16 through 20.
| | - | --------------------------------------------

During the
renewal periods, the tenant would also be obligated to pay percentage rent if sales exceed certain specified breakpoints. The tenant is responsible for maintaining the premises and the landlord is responsible for the structural elements including
the roof and parking areas. The tenant must pay its pro-rata share of common charges and will reimburse the landlord for its pro-rata share of real estate taxes and insurance premiums. The tenant is responsible for all utility charges.

Toys R Us has been granted an exclusive for the sale of items customarily carried by a modern toy store and childrens specialty store and the
exclusive also applies to certain other property owned by Triangle Equities, Inc. (Triangle), ACRTs joint venture partner in this transaction and developer of the project. Triangle has agreed to hold ACRT harmless in the event this
exclusive is breached as a result of activities on its other properties.

National Amusements, Inc. Lease. The property is
approximately 55% leased to National Amusements, Inc. for use as a 12-screen multiplex movie theater. The initial lease term of 20 years commenced upon the tenants occupancy in May 1999 and expires in May 2019. The tenant has five successive
options to extend the term of the lease for additional periods of five years each with rent increases of approximately 9% for each five-year period. Base rent will be:



| |  | $1,983,487 for the first 5 years;
| | - | ---------------------------------



| |  | $2,024,175 in year 6;
| | - | ---------------------



| |  | $2,206,175 in years 7 through 11; and
| | - | -------------------------------------



| |  | $2,404,508 in years 12 through 15, for the duration of the term.
| | - | ----------------------------------------------------------------

The tenant is also obligated to pay percentage rent on 8% to 10% of gross sales above specified breakpoints. The tenant is responsible for maintenance of its premises and the landlord is responsible for the structural elements including the
roof and parking areas. The tenant must pay its pro-rata share of common charges and will reimburse the landlord for its pro-rata share of real estate taxes and insurance premiums. The tenant is responsible for all utility charges.

The tenant has been granted an exclusive with respect to the property for its use as a movie theater.

Joint Venture. In June 1998, ACRT acquired a 40% interest in Triangle Plaza II LLC, a New York limited liability company (TP II
LLC), for a cash investment of $4,473,900 plus its pro-rata share of TP II LLCs obligation under the construction loan and permanent loan. The remaining 60% of the TP II LLC interests are held by Triangle. The day-to-day management of
the property will be performed by an entity controlled by Triangle. ACRT is entitled to a 12% preferred return on its equity invested and has a preferred position with respect to refinancing or sales proceeds distributed. ACRT has a right of first
refusal and tag along rights if Triangle desires to sell all or a portion of the property or Triangles interest in TP II LLC.

Nomura
Asset Capital Corporation (Nomura) provided a combination construction/permanent loan. Upon completion of construction, permanent loan proceeds were to be $24,600,000. The interest rate of the Nomura permanent loan was 7.57% and was
amortized over a period of 30 years. In August 2000, TP II LLC refinanced the Nomura permanent loan with a new permanent loan from CIBC totaling $26,307,584 at an interest rate of 7.44% and amortization over a 30-year schedule. The new loan has a
10-year term. The refinance resulted in approximately $1,400,000 of net proceeds distributed to ACRT.

Proposed Transaction.On March 25, 2005, Whitestone Triangle LP (Whitestone) a wholly owned subsidiary of ACRT and the 40% owner of the New York City property brought suit against its joint venture partner regarding the exercise of a right of
first refusal to purchase ACRTs interest in the property. On January 5, 2005, Whitestone sent to the joint venture partner a notice of right of first refusal to purchase Whitestones interest in the property at a price and other
terms as set forth in the notice, subject to an attached form of contract that required both shareholder and board of director approval. Subsequently, ACRT discovered that the calculation used to allocate capital proceeds in the contemplated sale,
prepared by a third party, was incorrectly allocated and as a result management and the board of directors of ACRT did not approve the terms of the sale. In addition, ACRT believes the joint venture partner, due to their unique insight into the
value of the interest as the manager of the property, was aware that the capital proceeds were incorrectly allocated. The joint venture partner has refused to accept a revised purchase price calculation, which necessitated ACRT bringing suit to halt
the sale.

On April 1, 2005, ACRTs joint venture partner filed a separate lawsuit against Whitestone compelling a sale of
ACRTs interest under the terms of the original right of first refusal.



12



---

##### Table of Contents

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

The Sports Authority and OfficeMax/Lilburn (Atlanta) Property

Description. The property is located at U.S. Highway 78 and Payton Drive, in Lilburn (Atlanta), Gwinnett County, Georgia. The property is
approximately 65% leased to The Sports Authority for an initial lease term of 20 years and approximately 35% leased to OfficeMax for an initial lease term of 20 years. The Sports Authority occupies 43,393 square feet and OfficeMax occupies 23,532
square feet for a total of 66,925 square feet on approximately seven acres of land. The building was constructed in 1996 and consists of steel frame and masonry construction. Parking is provided for approximately 340 parking spaces.

The Sports Authority Lease. The property is approximately 65% leased to The Sports Authority for use as a retail facility. In 2003, The
Sports Authority and GART Sports Company merged. The initial lease term of 20 years commenced on May 23, 1996, and expires on May 31, 2016. The tenant has four successive options to extend the term of the lease for additional periods of
five years each. Base rent for the initial term was $357,992. Base rent increases by 5% for each five-year option period. The tenant is responsible for maintaining its premises, including its roof and parking areas, as well as all utility charges.
The tenant must maintain casualty and liability insurance; however, the tenant may self-insure its obligations to restore so long as its net worth exceeds $100,000,000. The tenant will reimburse ACRT for its pro-rata share of all real estate taxes.
ACRT is responsible for maintenance and repair of the structure and underground utilities and for parking area replacement.

The tenant has
been given an exclusive for the sale of sporting goods, including athletic sportswear and apparel, athletic footwear and general recreational merchandise.

OfficeMax Lease. The property is approximately 35% leased to OfficeMax for use as a retail facility. The initial lease term of 20 years commenced June 6, 1996, and expires on June 30, 2016. The
tenant has four successive options to extend the term of the lease for additional periods of five years each. Base rent for the initial term is $229,437. Base rent increases $11,766 for each five-year option period. The tenant is responsible for
maintaining the premises, building systems and all utility charges. The tenant will reimburse ACRT for its pro-rata share of all real estate taxes, casualty insurance premiums and parking area maintenance. ACRT is responsible for maintenance and
repair of the roof and structure and for parking area replacement.

The tenant has been given an exclusive for the sale of office products,
including school products, business supplies and equipment and office furniture and electronics.

Acquisition. On
September 24, 1997, ACRT, through a wholly owned subsidiary, acquired the property for a purchase price of $5,958,000.

ACRT acquired
the property and assumed the existing first mortgage loan, which had an outstanding principal balance of $4,544,830. Interest is payable on outstanding principal at the rate of 8.49% per year and amortization is based upon a 30-year schedule.
The loan matures in July 2017.

Sears/San Antonio Property

Description. The property is located at Northwest Loop 410 in San Antonio, Texas. The property is leased to Sears, Roebuck and Co. for an
initial term of 15 years and consists of a one-story steel frame retail facility with an aluminum and glass storefront on 3.48 acres. The property was constructed in October 1995 and consists of 34,414 square feet with a paved parking area of 168
spaces.

Lease. The property is 100% leased to Sears, Roebuck and Co. for use as a Sears Homelife Furniture Store retail
sales facility. The initial lease term of approximately 15 years commenced upon completion of construction in October 1995 and expires in September 2010. The tenant has two renewal options of five years each at an increased rental. The base rent as
of the commencement date was $289,077; rent increased in the sixth year to $306,285 and in eleventh year to $323,492. The tenant is responsible for the cost of all insurance premiums, and real estate taxes and maintenance of the buildings
interior and heating, ventilation and air conditioning system. Tenant is also responsible for the costs of exterior and public area maintenance, subject to a cap of $.78 per square foot that increases by 6% annually. ACRT is responsible for repair
and replacement of the buildings structure, roof, parking areas and certain building systems. On July 11, 2001, the Sears



13



---

##### Table of Contents

Homelife store was closed. On October 1, 2001, the tenant vacated the property. Sears Roebuck & Co., as the guarantor on the lease, has
continued to pay rent on a current basis and, as of November 2003, it has subleased this property to BEL Furniture Co. for the remainder of the original lease term.

Acquisition. On December 29, 1995, ACRT, through a wholly owned subsidiary, acquired the property from an unaffiliated third party for an aggregate purchase price of $2,817,500.

The property was acquired with non-recourse financing of $2,000,000 at an interest rate of 7.72% per year with amortization over 25 years. The loan
matured in January 2006 and was repaid in January 2006 with proceeds from ACRTs line of credit.

United
Technologies Automotive/Plymouth Property

Description. The property is located in Plymouth, Indiana, within the
700-acre Plymouth Industrial Development Park, near the intersection of Routes 30 and 31. The building was constructed under a build-to-suit lease for United Technologies Automotive, Inc. (UTA) and was completed in August 1994. The
105,600 square foot building on approximately 30 acres of land is being used by UTA as a distribution center.

Lease. The
property is 100% leased to UTA. The lease is guaranteed by UTAs parent company, United Technologies Corporation. The initial lease term of 15 years commenced in December 1995 and expires in December 2010. The lease may be renewed by the tenant
for either a five-year period with two additional option periods of five years each on the same terms as the lease; or for a 10-year period with one additional option period for five years on the same terms and conditions as in the lease except that
the rental increases in the option period are 6% for the first five years and 7.5% each five years thereafter. The initial base rent was $315,000, which increases approximately 6% every three years. The tenant is responsible for all property
expenses and real estate taxes.

The tenant has an option to expand the building at a lease rate, which is based upon interest rates,
amortization schedules and costs at the time of the expansion. If the tenant elects to expand the building and ACRT agrees to fund the cost, the lease term will extend to a date fifteen years from the completion of the expansion. The tenant has a
right of first offer in the event ACRT wishes to sell the property at a mutually agreeable price.

Acquisition. On
December 15, 1995, ACRT, through a wholly owned subsidiary, acquired the property for an aggregate purchase price of $3,495,000 after applicable credits, including $900,000 paid directly to UTA.

ACRT obtained permanent financing in March 1996 in the amount of $2,500,000 at an annual interest rate of 6.86%. Amortization is based upon an
amortization schedule of 20 years for loan years one through nine; and an eight year amortization schedule for loan years ten through fifteen. The loan matures in May 2011.

Walgreen/Memphis Property

Description. The property is located approximately six miles northeast of downtown Memphis, Tennessee at the intersection of Range Line Street and James Road in Shelby County. The property is
approximately 88% leased to Walgreen Co. for an initial term of 50 years and 12% leased to H & R Block, Eastern Tax Services, Inc. for an initial term of four years. The property is a freestanding masonry retail facility of 14,294 square feet on
1.149 acres, which was constructed in 1993. The paved parking area has 55 spaces.

Walgreen Lease. The property is 88% leased
to Walgreen Co. for use as a retail facility. The initial lease term of 50 years commenced in January 1993 and expires in December 2042. Tenant has the option to terminate the lease after the 20th lease year and every five years thereafter. The
lease calls for fixed rent of $141,747 per year and there is a provision for additional percentage rent, which is capped at an amount equal to the fixed rent. The tenant is responsible for insurance premiums, utilities and some non-structural
maintenance and repairs to the interior of the premises. The landlord is responsible for repairs to the exterior and structural portions of the premises.

H & R Block Lease. The property is 12% leased to H & R Block, Eastern Tax Services, Inc., a national franchise which offers tax preparation services. The initial lease term of four years
commenced in May 1994 and expired in May 1998; however, the lease was extended through April 2009. The tenant has no other renewal options. The rent was $15,750 per year until May 1998 and then increased to $16,538. In May 2003, the rent increased
to $17,027. The renewal extending the lease through 2009 increases the rent to $17,538 per year. The tenant is responsible for utilities, all non-structural repairs, insurance and property taxes. The landlord is responsible for structural and roof
repairs.



14



---

##### Table of Contents

Acquisition. On July 1, 1994, ACRT, through a wholly owned subsidiary, acquired the
property from an unaffiliated third party for a purchase price of $1,425,000. ACRT acquired the property subject to the existing non-recourse mortgage financing from an unaffiliated third party with an outstanding principal balance of approximately
$1,140,000. The loan provides for an interest rate of 9.5% per year, with the loan fully amortized over its term. The loan was to mature in June 2013. This loan was paid off in February 2002 with proceeds from ACRTs secured credit
facility.

Giant Food/Levittown, Pennsylvania Property

Description. The property is located on New Falls Road, near the intersection with New Rogers Road (SR 413) in Levittown, Bucks County,
Pennsylvania. The property is leased for an initial term of twenty years and consists of a single story steel frame retail facility on 4.7 acres. The property was constructed in 1987 and is approximately 40,100 square feet.

Lease. The property is 100% leased to Giant Food Store, a subsidiary of Royal Ahold, N.V. The initial term of twenty years commenced in
1987 and expires in August of 2007. The annual base rent is $332,028. The tenant is responsible for all real estate taxes, insurance, utilities and expenses of the building with the exception of roof and structure.

The tenant has outgrown this location and may be relocating to a new store. Under the terms of the lease, ACRT has the option, but not the obligation, to
terminate the lease twelve months after the tenant vacates the building. The tenant does not have the right to sublet without the consent of ACRT. The tenant is required to pay rent and expenses of the building until August of 2007. ACRT believes
that the current rent being paid by Giant, which was negotiated in 1987, is below market and ACRT expects to be able to re-rent the property at higher rents prior to 2007 when the lease expires.

Acquisition. In March 2003, ACRT formed Levittown-ARC, LP and acquired the property for a total purchase price of approximately $3,500,000
payable $1,000,000 in cash and assumed the existing first mortgage loan described below. ACRT invested $200,000 for a 20% limited partnership interest in Levittown-ARC LP and the remaining 80% interest is owned by third party investors. ACRT also
receives an additional 32% of the available cash flow or capital proceeds in excess of a 9% preferred return to the limited partners.

The
property was acquired subject to a mortgage, which had an outstanding principal balance of approximately $2,500,000 at closing. Interest is payable at a rate of 7.2% per year and amortization is based upon a 30-year schedule. The loan matures
on August 11, 2028, at which time a balloon payment of $267,000 will be required. On August 11, 2008, ACRT has the option to prepay the balance in full. If ACRT chooses not to prepay the mortgage, the interest rate increases to an annual
rate of 12.2% for the remainder of the term.

Levitz, Babies R Us, Wade Odell Wade/Paramus, New Jersey Property

Description. The property is located on approximately 13 acres on Route 17 in Paramus, New Jersey. The property
is 100% leased under long-term leases. The property was constructed in 1974, renovated in 1998 and is approximately 154,000 square feet.

Levitz Lease. The property is leased to Levitz Furniture under a long-term lease that is at below market rent. Levitz occupies 91,103 square feet of two-story retail space for an initial term expiring in 2019 at a rent of
$12.49 per square foot. Levitz is responsible for all property expenses. On October 11, 2005 Levitz declared bankruptcy under Chapter 11 of the U.S. Bankruptcy code. At the time of declaration, rent totaling $99,572 related to October was
unpaid. All subsequent months have been paid.

Babies R Us Lease. The property is leased to Babies R Us under a long-term
lease that is at below market rent. Babies R Us occupies 39,220 square feet of single story retail space for an initial term expiring in 2018 at a rent of $14.74 per square foot.

Wade Odell Wade Lease. The property is leased to Wade Odell Wade under a five-year lease term at market rent. Wade Odell Wade, a United Van
Lines padded van service, occupies 23,355 square feet of warehouse space at the rear of the building for an initial term expiring in 2007 at a rent of $7.50 per square foot.

Acquisition. On May 21, 2003, ACRT purchased a 40% tenant-in-common interest in the Paramus Plaza in Paramus, New Jersey for a
purchase price of $2,400,000 and the assumption of a 40% interest in the first mortgage on the property in the total original principal amount of $15,000,000 at an interest rate of 7.46% on a 30-year amortization schedule. The remaining 60%
tenant-in-common interest in the property is held by an affiliate of the Advisor. The mortgage matures in October 2011.

Proposed
Transaction.ACRT expects to sell this property to an affiliate of the Advisor, in the first half of 2006, as discussed in Item 1.Business Strategy above.



15



---

##### Table of Contents

Willow Grove Property

Description. The development property is located in Willow Grove, Pennsylvania at the intersection of Route 611 and Route 276. The 12 acre
site is expected to be developed as a hotel and theme restaurant park.

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

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

On October 5, 2004, the operating agreement with Willow Grove, LLC was amended to increase the maximum loan amount to $650,000. All other terms and
conditions set forth in the original agreement remain unchanged. On October 6, 2004, $100,000 was paid to Willow Grove LLC bringing the loan amount to $650,000. On October 21, 2004, the operating agreement with Willow Grove, LLC was
further amended to increase the maximum loan amount to $800,000. As of December 31, 2004, Willow Grove ACRT had made loans totaling $800,000 under this agreement.

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



16



---

##### Table of Contents

The following table sets forth, as of December 31, 2005, specified information relating to
ACRTs real estate portfolio.



|                         |  |                     |  |                               |  |                 |  |                       |              |                                                                   |   |                |                          |                              |         |  |  | 
|------------------------ |  | ------------------- |  | ----------------------------- |  | --------------- |  | --------------------- | ------------ | ----------------------------------------------------------------- | - | -------------- | ------------------------ | ---------------------------- | ------- |  |  | 
|Tenant (Guarantor)       |  | Property Location   |  | Property Type/YearConstructed |  | LandArea(Acres) |  | NetRentableSquareFeet |              | Base Lease Term and Annual Rents Per Net RentableSquare Foot      |   | RenewalOptions |                          | ACRT Shareof 2005Annual Rent
|AT&T Wireless            |  | Atlanta, GA         |  | Office/1996                   |  | 2               |  | 22,359                |              | 12 years (6/96 -5/08)                                             |   | None           |                          | $                            | 269,868
|                         |  |                     |  |                               |  |                 |  |                       |              | 6/96 -5/99                                                        |   | $              | 9.50                     |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 6/99 -5/02                                                        |   | $              | 10.45                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 6/02 -5/05                                                        |   | $              | 11.50                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 6/05 -5/08                                                        |   | $              | 12.64                    |                              |         |  |  | 
|A.C. Moore               |  | Montgomeryville, PA |  | Retail/2003                   |  | 3.2             |  | 25,497                |              | 10 years (1/03 -12/13)                                            |   | Four 5-year    |                          |                              | 425,892
|                         |  |                     |  |                               |  |                 |  |                       |              | 1/03 -12/13                                                       |   | $              | 17.00                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | During first year of lease tenant received a $187,500 rent credit |   |                |                          |                              |        
|BCBSS(1)                 |  | Rochelle Park, NJ   |  | Office/1989                   |  | 2.543           |  | 80,000                |              | 19 years (10/89 -9/14)                                            |   | None           |                          |                              | 928,202
|                         |  |                     |  |                               |  |                 |  |                       |              | 10/89 -9/99                                                       |   | $              | 19.25                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 10/99 -9/04                                                       |   | $              | 21.50                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 10/04 -9/00                                                       |   | $              | 22.75                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 10/09 -9/14                                                       |   | $              | 23.00                    |                              |         |  |  | 
|Babies R Us(5)           |  | Paramus, NJ         |  | Retail                        |  | 13              |  | 39,220                |              | 20 years 11/98 -11/18                                             |   | Five 5-year    |                          |                              | 253,110
|                         |  |                     |  |                               |  |                 |  |                       |              | 11/98 -10/03                                                      |   | $              | 14.67                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 11/03 -10/08                                                      |   | $              | 16.13                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 11/08 -10/13                                                      |   | $              | 17.75                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 11/13 -10/18                                                      |   | $              | 19.52                    |                              |         |  |  | 
|Bed Bath & Beyond(2)     |  | Overland Park, KS   |  | Retail/1995                   |  | 7.168           |  | 50,028                |              | 15 years (8/95 - 1/11)                                            |   | Three 5-year   |                          |                              | 328,638
|                         |  |                     |  |                               |  |                 |  |                       | 8/95 - 7/00  |                                                                   | $ | 11.50          |                          |                              |         |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 8/00 - 7/05                                                       |   | $              | 12.65                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 8/05 - 1/11                                                       |   | $              | 13.91                    |                              |         |  |  | 
|Borders Books(2)         |  | Overland Park, KS   |  | Retail/1995                   |  | 7.168           |  | 30,000                |              | 15 years (11/95 1/11)                                            |   | Five 5-year    |                          |                              | 177,123
|                         |  |                     |  |                               |  |                 |  |                       |              | 12/95 -11/00                                                      |   | $              | 11.00                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 12/00 -11/05                                                      |   | $              | 11.80                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 12/05 -11/11                                                      |   | $              | 12.70                    |                              |         |  |  | 
|CaroMont Health Stanley  |  | Charlotte, NC       |  | Office                        |  | 3.12            |  | 8,323                 |              | 15 years (1/01 -12/15)                                            |   | Two 10-year    |                          |                              | 106,005
|                         |  |                     |  |                               |  |                 |  |                       | 1/01 - 12/01 |                                                                   | $ | 12.00          |                          |                              |         |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 1/02 - 12/02                                                      |   | $              | 12.18                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 1/03 - 12/03                                                      |   | $              | 12.36                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 1/04 - 12/04                                                      |   | $              | 12.55                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 1/05 - 12/05                                                      |   | $              | 12.73                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 1/06 - 12/06                                                      |   | $              | 12.93                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              |                                                                   |   |                | Increases1.015% per year |                              |         | 
|CaroMont Health Gastonia |  | Charlotte, NC       |  | Office                        |  | 3.38            |  | 18,654                |              | 15 years (1/01 -12/15)                                            |   | Two 10-year    |                          |                              | 257,383
|                         |  |                     |  |                               |  |                 |  |                       | 1/01 - 12/01 |                                                                   | $ | 13.00          |                          |                              |         |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 1/02 - 12/02                                                      |   | $              | 13.20                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 1/03 - 12/03                                                      |   | $              | 13.39                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 1/04 - 12/04                                                      |   | $              | 13.59                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 1/05 - 12/05                                                      |   | $              | 13.80                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              | 1/06 - 12/06                                                      |   | $              | 14.00                    |                              |         |  |  | 
|                         |  |                     |  |                               |  |                 |  |                       |              |                                                                   |   |                | Increases1.015% per year |                              |         | 



17



---

##### Table of Contents

|                                    |  |                   |  |                               |  |                 |  |                       |             |                                                                  |       |                 |                                                 |                              |  |  | 
|----------------------------------- |  | ----------------- |  | ----------------------------- |  | --------------- |  | --------------------- | ----------- | ---------------------------------------------------------------- | ----- | --------------- | ----------------------------------------------- | ---------------------------- |  |  | 
|Tenant (Guarantor)                  |  | Property Location |  | Property Type/YearConstructed |  | LandArea(Acres) |  | NetRentableSquareFeet |             | Base Lease Term and Annual Rents Per Net Rentable Square Foot    |       | Renewal Options |                                                 | ACRT Shareof 2005Annual Rent
|CaroMont Health Belmont             |  | Charlotte, NC     |  | Office                        |  | 2.57            |  | 14,829                |             | 15 years (1/01 - 12/15)                                          |       | Two 10-year     |                                                 | 188,868                     
|                                    |  |                   |  |                               |  |                 |  |                       |             | 1/01 -12/01                                                      |       | $               | 12.00                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 1/02 -12/02                                                      |       | $               | 12.18                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 1/03 -12/03                                                      |       | $               | 12.36                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 1/04 -12/04                                                      |       | $               | 12.55                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 1/05 -12/05                                                      |       | $               | 12.73                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 1/06 -12/06                                                      |       | $               | 12.93                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             |                                                                  |       |                 | Increases1.015% peryear                         |                              |  |  | 
|CaroMont Health Kings Mountain      |  | Charlotte, NC     |  | Office                        |  | 3.10            |  | 3,624                 |             | 15 years (1/01  12/15)                                          |       | Two 10-year     |                                                 | 46,156                      
|                                    |  |                   |  |                               |  |                 |  |                       | 1/01 -12/01 |                                                                  | $     | 12.00           |                                                 |                              |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 1/02 -12/02                                                      |       | $               | 12.18                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 1/03 -12/03                                                      |       | $               | 12.36                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 1/04 -12/04                                                      |       | $               | 12.55                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 1/05 -12/05                                                      |       | $               | 12.73                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 1/06 -12/06                                                      |       | $               | 12.93                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             |                                                                  |       |                 | Increases1.015% peryear                         |                              |  |  | 
|Circuit City(3)                     |  | Wichita, KS       |  | Retail/1996                   |  | 5.92            |  | 37,591                |             | 20 years (11/96 - 1/17)                                          |       | Five 5-year     |                                                 | 284,145                     
|                                    |  |                   |  |                               |  |                 |  |                       |             | 11/96 -10/01                                                     |       | $               | 9.80                                            |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 11/01 -10/06                                                     |       | $               | 10.80                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 11/06 10/11}11/11 -1/17}                                         |       |                 | The lesser of10% or thepercentageincrease inCPI |                              |  |  | 
|GART Sports())                      |  | Sacramento, CA    |  | Retail/1985                   |  | 2.97            |  | 40,145                |             | 20 years (8/94 - 1/15)                                           |       | Two 10-year     |                                                 | 515,216                     
|                                    |  |                   |  |                               |  |                 |  |                       |             | 8/94 - 1/05                                                      |       | $               | 11.51                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 2/05 - 1/15                                                      |       | $               | 12.95                                           |                              |  |  | 
|Giant Food, Inc.(6)                 |  | Levittown, PA     |  | Retail                        |  | 4.70            |  | 40,100                |             | 20 years (8/97 - 07/17)                                          |       | Four 5-year     |                                                 | 66,406                      
|                                    |  |                   |  |                               |  |                 |  |                       |             | 8/97 - 07/17                                                     |       | $               | 8.28                                            |                              |  |  | 
|Great Atlantic & Pacific Tea Co.(9) |  | WoodcliffLake, NJ |  | Retail                        |  | 7.26            |  | 70,000                |             | 25 years (2/96-1/21)                                             |       | Eight 5-Year    |                                                 | 191,858                     
|                                    |  |                   |  |                               |  |                 |  | 2/01 - 1/06           |             | $                                                                | 24.47 |                 |                                                 |                              | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 2/06 - 1/11                                                      |       | $               | 25.47                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 2/11 - 1/16                                                      |       | $               | 26.47                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 2/14 - 1/21                                                      |       | $               | 28.47                                           |                              |  |  | 
|Hollywood Video                     |  | Atlanta, GA       |  | Retail/1996                   |  | 0.75            |  | 7,488                 |             | 15 years (12/96 - 12/11)                                         |       | Three 5-year    |                                                 | 154,388                     
|                                    |  |                   |  |                               |  |                 |  |                       |             | 12/96 -11/01                                                     |       | $               | 18.43                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 12/01 -11/06                                                     |       | $               | 20.62                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 12/06 -12/11                                                     |       |                 |                                                 |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | increase based onpercentage interest in CPInot to exceed $16,564 |       |                 |                                                 |                             
|H & R Block                         |  | Memphis, TN       |  | Retail/1993                   |  | 1.149           |  | 1,750                 |             | 4 years (5/94 - 5/98,extended to 4/09)                           |       | None            |                                                 | 17,028                      
|                                    |  |                   |  |                               |  |                 |  |                       |             | 5/94 - 5/98                                                      |       | $               | 9.00                                            |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 6/98 - 4/03                                                      |       | $               | 9.45                                            |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 5/03 - 4/06                                                      |       | $               | 9.73                                            |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 5/06 - 4/09                                                      |       | $               | 10.02                                           |                              |  |  | 
|LA Fitness(4)                       |  | Ft. Washington,PA |  | Retail/2003                   |  | 7               |  | 41,000                |             | 15 years (9/03 - 8/18)                                           |       | Three 5-year    |                                                 | 370,800                     
|                                    |  |                   |  |                               |  |                 |  |                       |             | 9/03 - 8/08                                                      |       | $               | 18.09                                           |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 9/08 - 8/13}                                                     |       |                 | Lesser ofCPI                                    |                              |  |  | 
|                                    |  |                   |  |                               |  |                 |  |                       |             | 9/13 - 8/18}                                                     |       |                 | or 10%                                          |                              |  |  | 



18



---

##### Table of Contents

|                                       |  |                   |  |                                |  |                 |  |                          |              |                                                                                                                                                                                                                                               |   |                |       |                              |  |  | 
|-------------------------------------- |  | ----------------- |  | ------------------------------ |  | --------------- |  | ------------------------ | ------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------------- | ----- | ---------------------------- |  |  | 
|Te nant (Guarantor)                    |  | Property Location |  | Property Type/ YearConstructed |  | LandArea(Acres) |  | Net Rentable Square Feet |              | Base Lease Term and Annual Rents Per NetRentable Square Foot                                                                                                                                                                                  |   | RenewalOptions |       | ACRT Shareof 2005Annual Rent
|LevitzFurniture(5)                     |  | Paramus, NJ       |  | Retail                         |  | 13              |  | 91,103                   |              | 20 years (6/99 - 5/19)                                                                                                                                                                                                                        |   | Three 5-year   |       | 438,118                     
|                                       |  |                   |  |                                |  |                 |  |                          |              | 6/99 - 5/04                                                                                                                                                                                                                                   |   | $              | 12.49 |                              |  |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 6/04 - 5/09                                                                                                                                                                                                                                   |   | $              | 13.12 |                              |  |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 6/09 - 5/14                                                                                                                                                                                                                                   |   | $              | 13.77 |                              |  |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 6/14 - 5/19                                                                                                                                                                                                                                   |   | $              | 14.46 |                              |  |  | 
|NationalAmusements,Inc.(5)             |  | New York, NY      |  | Retail/1999                    |  | 9.75            |  | 74,282                   |              | 20 years (5/99 - 5/19)                                                                                                                                                                                                                        |   | Four 5-year    |       | 809,674                     
|                                       |  |                   |  |                                |  |                 |  |                          |              | 6/99 - 5/04                                                                                                                                                                                                                                   |   | $              | 26.70 |                              |  |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 6/04 - 5/09                                                                                                                                                                                                                                   |   | $              | 27.25 |                              |  |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 6/09 - 5/14                                                                                                                                                                                                                                   |   | $              | 29.70 |                              |  |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 6/14 - 5/19                                                                                                                                                                                                                                   |   | $              | 32.37 |                              |  |  | 
|OfficeMax                              |  | Atlanta, GA       |  | Retail/1996                    |  | 7               |  | 23,532                   |              | 20 years (6/96 - 6/16)                                                                                                                                                                                                                        |   | Four 5-year    |       | 229,437                     
|                                       |  |                   |  |                                |  |                 |  |                          |              | 6/96 - 6/16                                                                                                                                                                                                                                   |   | $              | 9.75  |                              |  |  | 
|OfficeMax(3)                           |  | Wichita, KS       |  | Retail/1996                    |  | 5.92            |  | 30,446                   |              | 15 years (2/97 -1/12)                                                                                                                                                                                                                         |   | Five 5-year    |       | 205,237                     
|                                       |  |                   |  |                                |  |                 |  |                          |              | 2/97 - 1/02                                                                                                                                                                                                                                   |   | $              | 9.13  |                              |  |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 2/02 - 1/07                                                                                                                                                                                                                                   |   | $              | 9.63  |                              |  |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 2/07 - 1/12                                                                                                                                                                                                                                   |   | $              | 10.13 |                              |  |  | 
|The SportsAuthority                    |  | Atlanta, GA       |  | Retail/1996                    |  | 7               |  | 43,393                   |              | 20 years (5/96 - 5/16)                                                                                                                                                                                                                        |   | Four 5-year    |       | 357,992                     
|                                       |  |                   |  |                                |  |                 |  |                          | 5/96 - 5/16  |                                                                                                                                                                                                                                               | $ | 8.25           |       |                              |  | 
|Sears                                  |  | San Antonio, TX   |  | Retail/1995                    |  | 3.48            |  | 34,414                   |              | 15 years (10/95 -9/10)                                                                                                                                                                                                                        |   | Two 5-year     |       | 310,586                     
|                                       |  |                   |  |                                |  |                 |  |                          |              | 10/95 - 9/00                                                                                                                                                                                                                                  |   | $              | 8.40  |                              |  |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 10/00 - 9/05                                                                                                                                                                                                                                  |   | $              | 8.90  |                              |  |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 10/05 -9/10                                                                                                                                                                                                                                   |   | $              | 9.40  |                              |  |  | 
|ThomasvilleFurniture                   |  | Montgomeryville   |  | Retail/2003                    |  | 3.2             |  | 15,544                   |              | 10 years (1/03 -12/13)                                                                                                                                                                                                                        |   | Two 5-year     |       | 248,868                     
|                                       |  |                   |  |                                |  |                 |  |                          | 1/03 - 12/08 |                                                                                                                                                                                                                                               | $ | 16.00          |       |                              |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 1/08 - 12/13                                                                                                                                                                                                                                  |   | $              | 17.60 |                              |  |  | 
|Toys R Us(5)(Toys R Us,Inc.)
(2leases) |  | New York, NY      |  | Retail/1999                    |  | 9.75            |  | 63,702                   |              | 20 years (7/99 -7/19)                                                                                                                                                                                                                         |   | Four 5-year    |       | 472,881                     
|                                       |  |                   |  |                                |  |                 |  |                          | 7/99 -6/04   |                                                                                                                                                                                                                                               | $ | 17.00          |       |                              |  | 
|                                       |  |                   |  |                                |  |                 |  |                          |              | 7/04 - 6/09 Lesser of $1,057,706 x twice the % increase in CPI and $1,191,227 - 7/09 - 6/14 Lesser of $1,057,706 x twice the % increase in CPI and $1,310,350 - 7/14 - 7/19 Lesser of $1,057,706 x twice the % increase in CPI and $1,441,576 |   |                |       |                             



19



---

##### Table of Contents

|                          |  |                   |  |                                |  |                 |  |                       |              |                                                              |   |                |      |                              |         |  |   |          
|------------------------- |  | ----------------- |  | ------------------------------ |  | --------------- |  | --------------------- | ------------ | ------------------------------------------------------------ | - | -------------- | ---- | ---------------------------- | ------- |  | - | ---------
|Tenant (Guarantor)        |  | Property Location |  | Property Type/ YearConstructed |  | LandArea(Acres) |  | NetRentableSquareFeet |              | Base Lease Term and Annual Rents Per NetRentable Square Foot |   | RenewalOptions |      | ACRT Shareof 2005Annual Rent
|United Technologies, Inc. |  | Plymouth, IN      |  | Industrial/1994                |  | 30              |  | 105,600               |              | 15 years (12/95 -12/10)                                      |   | Three 5-year   |      |                              | 375,000
|                          |  |                   |  |                                |  |                 |  |                       |              | 12/95 -11/98                                                 |   | $              | 2.98 |                              |         |  |   |          
|                          |  |                   |  |                                |  |                 |  |                       |              | 12/98 -11/01                                                 |   | $              | 3.16 |                              |         |  |   |          
|                          |  |                   |  |                                |  |                 |  |                       |              | 12/01 -11/04                                                 |   | $              | 3.35 |                              |         |  |   |          
|                          |  |                   |  |                                |  |                 |  |                       |              | 12/04 -11/07                                                 |   | $              | 3.55 |                              |         |  |   |          
|                          |  |                   |  |                                |  |                 |  |                       |              | 12/07 -12/10                                                 |   | $              | 3.76 |                              |         |  |   |          
|Wade Odell Wade(5)        |  | Paramus, NJ       |  | Warehouse                      |  | 13              |  | 23,355                |              | 5 years (1/02 - 8/07)                                        |   | None           |      |                              | 74,672 
|                          |  |                   |  |                                |  |                 |  |                       | 1/02 - 12/05 |                                                              | $ | 7.49           |      |                              |         |  |  
|                          |  |                   |  |                                |  |                 |  |                       |              | 1/05 - 12/07                                                 |   | $              | 7.99 |                              |         |  |   |          
|Walgreen Co.              |  | Memphis, TN       |  | Retail/1993                    |  | 1.149           |  | 12,544                |              | 20 years (1/93 -12/12)                                       |   | Six 5-year     |      |                              | 141,747
|                          |  |                   |  |                                |  |                 |  |                       | 1/93 -12/12  |                                                              | $ | 11.30          |      |                              |         |  |  
|                          |  |                   |  |                                |  |                 |  |                       |              |                                                              |   |                |      |                              |         |  |   |          
|Total:                    |  |                   |  |                                |  | 184.377         |  | 1,048,523             |              |                                                              |   |                |      |                              |         |  | $ | 8,245,298

---

|(1) | ACRT owns a 51% interest in the property as a tenant-in-common interest.
|--- | ------------------------------------------------------------------------

|(2) | ACRT owns a 49.95% interest in the property owning entity.
|--- | ----------------------------------------------------------

|(3) | ACRT owns a 70% interest in the property owning entity.
|--- | -------------------------------------------------------

|(4) | ACRT owns a 50% interest in the property owning entity.
|--- | -------------------------------------------------------

|(5) | ACRT owns a 40% interest in the property as a tenant-in-common interest. Levitz declared
bankruptcy under Chapter 11 of the U.S. Bankruptcy code and did not make their October 2005 rent payment. All other rent payments have been made.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | ACRT owns a 20% interest in the property owning entity.
|--- | -------------------------------------------------------

|(7) | In 2003, GART Sports and The Sports Authority merged.
|--- | -----------------------------------------------------

|(8) | Property was purchased on March 4, 2004.
|--- | ----------------------------------------

|(9) | ACRT owns an 11.2% interest in the property owning entity. The interest was purchased on
March 31, 2004.
|--- | --------------------------------------------------------------------------------------------------------

As of December 31, 2005, the scheduled lease maturities for each of the next ten years are as
follows:



|                        |  |                 |  |               |  |                    
|----------------------- |  | --------------- |  | ------------- |  | -------------------
|Year Ended December 31, |  | Number ofLeases |  | SquareFootage |  | 2005Annual BaseRent
|2006                    |  |                |  |              |  |                   
|2007                    |  | 2               |  | 63,455        |  | 141,078            
|2008                    |  | 1               |  | 22,359        |  | 269,868            
|2009                    |  | 1               |  | 1,750         |  | 17,027             
|2010                    |  | 2               |  | 140,014       |  | 685,586            
|2011                    |  | 3               |  | 87,516        |  | 660,149            
|2012                    |  | 2               |  | 44,740        |  | 364,012            
|2013                    |  | 2               |  | 41,041        |  | 674,760            
|2014                    |  | 1               |  | 80,000        |  | 928,202            
|2015                    |  | 2               |  | 85,575        |  | 1,113,628          



20



---

##### Table of Contents

ITEM 3. LEGAL PROCEEDINGS

On August 22, 2004, ACRT was named as a defendant in a suit involving the
tenant in the Rochelle Park, NJ property. The tenants suit claims, among other issues, that they were not given proper notice to effect their right of first refusal in connection with the tenant-in-common sale of a portion of the property in
March of 2003. On January 25, 2005, the tenant in the Rochelle Park, NJ property signed a stipulation of settlement agreeing to dismiss the suit against ACRT. As part of the settlement, the tenant entered into a contract to purchase ACRTs
51% tenant in common interest and the remaining 49% tenant in common interest not owned by ACRT for $19,500,000.This contract was subsequently terminated.

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

On April 1, 2005, ACRTs joint venture partner filed a separate lawsuit against Whitestone compelling a sale of
ACRTs interest under the terms of the original right of first refusal.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of
shareholders during the fourth quarter of the fiscal year ended December 31, 2005.



21



---

##### Table of Contents

PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As of March 15, 2006, there were approximately 674 holders of record of the shares of Class A common stock and one holder of record of the shares of Class B common stock. ACRTs shares of common stock
are not listed for trading on a national securities exchange or included for quotation on the Nasdaq Stock Market. If ACRTs capital stock is not listed for trading on a national securities exchange or included for quotation on the Nasdaq Stock
Market on or before March 31, 2006, dependent upon market and other conditions, the Board of Directors intends to explore liquidity strategies, including, but not limited to, adopting a plan of liquidation, subject to market conditions and
shareholder approval, pursuant to which ACRTs properties generally would be liquidated in an orderly fashion designed to return the most value to shareholders. Any such plan of liquidation will be effected as may be determined by the Board of
Directors to be in the best interests of ACRTs shareholders.

The Board of Directors recommended, and the shareholders approved, at
the annual meeting held in May 2004, an extension of ACRTs liquidity date described above. The Board of Directors asked to have this date extended by five years, to 2011 to 2013, instead of 2006 to 2008. The Board retained the ability to
implement a liquidity strategy earlier than that time if it determines that it would be in the best interests of the shareholders to do so.

On February 8, 2006 the board of directors approved the adoption of a Plan of Liquidation and Dissolution (the Plan). The Plan is subject to the approval of ACRTs Common stockholders, by two-thirds vote. ACRT intends
to sell its real estate properties on an orderly basis, to pay or provide for its liabilities and to distribute its remaining cash to its shareholders.

On December 20, 2004, ACRT entered into a Contract of Purchase and Sale (the Agreement), by and among ACRT, certain affiliates of ACRT and HPI/NL Investors LLC (the Purchaser). The
Agreement provides for the sale to the Purchaser of 14 of ACRTs 22 properties and a limited partnership interest in an entity that owns a property.

On June 30, 2005 the Agreement became subject to termination. On November 30, 2005 ACRT entered into a Termination and Release Agreement with the Purchaser. The Termination and Release Agreement called for
the payment of $150,000 to ACRT from the deposit escrow and an additional payment to ACRT of $37,450 as reimbursement of survey and other costs related to the Agreement. In exchange ACRT released the Purchaser from any further obligations under the
Agreement.

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



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

ACRT anticipates that the sale of these investments will close in 2006. Based on the current sales
prices, ACRT anticipates that all properties and investments will be sold for amounts in excess of their carrying amounts and, therefore, will result in a gain for financial reporting purposes.

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



22



---

##### Table of Contents

Equity Compensation Plan Information

Our equity compensation plan information as of December 31, 2005 is as follows:



|                                                       |  |                                                                                            |  |                                                                            |      |                                                                                                                                                         |       
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan Category                                          |  | Number of securities tobe issued upon exercise of outstanding options, warrants and rights |  | Weighted averageexercise price
of outstanding options, warrants and rights |      | Number of securities remaining available for future issuance under equity compensation plans(excluding securities reflected in the to be issued column)
|Equity compensation plans approved by shareholders     |  | 675,000                                                                                    |  | $                                                                          | 8.50 |                                                                                                                                                         | 75,000
|Equity compensation plans not approved by shareholders |  | None                                                                                       |  |                                                                            | N/A  |                                                                                                                                                         | N/A   
|                                                       |  |                                                                                            |  |                                                                            |      |                                                                                                                                                         |       
|Total                                                  |  | 675,000                                                                                    |  | $                                                                          | 8.50 |                                                                                                                                                         | 75,000
|                                                       |  |                                                                                            |  |                                                                            |      |                                                                                                                                                         |       

Warrants

Chauner Securities, Inc. served as the managing broker-dealer in connection with a private placement of ACRTs Class A Common Stock in 1998 and
1999. In connection with that offering, ACRT issued 33,490 stock warrants to Chauner Securities, Inc. to purchase 33,490 shares of Class A Common Stock at an exercise price of $9.30 per share. The stock warrants expire in 2008.

Pursuant to the terms of the agreement with the managing broker-dealer for ACRTs third private placement offering which began on May 23, 2003,
ACRT will issue to Chauner Securities, Inc., the managing brokerdealer or its designees, stock warrants equal to 7% of the total shares sold by the soliciting dealers. The stock warrants will have a term of 10 years and an exercise price of
$10.98. As of December 31, 2005, Chauner Securities is entitled to approximately 71,000 stock warrants.

Income Taxes

ACRT has elected to be treated as a real estate investment trust (REIT) under the
applicable provisions of the Internal Revenue Code of 1986, as amended. In order to qualify as a REIT, ACRT is required to distribute to shareholders at least 90% of its taxable income and to meet certain asset and income tests as well as certain
other requirements. ACRT has met and will continue to meet these requirements necessary to be treated as a REIT.

For federal income tax
purposes, distributions may consist of ordinary income dividends, nontaxable return of capital, capital gains or a combination thereof. Distributions in excess of ACRTs current and accumulated earnings and profits (calculated for tax purposes)
will constitute a nontaxable return of capital rather than a dividend and will reduce the shareholders basis in his or her shares of common stock for tax purposes. To the extent that a distribution exceeds both ACRTs current and accumulated
earnings and profits and the shareholders basis in his or her shares, the amount of such excess will generally be treated as gain from the sale or exchange of that shareholders shares. ACRT annually notifies shareholders of the taxability of
distributions paid during the preceding year. The following table sets forth the taxability of distributions paid in 2005, 2004, and 2003:



|                  |  |       |   |  |       |   |  |       |  
|----------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                  |  | 2005  |   |  | 2004  |   |  | 2003  |  
|Ordinary Income   |  | 67.59 | % |  | 66.82 | % |  | 87.93 | %
|Return of Capital |  | 17.31 | % |  | 33.18 | % |  | 12.07 | %
|Capital Gains     |  | 15.10 | % |  |      |   |  |      |  

Investment Objectives

ACRTs goal is to provide shareholders with a total return through satisfaction of the following objectives:



| |  |  | Current dividends that may be partially free from current taxation.
| | - |  | -------------------------------------------------------------------



23



---

##### Table of Contents

| |  | Mortgage amortization which will increase equity in ACRTs properties through the regularly scheduled pay down of mortgage debt.
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  | Capital appreciation through the acquisition of a carefully selected portfolio of real estate that has the potential to increase in value.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected historical financial data for each
of the five years in the period ended December 31, 2005, which data has been derived from our audited financial statements for those years. You should read the following selected financial data together with Managements Discussion
and Analysis of Financial Condition and Results of Operations and our audited financial statements included in this annual report.

Our selected financial data for the year ended December 31, 2001 and for the period then ended has been derived from financial statements audited by Arthur Andersen LLP, independent public accountants, who have ceased operations.



|                                                                        |  |                                          |        |   |      |   |        |  |      |        |      |   |        |  |   |       
|----------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                                        |  | Year Ended December 31,                 
|                                                                        |  | 2005                                     |        |   | 2004 |   | 2003   |  | 2002 |        | 2001
|                                                                        |  | (in thousands, except per share amounts)
|Income Statement Data:                                                  |  |                                          |        |   |      |   |        |  |      |        |      |   |        |  |   |       
|Revenues                                                                |  | $                                        | 6,690  |   |      | $ | 6,188  |  | $    | 6,111  |      | $ | 7,661  |  | $ | 7,583 
|Expenses                                                                |  |                                          | 5,947  |   |      |   | 5,802  |  |      | 5,196  |      |   | 6,534  |  |   | 6,752 
|Operating profit                                                        |  |                                          | 743    |   |      |   | 386    |  |      | 915    |      |   | 1,127  |  |   | 831   
|Gain on sale of property                                                |  |                                          |       |   |      |   |       |  |      |       |      |   | 11     |  |   |      
|Minority interest in income of joint ventures                           |  |                                          | 225    |   |      |   | 222    |  |      | 268    |      |   | 467    |  |   | 444   
|Equity in income of unconsolidated subsidiaries and undivided interests |  |                                          | 1,162  |   |      |   | 1,185  |  |      | 815    |      |   | 551    |  |   | 555   
|Gain on sale of investment in unconsolidated subsidiary                 |  |                                          | 400    |   |      |   |       |  |      |       |      |   |       |  |   |      
|Income (loss) from discontinued operations                              |  |                                          | (136   | ) |      |   | 320    |  |      | 225    |      |   | 220    |  |   | 223   
|Net income                                                              |  |                                          | 1,944  |   |      |   | 1,669  |  |      | 1,687  |      |   | 1,442  |  |   | 1,165 
|Net income per common share from continuing operations-basic            |  |                                          | 0.62   |   |      |   | 0.40   |  |      | 0.58   |      |   | 0.57   |  |   | 0.44  
|Net income per common share from discontinued operations-basic          |  |                                          | (.04   | ) |      |   | .10    |  |      | .09    |      |   | .10    |  |   | .10   
|Net income per share-basic                                              |  |                                          | .58    |   |      |   | .50    |  |      | .67    |      |   | .67    |  |   | .54   
|                                                                        | 
|                                                                        |  | As of December 31,                      
|                                                                        |  | 2005                                     |        |   | 2004 |   | 2003   |  | 2002 |        | 2001
|                                                                        |  | (in thousands, except per share amounts)
|Balance Sheet Data:                                                     |  |                                          |        |   |      |   |        |  |      |        |      |   |        |  |   |       
|Real estate, net                                                        |  | $                                        | 41,915 |   |      | $ | 53,183 |  | $    | 45,945 |      | $ | 49,467 |  | $ | 50,567
|Investments in non consolidated entities                                |  |                                          | 7,693  |   |      |   | 7,797  |  |      | 7,390  |      |   | 4,973  |  |   | 3,921 
|Total assets                                                            |  |                                          | 53,177 |   |      |   | 65,318 |  |      | 58,635 |      |   | 59,664 |  |   | 58,624
|Mortgages, notes payable and credit facility                            |  |                                          | 26,395 |   |      |   | 34,625 |  |      | 29,529 |      |   | 41,556 |  |   | 40,108
|Total liabilities                                                       |  |                                          | 27,052 |   |      |   | 38,369 |  |      | 30,532 |      |   | 42,465 |  |   | 41,014
|Cash distributions per common share                                     |  | $                                        | 0.96   |   |      | $ | 0.96   |  | $    | 0.84   |      | $ | 0.80   |  | $ | 0.80  
|Weighted average shares outstanding                                     |  |                                          | 3,348  |   |      |   | 3,348  |  |      | 2,518  |      |   | 2,165  |  |   | 2,171 



24



---

##### Table of Contents

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

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

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

As of December 31, 2005, ACRT had 28 leases with credit tenants in 20 properties encompassing 1,048,523 rentable square feet. The properties are 74%
leased to retail tenants, 14% to office tenants and the remaining 12% to industrial or warehouse tenants. During 2004, ACRT purchased two retail properties, including unconsolidated investments, totaling approximately 93,000 rentable square feet for
$8,300,000. No properties were purchased in 2005.

ACRTs revenues and cash flows are generated from property rent receipts and
reimbursements of operating costs of the properties, including real estate taxes and insurance. Growth in revenue and cash flows is a function of scheduled rent increases within existing leased properties and ACRTs ability to acquire income
producing properties. The challenge ACRT faces in acquiring properties is finding properties in the credit lease area that will provide an attractive return.

In the past three years, ACRT has only experienced rent loss in regards to the Paramus, NJ property leased to Levitz Furniture. Levitz declared bankruptcy under Chapter 11 of the U.S. Bankruptcy code and did not make
their October 2005 rent payment. Levitz has made all subsequent rent payments. In 2002, the San Antonio property leased to Sears HomeLife, with Sears Roebuck and Co. as the guarantor, became vacant when Sears HomeLife filed for Chapter 11 bankruptcy
protection. However, ACRT has collected all rents due from Sears, Roebuck and Co. In November 2003, Sears, Roebuck and Co. subleased this property to BEL Furniture Co. for the remainder of the original lease term. In 2003, Kids R Us announced it
would cease operations. ACRT, through a lease with Toys R Us, leases 18,961 square feet to Kids R Us at its New York City property. Kids R Us closed this location on May 1, 2004 and subsequently subleased this property to Office Depot.

Through 2010, ACRT has six leases expiring totaling 227,578 rentable square feet and which generated, adjusted for ACRTs pro rata
interest, approximately $1,113,559 in rental revenue for the year ended December 31, 2005. The primary risks ACRT will incur in re-leasing these properties are: (1) the period of time required to find a new tenant, (2) whether rental
rates will be lower than the previous lease covering the property, (3) leasing costs, if any, incurred when re-leasing the property and (4) the payment of operating costs, such as real estate taxes and insurance, while the property is
vacant. ACRT will address these risks by communicating frequently with the tenant well in advance of the lease termination date to better understand the tenants needs and requirements and, if needed, by using local brokers in the re-leasing
process. In addition, ACRT focuses on buying general purpose real estate with exceptional locations, which can be leased to other tenants without significant modification to the properties. No assurance can be given that once a property becomes
vacant it will subsequently be re-leased.

During 2001, ACRT sold three properties leased to CaroMont Medical for approximately $1.8
million, which approximated their book value. In 2002, ACRT received condemnation proceeds totaling $26,000 from the City of Overland Park related to a parcel of land owned by TMD Development, LLC, our joint venture partner in the property located
in Overland Park, Kansas. In 2004, ACRT sold one property located in Memphis, Tennessee leased to Federal Express Corp. for approximately $2,325,000. On August 10, 2005, ACRT sold the Philadelphia, Pennsylvania property leased to Barnes and
Noble for approximately $7,734,375.



25



---

##### Table of Contents

On December 20, 2004, ACRT entered into a Contract of Purchase and Sale (the Agreement),
by and among ACRT, certain affiliates of ACRT and HPI/NL Investors LLC (the Purchaser). The Agreement provides for the sale to the Purchaser of 14 of ACRTs 22 properties and a limited partnership interest in an entity that owns a
property.

On June 30, 2005 the Agreement became subject to termination. On November 30, 2005 ACRT entered into a Termination and
Release Agreement with the Purchaser. The Termination and Release Agreement called for the payment of $150,000 to ACRT from the deposit escrow and an additional payment to ACRT of $37,450 as reimbursement of survey and other costs related to the
Agreement. In exchange ACRT released the Purchaser from any further obligations under the Agreement.

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



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

ACRT anticipates that the sale of these investments will close in 2006. Based on the current sales
prices, ACRT anticipates that all properties and investments will be sold for amounts in excess of their carrying amounts and, therefore, will result in a gain for financial reporting purposes.

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

On February 8, 2006 the board of directors approved the adoption of a Plan of Liquidation and Dissolution (the
Plan). The Plan is subject to the approval of ACRTs Common stockholders, by two-thirds vote. ACRT intends to sell its real estate properties on an orderly basis, to pay or provide for its liabilities and to distribute its remaining
cash to its shareholders.

Critical Accounting Policies

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

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

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

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

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



26



---

##### Table of Contents

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

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

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

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

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

During the years ended December 31, 2005 and 2004, ACRT incurred an impairment charge of
$287,259 and $52,521 on the Philadelphia, Pennsylvania property leased to Barnes and Noble and the Memphis, Tennessee property leased to Federal Express Corp., respectively.

Liquidity and Capital Resources

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

ACRTs $5.5 million variable rate secured line-of-credit facility, which is scheduled to expire in April 2006, is available to finance acquisitions on a temporary basis until selective secured indebtedness can be
obtained and to meet any short-term capital requirements. Interest is payable at the London Interbank Offered Rate (LIBOR) plus 2% on the facility and ACRT is also required to pay a commitment fee equal to .5% per year on the unused
portion of the commitment. On April 30, 2004 with the sale of the Memphis, Tennessee property leased to Federal Express Corp. the credit facility was reduced by $1,652,387 which represented the collateral value of this property in the loan
agreement. In addition, the quarterly reduction in the amount available under the loan was reduced from $125,000 to $84,150. The total amount available under this facility at December 31, 2005, after quarterly amortization and the sale of the
Memphis property, is $2,842,717 and $0 has been drawn.

On June 17, 2004, ACRT established an additional secured credit facility,
which provides for additional borrowing of up to $5,500,000 and decreases by $100,000 per annum. This credit facility bears interest at LIBOR plus 225 basis points and matures in five years. ACRT is required to pay an annual commitment fee equal to
0.5% on the unused portion of the facility. The total amount available under this facility at December 31, 2005 was $5,400,000.

Since
1993, ACRT has raised, through the issuance of shares of Class A common stock, aggregate capital of approximately $30.5 million, and through the issuance of shares of Class B common stock, aggregate capital of approximately $1.56 million. The
capital raised was used primarily to acquire properties and to retire indebtedness.

During 2003, ACRT completed a private offering of
1.05 million shares of Class A common stock for $12.00 per share. The total amount raised, net of offering costs, was approximately $11.1 million. In addition, ACRT sold approximately



27



---

##### Table of Contents

166,000 shares of Class B common stock at prices ranging from $10.625 to $12.00 per share. The sale of shares of Class B common stock raised, net of offering
costs, approximately $1.56 million. The proceeds from these offerings were used primarily to pay down the secured credit facility and to purchase the Montgomeryville, Pennsylvania property.

On December 20, 2004, ACRT entered into a Contract of Purchase and Sale (the Agreement), by and among ACRT, certain affiliates of ACRT
and HPI/NL Investors LLC (the Purchaser). The Agreement provides for the sale to the Purchaser of 14 of ACRTs 22 properties and a limited partnership interest in an entity that owns a property.

On June 30, 2005 the Agreement became subject to termination. On November 30, 2005 ACRT entered into a Termination and Release Agreement with
the Purchaser. The Termination and Release Agreement called for the payment of $150,000 to ACRT from the deposit escrow and an additional payment to ACRT of $37,450 as reimbursement of survey and other costs related to the Agreement. In exchange
ACRT released the Purchaser from any further obligations under the Agreement.

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



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

ACRT anticipates that the sale of these investments will close in 2006. Based on the current sales
prices, ACRT anticipates that all properties and investments will be sold for amounts in excess of their carrying amounts and, therefore, will result in a gain for financial reporting purposes.

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

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

On February 8, 2006 the board of directors approved the adoption of a Plan of Liquidation and Dissolution (the Plan). The Plan is
subject to the approval of ACRTs Common stockholders, by two-thirds vote. ACRT intends to sell its real estate properties on an orderly basis, to pay or provide for its liabilities and to distribute its remaining cash to its shareholders.

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

Dividends paid to Class A common shareholders increased to $3.054 million in 2005 compared to $2.975 million in 2004, and $1.839 million in 2003. The increase is due both to an increase in the number of
outstanding shares and an increase in the dividend rate to $0.24 per quarter during the second half of 2003.

In 2005, Net Cash Flow from
Operations funded $2.097 million of the total dividends paid of $3.217 million with the remainder of $1.12 million being funded primarily by distributions from unconsolidated subsidiaries and undivided interests of $1.266 million. In 2004, Net Cash
Flow from Operations funded $2.083 million of the total dividends paid of $2.975 million with the remainder of $0.892 million being funded primarily by distributions from unconsolidated subsidiaries and undivided interests $1.531 million.

In addition in 2005, ACRT paid to the Class B shareholder dividends totaling $280,846 of which $118,077 were declared for the year ending
2003 and $162,769 were for the year ending 2004.

ACRT believes that cash flow from operations and distributions from unconsolidated
subsidiaries will provide a portion of the capital to fund operating and administrative expenses and debt service. In addition, ACRT anticipates that cash on hand and borrowings under its secured facilities will assist in providing funds for these
expenses and costs. Upon the approval of the shareholders of the Plan of Liquidation, dividends will only be paid from the proceeds of the sale of properties or upon final liquidation, as determined by the board of directors. Cash flows from
operations were $2.097 million, $2.083 million and $2.368 million for 2005, 2004 and 2003, respectively.



28



---

##### Table of Contents

Net cash provided by investing activities was $9.876 million in 2005 and net cash used in investing
activities was $4.760 million in 2004 and $7.412 in 2003. Cash used or provided in investing activities is related primarily to investments in real estate properties, investments in joint ventures or sales of same. Therefore, the fluctuation in
investing activities relates primarily to the timing of investments and dispositions.

Net cash used in financing activities was $11.697
million in 2005 and net cash provided by financing activities was $1.545 million in 2004 and $6.331 million in 2003. Cash provided by or used in financing activities during each year was primarily attributable to proceeds from equity offerings,
mortgage financings, and advances under the secured credit facility. Net cash used was for repayments under the secured credit facility, dividends paid and debt service payments.

Debt Service Requirements

ACRTs principal liquidity needs are payments of interest and principal on outstanding indebtedness. As of December 31, 2005, a total of seven of ACRTs eleven consolidated properties were subject to
outstanding mortgages which had an aggregate principal amount outstanding of $26.395 million, including $8.215 million in variable interest rate mortgages. As of December 31, 2005, the weighted averaged interest rate on ACRTs outstanding
mortgages was 7.49%. The scheduled principal payments for the next five years are as follows:



|     |  |   |        
|---- |  | - | -------
|2006 |  | $ | 632,761
|2007 |  |   | 715,552
|2008 |  |   | 576,742
|2009 |  |   | 466,190
|2010 |  |   | 479,848

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



|     |  |   |          
|---- |  | - | ---------
|2006 |  | $ | 8,227,954
|2007 |  |   | 3,820,638
|2009 |  |   | 3,734,983

The interest rates on ACRTs outstanding indebtedness range from 6.14% (variable rate at
December 31, 2005) to 8.65%. The ability of ACRT to make its balloon payments will depend upon its ability to refinance the mortgages related thereto, sell the related property, and have amounts available under its secured credit facility or
obtain access to other capital. The ability of ACRT to accomplish this will be affected by the availability and cost of mortgage debt at that time, ACRTs equity in the mortgaged properties, the financial condition of ACRT, the operating
history of the mortgaged properties, the then current tax laws and general national, regional and local economic conditions.

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

ACRT has also purchased interest rate caps in connection with its variable rate mortgage on the
Sacramento, California. The interest rate cap is coterminous with the mortgage and its notional amount is equal to the outstanding principal balance for the mortgage on the Sacramento mortgage. ACRT intends to continue to mitigate its interest rate
risk by using interest rate caps or swaps in the future.

Lease Obligations

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



29



---

##### Table of Contents

Results of Operations



|                                                                     |                        |                         |       |                        |      |   |       |  |           |  |       |           |   |      |   |      |   |     |  
|-------------------------------------------------------------------- | ---------------------- | ----------------------- | ----- | ---------------------- | ---- | - | ----- |  | --------- |  | ----- | --------- | - | ---- | - | ---- | - | --- | -
|                                                                     |                        | Year Ended December 31, |       | Favorable(Unfavorable) |     
|Selected Income Statement Data                                       |                        | 2005                    |       |                        | 2004 |   | 2003  |  | 2005-2004 |  |       | 2004-2003 |  
|                                                                     | (Dollars in thousands) |                        
|Rental revenues and reimbursements                                   |                        | $                       | 6,476 |                        |      | $ | 6,043 |  | $6,000    |  | $     | 433       |   |      | $ | 43   |  
|Interest income                                                      |                        |                         | 64    |                        |      |   | 145   |  | 59        |  |       | (81       | ) |      |   | 86   |  
|Miscellaneous income                                                 |                        |                         | 150   |                        |      |   |      |  | 52        |  |       | 150       |   |      |   | (52  | )
|Interest expense                                                     |                        |                         | 2,012 |                        |      |   | 1,946 |  | 2,089     |  |       | (66       | ) |      |   | 143  |  
|Depreciation and amortization expense                                |                        |                         | 1,074 |                        |      |   | 1,062 |  | 950       |  |       | (12       | ) |      |   | (112 | )
|Management fees-affiliate                                            |                        |                         | 685   |                        |      |   | 693   |  | 607       |  |       | 8         |   |      |   | (86  | )
|Property operating expenses                                          |                        |                         | 1,028 |                        |      |   | 1,033 |  | 1,111     |  |       | 5         |   |      |   | 78   |  
|General and administrative                                           |                        |                         | 114   |                        |      |   | 179   |  | 132       |  |       | 65        |   |      |   | (47  | )
|Stock based compensation                                             |                        |                         | 449   |                        |      |   | 299   |  |          |  |       | (150      | ) |      |   | (299 | )
|Professional expenses                                                |                        |                         | 519   |                        |      |   | 497   |  | 138       |  |       | (22       | ) |      |   | (359 | )
|Other expenses                                                       |                        |                         | 66    |                        |      |   | 92    |  | 168       |  |       | 26        |   |      |   | 76   |  
|Minority interest in earning of subsidiaries and undivided interests |                        |                         | 225   |                        |      |   | 222   |  | 268       |  |       | (3        | ) |      |   | 46   |  
|Equity in income of unconsolidated subsidiaries                      |                        |                         | 1,162 |                        |      |   | 1,185 |  | 814       |  |       | (23       | ) |      |   | 371  |  
|Gain on sale of investment in unconsolidated subsidiary              |                        |                         | 400   |                        |      |   |      |  |          |  |       | 400       |   |      |   |     |  
|(Loss) income from discontinued operations                           |                        |                         | (136  | )                      |      |   | 319   |  |           |  | 225   |           |   | (455 | ) |      |   | 94  |  
|Net income                                                           |                        |                         | 1,944 |                        |      |   | 1,669 |  |           |  | 1,687 |           |   | 275  |   |      |   | (18 | )

Comparison of Year Ended December 31, 2005 to Year Ended
December 31, 2004

Rental Revenue increased by $433,000 of which $368,000 is attributable to the Montgomeryville, PA
property, and $53,000 higher rents on the Sacramento, CA property due to a CPI rent increase and $42,000 in higher Real Estate tax reimbursements, offset by $26,000 lower common area reimbursements due to lower property operating expenses. The
increase in real estate tax reimbursements is offset by a similar increase in real estate tax expense.

Miscellaneous income increased by
$150,000 attributable to the termination of the HPI sale contract.

Interest expense increased $66,000 due mainly to higher interest rates
on the variable rate mortgages partially offset by normal shifting of mortgage amortization from interest to principal on the fixed rate debt and lower balances outstanding on the line of credit.

Depreciation and amortization expense increased by $12,000 due mainly to the amortization of the financing fees associated with the Montgomeryville line
of credit, which was established in June 2004. Property operating expenses decreased by $5,000 of which $35,000 is due to lower property expenses due mainly to lower parking lot and road repairs at the Overland Park, KS property, offset by 30,000
higher real estate taxes.

General and administrative expense decreased by $65,000 due mainly to lower printing costs due to changes in the
printing of the annual report and lower travel expense and board of director fees due to one less board meeting in 2005.

Stock based
compensation increased by $150,000 due to modifications made in May 2004 to the 1997 Stock Option Plan.



30



---

##### Table of Contents

Professional expenses increased by $22,000 due to higher legal and accounting fees associated with the
sale of various assets and increased legal fees associated with proxy preparations and lawsuits. Other expenses decreased $26,000 due to lower loss on the interest rate cap of $37,000, offset by $8,000 higher state taxes mainly due to the
Philadelphia, PA property and $3,000 minority interest adjustments.

Equity in income of unconsolidated subsidiaries and undivided
interests decreased by $23,000 due to lower income from the Triangle property due to lower percentage rent and lower income from the Fort Washington property due to higher interest expense, offset by a full year of income on the Woodcliff Lake
property.

Gain on sale of unconsolidated subsidiaries is attributable to the sale of the Willow Grove member interest. Interest Income
decreased $81,000 due mainly to lower income from the Integral loan, which was repaid in September 2004, and the Willow Grove loan, which was repaid in February 2005.

Income from discontinued operations decreased by $455,000 due mainly to the impairment charge on the Philadelphia property and to costs associated with the sale and having less than eight months of operations in 2005
versus 10 months in 2004 and from the inclusion in 2004 of income from the Memphis, TN property leased to Federal Express which was sold in April 2004.

Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003

The major variance between 2004 and 2003 is attributable to the properties purchased in 2003 and 2004 and to a full year of income for the investment in unconsolidated subsidiaries purchased in 2003 and to the deconsolidation of the
Rochelle Park property. Rental revenue increased $43,000 due primarily to $587,000 from the Montgomeryville, Pennsylvania property purchased in December 2003 offset by $530,000 due to the deconsolidation of the Rochelle Park, New Jersey property in
2003.

Interest income increased by $86,000 due to payments of interest on the Montgomeryville and Willow Grove notes. Miscellaneous income
decreased due to payment of a non-recurring insurance settlement and a right of way settlement involving the Marietta, Georgia property in 2003.

Interest expense decreased $143,000 due primarily to the deconsolidation of the Rochelle Park, New Jersey property. Depreciation and amortization expense increased by $112,000, of which $174,000 is attributable to the Montgomeryville,
Pennsylvania property purchased in December 2003 and to higher amortization of mortgage and finance costs, offset by $84,000 due to the Rochelle Park, New Jersey property deconsolidation.

Management fees increased by $86,000, which is primarily attributable to additional properties purchased in the second half of 2003 and in 2004. Property
operating expenses decreased by $78,000, of which $221,000 is due to the deconsolidation of the Rochelle Park property, offset by $143,000 is due to the Montgomeryville, Pennsylvania property purchased in December 2003. General and administrative
expenses increased by $47,000 primarily due to $17,000 in higher board of directors fees and travel expenses due to an increase in fees and to an additional board meeting in June 2004 and higher business related travel, and to higher Directors and
Officers liability insurance, stationary and printing costs.

Stock based compensation of $299,000 was recorded in 2004 due to
modifications made to the 1997 Stock Option Plan. Professional expenses increased by $359,000 due to a $178,000 increase in legal fees primarily associated with trademark protection, SEC reporting requirements and the proposed asset sale and
$176,000 increase in accounting and consulting fees associated with the SEC reporting requirements and the proposed asset sale. Other expenses decreased by $76,000 due primarily to minority interest adjustments offset by lower losses on interest
rate caps.

Minority interest in earnings of subsidiaries decreased by $46,000 due primarily to the deconsolidation of the Rochelle Park
property. Income from discontinued operations increased by $94,000 due the reclassification of the Philadelphia, Pennsylvania property leased to Barnes and Noble (property was purchased in March 2004 and sold in August 2005), offset by the sale of
the Memphis, Tennessee property leased to Federal Express Corp. on April 30, 2004 and to the $52,000 impairment charge taken on the property prior to sale.

Equity in income of unconsolidated subsidiaries and undivided interests increased by $371,000 due to a $126,000 increase in income from the Rochelle Park, New Jersey property, an $82,000 increase from the Paramus, New
Jersey property which was purchased in May of 2003, a $156,000 increase from the Fort Washington, Pennsylvania property which was under construction in 2003 and did not start receiving rent until 2004, and a $42,000 increase from the ARC
International Fund II investment which was made in March 2004 offset by a $35,000 decrease from Triangle Plaza due mainly to bad debt reserves related to tenant reimbursements for sidewalk repairs.



31



---

##### Table of Contents

Inflation

A majority of ACRTs long-term leases contain provisions to mitigate the adverse impact of inflation on its operating results. Such provisions
include clauses entitling ACRT to receive scheduled fixed base rent increases and base rent increases based upon the consumer price index. In addition, most of ACRTs leases require the tenants to pay operating expenses, including maintenance,
real estate taxes, insurance and utilities, thereby reducing ACRTs exposure to increases in costs and operating expenses resulting from inflation.

Environmental Matters

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

Funds from Operations

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



32



---

##### Table of Contents

The following table reflects the calculation of ACRTs FFO and cash flow activities for each of the
years in the three year period ended December 31, 2005.



|                                                                |  |                         |         |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                |  | Year Ended December 31, |        
|                                                                |  | 2005                    |         |   | 2004 |   |        | 2003 | 
|                                                                |  | (Dollars in thousands)  |        
|Net income allocable to Class A and Class B common shareholders |  | $                       | 1,944   |   |      | $ | 1,669  |      |  | $ | 1,687  |  
|Gain on sale of investment in unconsolidated subsidiary         |  |                         | (400    | ) |      |   |       |      |  |   |       |  
|Depreciation and amortization of real estate                    |  |                         | 944     |   |      |   | 946    |      |  |   | 856    |  
|Amortization of leasing commissions                             |  |                         | 14      |   |      |   | 14     |      |  |   | 14     |  
|Joint venture adjustment-depreciation                           |  |                         | 582     |   |      |   | 583    |      |  |   | 418    |  
|Joint venture adjustment-amortization of leasing commissions    |  |                         | 22      |   |      |   | 22     |      |  |   | 22     |  
|                                                                |  |                         |         |   |      |   |        |      |  |   |        |  
|Funds from Operations                                           |  | $                       | 3,106   |   |      | $ | 3,234  |      |  | $ | 2,997  |  
|                                                                |  |                         |         |   |      |   |        |      |  |   |        |  
|Cash flow provided by operating activities                      |  | $                       | 2,097   |   |      | $ | 2,083  |      |  | $ | 2,368  |  
|Cash flow provided by (used in) investing activities            |  |                         | 9,876   |   |      |   | (4,760 | )    |  |   | (7,412 | )
|Cash flow (used in) provided by financing activities            |  |                         | (11,698 | ) |      |   | 1,545  |      |  |   | 6,331  |  

Recently Issued Accounting Standards

On December 24, 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and,
accordingly, should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, which was issued in January 2003. An enterprises obligation to absorb a majority of the economic risks of a variable interest entity
(VIE), measured as its expected losses, or, if no party has an obligation to absorb a majority of the VIEs economic risks to receive a majority of the VIEs economic rewards, measured as its expected residual returns, requires
the entity to consolidate the VIE. The enterprise that consolidates the VIE is termed the primary beneficiary in FIN 46R. ACRT adopted the requirements of FIN 46R related to certain of its investments as of March 31, 2004. FIN 46R did not have
any impact on ACRTs consolidated financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123R
Accounting for Stock-Based Compensation. The statement supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. The statement establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entitys equity instruments
or that may be settled by the issuance of those equity instruments. The Statement is effective as of the beginning of the first quarter of 2006. The adoption of this pronouncement is not expected to have a material effect on ACRTs consolidated
financial position or results of its operations.

In March 2005, the FASB issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations-an Interpretation of SFAS Statement No. 143 (FIN 47). FIN 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived asset when the
timing and/or method of settlement are conditional on a future event. FIN 47 is effective for fiscal years ending after December 15, 2005. ACRT adopted FIN 47 on December 31, 2005. The adoption did not have any impact on ACRTs
consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections
which replaces Accounting Principles Board Opinions No. 20 Accounting Changes and SFAS No. 3 Reporting Accounting Changes in Interim Financial Statements An Amendment of APB Opinion No. 28. SFAS
No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle and the reporting of a
correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.



33



---

##### Table of Contents

In June 2005, the FASB ratified the Emerging Issues Task Forces (EITF) consensus on EITF 04-05,
Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. EITF 04-05 provides a framework for determining whether a general partner
controls, and should consolidate, a limited partnership or a similar entity. It was effective after June 29, 2005, for all newly formed limited partnerships and for any pre-existing partnerships that modify their partnership agreements after
that date. General partners of all other limited partnerships will apply the consensus no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The impact of the adoption of EITF 04-05 is not
expected to have a material impact on ACRTs consolidated financial position or results of operations.

In 2005, the EITF released
Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements (EITF 05-6), which clarifies the period over which leasehold improvements should be amortized. EITF 05-6 requires all leasehold improvements to be
amortized over the shorter of the useful life of the assets, or the applicable lease term, as defined. The applicable lease term is determined on the date the leasehold improvements are acquired and includes renewal periods for which exercise is
reasonably assured. EITF 05-6 was effective for leasehold improvements acquired in reporting periods beginning after June 29, 2005. The impact of the adoption of EITF 05-6 did not have a material impact on ACRTs consolidated financial
position or results of operations.

Off-Balance Sheet Arrangements

Unconsolidated Real Estate Joint Ventures and Undivided Interests

ACRT has investments in various real estate joint ventures with varying structures. These investments include ACRTs non-controlling interests in Triangle Plaza II, LLC (Notes to Consolidated Financial
Statements: Note 5), Fort Washington Fitness, L.P. (Notes to Consolidated Financial Statements: Note 6), Levittown ARC, LP (Notes to Consolidated Financial Statements: Note 7), Willow Grove ACRT, LLC (Notes to Consolidated Financial Statements: Note
10) and ARC International Fund II, LP (Notes to Consolidated Financial Statements: Note 11) and its undivided interests in the Rochelle Park property (Notes to Consolidated Financial Statements: Note 8) and the Paramus property (Notes to
Consolidated Financial Statements: Note 9).

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

Contractual Obligations



|                           |  |                        |            |                  |   |           |  |           |           |          |   |           |  |   |          
|-------------------------- |  | ---------------------- | ---------- | ---------------- | - | --------- |  | --------- | --------- | -------- | - | --------- |  | - | ---------
|                           |  | Payments due by period
|Contractual Obligations    |  | Total                  |            | Less than 1 Year |   | 1-3 Years |  | 3-5 Years |           | 5+ Years
|Long-Term Debt Obligations |  | $                      | 26,395,027 |                  | $ | 8,860,715 |  | $         | 5,112,932 |          | $ | 4,681,021 |  | $ | 7,740,359
|                           |  |                        |            |                  |   |           |  |           |           |          |   |           |  |   |          

7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ACRTs exposure to market risk
relates to its variable rate debt. As of December 31, 2005 and 2004 ACRT had two variable rate mortgages and three variable rate mortgages outstanding totaling $8.215 million and $13.661 million, respectively. These mortgages bear interest at
LIBOR plus 206 basis points (6.14% per year at December 31, 2005 on $4.107 million) to LIBOR plus 225 basis points (6.33% at December 31, 2005 on $4.108 million). Had the LIBOR rate been 100 basis points higher during 2005, ACRTs net
income would have been reduced by approximately $82,150. ACRT also entered into an interest rate cap agreement on a notional amount equal to the $4.107 million mortgage balance at December 31, 2005, which effectively caps the LIBOR rate at
7.45% per year.



34



---

##### Table of Contents

ITEM 8. Financial Statements and Supplementary Data



|                                                                                                                 |  |     
|---------------------------------------------------------------------------------------------------------------- |  | ----
|Index to Financial Statements                                                                                    |  | Page
|Report of Independent Registered Public Accounting Firm                                                          |  | 36  
|                                                                                                                 | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                                     |  | 37  
|                                                                                                                 | 
|Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003                           |  | 38  
|                                                                                                                 | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2005, 2004, and 2003 |  | 39  
|                                                                                                                 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                       |  | 40  
|                                                                                                                 | 
|Notes to Consolidated Financial Statements                                                                       |  | 42  
|                                                                                                                 | 
|Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2005                                    |  | 62  



35



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

ARC Corporate Realty Trust, Inc.:

We have audited the consolidated financial
statements of ARC Corporate Realty Trust, Inc. and subsidiaries as listed in the accompanying index to financial statements. In connection with our audits of the consolidated financial statements, we also have audited the financial statement
schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of ARC Corporate Realty Trust, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

New York, New York

February 17, 2006



36



---

##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                            |  |              |            |   |      |   |            |  
|----------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                            |  | December 31, |           
|                                                                                                            |  | 2005         |            |   | 2004 |  
|ASSETS                                                                                                      |  |              |            |   |      |   |            |  
|Properties                                                                                                  |  |              |            |   |      |   |            |  
|Land                                                                                                        |  | $            | 12,412,227 |   |      | $ | 14,515,922 |  
|Buildings and improvements                                                                                  |  |              | 36,653,540 |   |      |   | 45,068,320 |  
|                                                                                                            |  |              |            |   |      |   |            |  
|                                                                                                            |  |              | 49,065,767 |   |      |   | 59,584,242 |  
|Less accumulated depreciation                                                                               |  |              | 7,151,201  |   |      |   | 6,401,456  |  
|                                                                                                            |  |              |            |   |      |   |            |  
|                                                                                                            |  |              | 41,914,566 |   |      |   | 53,182,786 |  
|Investment in unconsolidated subsidiaries and undivided interests                                           |  |              | 7,693,231  |   |      |   | 7,797,437  |  
|                                                                                                            |  |              |            |   |      |   |            |  
|Total property and property investments                                                                     |  |              | 49,607,797 |   |      |   | 60,980,223 |  
|Cash and cash equivalents                                                                                   |  |              | 711,853    |   |      |   | 436,264    |  
|Restricted cash                                                                                             |  |              | 517,707    |   |      |   | 424,035    |  
|Deferred rent receivable                                                                                    |  |              | 1,198,693  |   |      |   | 1,130,154  |  
|Rent receivable                                                                                             |  |              | 195,088    |   |      |   | 236,867    |  
|Notes receivable-tenants                                                                                    |  |              | 322,923    |   |      |   | 369,608    |  
|Notes receivable                                                                                            |  |              |           |   |      |   | 800,000    |  
|Prepaid expenses and other assets                                                                           |  |              | 270,002    |   |      |   | 322,159    |  
|Deferred financing and other fees, net of accumulated amortization of $729,927 in 2005 and $624,597 in 2004 |  |              | 271,389    |   |      |   | 522,540    |  
|Deferred leasing costs, net of accumulated amortization of $130,518 in 2005 and $116,353 in 2004            |  |              | 81,949     |   |      |   | 96,114     |  
|                                                                                                            |  |              |            |   |      |   |            |  
|Total assets                                                                                                |  | $            | 53,177,401 |   |      | $ | 65,317,964 |  
|                                                                                                            |  |              |            |   |      |   |            |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                        |  |              |            |   |      |   |            |  
|Liabilities                                                                                                 |  |              |            |   |      |   |            |  
|Mortgage notes payable                                                                                      |  | $            | 26,395,027 |   |      | $ | 32,377,883 |  
|Lines of credit                                                                                             |  |              |           |   |      |   | 2,247,613  |  
|Due to related parties                                                                                      |  |              | 45,061     |   |      |   | 45,061     |  
|Acquired unfavorable leases, net                                                                            |  |              |           |   |      |   | 2,815,460  |  
|Unearned rental revenue                                                                                     |  |              | 31,250     |   |      |   | 31,250     |  
|Accounts payable and accrued expenses                                                                       |  |              | 580,567    |   |      |   | 851,859    |  
|                                                                                                            |  |              |            |   |      |   |            |  
|                                                                                                            |  |              | 27,051905  |   |      |   | 38,369,126 |  
|Minority interests in consolidated subsidiaries                                                             |  |              | 32,072     |   |      |   | 30,972     |  
|                                                                                                            |  |              |            |   |      |   |            |  
|Total liabilities and minority interests                                                                    |  |              | 27,083,977 |   |      |   | 38,400,098 |  
|                                                                                                            |  |              |            |   |      |   |            |  
|Shareholders Equity:                                                                                       |  |              |            |   |      |   |            |  
|Common shares: $.001 par value per share; authorized 40,000,000 shares                                      |  |              |            |   |      |   |            |  
|Class A shares  5,000,000 authorized; 3,181,540 issued and outstanding                                     |  |              | 3,182      |   |      |   | 3,182      |  
|Class B shares  5,000,000 authorized; 166,397 issued and outstanding                                       |  |              | 166        |   |      |   | 166        |  
|Additional paid-in capital                                                                                  |  |              | 32,106,429 |   |      |   | 32,106,429 |  
|Deferred compensation plan                                                                                  |  |              | 747,930    |   |      |   | 299,172    |  
|Accumulated distributions in excess of net income                                                           |  |              | (6,764,283 | ) |      |   | (5,491,083 | )
|                                                                                                            |  |              |            |   |      |   |            |  
|Total shareholders equity                                                                                  |  |              | 26,093,424 |   |      |   | 26,917,866 |  
|                                                                                                            |  |              |            |   |      |   |            |  
|Total liabilities and shareholders equity                                                                  |  | $            | 53,177,401 |   |      | $ | 65,317,964 |  
|                                                                                                            |  |              |            |   |      |   |            |  

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



37



---

##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME



|                                                                        |  |              |           |   |      |   |           |  |   |          
|----------------------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- |  | - | ---------
|                                                                        |  | December 31,
|                                                                        |  | 2005         |           |   | 2004 |   | 2003     
|Revenues                                                                |  |              |           |   |      |   |           |  |   |          
|Rental revenues                                                         |  | $            | 5,760,642 |   |      | $ | 5,369,454 |  | $ | 5,366,660
|Real estate tax reimbursements                                          |  |              | 715,263   |   |      |   | 673,813   |  |   | 633,276  
|Interest income                                                         |  |              | 64,420    |   |      |   | 144,911   |  |   | 58,666   
|Miscellaneous income                                                    |  |              | 150,000   |   |      |   | 145       |  |   | 52,170   
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Total revenues                                                          |  |              | 6,690,325 |   |      |   | 6,188,323 |  |   | 6,110,772
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Expenses                                                                |  |              |           |   |      |   |           |  |   |          
|Interest expense                                                        |  |              | 2,012,244 |   |      |   | 1,946,386 |  |   | 2,089,472
|Depreciation and amortization                                           |  |              | 1,074,406 |   |      |   | 1,062,279 |  |   | 949,793  
|Management fees  affiliate                                             |  |              | 684,702   |   |      |   | 693,132   |  |   | 607,146  
|Real estate taxes                                                       |  |              | 722,003   |   |      |   | 691,564   |  |   | 670,226  
|Property operating expenses                                             |  |              | 306,445   |   |      |   | 341,176   |  |   | 440,500  
|General and administrative expenses                                     |  |              | 113,813   |   |      |   | 178,693   |  |   | 132,460  
|Stock based compensation                                                |  |              | 448,758   |   |      |   | 299,172   |  |   |         
|Professional expenses                                                   |  |              | 519,121   |   |      |   | 496,902   |  |   | 137,661  
|Other expenses                                                          |  |              | 26,648    |   |      |   | 23,924    |  |   | 99,787   
|Loss on interest rate cap, net                                          |  |              | 4,103     |   |      |   | 41,624    |  |   | 47,287   
|State and local taxes                                                   |  |              | 35,307    |   |      |   | 26,739    |  |   | 21,486   
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Total expenses                                                          |  |              | 5,947,550 |   |      |   | 5,801,591 |  |   | 5,195,818
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Minority interests in earnings of subsidiaries                          |  |              | 224,611   |   |      |   | 222,350   |  |   | 267,902  
|Equity in income of unconsolidated subsidiaries and undivided interests |  |              | 1,162,243 |   |      |   | 1,184,828 |  |   | 814,695  
|Gain on sale of investment in unconsolidated subsidiary                 |  |              | 400,000   |   |      |   |          |  |   |         
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Income from continuing operations                                       |  |              | 2,080,407 |   |      |   | 1,349,210 |  |   | 1,461,747
|(Loss) income from discontinued operations                              |  |              | (136,530  | ) |      |   | 319,549   |  |   | 225,435  
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Net income allocable to Class A and Class B common shareholders         |  | $            | 1,943,877 |   |      | $ | 1,668,759 |  | $ | 1,687,182
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Basic:                                                                  |  |              |           |   |      |   |           |  |   |          
|Net income per share from continuing operations                         |  | $            | 0.62      |   |      | $ | 0.40      |  | $ | 0.58     
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Net (loss) income per share from discontinued operations                |  |              | (0.04     | ) |      |   | 0.10      |  |   | 0.09     
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Net income per share                                                    |  | $            | 0.58      |   |      | $ | 0.50      |  | $ | 0.67     
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Diluted:                                                                |  |              |           |   |      |   |           |  |   |          
|Net income per share from continuing operations                         |  | $            | 0.53      |   |      | $ | 0.34      |  | $ | 0.57     
|Net (loss) income per share from discontinued operations                |  |              | (0.04     | ) |      |   | 0.08      |  |   | 0.09     
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Net income per share                                                    |  | $            | 0.49      |   |      | $ | 0.42      |  | $ | 0.66     
|                                                                        |  |              |           |   |      |   |           |  |   |          
|Shares:                                                                 |  |              |           |   |      |   |           |  |   |          
|Weighted average shares outstanding  basic                             |  |              | 3,348,000 |   |      |   | 3,348,000 |  |   | 2,518,000
|Weighted average shares outstanding  diluted                           |  |              | 3,954,000 |   |      |   | 3,954,000 |  |   | 2,551,000

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



38



---

##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003



|                                         |  |                     |       |   |                     |   |                          |  |   |                            |   |                                                  |   |         |                          |   |            |   |  |   |            |  
|---------------------------------------- |  | ------------------- | ----- | - | ------------------- | - | ------------------------ |  | - | -------------------------- | - | ------------------------------------------------ | - | ------- | ------------------------ | - | ---------- | - |  | - | ---------- | -
|                                         |  | Class ACommonShares |       |   | Class BCommonShares |   | AdditionalPaid-InCapital |  |   | Deferred Compensation Plan |   | Accumulated Distributions In Excess ofNet
Income |   |         | TotalShareholdersEquity |  
|Balance, January 1, 2003                 |  | $                   | 2,164 |   |                     | $ |                         |  | $ | 19,377,113                 |   |                                                  | $ |        |                          | $ | (3,913,843 | ) |  | $ | 15,465,434 |  
|Sale of common stock                     |  |                     | 1,019 |   |                     |   | 166                      |  |   | 14,064,020                 |   |                                                  |   |        |                          |   |           |   |  |   | 14,065,205 |  
|Offering costs                           |  |                     |      |   |                     |   |                         |  |   | (1,300,911                 | ) |                                                  |   |        |                          |   |           |   |  |   | (1,300,911 | )
|Retirements                              |  |                     | (1    | ) |                     |   |                         |  |   | (8,999                     | ) |                                                  |   |        |                          |   |           |   |  |   | (9,000     | )
|Net income                               |  |                     |      |   |                     |   |                         |  |   |                           |   |                                                  |   |        |                          |   | 1,687,182  |   |  |   | 1,687,182  |  
|Dividends paid                           |  |                     |      |   |                     |   |                         |  |   |                           |   |                                                  |   |        |                          |   | (1,839,617 | ) |  |   | (1,839,617 | )
|                                         |  |                     |       |   |                     |   |                          |  |   |                            |   |                                                  |   |         |                          |   |            |   |  |   |            |  
|Balance, December 31, 2003               |  |                     | 3,182 |   |                     |   | 166                      |  |   | 32,131,223                 |   |                                                  |   |        |                          |   | (4,066,278 | ) |  |   | 28,068,293 |  
|Offering costs                           |  |                     |      |   |                     |   |                         |  |   | (24,794                    | ) |                                                  |   |        |                          |   |           |   |  |   | (24,794    | )
|Amortization of stock based compensation |  |                     |      |   |                     |   |                         |  |   |                           |   |                                                  |   | 299,172 |                          |   |           |   |  |   | 299,172    |  
|Net income                               |  |                     |      |   |                     |   |                         |  |   |                           |   |                                                  |   |        |                          |   | 1,668,759  |   |  |   | 1,668,759  |  
|Dividends                                |  |                     |      |   |                     |   |                         |  |   |                           |   |                                                  |   |        |                          |   | (3,093,564 | ) |  |   | (3,093,564 | )
|                                         |  |                     |       |   |                     |   |                          |  |   |                            |   |                                                  |   |         |                          |   |            |   |  |   |            |  
|Balance, December 31, 2004               |  |                     | 3,182 |   |                     |   | 166                      |  |   | 32,106,429                 |   |                                                  |   | 299,172 |                          |   | (5,491,083 | ) |  |   | 26,917,866 |  
|Amortization of stock based compensation |  |                     |      |   |                     |   |                         |  |   |                           |   |                                                  |   | 448,758 |                          |   |           |   |  |   | 448,758    |  
|Net income                               |  |                     |      |   |                     |   |                         |  |   |                           |   |                                                  |   |        |                          |   | 1,943,877  |   |  |   | 1,943,877  |  
|Dividends                                |  |                     |      |   |                     |   |                         |  |   |                           |   |                                                  |   |        |                          |   | (3,217,077 | ) |  |   | (3,217,077 | )
|                                         |  |                     |       |   |                     |   |                          |  |   |                            |   |                                                  |   |         |                          |   |            |   |  |   |            |  
|Balance, December 31, 2005               |  | $                   | 3,182 |   |                     | $ | 166                      |  | $ | 32,106,429                 |   |                                                  | $ | 747,930 |                          | $ | (6,764,283 | ) |  | $ | 26,093,424 |  
|                                         |  |                     |       |   |                     |   |                          |  |   |                            |   |                                                  |   |         |                          |   |            |   |  |   |            |  

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



39



---

##### Table of Contents

ARC CORPORATE REALTY TRUST, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                          |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                  |  | Years Ended December 31, |           
|                                                                                  |  | 2005                     |            |   | 2004 |   |            | 2003 | 
|Cash Flows From Operating Activities:                                             |  |                          |            |   |      |   |            |      |  |   |            |  
|Net income                                                                        |  | $                        | 1,943,877  |   |      | $ | 1,668,759  |      |  | $ | 1,687,182  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |            |   |      |   |            |      |  |   |            |  
|Depreciation and amortization                                                     |  |                          | 1,100,835  |   |      |   | 1,246,354  |      |  |   | 1,008,328  |  
|Write off of financing costs                                                      |  |                          | 141,376    |   |      |   |           |      |  |   |           |  
|Amortization of stock based compensation                                          |  |                          | 448,758    |   |      |   | 299,172    |      |  |   |           |  
|Amortization of acquired unfavorable lease                                        |  |                          | (139,772   | ) |      |   | (181,335   | )    |  |   |           |  
|Minority interest in earnings of subsidiaries                                     |  |                          | 224,611    |   |      |   | 222,350    |      |  |   | 267,902    |  
|Impairment charge on disposed property                                            |  |                          | 287,259    |   |      |   | 52,521     |      |  |   |           |  
|Write off TMD minority interest                                                   |  |                          | 26,648     |   |      |   | 23,924     |      |  |   | 99,787     |  
|Gain on sale of investment in unconsolidated subsidiary                           |  |                          | (400,000   | ) |      |   |           |      |  |   |           |  
|Loss on interest rate cap                                                         |  |                          | 16,364     |   |      |   | 69,866     |      |  |   | 47,287     |  
|Equity in income of unconsolidated subsidiaries and undivided interests           |  |                          | (1,162,243 | ) |      |   | (1,184,828 | )    |  |   | (814,695   | )
|(Increase) decrease in assets:                                                    |  |                          |            |   |      |   |            |      |  |   |            |  
|Restricted cash                                                                   |  |                          | (93,672    | ) |      |   | (45,779    | )    |  |   | (2,439     | )
|Rent receivable                                                                   |  |                          | 41,779     |   |      |   | 9,849      |      |  |   | (8,137     | )
|Deferred rent receivable                                                          |  |                          | (68,539    | ) |      |   | (101,628   | )    |  |   | (37,560    | )
|Prepaid expenses and other assets                                                 |  |                          | 1,451      |   |      |   | 6,669      |      |  |   | (8,349     | )
|Increase (decrease) in liabilities:                                               |  |                          |            |   |      |   |            |      |  |   |            |  
|Due to related parties, net                                                       |  |                          |           |   |      |   | (43,469    | )    |  |   | 43,470     |  
|Accounts payable and accrued expenses                                             |  |                          | (271,292   | ) |      |   | 9,462      |      |  |   | 157,950    |  
|Unearned rental revenue                                                           |  |                          |           |   |      |   | 31,250     |      |  |   | (72,336    | )
|                                                                                  |  |                          |            |   |      |   |            |      |  |   |            |  
|Net cash provided by operating activities                                         |  |                          | 2,097,440  |   |      |   | 2,083,137  |      |  |   | 2,368,390  |  
|                                                                                  |  |                          |            |   |      |   |            |      |  |   |            |  
|Cash Flows From Investing Activities:                                             |  |                          |            |   |      |   |            |      |  |   |            |  
|Payments for tenant improvements                                                  |  |                          |           |   |      |   | (146,971   | )    |  |   |           |  
|Proceeds from the sale of unconsolidated subsidiary                               |  |                          | 400,000    |   |      |   |           |      |  |   |           |  
|Net proceeds from sale of property                                                |  |                          | 7,362,720  |   |      |   | 2,310,027  |      |  |   |           |  
|Due to related party, net                                                         |  |                          |           |   |      |   | (209,675   | )    |  |   | 82,602     |  
|Acquisition of properties                                                         |  |                          |           |   |      |   | (7,527,285 | )    |  |   | (6,936,939 | )
|Investments in unconsolidated subsidiaries and undivided interests                |  |                          |           |   |      |   | (753,655   | )    |  |   | (3,072,234 | )
|Distributions from unconsolidated subsidiaries and undivided interests            |  |                          | 1,266,449  |   |      |   | 1,530,778  |      |  |   | 3,361,549  |  
|Deconsolidation of Rochelle Park cash                                             |  |                          |           |   |      |   |           |      |  |   | (90,159    | )



40



---

##### Table of Contents

|                                                        |  |                          |             |   |      |   |            |      |  |   |            |  
|------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                        |  | Years Ended December 31, |            
|                                                        |  | 2005                     |             |   | 2004 |   |            | 2003 | 
|Increase in notes receivable                            |  |                          |            |   |      |   | (650,000   | )    |  |   | (795,000   | )
|Payoff of notes receivable                              |  |                          | 800,000     |   |      |   | 645,000    |      |  |   |           |  
|Principal payments on notes receivable-tenants          |  |                          | 46,685      |   |      |   | 42,052     |      |  |   | 37,877     |  
|                                                        |  |                          |             |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) investing activities     |  |                          | 9,875,854   |   |      |   | (4,759,729 | )    |  |   | (7,412,304 | )
|                                                        |  |                          |             |   |      |   |            |      |  |   |            |  
|Cash Flows From Financing Activities:                   |  |                          |             |   |      |   |            |      |  |   |            |  
|Mortgage notes principal amortization                   |  |                          | (765,144    | ) |      |   | (700,994   | )    |  |   | (608,802   | )
|Payoff of principal on mortgage note                    |  |                          | (5,217,712  | ) |      |   |           |      |  |   |           |  
|Borrowings under mortgage notes payable                 |  |                          |            |   |      |   | 5,300,000  |      |  |   |           |  
|Lines of credit, net                                    |  |                          | (2,247,613  | ) |      |   | 497,613    |      |  |   | (4,288,090 | )
|Purchase of interest rate cap                           |  |                          |            |   |      |   | (56,500    | )    |  |   | (99,800    | )
|Due from escrow agent                                   |  |                          |            |   |      |   |           |      |  |   | 1,307,470  |  
|Deferred financing and other fees                       |  |                          |            |   |      |   | (264,222   | )    |  |   | (81,919    | )
|Distributions to minority interest owners               |  |                          | (250,159    | ) |      |   | (250,159   | )    |  |   | (250,159   | )
|Sale of common stock - Class A                          |  |                          |            |   |      |   |           |      |  |   | 12,211,050 |  
|Sale of common stock - Class B                          |  |                          |            |   |      |   |           |      |  |   | 1,218,178  |  
|Stock retirements                                       |  |                          |            |   |      |   |           |      |  |   | (9,000     | )
|Offering costs paid - Class A                           |  |                          |            |   |      |   | (5,310     | )    |  |   | (1,098,609 | )
|Offering costs paid - Class B                           |  |                          |            |   |      |   |           |      |  |   | (129,882   | )
|Class A and B Dividends paid                            |  |                          | (3,217,077  | ) |      |   | (2,975,487 | )    |  |   | (1,839,617 | )
|                                                        |  |                          |             |   |      |   |            |      |  |   |            |  
|Net cash (used in) provided be financing activities     |  |                          | (11,697,705 | ) |      |   | 1,544,941  |      |  |   | 6,330,820  |  
|                                                        |  |                          |             |   |      |   |            |      |  |   |            |  
|Change in cash and cash equivalents                     |  |                          | 275,589     |   |      |   | (1,131,651 | )    |  |   | 1,286,906  |  
|Cash and cash equivalents, beginning of year            |  |                          | 436,264     |   |      |   | 1,567,915  |      |  |   | 281,009    |  
|                                                        |  |                          |             |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents, end of year                  |  | $                        | 711,853     |   |      | $ | 436,264    |      |  | $ | 1,567,915  |  
|                                                        |  |                          |             |   |      |   |            |      |  |   |            |  
|Supplemental Disclosure of Cash Flow Information:       |  |                          |             |   |      |   |            |      |  |   |            |  
|Cash payments for interest                              |  | $                        | 2,208,793   |   |      | $ | 2,160,465  |      |  | $ | 2,128,866  |  
|                                                        |  |                          |             |   |      |   |            |      |  |   |            |  
|Non-Cash Financing Activities:                          |  |                          |             |   |      |   |            |      |  |   |            |  
|Conversion of note payable to Class B common stock      |  | $                        |            |   |      | $ |           |      |  | $ | 500,000    |  
|                                                        |  |                          |             |   |      |   |            |      |  |   |            |  
|Conversion of placement deposit to Class B common stock |  | $                        |            |   |      | $ |           |      |  | $ | 63,557     |  
|                                                        |  |                          |             |   |      |   |            |      |  |   |            |  

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



41



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



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

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

Through December 31, 2005 ACRT raised $33,678,336 of gross proceeds (net of stock retirements) representing 3,181,540 Class A shares from 674
investors which, net of offering costs, has yielded $ 30,545,106 to ACRT. In addition, ACRT has raised $1,781,735 of gross proceeds representing 166,397 Class B shares from one investor, which, net of offering costs, has yielded $1,564,671 to ACRT.

On December 20, 2004, ACRT entered into a Contract of Purchase and Sale (the Agreement), by and among ACRT, certain
affiliates of ACRT and HPI/NL Investors LLC (the Purchaser). The Agreement provides for the sale to the Purchaser of 14 of ACRTs 21 properties and a limited partnership interest in an entity that owns a property.

On June 30, 2005 the Agreement became subject to termination. On November 30, 2005 ACRT entered into a Termination and Release Agreement with
the Purchaser. The Termination and Release Agreement called for the payment of $150,000 to ACRT from the deposit escrow and an additional payment to ACRT of $37,450 as reimbursement of survey and other costs related to the Agreement. In exchange
ACRT released the Purchaser from any further obligations under the Agreement.

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



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

ACRT anticipates that the sale of these investments will close in 2006. Based on the current sales
prices, ACRT anticipates that the above three investments will be sold for amounts in excess of their carrying amounts and, therefore, will result in a gain for financial reporting purposes.

On August 10, 2005, ACRT sold the Philadelphia, Pennsylvania property leased to Barnes and Noble (see Note 4).

On February 8, 2006 the board of directors approved the adoption of a Plan of Liquidation and Dissolution (the Plan). The Plan is subject
to the approval of ACRTs Common stockholders, by two-thirds vote. ACRT intends to sell its real estate properties on an orderly basis, to pay or provide for its liabilities and to distribute its remaining cash to its shareholders.



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



| | a. | Basis of Presentation - The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP) and include the accounts of ACRT, its wholly-owned subsidiaries and those majority-owned subsidiaries in which ACRT can exercise control. Investments in non-controlled entities, which include Triangle
Plaza II, LLC (Note 5), Fort Washington Fitness, LP (Note 6), Levittown ARC, LP (Note 7), Willow Grove ACRT, LLC (Note 10) and ARC International Fund II, LP (Note 11) are accounted for under the equity method of accounting. Additionally, ACRTs
undivided interests in the Rochelle Park property (Note 8) and the Paramus property (Note 9) are accounted for under the equity method, as ACRT maintains joint control over the properties. Under the equity method, ACRTs investment increases as
a result of contributions and its allocable share of net income and decreases as a result of distributions and its allocable share of net losses. All significant intercompany balances and transactions have been eliminated in consolidation and in the
use of the equity method of accounting.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



42



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



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



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



| | d. | Purchase Accounting for the Acquisition of Real Estate  In accordance with SFAS No. 141, commencing with properties acquired after June 30,
2002, the fair value of real estate acquired is allocated to the acquired tangible assets, consisting of land and building and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value
of in-place leases and value of tenant relationships, based in each case on their fair values. The fair value of the tangible assets of an acquired property (which includes land and building) is determined by valuing the property as if it were
vacant, and the as-if vacant value is then allocated to land and building based on managements determination of relative fair values of these assets. Factors considered by management in performing these analyses include an estimate
of carrying costs during the expected lease up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and
estimates of lost rental revenues during expected lease up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



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

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

During the year ended December 31, 2004, ACRT sold one property located in Memphis, Tennessee, previously designated as to be disposed and for which
an impairment charge of $52,521 had been recorded, for aggregate net proceeds of $2,310,027 which resulted in no gain or loss on the sale for financial reporting purposes.

During the year ended December 31, 2005, ACRT sold one property located in Philadelphia, Pennsylvania, previously designated as to be disposed and for which an impairment charge of $287,259 was recorded, which
included a disposition fee of $116,016. This property was sold on August 10, 2005 for aggregate net proceeds of $7,362,720 which resulted in no gain or loss for financial reporting purposes.



43



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



The following presents the operating results for the properties sold for the applicable periods:



|                  |  |                          |          |   |      |   |           |  |   |        
|----------------- |  | ------------------------ | -------- | - | ---- | - | --------- |  | - | -------
|                  |  | Years Ended December 31,
|                  |  | 2005                     |          |   | 2004 |   | 2003     
|Revenues          |  | $                        | 745,587  |   |      | $ | 1,006,895 |  | $ | 366,932
|Net (Loss) Income |  |                          | (136,530 | ) |      |   | 319,549   |  |   | 225,435



| | f. | Cash and Cash Equivalents - Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------

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



| | g. | Restricted cash - Restricted cash represents cash maintained for real estate taxes, insurance and capital expenditures.
| | -- | -----------------------------------------------------------------------------------------------------------------------



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



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



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



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

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



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



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



44



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



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



|                                                                                           |  |                          |  |       |  |      
|------------------------------------------------------------------------------------------ |  | ------------------------ |  | ----- |  | -----
|                                                                                           |  | Years Ended December 31,
|                                                                                           |  | 2005                     |  | 2004  |  | 2003 
|                                                                                           |  | (in thousands)          
|Total weighted average Class A common shares                                               |  | 3,182                    |  | 3,182 |  | 2,392
|Total weighted average Class B common shares                                               |  | 166                      |  | 166   |  | 126  
|                                                                                           |  |                          |  |       |  |      
|Weighted average number of common shares used in calculation of basic earnings per share   |  | 3,348                    |  | 3,348 |  | 2,518
|Shares issuable on exercise of warrants                                                    |  | 104                      |  | 104   |  | 33   
|Shares issuable upon exercise of stock options (15% of outstanding common shares)          |  | 502                      |  | 502   |  |     
|                                                                                           |  |                          |  |       |  |      
|Weighted average number of common shares used in calculation of diluted earnings per share |  | 3,954                    |  | 3,954 |  | 2,551



| | n. | Recent Accounting Pronouncements  On December 24, 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and, accordingly, should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, which was issued in January 2003. An enterprises obligation to absorb a majority of the economic risks of a
variable interest entity (VIE), measured as its expected losses, or, if no party has an obligation to absorb a majority of the VIEs economic risks to receive a majority of the VIEs economic rewards, measured as its expected
residual returns, requires the entity to consolidate the VIE. The enterprise that consolidates the VIE is termed the primary beneficiary in FIN 46R. ACRT adopted the requirements of FIN 46R related to certain of its investments as of March 31,
2004. FIN 46R did not have any impact on ACRTs consolidated financial position or results of operations.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In December
2004, the FASB issued SFAS No. 123R Accounting for Stock-Based Compensation. The statement supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. The statement establishes standards
for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value
of the entitys equity instruments or that may be settled by the issuance of those equity instruments. The statement is effective as of the beginning of the first quarter of 2006. The adoption of this pronouncement is not expected to have a
material effect on ACRTs consolidated financial position or results of operations.

In March 2005, the FASB issued Interpretation
No. 47, Accounting for Conditional Asset Retirement Obligations-an Interpretation of SFAS Statement No. 143 (FIN 47). FIN 47 clarifies the timing of liability recognition for legal obligations associated with the
retirement of tangible long-lived asset when the timing and/or method of settlement are conditional on a future event. FIN 47 is effective for fiscal years ending after December 15, 2005. ACRT adopted FIN 47 on December 31, 2005. The
adoption did not have any impact on ACRTs consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections which replaces Accounting Principles Board Opinions No. 20 Accounting Changes and SFAS No. 3 Reporting Accounting Changes in Interim Financial
Statements An Amendment of APB Opinion No. 28. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method
for reporting a change in accounting principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.



45



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



In June 2005, the FASB ratified the Emerging Issues Task Forces (EITF) consensus on EITF 04-05,
Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. EITF 04-05 provides a framework for determining whether a general
partner controls, and should consolidate, a limited partnership or a similar entity. It was effective after June 29, 2005, for all newly formed limited partnerships and for any pre-existing partnerships that modify their partnership agreements
after that date. General partners of all other limited partnerships will apply the consensus no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The impact of the adoption of EITF 04-05
is not expected to have a material impact on ACRTs consolidated financial position or results of operations.

In 2005, the EITF
released Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements (EITF 05-6), which clarifies the period over which leasehold improvements should be amortized. EITF 05-6 requires all leasehold
improvements to be amortized over the shorter of the useful life of the assets, or the applicable lease term, as defined. The applicable lease term is determined on the date the leasehold improvements are acquired and includes renewal periods for
which exercise is reasonably assured. EITF 05-6 was effective for leasehold improvements acquired in reporting periods beginning after June 29, 2005. The impact of the adoption of EITF 05-6 did not have a material impact on ACRTs
consolidated financial position or results of operations.



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

Accordingly, ACRT recognizes compensation expense ratably over the
vesting period for variable stock awards previously granted under the plan. For the years ended December 31, 2005 and 2004, ACRT recognized stock based compensation expense totaling $448,758 and $299,172, respectively.

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



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

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

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

Mortgage Notes Payable and Lines of Credit

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



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



| | r. | Environmental Matters - Based upon managements ongoing review of its properties, management is not aware of any environmental conditions with respect to
any of ACRTs properties, which would be reasonably likely to have a material adverse effect on ACRT or would require accrual or disclosure in accordance with FIN47. There can be no assurance, however, that the discovery of environmental
conditions which were previously unknown, changes in law, the conduct of tenants or activities relating to properties in the vicinity of ACRTs properties, will not expose ACRT to material liability in the future. Changes in law increasing the
potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of
ACRTs tenants, which would adversely affect ACRTs consolidated financial condition and results of operations.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



46



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



|3. | OFFERING COSTS
|-- | --------------

Costs incurred to sell Class A
and Class B shares consisting of selling commissions, placement fees, printing and other costs related to marketing shares for sale are considered selling and offering expenses. These costs were charged directly to shareholders equity.

Pursuant to the terms of the agreement with the managing broker-dealer for ACRTs third private placement offering which began on
May 23, 2003, ACRT will issue to the managing brokerdealer or its designees, stock warrants equal to 7% of the total shares sold by the soliciting dealers. The stock warrants will have a term of 10 years and an exercise price of $10.98.
As of December 31, 2003, this represented approximately 71,000 warrants. The fair value of the stock warrants of $1.02 per share is reflected in offering costs on the accompanying consolidated statements of shareholders equity.

As of December 31, 2005 and 2004, no stock warrants have been exercised.



|4. | PROPERTIES AND PROPERTY INVESTMENTS
|-- | -----------------------------------

On
June 29, 1994, ACRT paid $2,650,000 plus acquisition fees and other expenses to purchase a 30,000-square-foot office building at 3400 Prescott Road, Memphis, Tennessee leased to Federal Express Corp. On April 30, 2004, ACRT sold this
property for approximately $2,325,000.

On July 1, 1994, ACRT paid $1,425,000 plus acquisition fees and other expenses to purchase a
14,294-square-foot retail building at 2644 James Road, Memphis, Tennessee leased 87.76% to Walgreen Co. and 12.24% to H&R Block, Eastern Tax Services.

On December 1, 1994, ACRT paid $4,550,000 plus acquisition fees and other expenses to purchase a 40,145-square-foot retail building at 1700 Challenge Way, Sacramento, California leased to GART Sports Company
(successor by merger to Sportmart Inc.). In 2003, GART Sports Company merged with The Sports Authority.

On August 28, 1995, ACRT paid
$1,989,000 plus its pro rata share of the mortgage, plus acquisition fees and other expenses, to acquire limited partnership units representing a 51% interest in a 80,000-square-foot office building at 222 Route 17 North, Rochelle Park, New Jersey
with a total cost of $11,780,000 leased to Bergen County Board of Social Services. On April 1, 2003, ACRT converted its 51% limited partnership interest in Rochelle Park Investors, LP into undivided interests owned by Rochelle ACRT 1, LLC and
Rochelle ACRT 2, LLC, both wholly owned subsidiaries of ACRT (Note 8).

On December 15, 1995, ACRT paid $3,495,000 plus acquisition
fees and other expenses to purchase a 105,600-square-foot industrial building at 2000 Walter Glaub Drive, Plymouth, Indiana leased to United Technologies Automotive.

On December 29, 1995, ACRT paid $2,817,500 plus acquisition fees and other expenses to purchase a 34,414-square-foot retail building at 6963 Northwest Loop 410, San Antonio, Texas leased to Sears, Roebuck and Co.

On April 24, 1996, ACRT paid $1,800,750 plus acquisition fees and other expenses to purchase a 22,359-square-foot office building at
Oakbrook Business Park, Norcross, Georgia leased to AT&T Wireless PCS Inc.

On August 20, 1996, ACRT, through a wholly owned
subsidiary, acquired a 49.95% interest in TMD Development, LLC (TMD) for $1,223,500 cash plus the assumption of its pro rata portion of the existing debt, plus acquisition fees and other expenses. TMD was a previously existing entity
which owns and operates an 80,028-square-foot retail facility located in Overland Park, Kansas leased to Bed, Bath & Beyond and Borders, Inc.

On December 31, 1996, ACRT, through a wholly owned subsidiary, acquired a 70% interest in Rebox Development, LLC (Rebox) for $891,695 cash plus the assumption of its pro rata portion of the existing
debt, plus acquisition fees and other expenses. Rebox was a previously existing entity, which owns a 68,037-square-foot retail facility in Wichita, Kansas leased to OfficeMax, Inc. and Circuit City, Inc.

On March 31, 1997, ACRT paid $1,315,000 plus acquisition fees and other expenses to purchase a 7,488-square-foot retail building at State Highway 120
and Barrett Parkway, Marietta, Georgia leased to Hollywood Video.



47



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



On September 24, 1997, ACRT paid $5,958,000 plus acquisition fees and other expenses to purchase
a 66,925-square-foot retail building at State Highway 78 and Paxton Drive, Lilburne, Georgia leased to OfficeMax, Inc. and The Sports Authority, Inc.

On June 9, 1998, ACRT acquired a 40% interest in Triangle Plaza II, LLC (Note 5).

On December 28,
2000, ACRT paid $7,800,000 plus acquisition fees and other expenses to purchase seven medical office buildings totaling 58,295 square feet in the Charlotte, North Carolina area leased to CaroMont Medical Group, Inc. On June 29, 2001, the Mount
Holly, North Carolina property was sold; on September 10, 2001 the Cherryville, North Carolina property was sold; and on October 9, 2001 the McAdenville, North Carolina property was sold, leaving four buildings remaining with a total
square footage of 45,430.

On December 24, 2002, ACRT acquired a 50% limited partnership interest in Fort Washington Fitness, LP (Note
6).

On March 7, 2003, ACRT acquired a 20% limited partnership interest in Levittown ARC, LP (Note 7).

On May 21, 2003 ACRT acquired a 40% undivided interest in a 154,768-square-foot retail property in Paramus, NJ (Note 9).

On October 3, 2003 ACRT entered into an operating agreement through Willow Grove ACRT, LLC with Willow Grove, LLC (Note 10).

On December 31, 2003, ACRT paid $6,900,000 plus acquisition fees and other expenses to purchase a 41,041-square-foot retail building located on Route
309 in Montgomeryville, Pennsylvania leased to A.C. Moore and Thomasville Furniture. ACRT allocated $270,803 of the purchase price to intangibles, which are included in prepaid expenses and other assets on the accompanying consolidated balance
sheets. The estimated amortization of the intangibles for the next five years is $27,000.

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

On March 31, 2004, ACRT acquired an 11.2% limited partnership interest in ARC International Fund II, LP (ARC International). An affiliate
of the Chairman and President of ACRT is the general partner of ARC International (Note 11).

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

On January 3, 2005, an affiliate of the Advisor exercised its right to purchase ACRTs property located in Philadelphia, PA leased to Barnes and
Noble, for approximately $7.7 million. ACRT has recorded an impairment charge of $287,259 in connection with the transaction in 2005. On August 10, 2005, ACRT sold the property for $7,734,375 resulting in net proceeds to ACRT of $7,362,720
after costs and expenses, which resulted in no gain or loss for financial reporting purposes.

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

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



|                           |  |                                                   |       |      |   |      
|-------------------------- |  | ------------------------------------------------- | ----- | ---- | - | -----
|                           |  | 2005                                              |       | 2004
|                           |  | (dollars in thousands, except for per share data)
|Revenues                   |  | $                                                 | 7,832 |      | $ | 7,348
|Net Income                 |  |                                                   | 1,660 |      |   | 1,327
|Net Income per share-basic |  |                                                   | .50   |      |   | .40  
|-diluted                   |  |                                                   | .42   |      |   | .34  



48



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



|5. | INVESTMENT IN TRIANGLE PLAZA II
|-- | -------------------------------

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

ACRTs investment in Triangle Plaza II
includes costs capitalized by ACRT in the amount of $901,829. This amount, which includes the acquisition fee of $572,520 paid to an affiliate of ACRT and capitalized interest totaling $308,830, is not reflected in the underlying equity of Triangle
and is being amortized over the estimated useful life of the underlying real estate asset, which is 39 years. Amortization expense in the amount of $23,124 has been recorded in each of 2005, 2004 and 2003 and charged against ACRTs equity in
income of unconsolidated subsidiaries and undivided interests. ACRT earns a 12% preferred return on its investment in Triangle in the form of distributions and, after a similar preferred return to the other member, receives 40% of distributable cash
flow attributable to base rent and recoveries and 20% of all percentage rents. ACRT received distributions of $470,838 (2005), $598,964 (2004) and $464,256 (2003) from cash flows attributable to base rent and recoveries, ACRT also received
$ 57,823 (2005), $83,647 (2004) and $ 99,464 (2003) in percentage rent distributions.

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

In March 2005, ACRT brought suit against its joint venture partner regarding the exercise of a right of first refusal on the purchase of ACRTs
interest in the property (see Note 22).

The following is the summary balance sheet information of Triangle Plaza II, LLC as of
September 30, 2005 (unaudited) and December 31, 2004. The September 30, 2005 data is the most recent available:



|                  |  |            |            |           |   |           
|----------------- |  | ---------- | ---------- | --------- | - | ----------
|                  |  | Sept. 2005 |            | Dec. 2004
|Total Assets      |  | $          | 29,308,041 |           | $ | 29,945,219
|Total Liabilities |  |            | 25,811,210 |           |   | 26,021,652
|ACRTs Investment |  |            | 3,683,237  |           |   | 3,735,509 

The following is the summary income statement information of Triangle Plaza II, LLC for the nine
months ended September 30, 2005 (unaudited) and the years ended December 31, 2004 and 2003. The September 30, 2005 data is the most recent available.



49



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



|                              |  |            |           |           |   |           |  |   |          
|----------------------------- |  | ---------- | --------- | --------- | - | --------- |  | - | ---------
|                              |  | Sept. 2005 |           | Dec. 2004 |   | Dec. 2003
|Rental Revenue                |  | $          | 3,209,481 |           | $ | 4,866,633 |  | $ | 4,689,591
|Interest and Other income     |  |            | 5,594     |           |   | 2,478     |  |   | 3,908    
|Operating Expenses            |  |            | 781,780   |           |   | 1,207,706 |  |   | 948,740  
|Interest Expense              |  |            | 1,420,900 |           |   | 1,918,285 |  |   | 1,934,115
|Depreciation and Amortization |  |            | 533,163   |           |   | 710,885   |  |   | 710,885  
|Net Income                    |  |            | 479,232   |           |   | 1,032,235 |  |   | 1,099,759
|                              |  |            |          
|ACRTs Equity in Earnings     |  |            | 476,389   |           |   | 497,605   |  |   | 532,118  



|6. | INVESTMENT IN FORT WASHINGTON
|-- | -----------------------------

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

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

ACRT earns a
12% preferred return on its investment in Fort Washington from the date of investment in the form of distributions and, after a similar preferred return to the other partners, will receive 50% of the remaining distributable cash flow. ACRT received
distributions of $120,000 and $277,053 in 2005 and 2004, respectively. The distributions received in 2004 included $120,000 in preferred returns for the period January 1, 2003 through December 31, 2003.

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



|                  |  |      |           |      |   |          
|----------------- |  | ---- | --------- | ---- | - | ---------
|                  |  | 2005 |           | 2004
|Total Assets      |  | $    | 6,397,442 |      | $ | 6,359,841
|Total Liabilities |  |      | 4,932,413 |      |   | 5,041,678
|                  |  |     
|ACRTs Investment |  |      | 991,349   |      |   | 980,608  

The following is the summary income statement information of Fort Washington for the years ended
December 31, 2005 and 2004. Due to the rent commencement date of January 2, 2004, there was no income statement activity for 2003.



|                                 |  |      |         |      |   |         |  |        |  
|-------------------------------- |  | ---- | ------- | ---- | - | ------- |  | ------ | -
|                                 |  | 2005 |         | 2004 |   | 2003    | 
|Rental Revenue                   |  | $    | 741,600 |      | $ | 743,654 |  |       |  
|Operating Expenses               |  |      | 23,420  |      |   | 29,177  |  |       |  
|Interest Expense                 |  |      | 333,038 |      |   | 288,866 |  |       |  
|Depreciation and Amortization    |  |      | 118,276 |      |   | 109,522 |  |       |  
|Net Income                       |  |      | 266,866 |      |   | 316,089 |  |       |  
|                                 |  |      |        
|ACRTs Equity in Earnings (Loss) |  |      | 130,741 |      |   | 155,353 |  | (2,692 | )



50



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



|7. | INVESTMENT IN LEVITTOWN
|-- | -----------------------

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

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

ACRT will earn a 9% preferred return on its investment in Levittown in the form of distributions and, after a
similar preferred return to the other limited partners, all distributions in excess of 9% are allocated 50% to the limited partners and 50% to Levittown ARC Residual Partners, of which ACRT owns 63%. ACRT has received $18,000 in distributions for
the years ended December 31, 2005 and 2004 and $10,200 for the year ended December 31, 2003.

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



|                  |  |      |           |      |   |          
|----------------- |  | ---- | --------- | ---- | - | ---------
|                  |  | 2005 |           | 2004
|Total Assets      |  | $    | 3,230,738 |      | $ | 3,359,619
|Total Liabilities |  |      | 2,530,074 |      |   | 2,561,051
|                  |  |     
|ACRTs Investment |  |      | 160,197   |      |   | 180,673  

The following is the summary income statement information of Levittown ARC, LP for the years ended
December 31, 2005, 2004 and 2003:



|                                 |  |      |         |   |      |   |         |      |  |   |         |  
|-------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                 |  | 2005 |         |   | 2004 |   |         | 2003 | 
|Rental Revenue                   |  | $    | 332,028 |   |      | $ | 332,028 |      |  | $ | 274,552 |  
|Operating Expenses               |  |      | 23,191  |   |      |   | 20,174  |      |  |   | 19,170  |  
|Interest Expense                 |  |      | 182,370 |   |      |   | 200,864 |      |  |   | 159,836 |  
|Depreciation and Amortization    |  |      | 136,619 |   |      |   | 136,619 |      |  |   | 108,157 |  
|Net Income                       |  |      | (10,152 | ) |      |   | (25,629 | )    |  |   | (13,151 | )
|                                 |  |      |        
|ACRTs Equity in Earnings (Loss) |  |      | (2,477  | ) |      |   | (5,571  | )    |  |   | (2,965  | )



|8. | INVESTMENT IN ROCHELLE PARK PROPERTY
|-- | ------------------------------------

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



51



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



On April 1, 2003, the property was refinanced. The refinancing produced excess distributable
capital proceeds of approximately $2,200,000, which were distributed to ACRT. ACRT has received distributions of $318,999, $365,000 and $342,629 for the years ended December 31, 2005, 2004 and 2003, respectively.

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



|                  |  |      |           |   |      |   |           |  
|----------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                  |  | 2005 |           |   | 2004 |  
|Total Assets      |  | $    | 5,689,142 |   |      | $ | 5,505,782 |  
|Total Liabilities |  |      | 5,591,252 |   |      |   | 5,701,177 |  
|                  |  |     
|ACRTs Investment |  |      | (561,090  | ) |      |   | (535,378  | )

The following is the combined summary income statement information of Rochelle ACRT 1 and 2s
51% undivided interests for the years ended December 31, 2005, 2004 and 2003:



|                                 |  |      |           |   |      |   |           |  |   |        
|-------------------------------- |  | ---- | --------- | - | ---- | - | --------- |  | - | -------
|                                 |  | 2005 |           |   | 2004 |   | 2003     
|Rental Revenue                   |  | $    | 1,158,769 |   |      | $ | 1,158,010 |  | $ | 863,411
|(Gain) Loss on Interest Rate Cap |  |      | (51,057   | ) |      |   | 15,209    |  |   |       
|Operating Expense                |  |      | 444,986   |   |      |   | 422,894   |  |   | 344,333
|Interest Expense                 |  |      | 311,230   |   |      |   | 256,441   |  |   | 192,847
|Depreciation and Amortization    |  |      | 160,323   |   |      |   | 160,323   |  |   | 148,004
|                                 |  |      |          
|Net Income                       |  |      | 293,287   |   |      |   | 303,143   |  |   | 178,227



|9. | INVESTMENT IN PARAMUS PROPERTY
|-- | ------------------------------

On May 21,
2003, ACRT acquired, through Paramus ACRT, LLC (a wholly owned subsidiary), a 40% undivided interest in a 154,768 square foot retail and warehouse property located in Paramus, New Jersey for $2,400,000 cash plus the assumption of its pro rata share
of the debt and acquisition fees. The property is leased to Babys R Us, Levitz Furniture and Wade Odell Wade Padded Van Services. ACRT has received distributions of $218,689(2005), $240,786 (2004) and $245,000 (2003).

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



|                  |  |      |           |      |   |          
|----------------- |  | ---- | --------- | ---- | - | ---------
|                  |  | 2005 |           | 2004
|Total Assets      |  | $    | 8,164,397 |      | $ | 8,231,980
|Total Liabilities |  |      | 5,765,331 |      |   | 5,828,279
|                  |  |     
|ACRTs Investment |  |      | 2,659,051 |      |   | 2,670,998



52



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



The following is the summary income statement information of Paramus ACRTs 40% undivided
interest for the years ended December 31, 2005, 2004 and 2003:



|                              |  |      |         |      |   |         |  |   |        
|----------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                              |  | 2005 |         | 2004 |   | 2003   
|Rental Revenue                |  | $    | 978,782 |      | $ | 963,524 |  | $ | 583,559
|Operating Expense             |  |      | 146,717 |      |   | 140,474 |  |   | 89,508 
|Interest Expense              |  |      | 438,516 |      |   | 444,292 |  |   | 272,764
|Depreciation and Amortization |  |      | 180,408 |      |   | 180,408 |  |   | 107,547
|Net Income                    |  |      | 213,141 |      |   | 198,350 |  |   | 113,740
|                              |  |      |        
|ACRTs Equity in Earnings     |  |      | 206,742 |      |   | 191,951 |  |   | 110,007



|10. | INVESTMENT IN WILLOW GROVE
|--- | --------------------------

On October 3,
2003, ACRT, through Willow Grove ACRT, LLC (Willow Grove ACRT), a wholly owned subsidiary of ACRT, entered into an operating agreement with Willow Grove, LLC. Willow Grove ACRT has a 25% member interest in Willow Grove, LLC.
Additionally, Willow Grove ACRT was to fund up to a maximum of $550,000 in the form of a loan (the Willow Grove Loan), to Willow Grove, LLC at an interest rate of 12% per annum payable monthly. The purpose of the Willow Grove Loan
was to fund pre-construction costs in connection with the development of 12 acres of land located in Willow Grove, Pennsylvania. The Willow Grove Loan was secured by a second mortgage on 42 acres of land held by an affiliate of the managing member
of Willow Grove, LLC.

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

As of December 31, 2004, Willow Grove ACRT had made loans totaling $800,000 respectively, under this agreement. This amount was
included in notes receivable on the accompanying consolidated balance sheet in 2004. Willow Grove ACRT has received interest payments of $20,571 (2005), $39,729 (2004) and $2,221 (2003).

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



|11. | INVESTMENT IN ARC INTERNATIONAL FUND II, LP
|--- | -------------------------------------------

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

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

ACRT earns a 9.0% return on its investment in ARC International in the form of
distributions. ACRT has received $62,100 and $30,975 in distributions for the years ended December 31, 2005 and 2004, respectively.

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



|                  |  |      |            |      |   |           
|----------------- |  | ---- | ---------- | ---- | - | ----------
|                  |  | 2005 |            | 2004
|Total Assets      |  | $    | 20,011,100 |      | $ | 20,129,842
|Total Liabilities |  |      | 12,143,461 |      |   | 12,368,644
|                  |  |     
|ACRTs Investment |  |      | 760,487    |      |   | 765,027   



53



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



The following is the summary income statement information of ARC International for the year ended
December 31, 2005 and 2004:



|                              |  |      |           |      |   |          
|----------------------------- |  | ---- | --------- | ---- | - | ---------
|                              |  | 2005 |           | 2004
|Rental Revenue                |  | $    | 1,794,213 |      | $ | 1,794,213
|Interest and Other Income     |  |      | 2,657     |      |   | 920      
|Operating Expenses            |  |      | 150,245   |      |   | 93,336   
|Interest Expense              |  |      | 851,519   |      |   | 869,346  
|Depreciation and Amortization |  |      | 314,747   |      |   | 314,747  
|Net Income                    |  |      | 480,359   |      |   | 517,704  
|                              |  |     
|ACRTs Equity in Earnings     |  |      | 57,561    |      |   | 42,347   



|12. | NOTES RECEIVABLE
|--- | ----------------

On December 31, 2003,
Montgomeryville 309 Associates, LP (Montgomeryville 309), a wholly owned subsidiary of ACRT, in connection with its purchase of the property located in Montgomeryville, Pennsylvania entered into a note agreement with Integral Development
Associates (Integral), the seller of the property. Under the terms of the note agreement, Montgomeryville 309 loaned Integral $645,000 at an interest rate of 12% per annum, which is secured by certain other property owned by
Integral. The loan was to mature on January 1, 2006 and interest was payable monthly starting July 1, 2004 (which included all accrued but unpaid interest through June 30, 2004). On September 24, 2004 the principal on the note of
$645,000, together with all outstanding interest, was repaid by Integral. For the year ended December 31, 2004, $56,619 in interest was earned by ACRT under this note.

Additionally, ACRT has a note receivable from a tenant totaling $322,923 and $369,608 at December 31, 2005 and 2004, respectively. The note bears
interest at 10.5% and principal and interest payable are due monthly. Future minimum principal payments due to ACRT are $51,831, $57,544, $63,884, $70,924 and $78,740 for the years ending December 31, 2006, 2007, 2008, 2009 and 2010.



|13. | CLASS B COMMON STOCK
|--- | --------------------

On October 25, 2000,
ACRT entered into a placement agreement with Working Capital Invest, N.V. (the Placement Agreement) whereby ACRT would offer an affiliate of Working Capital Invest, N.V. the right to purchase ACRTs Class B common stock. On
March 16, 2001, ACRT modified the Placement Agreement such that ACRT shall offer, pursuant to an offshore, private placement offering, the right to purchase up to 941,176 Class B shares of common stock at a price of $10.625 per share
($10,000,000) to WCI Working Capital Investitions und Beteiligungs, KG, an affiliate of Working Capital Invest, N.V. This offering, by its terms, was due to expire on December 31, 2002, but was extended on a month to month basis. As of
December 31, 2003, 156,382 shares have been sold at a price of $10.625 per share and 10,015 shares have been sold at a price of $12.00 per share under the Placement Agreement.

In connection with the offering, ACRT received a $100,000 good faith deposit from Working Capital Invest, N.V. in 2000, which was reduced to $76,265 in
March 2001. This amount was further reduced to $63,557 in May and December 2002. On April 25, 2003, this deposit was used to purchase 5,982 Class B shares by Working Capital Invest, N.V.



54



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



In 2004, ACRT approved dividends to the holders of Class B common stock for the year ending 2003. The
dividends, totaling $118,077, were accrued but not paid as of December 31, 2004. These dividends were paid on April 25, 2005.

In
2005, ACRT approved dividends to the holders of Class B common stock for the year ending 2004 totaling $162,769. These dividends were paid on April 25, 2005.



|14. | RELATED PARTY TRANSACTIONS
|--- | --------------------------

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

For the years ended December 31, 2005, 2004, and 2003, ACRT incurred the following
fees and reimbursements payable to the Advisor:

Acquisition Fee  ACRT did not incur any acquisition fees in 2005. On
March 4 and March 31, 2004, ACRT incurred acquisition fees in the amounts of $212,000 and $62,655 in connection with the purchase of the Philadelphia, Pennsylvania property and the investment in ARC International, respectively. On
March 7, May 21, and December 31, 2003, ACRT incurred acquisition fees of $17,408, $249,571 and $209,675 in connection with the investments in Levittown, Paramus and Montgomeryville, respectively. Acquisition fees are equal to 3% of
the purchase price of the investment. There were no unpaid acquisition fees at December 31, 2005.

Financing Fee 
ACRT did not incur any financing fees in 2005. On March 4, and June 18, 2004 ACRT incurred financing fees of $26,500 and $27,500 in connection with the purchase of the Philadelphia, Pennsylvania property and the placement of a line of
credit on the Montgomeryville property, respectively. The financing fee is generally equal to .5% of the principal amount financed. There were no unpaid finance fees at December 31, 2005.

Asset Management Fees - Asset management fees of $684,702, $693,132 and $607,146 for the years ended December 31, 2005, 2004 and 2003,
respectively, were incurred and payable to the Advisor. The annual asset management fee is equal to 1% of the first $36,049,000 of ACRTs average invested assets (the base amount, as defined in the Advisory Agreement). One half of this fee, the
subordinated asset management fee, is withheld by ACRT until the shareholders have been paid the Preferred Return (as defined in the Advisory Agreement). For assets in excess of the first $36,049,000, the asset management fee is equal to 0.5% of
ACRTs average invested assets, as defined. Pursuant to the Advisory Agreement, beginning in 1999, average invested assets were subject to periodic valuation performed by a third party (as defined in the Advisory Agreement). It was agreed by
the Advisor, that the 2005 or 2004 valuation, which would have resulted in an increase in asset management fees, would not be used to calculate the asset management fees. Accordingly, asset management fees were calculated using the 2003 valuation in
both years.

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

Disposition Fee - On August 10, 2005 ACRT incurred a disposition fee in the amount of
$116,015 on the sale of the Philadelphia, Pennsylvania property leased to Barnes and Noble. There were no disposition fees incurred for the years ended December 31, 2004 and 2003. The disposition fee is generally equal to 3% of the contract
sales price.

Incentive Fee ACRT has also agreed to pay the Advisor incentive compensation in the amount of 20% of
amounts distributed to our stockholders after our stockholders have received distributions equal to the amount of their initial investment in shares of Common Stock plus a preferred return of 8%.

Stock Ownership - As of December 31, 2005 and 2004, principals of the Advisor owned 44,760 shares of Class A Common Stock, which
represents approximately 1.4% of the outstanding shares of Class A Common Stock of ACRT. The total amounts purchased, net of commissions, were $414,030.

Miscellaneous - ACRT agreed to reimburse the Advisor $1,250 per month for various legal functions connected with stock transfers and filings of ACRT. The reimbursements were discontinued in May 2005.
These reimbursements totaled $6,250 for the year ended December 31, 2005 and $15,000 for the years ended December 31, 2004 and 2003 and are included in professional expenses on the accompanying consolidated statements of income.



55



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



|15. | LEASES
|--- | ------

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



|           |  |   |           
|---------- |  | - | ----------
|2006       |  | $ | 5,468,149 
|2007       |  |   | 5,493,356 
|2008       |  |   | 5,360,035 
|2009       |  |   | 5,264,818 
|2010       |  |   | 4,800,943 
|Thereafter |  |   | 18,178,659
|           |  |   |           
|           |  | $ | 44,565,960
|           |  |   |           

ACRT seeks to reduce its operating and leasing risks through diversification achieved by
geographic distribution of its properties, tenant industry diversification, avoiding dependency on a single property and the creditworthiness of its tenants. For the years ended December 31, 2005, 2004 and 2003 the following tenants accounted
for greater than 10% of rental revenues:



|                     |  |      |   |  |      |   |  |      |  
|-------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                     |  | 2005 |   |  | 2004 |   |  | 2003 |  
|Sports Authority     |  | 14.1 | % |  | 13.4 | % |  | 14.5 | %
|Bed, Bath and Beyond |  | 11.3 |   |  | 11.5 |   |  | 12.9 |  
|Barnes and Noble     |  |     |   |  | 10.9 |   |  |     |  
|CaroMont Medical     |  | 10.1 |   |  | 10.3 |   |  | 11.1 |  
|A.C. Moore           |  | 10.0 |   |  |     |   |  |     |  



|16. | MORTGAGES PAYABLE
|--- | -----------------

ACRT has fixed rate mortgages
totaling $18,179,843 and $18,717,178 at December 31, 2005 and 2004, respectively. These mortgages are secured by the respective properties with a total net book value of $21,358,469 and $21,824,655 at December 31, 2005 and 2004,
respectively.

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

ACRT has variable rate mortgages totaling $8,215,184 and $13,660,705 at December 31, 2005 and 2004, respectively.
The mortgages carry variable interest rates of 206 and 225 basis points over LIBOR (4.08% at December 31, 2005). The variable rate mortgages are secured by two properties with a combined net book value of $9,171,429 at



56



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



December 31, 2005 and three properties with a combined net book value of $19,527,811 at December 31, 2004. On August 10, 2005, in connection
with the sale of the Philadelphia, Pennsylvania property leased to Barnes and Noble, ACRT repaid the related mortgage totaling $5,217,712.

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



|           |  |                        |           |                 |   |            |  |   |           
|---------- |  | ---------------------- | --------- | --------------- | - | ---------- |  | - | ----------
|           |  | Scheduled Amortization |           | BalloonPayments |   | Total     
|2006       |  | $                      | 632,761   |                 | $ | 8,227,954  |  | $ | 8,860,715 
|2007       |  |                        | 715,552   |                 | $ | 3,820,638  |  |   | 4,536,190 
|2008       |  |                        | 576,742   |                 |   |           |  |   | 576,742   
|2009       |  |                        | 466,190   |                 |   | 3,734,983  |  |   | 4,201,173 
|2010       |  |                        | 479,848   |                 |   |           |  |   | 479,848   
|Thereafter |  |                        | 3,925,313 |                 |   | 3,815,046  |  |   | 7,740,359 
|           |  |                        |           |                 |   |            |  |   |           
|           |  | $                      | 6,796,406 |                 | $ | 19,598,621 |  | $ | 26,395,027
|           |  |                        |           |                 |   |            |  |   |           



|17. | DERIVATIVE INSTRUMENTS
|--- | ----------------------

On January 15, 2003,
in connection with ACRTs variable rate mortgage totaling $4,414,500 (Note 16), ACRT entered into an interest rate cap agreement with a third party. The cap is coterminous with the mortgage loan and its notional amount equals the outstanding
principal balance on the mortgage loan. The cap agreement was entered into as part of ACRTs management of interest rate exposure and effectively limits the amount of interest rate risk that may be taken on its variable rate mortgage. In
accordance with SFAS No. 133, the interest rate cap is reflected at its fair value. The carrying amount of the interest rate cap, included in prepaid expenses and other assets, was reported as an asset of $ 6,786 and $10,889, as of
December 31, 2005 and 2004, respectively, based on information supplied by the counter party to the cap contract, and the change in the fair value of the interest rate cap of $4,103 and $41,624 has been recorded as a loss, and included in loss
on interest rate cap, net, on the accompanying consolidated statements of income for the years ended December 31, 2005 and 2004, respectively.

On March 4, 2004, in connection with ACRTs variable rate mortgage totaling $5,300,000 (Note 16) ACRT entered into an interest rate cap agreement and an interest rate swap agreement with a third party. The cap is coterminous with
the mortgage loan. The cap, which terminates on March 1, 2007, is for a notional amount of $2,650,000. In accordance with SFAS No. 133, the interest rate cap is reflected at its fair value. As of December 31, 2004, the carrying amount
of the interest rate cap, included in prepaid expenses and other assets, was reported as an asset of $28,258 based on information supplied by the counter party to the cap contract and the change in the fair value of the interest rate cap of $28,242
has been recorded as a loss, and is included in income from discontinued operations on the accompanying consolidated statement of income for the year ended December 31, 2004. The impact of the interest rate swap was not material to the
consolidated financial statements. In connection with the sale of the Philadelphia, Pennsylvania property on August 10, 2005 (Note 4) the asset related to the interest rate cap was written off.



|18. | LINES OF CREDIT
|--- | ---------------

In September 1997, ACRT
established a secured revolving credit facility, which provided for an initial maximum borrowing of up to $5,500,000 and decreased by $200,000 per annum. Under the terms of this credit facility agreement, interest had been payable at LIBOR plus
1.5%. ACRT was also required to pay a commitment fee equal to .5% per annum on the unused portion of the commitment. This facility, which originally matured on September 30, 2002, had been extended until March 31, 2003.



57



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



On February 22, 2002, the borrowing capacity on this line was increased to the maximum of
$4,700,000 allowable under the terms of the line as a result of the inclusion of the Memphis, Tennessee property leased to Walgreen Co. and H&R Block.

In February 1998, ACRT established a second secured revolving credit facility, which provided for an initial borrowing of up to $1,000,000 and decreased by $40,000 per annum. This credit facility matured on
January 31, 2003 and was extended until March 31, 2003. This facility contained no restrictive covenants. Under the terms of the aforementioned credit facility agreements, interest was payable at LIBOR plus 1.5%. ACRT was also required to
pay a commitment fee equal to .5% per annum on the unused portion of the commitment.

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

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

The total amount available under this facility at December 31, 2005, after quarterly amortization and the sale of the Memphis
property, is $2,842,717 and none of the facility was outstanding at December 31, 2005.

On June 17, 2004, ACRT established an
additional secured credit facility, which provides for additional borrowing of up to $5,500,000 and decreases by $100,000 per annum. This credit facility bears interest at LIBOR plus 225 basis points and matures on June 16, 2009. ACRT is
required to pay an annual commitment fee equal to 0.5% on the unused portion of the facility. The total amount available under this facility at December 31, 2005 was $5,400,000.



|19. | STOCK OPTION PLANS
|--- | ------------------

ACRT established, with the
approval of the Shareholders, the 1997 Stock Option Plan (the Plan) for the purposes of encouraging and enabling ACRTs officers, employees, directors and advisors to acquire a proprietary interest in ACRT. The Plan provides for
administration by the Compensation Committee (the Committee) of the Board of Directors. A maximum of seven hundred and fifty thousand Class A common shares have been reserved under the Plan. The Plan authorized (i) the grant of
stock options that qualify as Incentive stock options (ISO) under section 422 of the Code (ii) the grant of stock options that do not so qualify and (iii) grants of shares upon the attainment of performance goals or subject to
restrictions.

Options granted under the Plan may be subject to various restrictions on exercise including vesting provisions and a
requirement that the Class A common shares be listed on a national exchange or quoted on NASDAQ and/or the requirement that the options when exercised will not constitute an amount greater than a specified percentage of ACRTs issued and
outstanding stock. On January 21, 1998, ACRT, pursuant to the Plan previously approved by the shareholders, granted 25,000 nonqualified stock options to purchase Class A common stock to the five non-employee directors and 650,000
nonqualified stock options to purchase Class A common stock to the advisor at an exercise price of $8.50. In January 2000 and October 2003, ACRT granted each of its three additional non-employee directors an option under the Option Plan to
purchase 5,000 shares of Class A common stock at an exercise price of $8.50. Each of these will vest as to 25% of such option for each full year that the non-employee Director has previously served and continues to serve as a Director of ACRT.
In 1998 and 2003, three non-employee directors holding a total of 15,000 stock options retired with their stock options unexercised. These stock options were retired and are available to be re-granted. The options are not exercisable unless and
until both of the following requirements are met: (a) either (i) the Class A common stock is listed for trading on any national securities exchange or quoted on any tier of the NASDAQ Stock Market or (ii) the occurrence of a
Change of Control of ACRT, as defined in the Plan, the sale of all or substantially all of ACRTs assets or adoption of a plan of liquidation by ACRT and (b) immediately prior to such exercise the number of shares of Class A common
stock issued and outstanding, as a result of the exercise of the options granted under the plan, shall not exceed fifteen percent of the issued and outstanding shares of Class A common stock. At December 31, 2005, no stock options under
the Plan have been exercised, all but 2,500 of the stock options granted have been vested and 75,000 are available for grant.



58



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



Amendments to the Plan were recommended by the Board of Directors and approved by the shareholders of
ACRT at the annual meeting held in May 2004. The Plan now allows for grants of options until March 31, 2013. In addition, the current term of outstanding stock options awarded pursuant to the Plan were extended from 10 years to 15 years and all
future stock options awarded pursuant to the Plan will have a term that ends in 2013. The restrictions applicable to the exercise of the options will be removed effective April 1, 2008 or upon the occurrence of one of the events noted above.

Other Awards under the Option Plan. In addition to the incentive and non-qualified stock options available for grant under the
Option Plan, the compensation committee may also award:



| |  |  | stock appreciation rights;
| | - |  | --------------------------



| |  |  | restricted stock awards;
| | - |  | ------------------------



| |  |  | phantom stock unit awards; and
| | - |  | ------------------------------



| |  |  | performance share units.
| | - |  | ------------------------

There are options outstanding as
of December 31, 2005, 2004 and 2003 for 675,000 shares at a weighted exercise price of $8.50.

The following are disclosures for
common stock options outstanding at December 31, 2005:



|                    |  |                     |      |                        |      |        |         |                |   |     
|------------------- |  | ------------------- | ---- | ---------------------- | ---- | ------ | ------- | -------------- | - | ----
|Options Outstanding |  | Exercisable Options
|Number              |  | Exercise Price      |      | Remaining Life (Years) |      | Number |         | Exercise Price
|660,000             |  | $                   | 8.50 |                        | 2.00 |        | 660,000 |                | $ | 8.50
|10,000              |  |                     | 8.50 |                        | 4.00 |        | 10,000  |                |   | 8.50
|5,000               |  |                     | 8.50 |                        | 7.80 |        | 2,500   |                |   | 8.50
|                    |  |                     |      |                        |      |        |         |                |   |     
|675,000             |  | $                   | 8.50 |                        |      |        | 672,500 |                | $ | 8.50
|                    |  |                     |      |                        |      |        |         |                |   |     



|20. | DIVIDENDS TO SHAREHOLDERS
|--- | -------------------------

ACRT paid cash dividends
to Class A shareholders of $3,054,308, $2,975,487 and $1,839,617 in 2005, 2004 and 2003, respectively.



|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                         |  | 2005 |        |   | 2004 |   |        | 2003 | 
|Total dividends per share                |  | $    | 0.96   |   |      | $ | 0.96   |      |  | $ | 0.84   |  
|Ordinary income                          |  |      | 67.59  | % |      |   | 66.82  | %    |  |   | 87.93  | %
|15% rate gain                            |  |      | 12.43  | % |      |   |       |      |  |   |       |  
|25% rate gain                            |  |      | 2.67   | % |      |   |       |      |  |   |       |  
|Percent non-taxable as return of capital |  |      | 17.31  | % |      |   | 33.18  | %    |  |   | 12.07  | %
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|                                         |  |      | 100.00 | % |      |   | 100.00 | %    |  |   | 100.00 | %
|                                         |  |      |        |   |      |   |        |      |  |   |        |  



59



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



|21. | CREDIT EVENTS
|--- | -------------

On July 11, 2001, Sears
Homelife, the tenant of the San Antonio, Texas property, ceased operations nationwide and filed for Chapter 11 bankruptcy protection. The lease on the San Antonio property was assigned to Sears Homelife in 1998, with the provision that Sears,
Roebuck and Co. (in whose name the original lease was executed) would still be responsible for all obligations under the lease in the event of default by Sears Homelife. The lease expires in 2010. ACRT has taken the necessary steps to collect the
rent under the guarantee and enforce this provision under the lease assignment. In November 2003, Sears, Roebuck and Co. subleased this property to BEL Furniture Co. for the remainder of the original lease term. As of December 31, 2005 all
rents due were paid.

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

On October 11, 2005, Levitz Furniture one of the tenants in the Paramus, New Jersey property which is included in
investments in unconsolidated subsidiaries and undivided interests on ACRTs consolidated balance sheet, declared bankruptcy under Chapter 11 of the U.S. bankruptcy code. All rents with the exception of the October rent totaling $99,572 are
current.

In 2006, OfficeMax the tenant in ACRTs Lilburne, Georgia property and Wichita, Kansas properties announced that they are
reviewing their store locations and may close various locations in 2006. The closures may include some ACRT owned locations.



|22. | LEGAL MATTERS
|--- | -------------

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

On April 1, 2005, ACRTs joint venture partner filed a separate lawsuit against Whitestone compelling a sale of ACRTs interest under the
terms of the original right of first refusal.

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



60



---

##### Table of Contents

ARC CORPORATE REALTY TRUST INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2004 AND 2003



|23. | UNAUDITED QUARTERLY FINANCIAL DATA
|--- | ----------------------------------



|                                                       |  |                                               |       |         |   |         |  |          |       |  |   |      
|------------------------------------------------------ |  | --------------------------------------------- | ----- | ------- | - | ------- |  | -------- | ----- |  | - | -----
|                                                       |  | 2005                                         
|                                                       |  | 3/31/05                                       |       | 6/30/05 |   | 9/30/05 |  | 12/31/05
|                                                       |  | (dollars in thousands, except per share data)
|Revenues(1)                                            |  | $                                             | 1,607 |         | $ | 1,740   |  | $        | 1,578 |  | $ | 1,765
|Net income allocable to common shareholders            |  |                                               | 595   |         |   | 516     |  |          | 249   |  |   | 584  
|                                                       |  |                                               |       |        
|Net income allocable to common shareholders per share: |  |                                               |       |         |   |         |  |          |       |  |   |      
|Basic(2)                                               |  | $                                             | 0.18  |         | $ | 0.15    |  | $        | 0.07  |  | $ | 0.17 
|                                                       |  |                                               |       |         |   |         |  |          |       |  |   |      
|Diluted(2)                                             |  | $                                             | 0.15  |         | $ | 0.13    |  | $        | 0.06  |  | $ | .15  
|                                                       |  |                                               |       |         |   |         |  |          |       |  |   |      
|                                                       | 
|                                                       |  | 2004                                         
|                                                       |  | 3/31/04                                       |       | 6/30/04 |   | 9/30/04 |  | 12/31/04
|                                                       |  | (dollars in thousands, except per share data)
|Revenues(1)                                            |  | $                                             | 1,353 |         | $ | 1,449   |  | $        | 1,792 |  | $ | 1,594
|Net income allocable to common shareholders            |  |                                               | 302   |         |   | 720     |  |          | 226   |  |   | 421  
|                                                       |  |                                               |       |        
|Net income allocable to common shareholders per share: |  |                                               |       |         |   |         |  |          |       |  |   |      
|Basic(2)                                               |  | $                                             | 0.09  |         | $ | 0.22    |  | $        | 0.07  |  | $ | .12  
|                                                       |  |                                               |       |         |   |         |  |          |       |  |   |      
|Diluted(2)                                             |  | $                                             | 0.07  |         | $ | 0.19    |  | $        | 0.06  |  | $ | .11  
|                                                       |  |                                               |       |         |   |         |  |          |       |  |   |      

---

|(1) | All periods have been adjusted to reflect the impact of properties classified as held for sale, which are reflected in discontinued operations in the consolidated statements of
income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The sum of the quarterly income per common share amounts may not equal the full year amounts primarily because the computations of the weighted average number of common shares
outstanding for each quarter and the full year are made independently.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|24. | SUBSEQUENT EVENTS
|--- | -----------------

On January 6, 2006, the
loan on the San Antonio, Texas property matured and was repaid. The repayment was made by drawing down $1,610,000 on ACRTs existing line of credit.

On January 31, 2006, ACRT issued a quarterly cash dividend of $763,577 to Class A shareholders of record as of December 31, 2005.

On February 8, 2006 the board of directors declared Class B shareholder dividends for 2005 totaling $162,770.



61



---

##### Table of Contents

REAL ESTATE AND ACCUMULATED DEPRECIATION

SCHEDULE III (000S OMITTED)

DECEMBER 31, 2005

Gross Amount at which carried at
end of year (A)



|                       |  |                     |  |              |        |     |      |   |                            |  |       |        |                          |   |               |  |                  |       |                                       |      |  |           |  |   
|---------------------- |  | ------------------- |  | ------------ | ------ | --- | ---- | - | -------------------------- |  | ----- | ------ | ------------------------ | - | ------------- |  | ---------------- | ----- | ------------------------------------- | ---- |  | --------- |  | --
|Description            |  | Location            |  | Encumbrances |        |     | Land |   | Buildings and Improvements |  | Total |        | Accumulated Depreciation |   | Date Acquired |  | Date Constructed |       | Useful LifeUsed toComputeDepreciation
|Office                 |  | Norcross, GA        |  | $            |       | (1) |      | $ | 739                        |  | $     | 1,157  |                          | $ | 1,896         |  | $                | 280   |                                       | 1996 |  | 1996      |  | 40
|Retail                 |  | Montgomeryville, PA |  |              |       |     |      |   | 1,396                      |  |       | 5,583  |                          |   | 6,979         |  |                  | 279   |                                       | 2003 |  | 2003      |  | 40
|Retail                 |  | Overland Park, KS   |  |              | 6,631  |     |      |   | 2,762                      |  |       | 5,200  |                          |   | 7,962         |  |                  | 1,216 |                                       | 1995 |  | 1989      |  | 40
|Office  (4 Buildings) |  | Charlotte, NC       |  |              | 4,108  |     |      |   | 1,224                      |  |       | 5,098  |                          |   | 6,322         |  |                  | 638   |                                       | 1996 |  | 1985      |  | 40
|Retail                 |  | Wichita, KS         |  |              | 4,157  |     |      |   | 1,279                      |  |       | 4,542  |                          |   | 5,821         |  |                  | 1,026 |                                       | 2000 |  | 1979/2000 |  | 40
|Retail                 |  | Sacramento, CA      |  |              | 4,107  |     |      |   | 1,085                      |  |       | 3,632  |                          |   | 4,717         |  |                  | 1,007 |                                       | 1994 |  | 1985      |  | 40
|Retail                 |  | Marietta, GA        |  |              |       | (1) |      |   | 506                        |  |       | 861    |                          |   | 1,367         |  |                  | 188   |                                       | 1997 |  | 1996      |  | 40
|Retail                 |  | San Antonio, TX     |  |              | 1,608  |     |      |   | 906                        |  |       | 2,017  |                          |   | 2,923         |  |                  | 506   |                                       | 1995 |  | 1995      |  | 40
|Retail                 |  | Lilburn, GA         |  |              | 4,145  |     |      |   | 1,944                      |  |       | 4,267  |                          |   | 6,211         |  |                  | 885   |                                       | 1997 |  | 1996      |  | 40
|Industrial             |  | Plymouth, IN        |  |              | 1,639  |     |      |   | 304                        |  |       | 3,079  |                          |   | 3,383         |  |                  | 776   |                                       | 1995 |  | 1994      |  | 40
|Retail                 |  | Memphis, TN         |  |              |       | (1) |      |   | 267                        |  |       | 1,217  |                          |   | 1,484         |  |                  | 350   |                                       | 1994 |  | 1993      |  | 40
|                       |  |                     |  |              |        |     |      |   |                            |  |       |        |                          |   |               |  |                  |       |                                       |      |  |           |  |   
|                       |  |                     |  | $            | 26,395 |     |      | $ | 12,412                     |  | $     | 36,653 |                          | $ | 49,065        |  | $                | 7,151 |                                       |      |  |           |  |   
|                       |  |                     |  |              |        |     |      |   |                            |  |       |        |                          |   |               |  |                  |       |                                       |      |  |           |  |   

---

|(A) | The initial costs include the purchase price paid by ACRT and acquisition fees and expenses.
|--- | --------------------------------------------------------------------------------------------

|(1) | These properties are collateral for ACRTs line-of-credit. The line-of-credit had $0
outstanding at December 31, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------



|                                                                                       |  |              |         |   |      |   |        |      |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                       |  | December 31, |        
|                                                                                       |  | 2005         |         |   | 2004 |   |        | 2003 | 
|Reconciliation of Real Estate Owned:                                                   |  |              |         |   |      |   |        |      |  |   |         |  
|Balance at the beginning of period                                                     |  | $            | 59,584  |   |      | $ | 51,820 |      |  | $ | 56,933  |  
|Additions during the period                                                            |  |              |        |   |      |   | 10,519 |      |  |   | 6,978   |  
|Properties sold during the period                                                      |  |              | (10,519 | ) |      |   | (2,755 | )    |  |   |        |  
|Deconsolidation due to change in form of legal ownership of property during the period |  |              |        |   |      |   |       |      |  |   | (12,091 | )
|                                                                                       |  |              |         |   |      |   |        |      |  |   |         |  
|Balance at end of the period                                                           |  | $            | 49,065  |   |      | $ | 59,584 |      |  | $ | 51,820  |  
|                                                                                       |  |              |         |   |      |   |        |      |  |   |         |  
|Reconciliation of Accumulated Depreciation:                                            |  |              |         |   |      |   |        |      |  |   |         |  
|Balance at the beginning of period                                                     |  | $            | 6,401   |   |      | $ | 5,875  |      |  | $ | 7,446   |  
|Depreciation expense                                                                   |  |              | 934     |   |      |   | 1,087  |      |  |   | 914     |  
|Accumulated depreciation of property sold during the period                            |  |              | (184    | ) |      |   | (561   | )    |  |   |        |  
|Accumulated depreciation of deconsolidated property during the period                  |  |              |        |   |      |   |       |      |  |   | (2,485  | )
|                                                                                       |  |              |         |   |      |   |        |      |  |   |         |  
|Balance at end of the period                                                           |  | $            | 7,151   |   |      | $ | 6,401  |      |  | $ | 5,875   |  
|                                                                                       |  |              |         |   |      |   |        |      |  |   |         |  



62



---

##### Table of Contents

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of ACRTs disclosure controls and procedures (as defined in Rule 13a-14
(c) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this annual report on Form 10-K was made under the supervision and with the participation of ACRTs management,
including its Chief Executive Officer and its Chief Financial Officer. Based upon this evaluation, ACRTs Chief Executive Office and its Chief Financial Officer have concluded that ACRTs disclosure controls and procedures
(a) are effective to ensure that information required to be disclosed by ACRT in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by ACRT in reports filed or submitted under the Exchange Act is accumulated and communicated to ACRTs management, including its Chief Executive Officer and its Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have been no significant changes in ACRTs internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) or
in other factors that occurred during the period covered by this annual report on Form 10-K that has materially affected or is reasonably likely to materially affect ACRTs internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None



63



---

##### Table of Contents

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

As of December 31, 2005, ACRT has seven
Directors, five of whom are Independent Directors. The Directors and executive officers of ACRT are as follows:



|                          |  |                                               
|------------------------- |  | ----------------------------------------------
|NAME                      |  | OFFICE                                        
|Robert J. Ambrosi#        |  | Chairman, President and Class III Director    
|James Steuterman*+        |  | Class III Director                            
|Richard G. Kelley*+#      |  | Class II Director                             
|Garrett E. Sheehan*       |  | Class II Director                             
|Mervin H. Goldman, CPA*+# |  | Class I Director                              
|Dietmar Georg*            |  | Class I Director                              
|Marc Perel, CPA           |  | Executive Vice President and Class II Director
|Claudia Graff             |  | Vice President                                
|Joseph M. Morena          |  | Treasurer                                     
|Bruce Nelson, CPA         |  | Chief Financial Officer                       

---

|* | Independent Director
|- | --------------------

|+ | Member of the Audit Committee
|- | -----------------------------

|# | Member of the Compensation Committee
|- | ------------------------------------

Robert J. Ambrosi, 55, is Chairman, President and a Class III Director of ACRT, and President and founder of ARC Properties, Inc.,
an affiliate of the Advisor. Mr. Ambrosi has more than 25 years of experience in the acquisition, development and management of real estate projects internationally. He began his real estate career as a real estate investment analyst for the
Mutual Life Insurance Company of New York. From 1976 to 1978, he was Vice President of Marcil Properties, Inc. a Canadian-based investment company which concentrated on the acquisition of U.S. real estate on behalf of foreign-based investors.
Mr. Ambrosi is also the co-founder and President of Tibor Pivko + Company, a real estate company which acts as an advisor to foreign-based investors and has activities in the United States, Europe and the Middle East, and has acted as managing
principal in more than 50 separate real estate entities. Mr. Ambrosi is also President and owner of ARC Financial Services, Inc., which is a member of the NASD. Mr. Ambrosi has a Bachelor of Science degree in Engineering from the New
Jersey Institute of Technology, a Masters degree in Finance from Rutgers University and a Senior Certificate in Real Estate from New York University.

James M. Steuterman, 49, is a Class III Director of ACRT and is a Senior Vice President of Toll Brothers Realty Trust (Toll), a commercial development and management firm specializing in
retail, multi-family and office development. Mr. Steuterman joined Toll in 2002. Toll Brothers Realty Trust is an affiliate of Toll Brothers, Inc. (NYSE: TOL), a Fortune 1000 company and the nations leading builder of luxury homes. Prior
to joining Toll, Mr. Steuterman was the Chief Operating Officer of New Plan Excel Realty Trust (New Plan), a publicly traded real estate company with a national portfolio of property investments exceeding $3.0 billion. In addition,
Mr. Steuterman was a member of New Plans Board of Directors and its Investment Committee. Prior to 1984, Mr. Steuterman worked with Schnuck Markets, Inc., a regional grocery chain, and Baur Properties, a developer of suburban office
parks and warehouse space. Mr. Steuterman holds a Business degree from the University of Missouri and is an active member of the International Council of Shopping Centers and National Association of Real Estate Investment Trusts.

Richard G. Kelley, 74, is a Class II Director of ACRT and the former Chairman, Chief Executive Officer, and Director of Citizens
First National Bank. Mr. Kelley has more than 35 years of banking experience and has been Chairman, President, Chief Executive Officer, and Director of three commercial banks. He was president of the American Institute of Banking and was also a
presidential appointment as a full-time consultant for the U.S. Department of Commerce in Washington, D.C., and appointed by the Governor as a member of the State of New Jersey Banking Advisory Committee. Mr. Kelley attended the Rutgers
University Stonier Graduate School of Banking where he was president of his class, and subsequently, a faculty member and member of the Board of Regents. He has a Bachelor of Science degree in Management and a Juris Doctorate in Law from Quinnipiac
University where he is currently trustee, member of the Executive Committee and Chairman of the Academic Affairs Committee.



64



---

##### Table of Contents

Garrett E. Sheehan, 57, is a Class II Director of ACRT, and is presently Managing
Director of Sentinel Real Estate Investment Corporation, a real estate advisory and investment management firm. Prior to joining Sentinel in 1999, he was a Managing Director of Jones Lang Wootton, an international real estate services and advisory
firm. In his ten years at Jones Lang Wootton, he was a broker/dealer affiliate, and a partner in its national Investment Sale and Finance Group. Prior to joining Jones Lang Wootton, he was a Vice President of the Pivko Group and a Commercial Loan
and Acquisition Officer for Travelers Insurance in its Real Estate Investment Department. He received a Bachelor of Arts degree from Trinity College in Hartford, Connecticut and a graduate degree from Oxford University in England.

Mervin H. Goldman, CPA,78 retired, is a Class I Director of ACRT and was formerly a Senior Partner in, and founder of, the
accounting firm of Dorfman, Goldman, Stobezki & Goldman, P.A. Mr. Goldman founded Dorfman & Goldman in 1974 and has over 20 years of experience in public accounting and financial planning. Prior to 1974, Mr. Goldman held
positions of Vice President of Finance and Operations and Treasurer for firms in the textile industry. In 1994, Mr. Goldman was appointed to the Advisory Board of Valley National Bank, in Wayne, New Jersey. Mr. Goldman received a Bachelor
of Science degree in Accounting from New York University. In addition to being a Certified Public Accountant, he is also a member of the New Jersey CPA Society and the American Institute of Certified Public Accountants.

Dietmar Georg, 51, is a Class I Director and is a Managing Director and Principal of GLL Real Estate Partners (GLL), an
international real estate advisory and management firm which he formed with majority shareholders Lend Lease (London) and Assicurazioni Generali. Prior to forming GLL, Mr. Georg was a Managing Director of HVB Capital Markets, Inc.
(HVBCM), the New York-based U.S. investment banking subsidiary of Munich-based HypoVereinsbank, Germanys second largest bank and Europes largest real estate lender. He also serves as chief executive of entities investing in
retail and office properties. Mr. Georg is a frequent speaker at real estate conferences both in Germany and in the U.S. and has authored several articles in real estate, finance and business publications. Mr. Georg has earned dual masters
degrees in Business Administration, University of Giessen, and in Economics, Kansas State University, Manhattan, Kansas.

Marc Perel,
CPA, 52, is a Class II Director and Executive Vice President of ACRT and has been Senior Vice President of ARC Properties, Inc. since 1985. From 1984 to 1985, Mr. Perel was employed by Secured Properties, Inc., a real estate investment
company. From 1977 to 1984, Mr. Perel was with Zimmerman & Co., a certified public accounting firm, where he became head of the firms real estate department in 1980 and a partner in 1984. During that period, he was responsible
for due diligence, property audits, investor reporting, tax planning and investment analysis. In addition to his accounting experience, Mr. Perel has experience in and continues to be involved with real estate development and property
management. Mr. Perel has a Bachelor of Science degree in Accounting from Long Island University and is a Certified Public Accountant.

Claudia Graff, 57, is Vice President of ACRT and Vice President of ARC Properties, Inc., since 1985 and has more than 17 years of experience in the acquisition and analysis of credit lease properties. Ms. Graff is
currently responsible for the screening of properties submitted to ACRT and the coordination of market research and valuation data. Prior to her involvement in the real estate business, Ms. Graff was an office and systems administrator for the
Security Mutual Life Insurance Company in Kearney, Nebraska.

Bruce Nelson, CPA, 51, is the Chief Financial Officer of
ACRT and Controller of ARC Properties, Inc. Mr. Nelson, who is a Certified Public Accountant, holds a Bachelor of Science degree in Accounting from William Paterson College of New Jersey and a Masters degree in Business Administration and
Finance from Fairleigh Dickinson University. Prior to joining ACRT in 1996, Mr. Nelson held a variety of financial and accounting positions, most recently as Controller and Treasurer for the Cirkus Real Estate Group, one of the largest real
estate developers and property managers in New Jersey. Prior to that, Mr. Nelson was the Corporate Accounting Manager for Becton, Dickinson & Co., a Fortune 500 company. Mr. Nelson is responsible for all accounting operations of
ACRT.

Joseph M. Morena, 52, is Treasurer of ACRT. Prior to joining ACRT in 1996, Mr. Morena was Vice President
and Chief Financial Officer of Tel-Save Holdings Inc., a publicly traded telecommunications company. From 1980 to 1993, Mr. Morena was Vice President and Treasurer of Air & Water Technologies Inc., a publicly traded international
engineering and construction company. Mr. Morena has substantial experience in corporate finance, including capital raising in the public IPO market, bank loan, public bond and private placement markets. Mr. Morena also has significant
business management experience in the area of financial statement preparation and control, as well as communication of financial performance to institutional investors. Mr. Morena is a graduate of New York University from which he received BS
and MBA degrees in Banking and Finance.

Compensation of Directors

Each independent director receives annual compensation of $5,000, a meeting fee of $1,000 for each Board meeting and a committee meeting fee of $500 for
all committee members, plus costs of attending meetings. In addition, each Independent Director has been awarded an option under the Option Plan to purchase 5,000 shares of Class A Common Stock.



65



---

##### Table of Contents

Audit Committee

The Audit Committee has three members, Messrs. Goldman, Steuterman and Kelley. The Audit Committee meets on a quarterly basis. During its quarterly
meetings, the Audit Committee reviews ACRTs financial statements and credit reports on each of ACRTs tenants. In connection with the issuance of ACRTs annual and quarterly financial statements, the Audit Committee meets with
ACRTs independent registered public accounting firm to discuss the financial statements and any related issues with management. Each director who serves on the Audit Committee receives fees of $500 for each meeting attended.

Compensation Committee

The Compensation Committee has three members, Messrs. Ambrosi, Goldman and Kelley. The Compensation Committee meets separately from the entire Board as needed but not less than annually. The Compensation Committee
reviews the cash compensation of the Directors and officers of ACRT as well as reviews non-cash compensation that may include stock options, restricted stock and stock appreciation rights pursuant to the 1997 Stock Option Plan. Each member of the
Compensation Committee, other than Mr. Ambrosi, receives fees of $500 for each meeting attended.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange
Act of 1934, as amended, requires our directors, executive officers and certain stockholders to file reports of ownership and transactions that result in changes in ownership of our equity securities on prescribed forms with the SEC.

Based solely on our review of the copies of these forms, we believe that during the year ended December 31, 2004, the reports on Form 3 of each of
the following persons were not filed timely: (a) Ms. Claudia Graff, ACRTs Vice President; (b) Mr. Robert Ambrosi, ACRTs Chairman and President; (c) Mr. Marc Perel, ACRTs Executive Vice President and a Director;
(d) Mr. Bruce Nelson, ACRTs Chief Financial Officer; (e) Mr. Joseph Morena, ACRTs Treasurer; (f) Mr. James Steuterman, a Director; (g) Mr. Richard G. Kelley, a Director; (h) Mr. Garrett E. Sheehan, a Director;
(i) Mr. Mervin H. Goldman, a Director; and Mr. Dietmar Georg, a Director.

There were no changes in ownership in 2005.

ITEM 11. EXECUTIVE COMPENSATION

The Advisor

ACRT is managed by its advisor, ARC Capital Advisors L.P, a Maryland limited partnership, which is affiliated with Mr. Ambrosi, ACRTs President
and Chairman. The Advisor performs services for ACRT pursuant to the terms of an advisory agreement (the Advisory Agreement). Such services include serving as ACRTs investment and financial advisor and providing consultation,
analysis and supervision of ACRTs activities in acquiring, financing, managing and disposing of properties. The Advisor also performs and supervises the various administrative duties of ACRT such as maintaining the books and records. ACRT pays
the Advisor fees pursuant to the Advisory Agreement as follows:



| |  |  | Acquisition fees equal to 3% of the purchase price of the property;
| | - |  | -------------------------------------------------------------------



| |  |  | Financing fees equal to .5% of the principal amount financed;
| | - |  | -------------------------------------------------------------



| |  |  | Annual asset management fees equal to 1% of the first $36,049,000 of ACRTs average invested assets (the base amount, as defined in the Advisory Agreement). One half of this
fee, the subordinated asset management fee, is withheld by ACRT until the shareholders have been paid the Preferred Return (as defined in the Advisory Agreement). In addition, on a yearly basis, the net asset value for all properties used in the
calculation of the annual asset management fee are recalculated by an outside, independent party and this revised net asset value is the basis used in the calculation of the annual asset management fee;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Disposition fees equal to 3% of the contract sales price of the property being sold; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | ACRT reimbursed the Advisor $1,250 per month for various legal functions connected with stock transfers and filings of ACRT. The reimbursements were not required after May of 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



66



---

##### Table of Contents

ACRT has no employees because all of its management functions are performed by the Advisor with oversight
from the Board of Directors.

The term of the Advisory Agreement ends on December 31, 2010. The Advisory Agreement may be terminated:



| |  |  | immediately by ACRT for Cause;
| | - |  | ------------------------------



| |  |  | by the Advisor with at least 60 days written notice; or
| | - |  | --------------------------------------------------------



| |  |  | immediately with Good Reason by the Advisor.
| | - |  | --------------------------------------------

Good
Reason is defined in the Advisory Agreement to mean either:



| |  |  | any failure by ACRT to obtain a satisfactory agreement from its successor to assume and agree to perform ACRTs obligations under the Advisory Agreement; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any material breach of the Advisory Agreement of any nature whatsoever by ACRT.
| | - |  | -------------------------------------------------------------------------------

Cause is defined in the Advisory Agreement to mean fraud, criminal conduct, willful misconduct, breach of fiduciary duty by the Advisor, a material breach of the Advisory Agreement by the Advisor or the
Bankruptcy of the Advisor.

The Advisory Agreement is not assignable without the consent of the other party; however, either ACRT or the
Advisor may assign or transfer the Advisory Agreement to a successor entity.

The Advisor and its Affiliates expect to engage in other
business ventures and, as a result, their resources will not be dedicated exclusively to ACRTs business. However, pursuant to the Advisory Agreement, the Advisor must devote sufficient resources to the administration of ACRT to discharge its
obligations.

1997 Stock Option Plan

In March 1997, the Board of Directors adopted, and the shareholders of ACRT approved, ACRTs 1997 Stock Option Plan under which an aggregate of
750,000 shares of all classes of Common Stock were reserved for issuance. Shares issued under the Option Plan can be of Class A, Class B or Class C Common Stock. The Option Plan is intended to qualify as an incentive stock option
plan under Section 422 of the Code. Both incentive stock options and non-qualified stock options may be awarded under the Option Plan. Awards under the Option Plan may be granted to officers, employees, consultants and advisors of ACRT and its
subsidiaries. Administration of the Option Plan is vested in the Compensation Committee, which has the authority to interpret the Option Plan, select the persons to whom grants are to be made, designate the number of shares to be covered by each
grant, and determine the time or times and the manner in which each option will be exercisable and the duration of the exercise period.

Except for grants to 10% shareholders of ACRT, the maximum term of options granted under the Option Plan is 10 years. Provisions are made for the exercise of options upon the death, disability or termination of employment by the optionee.

With respect to options which are incentive stock options, and except with respect to 10% shareholders, the exercise price per share of
common stock that may be purchased under the stock option may be determined by the Compensation Committee at the time of grant but may not be less than the fair market value on the date of grant for an incentive stock option. The exercise price per
share for grants of non-qualified stock options to non-10% shareholders cannot be less than the par value of the shares of stock underlying the option.

If an optionee, at the time the option is granted, owns 10% or more of the total combined voting power of all classes of stock of ACRT or any subsidiary, the option price of an incentive option must be at least 110%
of the fair market value of the stock (determined at the time of grant) subject to the option and any such option will only be exercisable for five years from the date of grant.

On January 21, 1998, ACRT granted the Advisor a non-qualified option to purchase 725,000 shares of Class A Common Stock at an exercise price of
$8.50 per share. These options vested in four equal installments, beginning upon the date of grant and continuing upon the first, second and third anniversaries of the date of grant. On October 23, 2003, the Advisor agreed to amend its option
agreement whereby 75,000 options were cancelled. In accordance with the cancellation of those options, they became available for grant under the Stock Option Plan. On January 21, 1998, ACRT granted each of its five non-employee Directors an
option under the Option Plan to purchase 5,000 shares of Class A Common Stock at an exercise price of $8.50 per share. In January 2000, ACRT granted each of its two additional non-employee Directors an option under the Option Plan to purchase
5,000 shares of Class A Common Stock at an exercise price of $8.50 per share. On October 23, 2003, Mr. Steuterman, a newly appointed non-employee Director, was granted a non-qualified option to



67



---

##### Table of Contents

purchase 5,000 shares of Class A Common Stock at an exercise price of $8.50 per share. Each of these options will vest as to 25% of such option for each
full year that the non-employee Director has previously served and continues to serve as a Director of ACRT. Upon termination of service as a Director of ACRT, all options granted under the Option Plan are terminated. In 1998 and 2003, three
non-employee Directors holding a total of 15,000 stock options retired with their stock options unexercised. These stock options were retired and are available to be re-granted. These options will vest in full immediately upon a change of control
(as defined in the option agreement) of ACRT. As of December 31, 2005, there were 75,000 shares of Common Stock available for grant under the Option Plan.

The vesting of all of the foregoing options will be accelerated upon a Change of Control (as defined in the Option Plan) of ACRT, the sale of all or substantially all of ACRTs assets, and/or the adoption of a
plan of liquidation by ACRT. However, an optionee may not exercise his options, regardless of any regular or accelerated vesting schedule provided by the option agreements, unless both of the following requirements are met:



| | (a) | Either
| | --- | ------



| | (1) | the shares of Class A Common Stock are listed for trading on any national securities exchange or is quoted on any tier of the Nasdaq Stock Market, including, without
limitation, the Nasdaq Stock Market, the Nasdaq Small-Cap Market or the Over-the-Counter Bulletin Board System or any other automated quotation service; or
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | the occurrence of a Change in Control of ACRT, the sale of all or substantially all of ACRTs assets, or the adoption of a plan of liquidation by ACRT; and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | immediately prior to such exercise, the number of shares of Common Stock issued and outstanding as a result of the exercise of options granted under the Option Plan (including the
number of shares that the optionee desires to exercise) do not exceed 15% of the total number of then issued and outstanding shares of Common Stock.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For purposes of the foregoing calculation, the number of shares that the optionee desires to exercise will be included in the total number of then issued and outstanding shares of Common Stock.

Other Awards under the Option Plan. In addition to the incentive and non-qualified stock options available for grant under the Option Plan, the
compensation committee may also award:



| |  |  | stock appreciation rights;
| | - |  | --------------------------



| |  |  | restricted stock awards;
| | - |  | ------------------------



| |  |  | phantom stock unit awards; and
| | - |  | ------------------------------



| |  |  | performance share units.
| | - |  | ------------------------

Amendments to the Stock Option
Plan were recommended by the Board of Directors and approved by the shareholders of ACRT at the annual meeting held in May 2004. The Stock Option Plan now allows for grants of options until March 31, 2013. In addition, the current term of
outstanding stock options awarded pursuant to the Stock Option Plan were extended from 10 years to 15 years and all future stock options awarded pursuant to the Stock Option Plan will have a term that ends in 2013. The restrictions applicable to the
exercise of the options will be removed effective April 1, 2008.

Employment Contracts

ACRT does not have any employees nor any employment agreements other than the Advisory Agreement with the Advisor.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Class A Common Stock.As of December 31, 2005, there were 3,181,540 shares of Class A Common Stock outstanding. The following table sets forth, as of December 31, 2005, the beneficial ownership of shares of:



| |  |  | each person who holds more than a 5% interest in ACRT;
| | - |  | ------------------------------------------------------



| |  |  | the directors of ACRT;
| | - |  | ----------------------



| |  |  | the executive officers of ACRT; and
| | - |  | -----------------------------------



| |  |  | the directors and executive officers of ACRT as a group.
| | - |  | --------------------------------------------------------



68



---

##### Table of Contents

|                                                |  |               |     |  |                                  |  
|----------------------------------------------- |  | ------------- | --- |  | -------------------------------- | -
|                                                |  | No. of Shares |     |  | Percentage of Outstanding Shares |  
|Robert J. Ambrosi(1)                            |  | 33,074        | (2) |  | 1.0                              | %
|James Steuterman                                |  |              | (2) |  |                                 |  
|Richard G. Kelley                               |  | 2,702         | (2) |  | *                                |  
|Garrett E. Sheehan                              |  |              | (2) |  |                                 |  
|Mervin H. Goldman                               |  | 4,000         | (2) |  | *                                |  
|Dietmar Georg                                   |  |              | (2) |  |                                 |  
|Marc Perel                                      |  | 2,702         |     |  | *                                |  
|Claudia Graff                                   |  | 540           |     |  | *                                |  
|Joseph Morena                                   |  | 3,242         |     |  | *                                |  
|Bruce Nelson                                    |  | 5,202         |     |  | *                                |  
|                                                |  |               |     |  |                                  |  
|All directors and executive officers as a group |  | 51,462        |     |  | 1.6                              | %
|                                                |  |               |     |  |                                  |  

---

|* | Represents less than 1% of the outstanding Shares.
|- | --------------------------------------------------

|(1) | The address for all persons named is 1401 Broad Street, Clifton, NJ 07013.
|--- | --------------------------------------------------------------------------

|(2) | Excludes 650,000 shares which could be acquired by the Advisor, which is controlled by
Mr. Ambrosi, through the exercise of stock options. Also excludes 5,000 shares for each of Messrs. Steuterman, Kelley, Sheehan, Goldman and Georg which could be acquired through the exercise of stock options.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Class B Common Stock.As of December 31, 2005, there were 166,397 shares of Class B Common Stock outstanding. All of the currently issued and
outstanding Class B Common Stock is beneficially owned by Working Capital Invest, N.V.

The Board of Directors has the authority to issue
Class C Common Stock to management of ACRT and the Advisor. However, the Board of Directors intends to issue Class C Common Stock only in the event of a threatened or actual takeover of ACRT. The Class C Common Stock has ten votes per share, and, if
issued, could give management and/or the Advisor effective control over the affairs of ACRT, including the election of all of the Directors of ACRT.

ACRT is not aware of any arrangements which may, at a subsequent date, result in a change in control of ACRT, which would result in the issuance of Class C Common Stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Advisory Agreement

Many of the services to be performed by the Advisor in managing ACRTs day-to-day activities are summarized below. This
summary is provided to illustrate the material functions, which the Advisor will perform for ACRT as its advisor, and it is not intended to include all of the services which may be provided to ACRT by the Advisor or by third parties. Under the terms
of the Advisory Agreement, the Advisor undertakes to use its best efforts to present to ACRT investment opportunities consistent with its investment policies and objectives as adopted by ACRTs Board of Directors. In its performance of this
undertaking, the Advisor, subject to the authority of the Board, either directly or indirectly, will:



| |  |  | serve as ACRTs investment and financial advisor;
| | - |  | -------------------------------------------------



| |  |  | provide the daily management of ACRT, including perform and supervise the administrative functions of ACRT;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | investigate and select and, on behalf of ACRT, engage and conduct business with persons and entities to provide ACRT with services necessary or desirable for the performance of its
obligations, including, but not limited to, consultants, accountants, lenders, attorneys, brokers, insurance agents, property owners and banks;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



69



---

##### Table of Contents

| |  |  | in consultation with ACRTs officers and Directors, formulate and implement ACRTs financial and other policies and objectives;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide the Directors with periodic reports with respect to prospective investments;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | negotiate on ACRTs behalf with banks or lenders for loans and with broker-dealers for the sale of shares;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | obtain for, or provide to, ACRT services in connection with acquiring, managing and disposing of ACRTs properties or loans;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | provide or arrange for administrative services, personnel and other overhead items necessary to ACRTs business;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | provide ACRT with accounting and other financing reporting assistance;
| | - |  | ----------------------------------------------------------------------



| |  |  | maintain ACRTs books and records;
| | - |  | ----------------------------------



| |  |  | provide cash management services; and
| | - |  | -------------------------------------



| |  |  | provide such other services as may be required from time to time for the management of ACRT and its assets.
| | - |  | -----------------------------------------------------------------------------------------------------------

The term of the Advisory Agreement ends on December 31, 2010.

The Advisor must obtain the prior approval of the Directors, including a majority of the Independent Directors, for transactions involving:



| | (1) | investments in property made through joint venture arrangements with the Advisor or its affiliates;
| | --- | ---------------------------------------------------------------------------------------------------



| | (2) | investments in property which are not contemplated by the terms of ACRTs investment guidelines;
| | --- | ------------------------------------------------------------------------------------------------



| | (3) | transactions that present issues which involve conflicts of interest for the Advisor (other than payment of fees and expenses); and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------



| | (4) | making or purchasing any loans on behalf of ACRT.
| | --- | -------------------------------------------------

Joint
ventures with the Advisor or its affiliates will only be permitted if:



| | (1) | the affiliate has a comparable investment objective as ACRT;
| | --- | ------------------------------------------------------------



| | (2) | there is no duplication of property management or other fees to the Advisor; and
| | --- | --------------------------------------------------------------------------------



| | (3) | the affiliate makes its investment on substantially the same terms and conditions as ACRT.
| | --- | ------------------------------------------------------------------------------------------

The cost of generating joint investments will be shared ratably among the participating investors and ACRT.

ACRT will reimburse the Advisor quarterly for certain operating, general and administrative expenses, including, without limitation, the following:



| |  |  | Offering Expenses (as defined in the Advisory Agreement);
| | - |  | ---------------------------------------------------------



| |  |  | all operating expenses (as defined in the Advisory Agreement) paid or incurred by ACRT;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | fees and expenses of outside counsel, accountants and auditors of ACRT;
| | - |  | -----------------------------------------------------------------------



| |  |  | payments to Directors and the expenses associated with meetings of the Directors and the shareholders;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | expenses incurred in connection with payment of distributions to shareholders;
| | - |  | ------------------------------------------------------------------------------



| |  |  | travel expenses for ACRT business; and
| | - |  | --------------------------------------



| |  |  | expenses of managing and operating the properties owned by ACRT, including insurance costs.
| | - |  | -------------------------------------------------------------------------------------------

ACRT will not reimburse the Advisor or its affiliates to the extent such amounts would exceed those which would be payable to non-affiliated third
parties in the same location for similar products or services.

For a breakdown of these expenses for the last three years see Note 14 in
the Notes to Consolidated Financial Statements.



70



---

##### Table of Contents

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table presents fees for professional
services rendered by KPMG LLP for the years ended December 31, 2005 and 2004 and fees billed for other services rendered by KPMG LLP.



|                   |  |      |         |      |   |        
|------------------ |  | ---- | ------- | ---- | - | -------
|                   |  | 2005 |         | 2004
|Audit Fees         |  | $    | 92,000  |      | $ | 85,000 
|Audit Related Fees |  |      | 48,000  |      |   | 101,000
|                   |  |      |         |      |   |        
|Total              |  | $    | 140,000 |      | $ | 186,000
|                   |  |      |         |      |   |        



71



---

##### Table of Contents

Part IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES



|    |  |    |   |  |                              |  |      
|--- |  | -- | - |  | ---------------------------- |  | -----
|    |  |    |   |  |                              |  | Page 
|(a) |  | (1 | ) |  | Financial Statements         |  | 37-41
|    |  |    |  
|    |  | (2 | ) |  | Financial Statement Schedule |  | 62   
|    |  |    |  
|    |  | (3 | ) |  | Exhibits                     |  | 72   



|            |  |                                                                                                                                                                                               
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                                                                       
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to rule 13a-14(a)/ 15d-14(a) of the Securities Exchange Act of 1934, 12 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002(3)
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to rule 13a-14(a)/ 15d-14(a) of the Securities Exchange Act of 1934, 12 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002(3)
|            | 
|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(2)                                          
|            | 
|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(2)                                          



72



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



ARC CORPORATE REALTY TRUST, INC.By:

/s/ Robert J. AmbrosiName:

Robert J. AmbrosiTitle:

Chairman and PresidentDate:

July 25, 2006By:

/s/ Bruce NelsonName:

Bruce NelsonTitle:

Chief Financial OfficerDate:

July 25, 2006


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



|       |  |                                      
|------ |  | -------------------------------------
|       |  | /s/ Robert J. Ambrosi                
|Name:  |  | Robert J. Ambrosi                    
|Title: |  | Chairman and President               
|       | 
|       |  | /s/ Bruce Nelson                     
|Name:  |  | Bruce Nelson                         
|Title: |  | Chief Financial Officer              
|       | 
|       |  | /s/ Dietmar Georg                    
|Name:  |  | Dietmar Georg                        
|Title: |  | Director                             
|       | 
|       |  | /s/ Mervin H. Goldman                
|Name:  |  | Merv Goldman                         
|Title: |  | Director                             
|       | 
|       |  | /s/ Richard G. Kelley                
|Name:  |  | Richard G. Kelley                    
|Title: |  | Director                             
|       | 
|       |  | /s/ Marc Perel                       
|Name:  |  | Marc Perel                           
|Title: |  | Director and Executive Vice President
|       | 
|       |  | /s/ Garrett E. Sheehan               
|Name:  |  | Garrett E. Sheehan                   
|Title: |  | Director                             
|       | 
|       |  | /s/ James Steuterman                 
|Name:  |  | James Steuterman                     
|Title: |  | Director                             

DATE: July 25, 2006



73