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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

Commission file number: 1-13762

RECKSON OPERATING PARTNERSHIP, L. P.

(Exact name of registrant as specified in its charter)



| | Delaware(State or other jurisdiction ofincorporation or organization) |  | 11-3233647(IRS EmployerIdentification Number) | 
| | --------------------------------------------------------------------- |  | --------------------------------------------- | 

| |  |  |  | 
| |  |  |  | 

| | 625
      Reckson Plaza, Uniondale, NY(Address of principal executive office) |  | 11556(zip code) | 
| | ----------------------------------------------------------------------------- |  | --------------- | 

(516) 506-6000

(Registrants telephone number including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) YesNo , and (2) has been subject to such filing requirements for the past 90 days. YesNo .

Indicate
  by check mark whether the registrant is a large accelerated filer, an accelerated
  filer, or a non-accelerated filer. See definition of accelerated filer
  and large accelerated filer in Rule 12b-2 of the Exchange Act (Check One):



Large Accelerated Filer

        Accelerated Filer

        Non-Accelerated File


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YesNo.



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RECKSON
  OPERATIN PARTNERSHIP,
  L.P.

QUARTERLY
  REPORT

FOR
  THE THREE
  MONTHS ENDED
  JUNE30,
  2006

TABLE
  OF CONTENTS



PAGEPART
          I.
      
      FINANCIAL
          INFORMATIONItem
          1.
      
      Financial
          StatementsConsolidated
          Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005
      
      3Consolidated
          Statements of Income for the three and six months ended June 30, 2006
          and 2005 (unaudited)
      
      4Consolidated
          Statements of Cash Flows for the six months ended June 30, 2006 and
          2005 (unaudited)
      
      5Notes
          to the Consolidated Financial Statements (unaudited)
      
      6Item
          2.
      
      Managements
          Discussion and Analysis of Financial Condition and Results of Operations
      
      29Item
          3.
      
      Quantitative
          and Qualitative Disclosures about Market Risk
      
      52Item
          4.
      
      Controls
          and Procedures
      
      54PART
          II.
      
      OTHER
          INFORMATIONItem
          1.
      
      Legal
          Proceedings
      
      60Item
          1A.
      
      Risk
          Factors
      
      60Item
          2.
      
      Unregistered
          Sales of Equity Securities and Use of Proceeds
      
      61Item
          3.
      
      Defaults
          Upon Senior Securities
      
      61Item
          4.
      
      Submission
          of Matters to a Vote of Securities Holders
      
      61Item
          5.
      
      Other
          Information
      
      61Item
          6.
      
      Exhibits
      
      63SIGNATURES
          & CERTIFICATIONS


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PARTI - FINANCIALINFORMATION

ITEM1 - FINANCIALSTATEMENTS

RECKSONOPERATINGPARTNERSHIP, L.P.

CONSOLIDATEDBALANCESHEETS

(in thousands, except unit amounts)



June 30,2006


      

        December 31,2005(unaudited)ASSETSCommercial real estate properties, at cost:Land


      


      $


      428,357


      


      $


      430,064Buildings and improvements

        

        

        2,886,834

        

        

        2,823,020Developments in progress:Land

        

        

        127,309

        

        

        123,761Development costs

        

        

        137,138

        

        

        99,570Furniture, fixtures and equipment

        

        

        13,208

        

        

        12,7383,592,846

        

        

        3,489,153Less accumulated depreciation

        

        

        (587,317

        )

        

        (532,152

        )Investments in real estate, net of accumulated depreciation

        

        

        3,005,529

        

        

        2,957,001Properties and related assets held for sale, net of accumulated depreciation

        

        

        68,795

        

        

        194,297Investments in real estate joint ventures

        

        

        46,816

        

        

        61,526Investments in mortgage notes and notes receivable

        

        

        169,784

        

        

        174,612Cash and cash equivalents

        

        

        32,103

        

        

        17,468Tenant receivables

        

        

        12,804

        

        

        20,196Investments in affiliate loans and joint ventures

        

        

        67,526

        

        

        64,954Deferred rents receivable

        

        

        147,000

        

        

        138,990Prepaid expenses and other assets

        

        

        88,029

        

        

        109,004Deferred leasing and loan costs, net of accumulated amortization

        

        

        81,308

        

        

        78,411Total Assets

        

        $

        3,719,694

        

        $

        3,816,459LIABILITIESMortgage notes payable

        

        $

        464,110

        

        $

        541,382Mortgage notes payable and other liabilities associated with properties held for sale

        

        

        63,839

        

        

        84,572Unsecured credit facility

        

        

        92,000

        

        

        419,000Senior unsecured notes

        

        

        1,254,932

        

        

        980,085Accrued expenses and other liabilities

        

        

        118,435

        

        

        118,661Deferred revenues and tenant security deposits

        

        

        70,349

        

        

        75,903Dividends and distributions payable

        

        

        36,582

        

        

        36,398Total Liabilities

        

        

        2,100,247

        

        

        2,256,001Minority partners interests in consolidated partnerships and other interests

        

        

        266,693

        

        

        219,358Commitments and contingencies

        

        


      

        

        


      PARTNERS CAPITAL:Preferred capital 1,200 units issued and outstanding

        

        

        1,200

        

        

        1,200General Partners Capital:Class A common units, 83,217,550 and 82,995,931 units outstanding, respectively

        

        

        1,317,790

        

        

        1,306,236Limited Partners Capital:Class A common units, 1,546,133 and 1,569,142 units issued and outstanding, respectively

        

        

        24,379

        

        

        24,555Class C common units, 456,621 units issued and outstanding

        

        

        7,200

        

        

        7,290Accumulated other comprehensive income

        

        

        2,185

        

        

        1,819Total Partners Capital

        

        

        1,352,754

        

        

        1,341,100TOTALLIABILITIES ANDPARTNERS
          CAPITAL

        

        $

        3,719,694

        

        $

        3,816,459


(see accompanying notes to financial statements)

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RECKSONOPERATINGPARTNERSHIP,
    L.P.

CONSOLIDATEDSTATEMENTSOFINCOME

(Unaudited
    and in thousands, except per unit and unit amounts)



Three
            Months EndedJune 30,
        
        Six
            Months EndedJune 30,2006
        
        2005
        
        2006
        
        2005PROPERTYOPERATINGREVENUES:Base
            rents
        
        $
        128,575
        
        $
        118,048
        
        $
        244,660
        
        $
        230,458Tenant
            escalations and reimbursements
        
        
        19,235
        
        
        17,324
        
        
        38,303
        
        
        35,102Total
            property operating revenues
        
        
        147,810
        
        
        135,372
        
        
        282,963
        
        
        265,560OPERATINGEXPENSES:Property
            operating expenses
        
        
        56,974
        
        
        51,216
        
        
        117,209
        
        
        103,956Marketing,
            general and administrative
        
        
        9,475
        
        
        8,241
        
        
        18,957
        
        
        16,236Depreciation
            and amortization
        
        
        36,047
        
        
        31,219
        
        
        68,883
        
        
        59,638Total
            operating expenses
        
        
        102,496
        
        
        90,676
        
        
        205,049
        
        
        179,830Operating
            income
        
        
        45,314
        
        
        44,696
        
        
        77,914
        
        
        85,730NON-OPERATING
            INCOME AND EXPENSES:Gains
            on sales of real estate
        
        
        
        
        
        
        
        
        35,393
        
        
        Interest
            income on mortgage notes and notes receivable (including $1,126, $418,
            $2,248 and $1,269, respectively from related parties)
        
        
        5,502
        
        
        3,333
        
        
        11,001
        
        
        5,780Investment
            income and other
        
        
        2,329
        
        
        454
        
        
        14,406
        
        
        1,136Interest:Expense
        
        
        (27,216
        )
        
        (27,259
        )
        
        (55,205
        )
        
        (50,825
        )Amortization
            of deferred financing costs
        
        
        (1,017
        )
        
        (1,068
        )
        
        (2,139
        )
        
        (2,059
        )Long-term
            incentive compensation expense
        
        
        (2,232
        )
        
        
        
        
        (5,855
        )
        
        Total
            non-operating income and expenses
        
        
        (22,634
        )
        
        (24,540
        )
        
        (2,399
        )
        
        (45,968
        )Income
            before minority interests, equity in earnings of real estate joint
            ventures and discontinued operations
        
        
        22,680
        
        
        20,156
        
        
        75,515
        
        
        39,762Minority
            partners interests in consolidated partnerships and other interests
        
        
        (4,052
        )
        
        (3,965
        )
        
        (8,512
        )
        
        (7,822
        )Equity
            in earnings of real estate joint ventures
        
        
        1,815
        
        
        83
        
        
        2,211
        
        
        234Income
            before discontinued operations
        
        
        20,443
        
        
        16,274
        
        
        69,214
        
        
        32,174Discontinued
            operations (net of minority interests):Income
            (loss) from discontinued operations
        
        
        (51
        )
        
        1,887
        
        
        842
        
        
        4,040Gains
            on sales of real estate
        
        
        
        
        
        175
        
        
        9,518
        
        
        175Net
            income
        
        $
        20,392
        
        $
        18,336
        
        $
        79,574
        
        $
        36,389Net
            income allocable to:Common
            unit holders
        
        $
        20,271
        
        $
        18,225
        
        $
        79,098
        
        $
        36,169Common
            C common unit holders
        
        
        121
        
        
        111
        
        
        476
        
        
        220Total
        
        $
        20,392
        
        $
        18,336
        
        $
        79,574
        
        $
        36,389Net
            income per weighted average common units:Income
            from continuing operations
        
        $
        .24
        
        $
        .20
        
        $
        .40
        
        $
        .38Gain
            on sales of real estate
        
        
        
        
        
        
        
        
        .41
        
        
        Discontinued
            operations
        
        
        
        
        
        .02
        
        
        .12
        
        
        .05Basic
            net income per common unit
        
        $
        .24
        
        $
        .22
        
        $
        .93
        
        $
        .43Class
            C common  income from continuing operations
        
        $
        .26
        
        $
        .21
        
        $
        .44
        
        $
        .42Gain
            on sales of real estate
        
        
        
        
        
        
        
        
        .46
        
        
        Discontinued
            operations
        
        
        
        
        
        .03
        
        
        .14
        
        
        .05Basic
            net income per Class C common unit
        
        $
        .26
        
        $
        .24
        
        $
        1.04
        
        $
        .47Weighted
            average common units outstanding:Common
            units
        
        
        84,760,000
        
        
        83,999,000
        
        
        84,695,000
        
        
        83,923,000Class
            C common units
        
        
        460,000
        
        
        466,000
        
        
        463,000
        
        
        466,000


(see
    accompanying notes to financial statements)

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RECKSON
  OPERATING PARTNERSHIP, L.P.

CONSOLIDATEDSTATEMENTS OF CASH
  FLOWS

(Unaudited and in thousands)



Six Months EndedJune 30,2006

        

        2005CASH
          FLOWS FROM OPERATING
          ACTIVITIES:NET
          INCOME


      


      $


      79,574


      


      $


      36,389Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization (including discontinued operations)

        

        

        72,089

        

        

        65,579Minority partners interests in consolidated partnerships and other interests

        

        

        8,586

        

        

        7,854Gains on sales of real estate

        

        

        (44,982

        )

        

        (181

        )Sale of option to acquire joint venture interest

        

        

        (9,016

        )

        

        Undistributed earnings from real estate joint ventures

        

        

        (1,870

        )

        

        (205

        )Changes
          in operating assets and liabilities:Deferred rents receivable

        

        

        (7,957

        )

        

        (17,444

        )Prepaid expenses and other assets

        

        

        13,393

        

        

        11,894Tenant receivables

        

        

        7,419

        

        

        (1,013

        )Accrued expenses and other liabilities

        

        

        (14,305

        )

        

        (4,839

        )Tenant security deposits

        

        

        (4,016

        )

        

        6,749Net cash provided by operating activities

        

        

        98,915

        

        

        104,783CASH
          FLOWS FROM INVESTMENT
          ACTIVITIES:Purchases of commercial real estate properties

        

        

        

        

        

        (547,823

        )Additions to Note Receivable Investments

        

        

        (14,687

        )

        

        (50,219

        )Repayments of Notes Receivable Investments

        

        

        16,990

        

        

        2,952Additions to developments in progress

        

        

        (30,780

        )

        

        (22,590

        )Additions to commercial real estate properties

        

        

        (29,540

        )

        

        (30,491

        )Payment of deferred leasing costs

        

        

        (10,538

        )

        

        (9,108

        )Investments in real estate joint ventures

        

        

        

        

        

        (6,223

        )Distributions from unconsolidated real estate joint ventures

        

        

        3,270

        

        

        Additions to furniture, fixtures and equipment

        

        

        (241

        )

        

        (606

        )Proceeds from sale of option to acquire joint venture interest

        

        

        9,016

        

        

        Proceeds from sales of real estate

        

        

        182,978

        

        

        1,285Increase in contract and land deposits and pre-acquisition costs

        

        

        (326

        )

        

        (5,221

        )Net cash provided by (used in) investing activities

        

        

        126,142

        

        

        (668,044

        )CASH
          FLOWS FROM FINANCING
          ACTIVITIES:Principal payments on secured borrowings

        

        

        (77,437

        )

        

        (5,742

        )Proceeds from issuance of senior unsecured notes, net of issuance costs

        

        

        272,819

        

        

        281,750Payment of loan and equity issuance costs

        

        

        (512

        )

        

        (1,683

        )Proceeds from unsecured credit facility

        

        

        44,000

        

        

        182,000Principal payments on unsecured credit facility

        

        

        (371,000

        )

        

        (289,500

        )Proceeds from unsecured bridge facility

        

        

        

        

        

        470,000Proceeds from unsecured term loan

        

        

        250,000

        

        

        Principal payments on unsecured term loan


      


      


      (250,000


      )


      


      Proceeds
          from issuance of common stock, net of issuance costs, and exercise of
          stock options

        

        

        2,279

        

        

        3,369Contributions by minority partners in consolidated partnerships

        

        

        1,798

        

        

        Distributions to minority partners in consolidated partnerships

        

        

        (8,474

        )

        

        (5,629

        )Distributions to limited partners in the operating partnership

        

        

        (2,481

        )

        

        (3,173

        )Dividends to common shareholders

        

        

        (71,414

        )

        

        (69,596

        )Net cash (used in) provided by financing activities

        

        

        (210,422

        )

        

        561,796Net increase (decrease) in cash and cash equivalents

        

        

        14,635

        

        

        (1,465

        )Cash and cash equivalents at beginning of period

        

        

        17,468

        

        

        25,137Cash and cash equivalents at end of period

        

        $

        32,103

        

        $

        23,672


(see accompanying notes to financial statements)

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RECKSONOPERATINGPARTNERSHIP,
  L.P. NOTES TO
  THECONSOLIDATEDFINANCIALSTATEMENTS

JUNE30, 2006

(Unaudited)

1. ORGANIZATION ANDFORMATION OF THECOMPANY

Reckson Operating Partnership, L.P. (the Operating Partnership) commenced operations on June 2, 1995. Reckson Associates Realty Corp. (the Company), which serves as the sole general partner of the Operating Partnership, is a fully integrated, self administered and self managed real estate investment trust (REIT). The Operating Partnership and the Company were formed for the purpose of continuing the commercial real estate business of Reckson Associates, the predecessor of the Operating Partnership, its affiliated partnerships and other entities. Unless the context requires otherwise, the terms Company, we, us, our and similar terms include Reckson Associates Realty Corp., Reckson Operating Partnership, L. P. and their wholly-owned subsidiaries.

The Operating Partnership is engaged in the ownership, management, operation, acquisition, leasing, financing and development of commercial real estate properties, principally office and to a lesser extent flex properties and also owns land for future development located in New York City and the surrounding tri-state area markets (the New York Tri-State Markets).

The Company was incorporated in Maryland in September 1994. In June 1995, the Company completed an initial public offering (the IPO) and commenced operations. On August 3, 2006, we entered into an Agreement and Plan of Merger with SL Green Realty Corp. (See Note 13).

The Company became the sole general partner of the Operating Partnership by contributing substantially all of the net proceeds of the IPO in exchange for an approximate 73% interest in the Operating Partnership. The remaining 27% interest in the Operating Partnership was owned primarily by investors who contributed properties or interests in properties to the Operating Partnership in exchange for common units of limited partnership interest in the Operating Partnership (OP Units). Since the IPO the Company has completed numerous equity transactions and contributed any net proceeds received to the Operating Partnership, thereby increasing its general partnership interest. The Companys ownership percentage in the Operating Partnership was approximately 96.6% and 96.8% at June 30, 2006 and 2005, respectively. All properties acquired by the Company are held by or through the
Operating Partnership.

2. BASIS OFPRESENTATION

The accompanying interim unaudited financial statements have been prepared by the Operating Partnerships management pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate so as not to make the information presented misleading. The unaudited financial statements at June 30, 2006 and for the three and six month periods ended June 30, 2006 and 2005 include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth herein. The results of operations for the
interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. These financial statements should be read in conjunction with the Operating Partnerships audited financial statements and the notes thereto included in the Operating Partnerships Form 10-K for the year ended December 31, 2005.

The accompanying consolidated financial statements include the consolidated financial position of the Operating Partnership and the Service Companies (as defined below) at June 30, 2006 and December 31, 2005 and the consolidated results of their operations for the three and six month periods ended June 30, 2006 and 2005, respectively, and their cash flows for the six months ended June 30, 2006 and 2005, respectively. The Operating Partnerships investments in majority owned and controlled real estate joint ventures are reflected in the accompanying financial statements on a consolidated basis with a reduction for the minority partners interest. The Operating Partnerships investments in real estate joint ventures, where it owns less than a controlling interest, are reflected in the accompanying financial statements on the equity method of accounting. The Service Companies, which provide management, develo




pment and construction services to the Company, the Operating Partnership and to third parties include Reckson Management Group, Inc., RANY Management Group, Inc., Reckson Construction & Development LLC and Reckson Construction Group New York, Inc. (collectively, the Service Companies). All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

Minority partners interests in consolidated partnerships represent a 49% non-affiliated interest in RT Tri-State LLC, owner of a six property suburban office portfolio located within the New York Tri-State Markets, a 40% non-affiliated interest in Omni Partners, L.P., owner of a 579,000 square foot suburban office property (the Omni Property), and a 49% non-affiliated interest in Metropolitan 919 3rd Avenue, LLC, owner of the property located at 919 Third Avenue, New York, NY.

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At June 30, 2006, the Operating Partnerships investments in unconsolidated real estate joint ventures consisted of a 30% interest in the 1.4 million square foot Class A office tower located at One Court Square, Long Island City, NY (the Court Square JV), a 25% interest in Reckson Australia Operating Company LLC, owner of a 20 suburban office property portfolio, located within the New York Tri-State Markets, containing approximately 2.8 million square feet (the Australian JV) and an approximate 5% indirect ownership interest in a 550,000 square foot office condominium in a Class A office tower located at 1166 Avenue of the Americas in New York, NY.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ from those estimates.

Real Estate

Land, buildings and improvements, furniture, fixtures and equipment are recorded at cost. Tenant improvements, which are included in buildings and improvements, are also stated at cost. Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Renovations and / or replacements, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.

Depreciation is computed utilizing the straight-line method over the estimated useful lives of ten to thirty years for buildings and improvements and five to ten years for furniture, fixtures and equipment. Tenant improvements, which are included in buildings and improvements, are amortized on a straight-line basis over the term of the related leases. Depreciation expense for each of the three and six month periods ended June 30, 2006 and 2005 amounted to approximately $23.7 million, $47.1 million, $22.5 million and $43.3 million, respectively.

We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on our net income. Should we lengthen the expected useful life of a particular asset, it would be depreciated over more years, and result in less depreciation expense and higher annual net income.

Assessment by us of certain other lease related costs must be made when we have a reason to believe that the tenant will not be able to execute under the term of the lease as originally expected.

On July 1, 2001 and January 1, 2002, we adopted Financial Accounting Standards Board (FASB) Statement No.141, Business Combinations and FASB Statement No. 142, Goodwill and Other Intangibles, respectively (Statement No.s 141 and 142). As part of the acquisition of real estate assets, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and building improvements, 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.

We allocate a portion of a propertys purchase price to tangible assets including the fair value of the building and building improvements on an as-if-vacant basis and to land determined either by real estate tax assessments, independent appraisals or other relevant data. Additionally, we assess fair value of identified intangible assets and liabilities based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information.

Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. If we incorrectly estimate the values at acquisition or the undiscounted cash flows, initial allocation of purchase price and future impairment charges may be different.

Long Lived Assets

We are required to make subjective assessments as to whether there are impairments in the value of our real estate properties and other investments. An investments value is impaired only if managements estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the investment is less than the carrying value of the investment. Such assessments consider factors such as cash flows, expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. To the extent impairment has occurred it will be measured as the excess of the carrying amount of the property over the fair value of the property. These assessments have a direct impact on our net income, as a recognition of an impairment results in an immediate negative adjustment to net income. In determining impairment, if any, we have
followed FASB Statement No. 144, Accounting for the Impairment or Disposal of Long Lived Assets (Statement No. 144). Statement No. 144 did not have an impact on net income. Statement No. 144 only impacts the presentation of the results of operations and gains on sales of real estate assets for those properties sold during the period within the consolidated statements of income.

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Cash Equivalents

We consider highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Tenants lease security deposits aggregating approximately $8.5 million and $5.5 million at June 30, 2006 and December 31, 2005, respectively,  have been included in cash and cash equivalents on the accompanying balance sheets.

Deferred Costs

Tenant leasing commissions, lease incentives and related costs incurred in connection with leasing tenant space are capitalized and amortized over the life of the related lease. Tenanting costs recorded as tenant improvements are amortized and included in depreciation and amortization expense on our consolidated statements of income. In contrast, tenanting costs recorded as lease incentives are amortized against base rents on our consolidated statements of income.

Loan costs incurred in obtaining financing are capitalized and amortized over the term of the related loan.

Costs incurred in connection with equity offerings are charged to partners capital when incurred.

Income Taxes

No provision has been made for income taxes in the accompanying financial statements since such taxes, if any are the responsibility of the individual partners.

Revenue Recognition & Accounts Receivable

Minimum rental revenue is recognized on a straight-line basis, which averages minimum rents over the terms of the leases. The excess of rents recognized over amounts contractually due are included in deferred rents receivable on the accompanying balance sheets. Contractually due but unpaid rents are included in tenant receivables on the accompanying balance sheets. Certain lease agreements also provide for reimbursement of real estate taxes, insurance, common area maintenance costs and indexed rental increases, which are recorded on an accrual basis. Ancillary and other property related income is recognized in the period earned.

We make estimates of the collectibility of our accounts receivables related to base rents, tenant escalations and reimbursements and other revenue or income. We specifically analyze tenant receivables and historical bad debts, customer credit worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of our allowance for doubtful accounts. In addition, when tenants are in bankruptcy, we make estimates of the expected recovery of pre-petition administrative and damage claims. In some cases, the ultimate resolution of those claims can exceed a year. These estimates have a direct impact on our net income because a higher bad debt reserve results in less net income.

We incurred approximately $175,000 and $445,000 and $253,000 and $645,000 of bad debt expense and related costs related to tenant receivables during the three and six month periods ended June 30, 2006 and 2005, respectively, which accordingly reduced our total revenues and reported net income during those periods.

We record interest income on our investments in notes receivable on the accrual basis of accounting. We do not accrue interest on impaired loans where, in the judgment of management, collection of interest according to the contractual terms is considered doubtful. Among the factors we consider in making an evaluation of the collectibility of interest are: (i) the status of the loan, (ii) the value of the underlying collateral, (iii) the financial condition of the borrower and (iv) anticipated future events.

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Reckson Construction & Development LLC and Reckson Construction Group New York, Inc. use the percentage-of-completion method for recording amounts earned on their contracts. This method records amounts earned as revenue in the proportion that actual costs incurred to date bear to the estimate of total costs at contract completion.

Gain on the sale of real estate is recorded when title is conveyed to the buyer, subject to the buyers financial commitment being sufficient to provide economic substance to the sale and us having no substantial continuing involvement with the buyer. Additionally, in connection with a sale of real estate, if we retain certain risks in the form of guarantees, the profit recognized on that sale shall be reduced and deferred by the maximum exposure to loss, until such exposure is relieved.

Share Based Payments

On December 16, 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment (Statement No. 123R), which is a revision of Statement No. 123. Statement No. 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.  Generally, the approach in Statement No. 123R is similar to the approach described in Statement No. 123. However, Statement No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. We adopted Statement No. 123R on January 1, 2006. The adoption of Statement No. 123R did not have a material impact on our consolidated financial statements.

Accumulated Other Comprehensive Income (Loss)

We report comprehensive income or loss in accordance with the provisions of FASB Statement No. 130, Reporting Comprehensive Income, which establishes standards for reporting comprehensive income and its components in the financial statements. The components of other comprehensive income (loss) (OCI) consist of unrealized gains and losses on derivative instruments. OCI is presented in the accompanying consolidated statements of partners capital.

Derivative Instruments

FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement No. 133), as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.

The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

As required by Statement No. 133, we record all derivatives on our balance sheet at fair value. For effective hedges, depending on the nature of the hedge, changes in the fair value of the derivative will be offset against the corresponding change in fair value of the hedged asset, liability, or firm commitment through earnings or recognized in OCI until the hedged item is recognized in earnings.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in OCI and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings.

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We do not enter into derivative financial instruments for trading or speculative purposes. However, in the normal course of our business and to help us manage our debt issuances and maturities, we do use derivative financial instruments in the form of cash flow hedges to protect ourselves against potentially rising interest rates.

Variable Interest Entities

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which explains how to identify variable interest entities (VIEs) and how to assess whether to consolidate such entities. VIEs are primarily entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs which we are involved with must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. The initial determination of whether an entity qualifies as a VIE shall be made as of the date at which a primary beneficiary becomes involved with the entity and reconsidered as of the date of a triggering event, as
defined. The provisions of this interpretation are immediately effective for VIEs formed after January 31, 2003. In December 2003, the FASB issued FIN 46R, deferring the effective date until the period ended March 31, 2004 for interests held by public companies in VIEs created before February 1, 2003, which were non-special purpose entities. We adopted FIN 46R during the period ended March 31, 2004 and have determined that our unconsolidated subsidiaries do not represent VIEs pursuant to such interpretation. We will continue to monitor any changes in circumstances relating to certain of our consolidated and unconsolidated joint ventures which could result in a change in our consolidation policy.

Current pronouncements

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). This interpretation, among other things, creates a two step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. De-recognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for de-recognition of tax positions, and it has expanded disclosure requirements. FIN 48 is
effective for fiscal years beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. We are currently evaluating FIN 48 and have not yet determined the impact the adoption will have on our consolidated financial statements.

In June 2005, the FASB ratified the consensus in EITF Issue No. 04-5, 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 (Issue 04-5), which provides guidance in determining whether a general partner controls a limited partnership. Issue 04-5 states that the general partner in a limited partnership is presumed to control that limited partnership. The presumption may be overcome if the limited partners have either (1) the substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (2) substantive participating rights, which provide the limited partners with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the
limited partnerships business and thereby preclude the general partner from exercising unilateral control over the partnership. The adoption of Issue 04-5 by us for new or modified limited partnership arrangements is effective June 30, 2005 and for existing limited partnership arrangements effective January 1, 2006. We have evaluated the guidance provided for under Issue 04-5 and have concluded that we are not required to consolidate our current unconsolidated joint venture investments nor do we expect Issue 04-5 to have a material effect on our consolidated financial statements.

In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections (Statement No. 154). Statement No. 154, which replaces APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, changes the requirements for the accounting for and reporting of a change in accounting principle. The statement requires retrospective application of changes in accounting principle to prior periods financial statements unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. Statement No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We adopted Statement No. 154 on January 1, 2006. The adoption of Statement No. 154 did not have a material impact on our consolidated financial




position, results of operations or cash flows.

In March 2005, FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47), which became effective December 31, 2005. Under FIN 47, a conditional asset retirement obligation (CARO) must be recorded if the liability can be reasonably estimated. A CARO is an obligation that is settled at the time an asset is retired or disposed of and for which the timing and/or method of settlement are conditional on future events. We own certain properties that currently have asbestos which under certain conditions must be remediated. As a result of adopting FIN 47, we will increase the value of our recorded tangible assets at the time we recognize the associated conditional retirement obligation.

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As a result, during 2005, we recorded approximately $2.0 million which represents the fair value of the CARO related to asbestos removal in tenant spaces. In addition, for certain limited areas of our properties, management is unable to reasonably determine the fair value of potential remediation costs as there is an indeterminate settlement date for the asset retirement obligation because the range of time over which way we may choose to remediate this condition may not be estimated with any level of precision which would lend itself to a meaningful estimate.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

3. MORTGAGENOTESPAYABLE

On January 6, 2006, we sold two of our suburban office properties: 6800 and 6900 Jericho Turnpike, Jericho, NY to the Australian JV, subject to their mortgage debt of approximately $20.1 million. The Australian JV subsequently pre-paid the mortgage notes with proceeds from a new mortgage financing transaction.

Pursuant to the terms of the mortgage note encumbering the property located at 1350 Avenue of the Americas in New York, NY, the note was prepayable, without penalty, subsequent to March 31, 2006. On March 31, 2006, we satisfied the note and unencumbered the property by repaying the outstanding balance of approximately $71.9 million with proceeds received from property sales and cash-on-hand.

At June 30, 2006, we had 12 fixed rate mortgage notes payable with an aggregate outstanding principal amount of approximately $527.5 million. These mortgage notes are secured by properties with an aggregate cost basis at June 30, 2006 of approximately $1.1 billion and which are pledged as collateral against the mortgage notes payable. In addition, approximately $41.0 million of the $527.5 million is recourse to the Company. The mortgage notes bear interest at rates ranging from 5.20% to 8.50%, and mature between 2006 and 2015. The weighted average interest rate on the outstanding mortgage notes payable at June 30, 2006 was approximately 7.1%.

Certain of the mortgage notes payable are guaranteed by the Company and/or certain limited partners in the Operating Partnership. In addition, consistent with customary practices in non-recourse lending, certain non-recourse mortgages may be recourse to the Company under certain limited circumstances including environmental issues and breaches of material representations.

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The following table sets forth our mortgage notes payable at June 30, 2006, by scheduled maturity date (dollars in thousands):



Property
      
      
      
      Principal
          AmountOutstanding
      
      Interest
          Rate
      
      Maturity
          Date
      
      AmortizationTerm (Years)Landmark
          Square, Stamford, CT
      
      (a)
      
      $
      40,973
      
      8.02
      %
      October,
          2006
      
      25100
          Summit Lake Drive, Valhalla, NY
      
      
      
      
      13,699
      
      8.50
      %
      April,
          2007
      
      15333
          Earle Ovington Blvd., Mitchel Field, NY
      
      (b)
      
      
      50,011
      
      7.72
      %
      August,
          2007
      
      25810
          Seventh Avenue, NY, NY
      
      (c)
      
      
      76,902
      
      7.73
      %
      August,
          2009
      
      25275
          Broadhollow Road, Melville, NY
      
      (c)
      
      
      14,966
      
      7.73
      %
      August,
          2009
      
      2590
          Merrick Avenue, East Meadow, NY
      
      (c)
      
      
      18,359
      
      7.73
      %
      August,
          2009
      
      25580
          White Plains Road, Tarrytown, NY
      
      (d)
      
      
      11,876
      
      7.86
      %
      September,
          2010
      
      25520
          Broadhollow Road, Melville, NY
      
      (e)
      
      
      11,869
      
      5.20
      %
      October,
          2010
      
      Interest
          Only50
          Marcus Avenue, Melville, NY
      
      (e)
      
      
      28,277
      
      5.20
      %
      October,
          2010
      
      Interest
          Only1660
          Walt Whitman Road, Melville, NY
      
      (e)
      
      
      11,386
      
      5.20
      %
      October,
          2010
      
      Interest
          Only919
          Third Avenue, NY, NY
      
      (f)
      
      
      236,675
      
      6.87
      %
      July,
          2011
      
      30711
          Westchester Avenue, White Plains, NY
      
      
      
      
      12,525
      
      5.36
      %
      January,
          2015
      
      30
          (g)Total
          / Weighted average
      
      
      
      $
      527,518
      
      7.09
      %


---

|(a) | Encompasses six Class A office properties.
|--- | ------------------------------------------

|(b) | At June 30, 2006, we had a 60% general partnership interest in this property and our proportionate share of the aggregate principal amount of the mortgage was approximately $30.0 million.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | These mortgages are cross-collateralized.
|--- | -----------------------------------------

|(d) | The property subject to this mortgage is contracted to be sold to the Australian JV in October 2006.
|--- | ----------------------------------------------------------------------------------------------------

|(e) | These mortgages are cross-collateralized by properties that are contracted to be sold, subject to the mortgages, to the Australian JV in October 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | We have a 51% membership interest in this property and our proportionate share of the aggregate principal amount of the mortgage is approximately $120.7 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | This mortgage note is interest only through January 2007 and then amortizes over a 30-year period.
|--- | --------------------------------------------------------------------------------------------------

Scheduled principal repayments to be made during the next five years and thereafter, for mortgage notes payable outstanding at June 30, 2006, are as follows (in thousands):



PrincipalAmortization


      

        Due atMaturity


      

        Total2006


      


      $


      5,229


      


      $


      40,402


      


      $


      45,6312007

        

        

        8,406

        

        

        60,642

        

        

        69,0482008

        

        

        7,370

        

        

        

        

        

        7,3702009

        

        

        6,774

        

        

        100,254

        

        

        107,0282010

        

        

        4,665

        

        

        62,105

        

        

        66,770Thereafter

        

        

        3,236

        

        

        228,435

        

        

        231,671$

        35,680

        

        $

        491,838

        

        $

        527,518


At June 30, 2006, our unconsolidated joint ventures had total indebtedness of approximately $838.3 million, which was comprised of $30.5 million of floating rate unsecured debt and approximately $807.8 million of fixed rate mortgage indebtedness with a weighted average interest rate of approximately 5.4% and a weighted average maturity of approximately 9.2 years. Our aggregate pro-rata share of the unconsolidated joint venture debt was approximately $180.8 million.

4. SENIORUNSECUREDNOTES

During March 2006, the Operating Partnership issued $275.0 million aggregate principal amount of ten-year 6.00% senior unsecured notes. Interest on the notes will be payable semi-annually on May 15 and November 15, commencing May 15, 2006. Prior to the issuance of these notes, we entered into an anticipatory interest rate hedge instrument to protect ourselves against potentially rising interest rates. At the time the notes were issued, this instrument was settled and we received a net benefit of approximately $490,000. Such benefit has been recorded to OCI and is being amortized as a yield adjustment to the fixed rate notes. The net proceeds from the offering, after the underwriters discounts and expenses, were approximately $272.5 million and were used for the repayment of amounts outstanding under our term loan. (See Note 5)

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At June 30, 2006, the Operating Partnership had outstanding approximately $1.25 billion (net of unamortized issuance discounts) of senior unsecured notes (the Senior Unsecured Notes). The following table sets forth the Operating Partnerships Senior Unsecured Notes and other related disclosures by scheduled maturity date (dollars in thousands):



Issuance

        

        FaceAmount

        

        CouponRate

        

        Term(in Years)

        

        MaturityJune 17, 2002


      


      $


      50,000


      


      6.00


      %


      5


      


      June 15, 2007August 27, 1997

        

        

        150,000

        

        7.20

        %

        10

        

        August 28, 2007March 26, 1999

        

        

        200,000

        

        7.75

        %

        10

        

        March 15, 2009January 22, 2004

        

        

        150,000

        

        5.15

        %

        7

        

        January 15, 2011August 13, 2004

        

        

        150,000

        

        5.875

        %

        10

        

        August 15, 2014March 31, 2006

        

        

        275,000

        

        6.00

        %

        10

        

        March 31, 2016June 27, 2005

        

        

        287,500

        

        4.00

        %

        20

        

        June 15, 2025 (a)$

        1,262,500


(a)

        Exchangable senior debentures which are callable after June 17, 2010 at 100% of par. In addition, the debentures can be put to us, at the option of the holder at par, on June 15, 2010, 2015 and 2020 and upon the occurrence of certain change of control transactions (including the Merger as discussed in Note 13).


Interest on the Senior Unsecured Notes is payable semiannually with principal and unpaid interest due on the scheduled maturity dates. In addition, certain of the Senior Unsecured Notes were issued at discounts aggregating approximately $8.6 million. Such discounts are being amortized to interest expense over the term of the Senior Unsecured Notes to which they relate. Through June 30, 2006, approximately $1.1 million of the aggregate discounts have been amortized.

5. UNSECUREDCREDITFACILITYANDTERMLOAN

We currently maintain our $500 million Credit Facility with JPMorgan Chase Bank, as administrative agent, Wells Fargo Bank, National Association as syndication agent and Citicorp, North America, Inc. and Wachovia Bank, National Association as co-documentation agents. The Credit Facility matures in August 2008, provides for a one-year extension subject to a fee of 25 basis points and, upon receiving additional lender commitments, for an increase to the maximum revolving credit amount to $750 million. The Credit Facility has a competitive bid feature, which allows us to solicit bids from lenders under the Credit Facility to borrow up to 50% of the maximum revolving credit amount at interest rates less than the current LIBOR plus 80 basis point spread. In addition, the Credit Facility carries a facility fee of 20 basis points per annum. In the event of a change in the Operating Partnerships
senior unsecured credit ratings, the interest rates and facility fee are subject to change. At June 30, 2006, the outstanding borrowings under the Credit Facility aggregated $92.0 million and carried a weighted average interest rate of 5.86% per annum.

We utilize the Credit Facility primarily to finance real estate investments, fund our real estate development activities and for working capital purposes. At June 30, 2006, we had availability under the Credit Facility to borrow approximately an additional $407.9 million, subject to compliance with certain financial covenants. Such amount is net of approximately $100,000 in an outstanding undrawn standby letter of credit, which is issued under the Credit Facility.

In connection with the acquisition of certain properties, contributing partners of such properties have provided guarantees on certain of our indebtedness. As a result, we maintain certain minimum outstanding balances on our Credit Facility.

On January 13, 2006, we obtained a $250.0 million term loan (the Term Loan) from Goldman Sachs Mortgage Company. The Term Loan was for an initial period of three months and had terms, including interest rates and financial covenants, substantially similar to our Credit Facility. Proceeds from the Term Loan were used to repay outstanding borrowings under our Credit Facility. On March 31, 2006, in conjunction with net proceeds received from the issuance of Senior Unsecured Notes, we repaid the entire amount outstanding under the Term Loan. As a result, the Term Loan has been retired and is no longer available for borrowings thereunder.

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6. COMMERCIALREALESTATEINVESTMENTS

In May 2005, we acquired a 1.4 million square foot, 50-story, Class A office tower located at One Court Square, Long Island City, NY. On November 30, 2005, we sold a 70% joint venture interest in One Court Square to certain institutional funds advised by JPMorgan Investment Management (the JPM Investor). The operating agreement of the Court Square JV requires approvals from members on certain decisions including annual budgets, sale of the property, refinancing of the propertys mortgage debt and material renovations to the property. In addition, after September 20, 2009 the members each have the right to recommend the sale of the property, subject to the terms of the mortgage debt, and to dissolve the Court Square JV. We have evaluated the impact of FIN 46R on our accounting for the Court Square JV and have concluded that the Court Square JV is not a VIE. We account for the Court
Square JV under the equity method of accounting. We have also evaluated and determined that under Issue 04-5 the JPM Investor has substantive participating rights in the ordinary course of the Court Square JVs business. In accordance with the equity method of accounting, our proportionate share of the Court Square JV income was approximately $67,400 and $110,000 for the three and six months ended June 30, 2006, respectively.

On May 26, 2005, we entered into a contract to sell approximately 60 acres of land located in Chatham Township, NJ. The sale was contingent upon due diligence, environmental assessment, final re-zoning and other customary approvals. During July 2006, the contract was terminated.

On August 18, 2005, we entered into (i) an underwriting agreement relating to the public offering in Australia of approximately A$263.0 million (approximately US$202.0 million) of units (LPT Units) in a newly-formed Reckson-sponsored Australian listed property trust, Reckson New York Property Trust (Reckson LPT), a newly-formed listed property trust which is traded on the Australian Stock Exchange and (ii) contribution and sale agreements pursuant to which, among other things, we agreed to transfer 25 of our properties for an aggregate purchase price of approximately $563.0 million and containing an aggregate of 3.4 million square feet, in three separate tranches, to the Australian JV in exchange for a 25% interest in the Australian JV and approximately $502.0 million in cash (inclusive of proceeds from mortgage debt to be assumed by the Australian JV). On September 21,
2005, Reckson LPT completed its public offering and the closing of the first of three tranches (Tranche I) of this transaction.

In connection with the Tranche I closing, the Australian JV acquired from us 17 of our suburban office properties containing approximately 2.0 million square feet for approximately $367.0 million (including the assumption of approximately $196.1 million in mortgage debt which had been incurred by us in August 2005  see Note 2). In return, we received a 25% interest in the Australian JV and approximately $128.1 million in cash resulting in an aggregate gain of approximately $103.6 million. As discussed below relating to certain guarantees we have made, approximately $18 million of the aggregate gain has been deferred to future periods pursuant to Statement No. 66 to coincide with the release of the guarantees. As a result, gains on sales of real estate reported in 2005, related to theTranche I closing was approximately $86.1 million. Approximately $22.0 million of the cash received was used
to repay certain of our secured mortgage indebtedness on September 30, 2005 and approximately $105.7 million of the cash received was used to establish an escrow account with a qualified intermediary for a future exchange of real property pursuant to Section 1031 of the Code (a Section 1031 Exchange). A Section 1031 Exchange allows for the deferral of taxes related to the gain attributable to the sale of property if a qualified replacement property is identified within 45 days and such qualified replacement property is acquired within 180 days from the initial sale. On October 7, 2005 we acquired a qualified replacement property for purposes of this Section 1031 Exchange and thereby deferred a portion of the tax gain from the Tranche I sale.

In connection with the foregoing, on September 21, 2005, Reckson Australia Holdings LLC (Reckson Holdings), a wholly-owned subsidiary of the Operating Partnership, and Reckson Australia LPT Corporation (LPT REIT), a U.S. real estate investment trust which is wholly-owned by Reckson LPT, entered into the Amended and Restated Limited Liability Company Agreement governing the Australian JV (the Operating Agreement). Pursuant to the Operating Agreement, LPT REIT holds a 75% interest in, and acts as the managing member for, the Australian JV, and Reckson Holdings holds a 25% non-managing member interest therein. The Operating Agreement provides that, if at any time additional capital contributions are made to the Australian JV, Reckson Holdings will have a right to make additional capital contributions up to an amount necessary to maintain its 25% interest therein on
the same terms and conditions as such other capital contributions.

As the managing member of the Australian JV, LPT REIT has the sole responsibility for managing its business and affairs on a day-to-day basis, other than with respect to certain identified major decisions, including but not limited to a merger or consolidation involving the Australian JV, a disposition of all or substantially all of its assets, or the liquidation or dissolution of the Australian JV. Such major decisions require the prior written consent of a majority of the non-managing members. As a result of the foregoing, we are accounting for our 25% non-managing member interest in the Australian JV under the equity method of accounting. In accordance with the equity method of accounting, our proportionate share of the Australian JVs income was approximately $1.6 million and $1.9 million for the three and six months ended June 30, 2006, respectively.

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On January 6, 2006, Reckson LPT completed the second Tranche of this transaction (Tranche II) whereby the Australian JV acquired three of our suburban office properties: 6800 and 6900 Jericho Turnpike, Syosset, NY and 710 Bridgeport Avenue, Shelton, CT, (the Tranche II Properties) aggregating approximately 761,000 square feet for approximately $84.6 million, including the assignment of approximately $20.1 million of mortgage debt. As a result, gains on sales of real estate related to Tranche II is approximately $35.4 million. Approximately $25.1 million of sales proceeds was used to establish an escrow account for the purpose of a future Section 1031 Exchange. During May 2006, we terminated the Section 1031 Exchange and received the sales proceeds previously held by the qualified intermediary, including accrued interest. Such proceeds were used to repay outstanding
borrowings under our Credit Facility. The balance of the cash proceeds, received at the time of the sale was used to fund our development activities and for general corporate purposes. For federal income tax purposes, we recognized a tax gain of approximately $26.7 million. We do not anticipate that such tax gain will require us to distribute more than our regular quarterly distribution in order to satisfy the distribution requirements necessary for the Company to qualify as a REIT.

The Tranche III closing (Tranche III), consisting of five of our suburban office properties valued at approximately $111.8 million, is scheduled to close in October 2006 and will include the assumption by the Australian JV of approximately $51.5 million of existing mortgage debt. It is anticipated that the Australian JV will pre-pay such mortgage debt in connection with the Tranche III closing. The Tranche III closing is subject to customary closing conditions and the Tranche III Properties consist of: 520 Broadhollow Road, 50 Marcus Avenue, 1660 Walt Whitman Road, all of which are located in Melville, NY, 580 White Plains Road, Tarrytown, NY and 300 Executive Park Drive, West Orange, NJ.

Our Service Companies provide asset management, property management, leasing, construction and other services to the Australian JV. Affiliates of ours are entitled to transaction fees and ongoing fees for providing services to the Australian JV. During January 2006, in connection with the Tranche II closing we earned and received approximately $819,000 in transaction related fees. Also, during the three and six months ended June 30, 2006 we earned and received approximately $1.5 million and $2.4 million, respectively of ongoing service related fees. Such amounts are included in investment income and other on our consolidated statements of income. In addition, we also formed Reckson Australia Management Limited (RAML), a wholly owned subsidiary, that will manage Reckson LPT and serve as its Responsible Entity. The Responsible Entity will be managed by a six member board that
includes three independent directors domiciled in Australia and three of the Companys executive officers. To address and mitigate any potential conflicts of interest with Reckson LPT or its affiliates the Company has adopted the following policies: (i) all transactions between the Company and Reckson LPT or its affiliates shall require the approval of a majority of the independent directors of both the Company and Reckson LPT, (ii) executive officers and directors of the Company are prohibited from owning equity in Reckson LPT, and (iii) the adoption of an express policy which mandates that property services and leasing decisions shall be made without regard to the Companys percentage ownership of any property.

Under the Operating Agreement, Reckson Holdings will have the right, beginning September 21, 2007, to require LPT REIT to redeem all or a portion of Reckson Holdings membership interest in the Australian JV for cash or, at LPT REITs option, shares of LPT REITs common stock (which may be exchanged for LPT Units) on a one-for-one basis. Reckson Holdings also has the right to cause the liquidation of the Australian JV in the event that RAML is replaced as Reckson LPTs Responsible Entity. In addition, the Operating Agreement contains a right of first refusal granting Reckson Holdings the right to acquire any asset of the Australian JV, at fair market value, in the event of an attempted sale of such asset or the exercise of Reckson Holdings right to liquidate the Australian JV.

In connection with the Tranche I closing, on September 21, 2005, the Company, the Australian JV and LPT REIT entered into an Option Agreement (the Option Agreement) pursuant to which we granted the Australian JV options to acquire ten additional properties from the Operating Partnership over a two year period, beginning January 1, 2006. The properties contain an aggregate of approximately 1.2 million square feet and will be priced based on the fair market value. The Option Agreement contains a right of first refusal granting the Australian JV the right to acquire any option property from Reckson in the event we receive, and are amenable to, an offer from a third party to purchase such option property. The Option Agreement will terminate under certain circumstances, including if (i) the Australian JV sends notice of its intent to exercise its option but fails to close as obligated, (ii)
the Australian JV is in default under the Option Agreement, the contribution agreement or the sale agreement or (iii) RAML or an affiliate of ours is no longer the Responsible Entity of Reckson LPT.

In connection with the mortgage indebtedness securing nine of the Tranche I properties, which were transferred to the Australian JV on September 21, 2005, and three of the Tranche III properties scheduled to be transferred to the Australian JV during October 2006, we have guaranteed to the lender certain customary non-recourse carve-outs, as well as certain obligations relating to the potential termination of a number of leases at four of these properties. We have also guaranteed to the lender certain capital requirements related to these properties. We will be relieved of the customary non-recourse carve-outs and capital requirements upon transfer of the respective properties to the Australian JV and the Australian JV meeting a net worth test of at least $100.0 million. We will be relieved of all but two of the lease related obligations upon transfer of the respective properties to the Australian
JV and the Australian JV meeting a net worth test of at least $200.0 million. The Australian JV has agreed to indemnify us for any loss, cost or damage it may incur pursuant to our guaranty of these obligations. The Australian JV has met the $100.0 million net worth threshold and there remain approximately $18 million of aggregate guarantees outstanding.

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In accordance with FASB Statement No. 144, the assets and liabilities of the properties transferred and to be transferred, excluding the option properties, to the Australian JV are classified as held for sale on our consolidated balance sheets, for all periods presented.

During September 2005, we entered into a letter of intent with an entity owned by the owner of the New York Islanders professional hockey team to enter into a 50 / 50 joint venture to potentially develop over five million square feet of office, residential, retail and hotel space located on 77 acres in the Mitchel Field, Long Island sub-market in and around Nassau Countys Veterans Memorial Coliseum where we are currently the largest owner of office properties. In March 2006, the joint venture was selected by the County Executive for the development of the 77 acre site. In May 2006, the County Executive and the joint venture entered into a memorandum of understanding for the development of the site. The development remains subject to certain conditions and governmental approvals, including legislative, zoning and other customary approvals. In addition, there can be no assurances that we will
enter into the aforementioned joint venture, that all applicable conditions will be satisfied or that all required approvals can be obtained.

On March 7, 2006, we sold our 354,000 square foot office building in Orlando, Florida for aggregate consideration of approximately $70.0 million which resulted in a gain of approximately $9.5 million. Such gain is reflected as a component of discontinued operations on our consolidated statements of income. This non-core real estate holding was acquired in May 1999 in connection with our initial New York City portfolio acquisition. Net proceeds from the sale were used to establish an escrow account with a qualified intermediary for a future Section 1031 Exchange. During May 2006 we terminated the Section 1031 Exchange and received the sales proceeds previously held by the qualified intermediary, including accrued interest. Such proceeds were used to repay outstanding borrowings under our Credit Facility. For federal income tax purposes, we recognized a tax gain of approximately $5.2 million. We do
not anticipate that such tax gain will require us to distribute more than our regular quarterly distribution in order to satisfy the distribution requirements necessary for the Company to qualify as a REIT.

On March 31, 2006, we sold a 161,000 square foot office building located in Westchester County for $35.3 million. Sales proceeds received were used for the repayment of the mortgage note encumbering the property located at 1350 Avenue of the Americas in New York, NY. This non-core real estate holding was acquired in December 2005 as part of a 14 office property portfolio acquisition.

On March 31, 2006, a group of institutional investors led by JPMorgan Investment Management, our joint venture partner in the Court Square JV and the property located at 919 Third Avenue, NY, purchased our option to acquire the existing minority partners 40% partnership interest in the Omni Property for net proceeds of approximately $9.0 million. Such proceeds have been included in investment income and other on our consolidated statements of income. In connection with this transaction, the original minority partner repaid to us approximately $22.1 million representing amounts due under a note receivable which was secured by their interest in the Omni Property. Such aggregate proceeds to us of approximately $31.2 million were used for the repayment of the mortgage note encumbering the property located at 1350 Avenue of the Americas in New York, NY.

As of June 30, 2006, we owned and operated 93 office properties (inclusive of twenty-six office properties owned through joint ventures) comprising approximately 19.3 million square feet and eight flex properties (inclusive of two flex properties owned through joint ventures) comprising approximately 863,000 square feet located in the New York Tri-State Markets.

We also own certain land parcels throughout our markets in the New York Tri-State Markets (the Development Parcels). During July 2005, we commenced the ground-up development on one of the Development Parcels of a 37,000 square foot Class A retail property located within our existing six building Landmark Square office park in Stamford, Connecticut. In August 2005, we recommenced the ground-up development of one of the Development Parcels of a 313,000 square foot Class A office building located within our existing three building office park located in Princeton, NJ. Further, one of the Development Parcels, aggregating approximately 4.1 acres, is classified as held for sale on our balance sheets and is expected to close during September 2006 for aggregate consideration of $2.0 million. Excluding the foregoing, at June 30, 2006 our inventory of Development Parcels aggregated approximately
305 acres of land in 9 separate parcels in which we had invested approximately $124.3 million.

Management has made subjective assessments as to the value and recoverability of our investments in the Development Parcels based on current and proposed development plans, market comparable land values and alternative use values. Based on these assessments, we believe there is no impairment to the carrying value of the Development Parcels.

Discontinued Operations

At June 30, 2006, we had identified five of our operating properties and one parcel of land as held for sale in accordance with Statement No. 144. We have classified the assets and liabilities for these properties and parcel of land at June 30, 2006 and December 31, 2005 on our consolidated balance sheets as held for sale. In addition, where we will not have a continuing interest in their operations, we have classified their results of operations, for all periods presented, as discontinued operations on our consolidated statements of income.

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In addition, during 2006 we sold two of our operating properties. We have classified the assets and liabilities for these properties at December 31, 2005 on our consolidated balance sheet as held for sale. In addition, we have classified their results of operations, for all periods presented, and gains from their sales, as discontinued operations on our consolidated statements of income.

The following table sets forth those assets and liabilities classified on our balances sheets as held for sale (in thousands):



June 30, 2006


      

        December 31, 2005Assets

        

        Liabilities

        

        Assets

        

        LiabilitiesProperties held for sale at June 30, 2006:The Australian JV Tranche III Properties


      


      $


      67,646


      


      $


      63,839


      


      $


      66,558


      


      $


      64,015Land parcel located in Long Island, New York

        

        

        1,149

        

        

        

        

        

        1,123

        

        

        Properties sold during 2006:The Australian JV Tranche II Properties

        

        

        

        

        

        

        

        

        35,182

        

        

        20,311One operating property located in Westchester County, New York

        

        

        

        

        

        

        

        

        31,977

        

        

        190One Orlando Centre located in Orlando, Florida

        

        

        

        

        

        

        

        

        59,457

        

        

        56Totals

        

        $

        68,795

        

        $

        63,839

        

        $

        194,297

        

        $

        84,572


The following table sets forth the income (loss) from discontinued operations and the related net gains on sales of real estate for those properties sold during the respective periods presented (in thousands and net of minority and limited partners interests):



Three Months Ended June 30,


      

        Six Months Ended June 30,2006

        

        2005

        

        2006

        

        2005Income (loss) from discontinued operations:310 / 333 East Shore Road, Great Neck, New York


      


      $


      


      


      $


      177


      


      $


      


      


      $


      27748 Harbor Park Drive, Port Washington, New York

        

        

        

        

        

        74

        

        

        

        

        

        139100 Wall Street, New York, New York

        

        

        

        

        

        1,312

        

        

        

        

        

        2,939One Orlando Centre located in Orlando, Florida

        

        

        (30

        )

        

        324

        

        

        384

        

        

        685One operating property located in Westchester County, New York

        

        

        (21

        )

        

        

        

        

        458

        

        

        Total income (loss) from discontinued operations

        

        

        (51

        )

        

        1,887

        

        

        842

        

        

        4,040Gains on sales of real estate:One Orlando Centre located in Orlando, Florida

        

        

        

        

        

        

        

        

        9,518

        

        

        Land parcel located in Long Island, New York

        

        

        

        

        

        175

        

        

        

        

        

        175Total discontinued operations

        

        $

        (51

        )

        $

        2,062

        

        $

        10,360

        

        $

        4,215




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Note Receivable Investments

At June 30, 2006, we had invested approximately $93.4 million in mezzanine loans and approximately $70.9 million in other loan investments (collectively, the Note Receivable Investments). In general these investments are secured by a pledge of either a direct or indirect ownership interest in the underlying real estate or leasehold, a first mortgage, other guaranties, pledges and assurances.

The following table sets forth the terms of the mezzanine loans at June 30, 2006 (in thousands):



Property


      

        Amount


      


      Interest Rate


      


      Funding


      


      MaturityLong Island office portfolio


      


      $


      8,031


      


      9.00


      %


      Mar., 2005


      


      Apr., 2010


      (a)Long Island office portfolio

        

        

        20,356

        

        9.00

        %

        Mar., 2005

        

        Apr., 2012

        (a)72 Madison Avenue, NY, NY (b)

        

        

        10,000

        

        20.00

        %

        Oct., 2005

        

        Oct., 20071166 Avenue of the Americas, NY, NY (c)

        

        

        25,000

        

        17.50

        %


      Nov., 2005

        


      Nov., 2009100 Wall Street, NY, NY

        

        

        30,000

        

        15.00

        %

        Dec., 2005

        

        Dec., 2007$

        93,387


|(a) | Prepayable without penalty after 18 months from initial funding.
|--- | ----------------------------------------------------------------

|(b) | In addition to this mortgage loan, Reckson Construction and Development, LLC (RCD) entered into a development agreement with the owner of the property to perform certain predevelopment, development and / or other services with respect to the property. In exchange for its services, RCD will receive a development fee of $2.0 million which is payable in equal monthly installments over a two-year period which commenced during October 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Junior mezzanine loan secured by interests in a 550,000 square foot condominium interest.
|--- | -----------------------------------------------------------------------------------------

In May 2005 we funded $55.3 million under an $85.0 million participating loan investment which is secured by an indirect interest in a 550,000 square foot condominium in a Class A office tower located at 1166 Avenue of the Americas, New York, NY. The loan accrues interest compounded at 9.0% and pays interest at an annual rate of 6.0% through March 2010, 8.5% thereafter through March 2015 and 11.0% thereafter through maturity in 2020. The loan is pre-payable only under certain circumstances and, in any case, not before 2009. Upon a capital event related to the indirect interest in the property which secures the loan, we are entitled to participate in 30% of the net proceeds derived from such capital event.

On March 30, 2006, we advanced approximately $14.2 million under three separate loan agreements which are secured by certain flex properties, aggregating approximately 450,000 square feet, located in Nassau County, Long Island and in part by a personal guarantee of an affiliate of the borrower. These loans have an initial weighted average interest rate of 15.3% and mature on April 1, 2008. In addition, the loans are not prepayable, without penalty, prior to October 1, 2007.

At June 30, 2006, we held one other note receivable, which aggregated $1.0 million and carried an interest rate of 10.50% per annum. This note receivable matures on January 31, 2010 and is secured in part by a minority partners preferred unit interest in the Operating Partnership.

The following table sets forth the terms of our other loan investments at June 30, 2006 (in thousands):



Property
      
      Amount
      
      Interest
          Rate
      
      Funding
      
      MaturityNYC
          Class A office condominium interest
      
      $
      55,250
      
      9.00
      %
      May,
          2005
      
      Dec.,
          2020Flex
          property located in Nassau County, Long Island
      
      
      14,188
      
      15.29
      %
      Mar.,
          2006
      
      Apr.,
          2008Other
      
      
      1,000
      
      10.50
      %
      Oct.,
          2004
      
      Jan.,
          2010Other
      
      
      500
      
      5.35
      %
      Dec.,
          2004
      
      Dec.,
          2009$
      70,938


As of June 30, 2006, management has made subjective assessments as to the underlying security value on the Note Receivable Investments. Based on these assessments, we believe there is no impairment to their carrying value.

On July 27, 2006, we advanced $20.0 million under a loan agreement which is secured by certain pledges of project income and ownership interests and a personal guarantee of an affiliate of the borrower. This loan matures in August 2009, bears interest at 15% per annum (10% annual pay rate and 5% monthly compounded deferred rate). The loan is pre-payable at any time and with yield maintenance through August 1, 2007 if pre-paid prior to August 2007. This investment was funded through a borrowing under our Credit Facility.



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7.
  PARTNERS CAPITAL

A Class A OP Unit and a share of common stock have similar economic characteristics as they effectively share equally in the net income or loss and distributions of the Operating Partnership. As of June 30, 2006, the Operating Partnership had issued and outstanding 1,546,133 Class A OP Units and 456,621 Class C OP Units. The Class A OP Units and the Companys common stock currently receive a quarterly distribution of $0.4246 per unit/share. The Class C OP Units were issued in August 2003 in connection with the contribution of real property to the Operating Partnership and currently receive a quarterly distribution of $0.4664 per unit. Subject to certain holding periods, OP Units may either be redeemed for cash or, at the election of the Company, exchanged for shares of common stock on a one-for-one basis.

The Operating Partnership issues additional units to the Company, and thereby increases the Companys general partnership interest in the Operating Partnership, with terms similar to the terms of any securities (i.e., common stock or preferred stock) issued by the Company (including any securities issued by the Company upon the exercise of stock options). Any consideration received by the Company in respect of the issuance of its securities is contributed to the Operating Partnership. In addition, the Operating Partnership or a subsidiary funds the compensation of personnel, including any amounts payable under the Companys LTIP.

As of June 30, 2006, the Company had approximately 1.3 million shares of its common stock reserved for issuance under its stock option plans, in certain cases subject to vested terms, at a weighted average exercise price of $24.63 per option. In addition, the Company has approximately 2.7 million shares of its common stock reserved for future issuance under its stock option plans.

During June 2005, the Operating Partnership issued $287.5 million aggregate principal amount of 4.00% exchangeable senior debentures due June 15, 2025. The debentures were issued at 98% of par and are exchangeable for shares of common stock of the Company on or after June 15, 2024 at an initial exchange rate of 24.6124 common shares per $1,000 of principal amount of debentures. The debentures are also exchangeable: (i) if the market price of the Companys common stock over a specified period of time is more than 125% of the exchange price per share then in effect; (ii) if the trading price of the debentures over a specified period of time is less than 98% of the product of the closing price of the Companys shares multiplied by the applicable exchange rate; (iii) during a specified period of time, for any debentures that have been called for redemption; (iv) under certain circumstances,
upon the occurrence of a distribution to holders of the Companys shares of (a) rights to purchase the Companys common stock at a price below the market price of the Companys shares or (b) assets, debt securities or rights to purchase the Companys securities or securities of the Operating Partnership that have a per share/unit value exceeding 10% of the market price of the Companys shares; (v) if the Companys common stock is not listed on a national or regional securities exchange or quoted on NASDAQ for 30 consecutive trading days; or (vi) if the Operating Partnership or the Company is party to a consolidation, merger or binding share exchange pursuant to which all of the Companys common stock would be exchanged for cash, securities or other property.

The initial exchange price of $40.63 represents a premium of approximately 25% to the closing price of the Companys common stock on the issuance date of $32.50 per share. If exchanged in accordance with their terms, the debentures will be settled in cash up to their principal amount and any remaining exchange value will be settled, at our option, in cash, the Companys common stock or a combination thereof. In accordance with the exchange rate terms of the debentures the Company has reserved approximately 8.8 million shares of its authorized common stock, $.01 par value, for potential future issuance upon the exchange of the debentures. Such amount is based on an exchange rate of 30.7692 common shares per $1,000 of principal amount of debentures. Although we have reserved these shares pursuant to the exchange rate terms, we believe the issuance of the Companys shares, if any,
would be significantly less than 8.8 million shares. The debentures are guaranteed by the Company. We have the option to redeem the debentures beginning June 18, 2010 for the principal amount plus accrued and unpaid interest. Holders of the debentures have the right to require us to repurchase their debentures at 100% of the principal amount thereof plus accrued and unpaid interest on June 15, 2010, June 15, 2015 and June 15, 2020 or, in the event of certain change in control transactions (including the Merger as discussed in Note 13), prior to June 15, 2010.

The limited partners minority interest in the Operating Partnership (Limited Partner Equity), which is reflected on the accompanying balance sheets, is reported at an amount equal to the limited partners ownership percentage of the net equity of the Operating Partnership at the end of the reporting period. The Limited Partner Equity is adjusted at the end of the period to reflect the ownership percentages at that time. The Limited Partner Equity was approximately 3.4% and 3.2% at June 30, 2006 and 2005, respectively.

During the three month period ended June 30, 2006, certain limited partners in the Operating Partnership exchanged 12,224 OP Units for an equal number of shares of the Companys common stock.

The Board of Directors of the Company initially authorized the purchase of up to 5.0 million shares of the Companys common stock. Transactions conducted on the New York Stock Exchange have been, and will continue to be, effectuated in accordance with the safe harbor provisions of the Securities Exchange Act of 1934 and may be terminated by the Company at any time. Since the Boards initial authorization, the Company has purchased 3,318,600 shares of its common stock for an aggregate purchase price of approximately $71.3 million. In June 2006, the Board of Directors authorized the re-institution of the Companys common stock repurchase program, which had been inactive since March 2003. Subject to the restrictive covenants contained in the Merger Agreement (see Note 13), the Company may repurchase up to an aggregate of 5.0 million shares of its common stock under the re-instituted plan.



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The Operating Partnership has issued and outstanding 1,200 preferred units of limited partnership interest with a liquidation preference value of $1,000 per unit and a stated distribution rate of 7.0%, which is subject to reduction based upon terms of their initial issuance (the Preferred Units). The terms of the Preferred Units provide for this reduction in distribution rate in order to address the effect of certain mortgages with above market interest rates which were assumed by the Operating Partnership in connection with properties contributed to the Operating Partnership in 1998. As a result of the aforementioned reduction, there are currently no distributions being made on the Preferred Units.

Net income per common partnership unit is determined by allocating net income after preferred distributions and minority partners interest in consolidated partnerships income to the general and limited partners based on their weighted average distribution per common partnership units outstanding during the respective periods presented.

Holders of preferred units of limited and general partnership interest are entitled to distributions based on the stated rates of return (subject to adjustment) for those units.

In July 2002, as a result of certain provisions of the Sarbanes-Oxley Act of 2002, we discontinued the use of stock loans in our Long Term Incentive Programs (LTIP). In connection with LTIP grants made prior to the enactment of the Sarbanes-Oxley Act of 2002, we currently have stock loans outstanding to certain executive officers which were used to purchase 385,000 shares of the Companys common stock. The stock loans were priced at the market prices of the Companys common stock at the time of issuance, bear interest at the mid-term Applicable Federal Rate and are secured by the shares purchased. Such stock loans (including accrued interest) are scheduled to vest and be ratably forgiven each year on the anniversary of the grant date based upon initial vesting periods ranging from seven to ten years. Such forgiveness is based on continued service and in part on the Company
attaining certain annual performance measures. These stock loans had an initial aggregate weighted average vesting period of approximately nine years. As of June 30, 2006, there remains 139,000 shares of common stock subject to the original stock loans which are anticipated to vest between 2007 and 2011. Approximately $627,000 and $1.4 million and $573,000 and $1.1 million of compensation expense (inclusive of cash payments in respect of taxes payable by the borrower resulting from such forgiveness) was recorded for the three and six month periods ended June 30, 2006 and 2005, respectively, related to these loans. Such amounts have been included in marketing, general and administrative expenses on the accompanying consolidated statements of income.

The outstanding stock loan balances due from executive officers aggregated approximately $2.9 million and $3.8 million at June 30, 2006 and December 31, 2005, respectively, and have been included as a reduction of additional paid in capital on the accompanying consolidated balance sheets. Other outstanding loans to executive and senior officers at June 30, 2006 and December 31, 2005 amounted to approximately $1.6 million and $2.5 million, respectively, and are included in investments in affiliate loans and joint ventures on the accompanying consolidated balance sheets and are primarily related to tax payment advances on stock compensation awards and life insurance contracts made to certain executive and non-executive officers.

In November 2002 and March 2003, an award of rights was granted to certain executive officers of the Company (the 2002 Rights and 2003 Rights, respectively, and collectively, the Rights). Each Right represents the right to receive, upon vesting, one share of the Companys common stock if shares are then available for grant under one of the Companys stock option plans or, if shares are not so available, an amount of cash equivalent to the value of such stock on the vesting date. The 2002 Rights vest in four equal annual installments beginning on November 14, 2003 (and shall be fully vested on November 14, 2006). The 2003 Rights were earned on March 13, 2005 and vest in three equal annual installments beginning on March 13, 2005 (and shall be fully vested on March 13, 2007). Dividends on the shares will be held by the Company until such shares become
vested, and will be distributed thereafter to the applicable officer. The 2002 Rights also entitle the holder thereof to cash payments in respect of taxes payable by the holder resulting from the 2002 Rights. The 2002 Rights aggregate 62,835 shares of the Companys common stock and the 2003 Rights aggregate 26,040 shares of common stock. As of June 30, 2006, there remains 15,709 shares of common stock reserved related to the 2002 Rights and 8,682 shares of common stock reserved related to the 2003 Rights. Approximately $120,000 and $240,000 and $120,000 and $224,000 of compensation expense was recorded for the three and six month periods ended June 30, 2006 and 2005, respectively, related to the Rights. Such amounts have been included in marketing, general and administrative expenses on the accompanying consolidated statements of income.



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In March 2003, the Company established a new LTIP for its executive and senior officers (the 2003 LTIP). The four-year plan has a core award, which provides for annual stock based compensation based upon continued service and in part based on the Company attaining certain annual performance measures. The plan also has a special outperformance component in the form of a bonus pool equal to 10% of the total return in excess of a 9% cumulative and compounded annual total return on the Companys common equity for the period through the four-year anniversary after the date of grant (the Special Outperformance Pool). The aggregate amount payable to such officers from the Special Outperformance Pool is capped at an amount calculated based upon a total cumulative and compounded annual return on the common equity of 15%. An officers special outperformance award represents
an allocation of the Special Outperformance Pool and will become vested on the fourth anniversary of the date of grant, provided that the officer remains in continuous employment with the Company or any of its affiliates until such date, and the Company has achieved on a cumulative and compounded basis, during the four fiscal years completed on the applicable anniversary date, a total return to holders of the common equity that (i) is at or above the 60th percentile of the total return to stockholders achieved by members of the peer group during the same period and (ii) equals at least 9% per annum. Special outperformance awards will be paid in cash; however, the Compensation Committee, in its sole discretion, may elect to pay such an award in shares of common stock, valued at the date of vesting, if shares are available at such time under any of the Companys existing stock option plans. The LTIP provides that no dividends or dividend equivalent payments will accrue
with respect to the special outperformance awards. On March 13, 2003, the Company made available 827,776 shares of its common stock under its existing stock option plans in connection with the core award of the 2003 LTIP for certain of its executive and senior officers. During May 2003, the special outperformance awards of the 2003 LTIP were amended to increase the per share base price above which the four year cumulative return is measured from $18.00 to $22.40.

The Board of Directors approved an amendment to the 2003 LTIP to revise the peer group used to measure relative performance. The amendment eliminated the mixed office and industrial companies and added certain other pure office companies in order to revise the peer group to office sector companies. The Board has also approved the revision of the performance measurement dates for future vesting under the core component of the 2003 LTIP from the anniversary of the date of grant to December 31 of each year. This was done in order to have the performance measurement coincide with the performance period that the Company believes many investors use to judge the performance of the Company.

On December 27, 2004, the Operating Partnership entered into definitive agreements with certain executive and senior officers of the Company to revise their incentive awards under the 2003 LTIP. The revised agreements provide for (i) the rescission of the unvested portion of their core awards and (ii) an award in exchange for the rescinded core awards of an equal number of units of a new class of limited partnership interests (LTIP Units) of the Operating Partnership.

Each executive and senior officer participating in the 2003 LTIP was offered the option to retain all or a portion of his core awards or to rescind them in exchange for new awards of LTIP Units. On December 27, 2004, certain executive and senior officers accepted such offer and thereby amended their Amended and Restated Long-Term Incentive Award Agreement to cancel, in the aggregate, 362,500 shares of restricted stock of the Company representing all or a portion of their unvested core award, and received an equal number of LTIP Units.

The revised awards under the 2003 LTIP were designed to provide the potential for executives to retain a greater equity interest in the Company by eliminating the need for executives to sell a portion of the core awards immediately upon vesting in order to satisfy personal income taxes which are due upon vesting under the original core awards.

With respect to the 2003 LTIP, the Company met its annual performance measure with respect to the 2005, 2004 and 2003 annual measurement periods, respectively. As a result, the Company issued to the participants of the 2003 LTIP 86,111, 102,779 and 206,944 shares of its common stock, respectively, related to the core component of the 2003 LTIP.



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The terms of each award of LTIP Units are substantially similar to those of the core awards under the 2003 LTIP. The vesting, performance hurdles and timing for vesting remain unchanged. However, an LTIP Unit represents an equity interest in the Operating Partnership, rather than the Company. At issuance, the LTIP Unit has no value but may over time accrete to a value equal to (but never greater than) the value of one share of common stock of the Company (a REIT Share). Initially, LTIP Units will not have full parity with OP Units with respect to liquidating distributions. Upon the occurrence of certain triggering events (such as the issuance of additional OP Units by the Operating Partnership), the Operating Partnership will revalue its assets for the purpose of the capital accounts of its partners and any increase in valuation of the Operating Partnerships assets
from the date of the issuance of the LTIP Units through the triggering event will be allocated to the capital accounts of holders of LTIP Units until their capital accounts are equivalent to the capital accounts of holders of OP Units. If such equivalence is reached, LTIP Units would achieve full parity with OP Units for all purposes, and therefore accrete to an economic value equivalent to REIT Shares on a one-for-one basis. In addition, if such parity is reached, vested LTIP Units may only be converted into an equal number of OP Units after two years from the date of grant. However, in the absence of an increase in the value of the assets of the Operating Partnership and the occurrence of triggering events, such economic equivalence would not be reached. Until and unless such economic equivalence is reached, the value that the officers will realize for vested LTIP Units will be less than the value of an equal number of REIT Shares. In addition, LTIP Units are
subject to specific performance related vesting requirements. In addition, unlike core awards under the 2003 LTIP (wherein dividends that accumulate are paid upon vesting), LTIP Units will receive the same quarterly distributions as OP Units on a current basis, thus providing full dividend equivalence with REIT Shares. Each LTIP Unit awarded is deemed equivalent to an award of one share of common stock reserved under one of the Companys stock option plans, reducing availability for other equity awards on a one-for-one basis. At the scheduled March 2005 vesting date, the specified performance hurdles were met, and officers that received LTIP Units received a one-time cash payment that represented payment of the full vested amount of the accrued unpaid dividends under the core award of the 2003 LTIP through December 27, 2004, the issuance date of the LTIP Units. In addition, the officers, in the aggregate, vested in 104,167 LTIP Units. At the scheduled March 2006 vesting date, the
specified performance hurdles were met and officers that received LTIP Units, in the aggregate, vested in 120,833 LTIP Units. On April 4, 2006 (the Measurement Date), as a result of the Company issuing 207,000 LTIP Units (discussed below) a triggering event occurred and the Company completed an analysis to determine the increase in the valuation, if any of the Operating Partnerships assets from the issuance of 362,500 LTIP Units on December 27, 2004 through the Measurement Date and with respect to the issuance of 272,100 LTIP Units issued on March 11, 2005 through the Measurement Date. The results of the analysis indicated that a sufficient increase in value to the Operating Partnerships assets was achieved. As a result the aforementioned LTIP Units achieved full parity with an OP Unit. In order to more closely replicate the terms of the core awards being rescinded, the Company also entered into agreements with three executive officers, which
provide that in the event of a change of control the executive shall receive the equivalent value of one REIT Share for each LTIP Unit.

For each of the calendar years ended December 31, 2004 and 2005, following the recommendations of the Compensation Committee, eight senior and executive officers of the Company were awarded, in the aggregate, 272,100 LTIP Units and 207,000 LTIP Units, respectively, for outperformance and to continue to incentivize them for the long-term (the Restricted Equity Awards). Initially, the terms of the Restricted Equity Awards were generally consistent with the terms of the 2003 LTIP, including with respect to the impact upon vesting in the event of a change of control. On June 12, 2006, with respect to the 2005 Restricted Equity Awards, the vesting periods were extended so that they will vest over a four-year period in lieu of a two-year period, provided that the officer remains in continuous employment with the Company until such dates and the Company has achieved certain specified
performance requirements during the year ending December 31, 2006. If the performance requirements are not met in 2006, the awards will become vested on any subsequent annual vesting date on which the performance requirements are met on a cumulative and compounded basis. In addition, with respect to the 2004 Restricted Equity Award to Scott Rechler, the Companys Chief Executive Officer, was similarly extended provided that Mr. Rechler remains in continuous employment with the Company.

As a result of the foregoing, there remains 69,443 shares of common stock reserved for future issuance under the core award of the 2003 LTIP and 616,600 shares of common stock reserved for issuance with respect to the issuance of LTIP Units. With respect to the core award of the 2003 LTIP, the Company recorded approximately $305,000 and $610,000 of compensation expense for each of the three and six month periods ended June 30, 2006 and 2005, respectively. In addition, with respect to the LTIP Units and the Restricted Equity Awards, the Company recorded compensation expense of approximately $941,000 and $1.8 million and $822,000 and $1.3 million, respectively, for the three and six month periods ended June 30, 2006 and 2005. Such amounts have been included in marketing, general and administrative expenses on the accompanying consolidated statements of income. Based on the terms of the 2003 LTIP,
potential outcomes of the Special Outperformance Pool are estimated to range from $0, assuming the requisite four year cumulative performance measures are not met, to a maximum of approximately $35.7 million, assuming relative peer group performance measures are met and a cap of 15% cumulative and compounded return on common equity. As of June 30, 2006, we have accrued approximately $29.4 million of compensation expense with respect to the Special Outperformance Pool of which $2.2 million and $5.9 million was accrued during the three and six months ended June 30, 2006. This amount is calculated on the closing stock price of the Companys common stock on June 30, 2006 and is based on managements determination of the probability of requisite performance measures being met. The accrual represents approximately 82% of the total estimated Special Outperformance Pool reflecting the service period through June 30, 2006.

Compensation expense with respect to the core component of the 2003 LTIP, which relates to the Company attaining certain annual performance measures, is recognized as a target stock price plan. Under this type of plan, compensation expense is recognized for the target stock price awards whether or not the targeted stock price condition is achieved as long as the underlying service conditions are achieved. Accordingly, we obtained an independent third party valuation of the 2003 LTIP awards and recognize compensation expense on a straight-line basis through the performance and vesting period for awards to employees who remain in service over the requisite period regardless of whether the target stock price has been reached.

Compensation expense with respect to the core component of the 2003 LTIP, which relates to the continued service of the grantee, is recognized as compensation expense on a straight-line basis through the vesting period based on the fair market value of the stock on the date of grant.



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As a result of the election of certain executive and senior officers to exchange all or a portion of their unvested core awards under the 2003 LTIP into an equal number of LTIP Units we again obtained an independent third party valuation of the newly granted LTIP Units and determined that the fair value of the LTIP Units was not greater than the exchanged 2003 LTIP awards on the date of the exchange. As such, compensation expense to be recognized, on a straight-lined basis, over the vesting period of the LTIP Units equals the amount of unamortized compensation expense cost for the 2003 LTIP awards as of the exchange date.

On January 1, 2006, we adopted Statement No. 123R and have determined that the adoption of Statement No. 123R did not have a material impact on our consolidated financial statements.

8.
  SUPPLEMENTAL DISCLOSURES OF CASH
  FLOWS INFORMATION(IN THOUSANDS)



Six Months EndedJune 30,2006

        

        2005Cash paid during the period for interest


      


      $


      59,908


      


      $


      51,561Interest capitalized during the period

        

        $

        6,283

        

        $

        4,611


9. SEGMENT DISCLOSURE

We own all of the interests in our real estate properties directly or indirectly through the Operating Partnership. Our portfolio consists of Class A office properties located within the New York City metropolitan area and Class A suburban office and flex properties located and operated within the New York Tri-State Markets (the Core Portfolio). We have formed an Operating Committee that reports directly to our Chief Executive Officer and Chief Financial Officer who have been identified as the Chief Operating Decision Makers due to their final authority over resource allocation, decisions and performance assessment.

We do not consider (i) interest incurred on our Credit Facility, Term Loan and Senior Unsecured Notes, (ii) the operating performance of those properties reflected as discontinued operations on our consolidated statements of income and (iii) the operating results of the Service Companies as part of our Core Portfolios property operating performance for purposes of our component disclosure set forth below.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. In addition, historical amounts have been adjusted to give effect to our discontinued operations in accordance with FASB Statement No. 144.



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The following table sets forth the components of our revenues and expenses and other related disclosures (in thousands):



Three
          months endedJune
          30, 2006
      
      June
          30, 2005Core
          Portfolio
      
      Other
      
      ConsolidatedTotals
      
      Core
          Portfolio
      
      Other
      
      ConsolidatedTotalsPROPERTYOPERATINGREVENUES:Base
          rents, tenant escalations and reimbursements
      
      $
      147,810
      
      $
      
      
      $
      147,810
      
      $
      135,372
      
      $
      
      
      $
      135,372EXPENSES:Property
          operating expenses
      
      
      56,974
      
      
      
      
      
      56,974
      
      
      51,216
      
      
      
      
      
      51,216Marketing,
          general and administrative
      
      
      4,667
      
      
      4,808
      
      
      9,475
      
      
      4,180
      
      
      4,061
      
      
      8,241Depreciation
          and amortization
      
      
      35,457
      
      
      590
      
      
      36,047
      
      
      30,860
      
      
      359
      
      
      31,219Total
          operating expenses
      
      
      97,098
      
      
      5,398
      
      
      102,496
      
      
      86,256
      
      
      4,420
      
      
      90,676Operating
          income (loss)
      
      
      50,712
      
      
      (5,398
      )
      
      45,314
      
      
      49,116
      
      
      (4,420
      )
      
      44,696NON-OPERATINGINCOME
          ANDEXPENSESInterest
          income, investment income and other
      
      
      1,096
      
      
      6,735
      
      
      7,831
      
      
      569
      
      
      3,218
      
      
      3,787Interest:Expense
          incurred
      
      
      (6,226
      )
      
      (20,990
      )
      
      (27,216
      )
      
      (14,167
      )
      
      (13,092
      )
      
      (27,259
      )Amortization
          of deferred financing costs
      
      
      (320
      )
      
      (697
      )
      
      (1,017
      )
      
      (327
      )
      
      (741
      )
      
      (1,068
      )Long-term
          incentive compensation expense
      
      
      
      
      
      (2,232
      )
      
      (2,232
      )
      
      
      
      
      
      
      
      Total
          non-operating income and expenses
      
      
      (5,450
      )
      
      (17,184
      )
      
      (22,634
      )
      
      (13,925
      )
      
      (10,615
      )
      
      (24,540
      )Income
          (loss) before minority interests, equity in earnings of real estate
          joint ventures and discontinued operations
      
      $
      45,262
      
      $
      (22,582
      )
      $
      22,680
      
      $
      35,191
      
      $
      (15,035
      )
      $
      20,156


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Six Months EndedJune 30, 2006

        

        June 30, 2005Core Portfolio

        

        Other

        

        ConsolidatedTotals

        

        Core Portfolio

        

        Other

        

        ConsolidatedTotalsPROPERTY
          OPERATING REVENUES:Base rents, tenant escalations and reimbursements

        

        $

        282,963

        

        $

        

        

        $

        282,963

        

        $

        265,560

        

        $

        

        

        $

        265,560EXPENSES:Property operating expenses

        

        

        117,209

        

        

        

        

        

        117,209

        

        

        103,956

        

        

        

        

        

        103,956Marketing, general and administrative

        

        

        9,671

        

        

        9,286

        

        

        18,957

        

        

        8,343

        

        

        7,893

        

        

        16,236Depreciation and amortization

        

        

        68,151

        

        

        732

        

        

        68,883

        

        

        58,916

        

        

        722

        

        

        59,638Total Operating Expenses

        

        

        195,031

        

        

        10,018

        

        

        205,049

        

        

        171,215

        

        

        8,615

        

        

        179,830Operating Income (Loss)

        

        

        87,932

        

        

        (10,018

        )

        

        77,914

        

        

        94,345

        

        

        (8,615

        )

        

        85,730NON-OPERATING
          INCOME AND EXPENSESGains on sales of real estate

        

        

        35,393

        

        

        

        

        

        35,393

        

        

        

        

        

        

        

        

        Interest and investment income and other

        

        

        2,069

        

        

        23,338

        

        

        25,407

        

        

        1,033

        

        

        5,881

        

        

        6,914Interest:Expense incurred

        

        

        (13,883

        )

        

        (41,322

        )

        

        (55,205

        )

        

        (25,267

        )

        

        (25,558

        )

        

        (50,825

        )Amortization of deferred financing costs

        

        

        (772

        )

        

        (1,367

        )

        

        (2,139

        )

        

        (588

        )

        

        (1,471

        )

        

        (2,059

        )Long-term incentive compensation expense

        

        

        

        

        

        (5,855

        )

        

        (5,855

        )

        

        

        

        

        

        

        

        Total Non-Operating Income and Expenses

        

        

        22,807

        

        

        (25,206

        )

        

        (2,399

        )

        

        (24,822

        )

        

        (21,148

        )

        

        (45,970

        )Income (loss) before minority interests, equity in earnings of real estate joint ventures and discontinued operations

        

        $

        110,739

        

        $

        (35,224

        )

        $

        75,515

        

        $

        69,523

        

        $

        (29,763

        )

        $

        39,760Total Assets

        

        $

        3,332,263

        

        $

        387,431

        

        $

        3,719,694

        

        $

        2,653,463

        

        $

        1,165,925

        

        $

        3,819,388




10. NON-CASHINVESTINGANDFINANCINGACTIVITIES

During the three months ended June 30, 2006, certain limited partners in the Operating Partnership exchanged 12,224 OP Units for an equal number of shares of the Companys common stock for total non cash consideration of approximately $493,000.

On March 31, 2006, a group of institutional investors purchased our option to acquire the existing minority partners 40% partnership interest in the Omni Property for net proceeds of approximately $9.0 million. Simultaneously, these institutional investors exercised the option and acquired the minority partners interest from the minority partner for approximately $50.8 million including the assumption of an allocation of approximately $20.1 million of mortgage debt on the Omni Property for a total investment of $59.9 million. As a result of the foregoing and in accordance with Statement No.s 141 and 142, we recorded approximately $44.4 million of fair value adjustments to the real estate and other intangible assets acquired by the institutional investors.



11. RELATEDPARTYTRANSACTIONS

In connection with the Companys IPO, we were granted an option to acquire the property located at 225 Broadhollow Road which is owned by certain Rechler family members including Scott H. Rechler, our CEO at a price based upon an agreed upon formula. Reckson Management Group, Inc. (RMG) currently leases approximately 26,000 square feet of office space at this property for its corporate offices at an annual base rent of approximately $809,000. During 2005, RMG exercised a termination option to terminate this lease on November 30, 2006 without penalty and in August 2006 will relocate its corporate headquarters to Reckson Plaza, a wholly owned property located in Uniondale, Long Island. During June 2006, we incurred approximately $211,000 of expense related to the repair of certain HVAC equipment at the 225 Broadhollow Road property. Such expenditure was approved by the independent
members of the Companys Board of Directors. RMG also leases 10,722 square feet of warehouse space used for equipment, materials and inventory storage at a property owned by certain members of the Rechler family at an annual base rent of approximately $81,000. In addition, commencing April 1, 2004, RCD has been leasing approximately 17,000 square feet of space at 225 Broadhollow Road, Melville, NY at an annual base rent of approximately $507,000, which is scheduled to terminate on September 30, 2006. RCD has sub-let the entire 17,000 square feet to a third party for approximately $35,000 per month through RCDs September 2006 lease termination date. RCD will also relocate to Reckson Plaza.

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During the three and six month periods ended June 30, 2006 and 2005, RCD billed approximately $29,000 and $30,000 and $17,000 and $26,000, respectively, of market rate services and RMG billed approximately $80,000 and $153,000 and $71,000 and $142,000, respectively, of market rate management fees to certain properties owned by members of the Rechler family including Scott H. Rechler, our CEO.

On March 28, 2005, an entity (REP) owned by members of the Rechler family (excluding Scott H. Rechler, but including his father, Roger, and brother, Gregg) exercised a Right of First Refusal (which was granted in connection with the 2003 sale of the industrial portfolio by us) to acquire a vacant parcel of land for a purchase price of $2.0 million. We have agreed to provide REP with the option to defer the closing on the purchase until September 2006, for a non-refundable deposit of $400,000 and a fee of $10,666 per month for each month that the closing is deferred. In connection therewith, REP agreed to settle a dispute concerning an easement on a separate parcel of land owned by us adjacent to one of the properties transferred to REP in November 2003.

A company affiliated with an independent director of the Company leases 15,566 square feet in a property owned by us at an annual base rent of approximately $430,000. Such lease expired on October 31, 2005. We are currently in the process of renewing the lease for approximately 8,000 square feet upon market terms through 2011. Such renewal is subject to approval by the other independent directors of the Companys Board of Directors. In addition, since the leases expiration, the lessee has been operating consistent with terms of the expired lease.

The Operating Partnership has a net investment of approximately $55.2 million in loans and REIT-qualified joint ventures with FrontLine Capital Group (FrontLine) and Reckson Strategic Venture Partners, LLC (RSVP), a real estate venture capital fund whose common equity is held indirectly by FrontLine (collectively, the RSVP / FLCG Investments). Frontline was formed by the Company in 1997. The net carrying value of the RSVP / FLCG Investments was reassessed with no change by management at June 30, 2006 and is included in investments in affiliate loans and joint ventures on our consolidated balance sheets.

FrontLine is in default under the loans from the Operating Partnership and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.

The RSVP REIT-qualified joint ventures are managed subject to a management agreement with the former managing directors of RSVP, which expires in September 2006. The management agreement provides for an annual base management fee and disposition fees equal to 2% of the net proceeds received by RSVP on asset sales which are subject to a maximum of $7.5 million. In addition, the former managing directors of RSVP retained a one-third residual interest in RSVPs assets which is subordinated to the distribution of an aggregate amount of $75.0 million to RSVP and/or us in respect of RSVP-controlled joint ventures.

Scott H. Rechler, our CEO and Chairman of the Board of Directors, serves as CEO and is FrontLines sole board member. Mr. Rechler also serves as a member of the management committee of RSVP.

In November 2004, a joint venture in which RSVP owns approximately 47% executed a binding agreement to contribute its Catskills, NY resort properties (excluding residentially zoned land) to Empire Resorts Inc. (NASDAQ: NYNY) (Empire) for consideration of 18.0 million shares of Empires common stock and the right to appoint five members of their Board of Directors. On December 29, 2005, the agreement was terminated and the joint venture received options to purchase approximately 5.2 million shares of common stock of Empire at a price of $7.50 per share. The options will be exercisable until December 29, 2006. On June 30, 2006, the closing price of a share of Empires common stock was $6.95 per share.

We have discontinued the accrual of interest income with respect to the loans from the Operating Partnership and our share of GAAP equity in earnings, if any, from the RSVP-controlled REIT-qualified joint ventures until such income is realized through cash distributions.

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12. COMMITMENTSANDCONTINGENCIES

We had undrawn letters of credit outstanding against our Credit Facility of approximately $100,000 at June 30, 2006.

In connection with the mortgage indebtedness securing nine of the Tranche I properties, which were transferred to the Australian JV on September 21, 2005, and three of the Tranche III properties scheduled to be transferred to the Australian JV during October 2006, we have guaranteed to the lender certain customary non-recourse carve-outs, as well as certain obligations relating to the potential termination of a number of leases at four of these properties. We have also guaranteed to the lender certain capital requirements related to these properties. We will be relieved of the customary non-recourse carve-outs and capital requirements upon transfer of the respective properties to the Australian JV and the Australian JV meeting a net worth test of at least $100.0 million. We will be relieved of all but two of the lease related obligations upon transfer of the respective properties to the Australian
JV and the Australian JV meeting a net worth test of at least $200.0 million. The Australian JV has agreed to indemnify us for any loss, cost or damage it may incur pursuant to our guaranty of these obligations. As of June 30, 2006, the Australian JV met the $100.0 million net worth threshold and there remain approximately $18 million of aggregate guarantees outstanding.

13. SUBSEQUENT
          EVENTS

On August 3, 2006, the Company, the Operating Partnership, SL Green Realty Corp. (Parent), Wyoming Acquisition Corp. (Purchaser), Wyoming Acquisition GP LLC and Wyoming Acquisition Partnership LP entered into an Agreement and Plan of Merger (the Merger Agreement). Under the terms of the Merger Agreement, the Company will merge with and into Purchaser (the Merger), with Purchaser continuing after the Merger as the surviving entity. At the effective time of the Merger, each of the issued and outstanding shares of common stock of the Company will be converted into the right to receive (i) $31.68 in cash, and (ii) 0.10387 of a share of the common stock, par value $0.01 per share, of Parent (the Merger Consideration).

In addition, under the terms of the Merger Agreement, Wyoming Acquisition LP will merge with and into the Operating Partnership (the Partnership Merger), with the Operating Partnership continuing after the Partnership Merger as the surviving entity. At the effective time of the Partnership Merger, each common unit in the Operating Partnership will be converted into the right to receive the applicable amount of Merger Consideration, in respect of the number of shares of Reckson common stock issuable upon exchange of each such common unit in accordance with the Amended and Restated Agreement of Limited Partnership of the Operating Partnership as if such common units were converted or exchanged for an equal number of Reckson common shares immediately prior to the effective time of the Merger.

At the effective time of the Merger, any options which have not been exercised will be cancelled and holders will be paid the Merger Consideration in respect of such options; the exercise price of the options will first be deducted from the cash consideration and then second from the stock consideration, if necessary. All outstanding options are currently vested. Restricted stock, whether or not vested, will be converted into the right to receive the Merger Consideration as if such restricted stock had vested immediately prior to the effective time of the Merger. Restricted stock units, whether or not vested, and LTIP Units, whether or not vested, (other than certain LTIP Units held by Messrs. Rechler, Maturo and Barnett, the vesting and payment rights to which they are waiving pursuant to the Amendments described below) will be converted into the right to receive the Merger Consideration (on
a one-for-one basis).

The Company has agreed to certain covenants, including, among others, subject to certain exceptions described in the Merger Agreement, an obligation not to initiate, solicit, encourage or facilitate (including by way of furnishing nonpublic information or assistance) any inquiries or the making of any proposal or other action that constitutes or may reasonably be expected to lead to any competing transaction (as defined in the Merger Agreement) or enter into discussions or negotiate with any person in furtherance of such inquiries or to obtain a competing transaction. Prior to the closing, the Company has agreed to operate its business in the ordinary course consistent with past practice and not to take certain actions specified in the Merger Agreement. The Company will be permitted to pay its regular quarterly dividends through the consummation of the Merger.

Consummation of the Merger is subject to customary conditions, including the approval of the Merger by the holders of the Companys common stock, the registration of SL Greens shares of common stock to be issued in the Merger, the listing of such shares on the New York Stock Exchange and the absence of any order, injunction or legal restraint or prohibition preventing the consummation of the Merger. In addition, each partys obligation to consummate the Merger is subject to certain other conditions, including (i) the accuracy of the representations and warranties of the other party (subject to the materiality standards contained in the Merger Agreement), (ii) compliance in all material respects of the other party with its covenants, (iii) the absence of a material adverse effect (as defined in the Merger Agreement) on the other party and (iv) the delivery of opinions with respect
to each others status as a real estate investment trust.

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The Merger Agreement contains certain termination rights for both the Company and SL Green and provides that, upon termination of the Merger Agreement under specified circumstances described in the Merger Agreement, the Company would be required to pay SL Green a termination fee of $99.8 million, and/or that the Company would be required to reimburse SL Green for its out-of-pocket costs and expenses up to $13.0 million.

The Merger Agreement contains representations and warranties that the parties have made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract between the parties, and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating its terms. Moreover, the representations and warranties are subject to a contractual standard of materiality that may be different from what may be viewed as material to shareholders, and the representations and warranties may have been intended not as statements of fact, but rather as a way of allocating risk among the parties.

In connection with the Merger, Scott Rechler, Michael Maturo, and Jason Barnett each entered into an Agreement to Amend their existing Employment and Noncompetition Agreement and Severance Agreement (the Amendments). Pursuant to the Amendments, each executive agreed to: (1) reduce the period of time he will be entitled to receive severance following a termination of employment in connection with a change in control from five years to three years, and to cap the cash severance he is entitled to receive under his existing severance agreement, (2) waive all rights to vesting and payment of certain outstanding long-term incentive awards, (3) further reduce the payments and benefits he is otherwise entitled to receive in connection with a change in control if the total amount of payments and benefits exceed his safe harbor amount under the Internal Revenue Codes so-called
golden parachute rules by 5% or less so that the total change in control-related payments and benefits paid or provided to him will not exceed his safe harbor amount, and (4) not compete with the Company in the acquisition, operation or management of any office real estate property in any of the submarkets in the borough of Manhattan, New York for the period commencing on August 3, 2006 through the earlier of August 3, 2007 or the six-month anniversary of the closing.  The parties also agreed to extend the terms of their existing Employment and Noncompetition Agreements and Severance Agreements through April 30, 2007. In addition, the Company agreed to assign certain existing split-dollar life insurance policies to the executives at their request in connection with a change in control of the Company.

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Item
  2. Managements Discussion and Analysis of Financial Condition and Results
  of Operations

The
  following discussion should be read in conjunction with the historical financial
  statements of Reckson Operating Partnership, L.P. (the Operating Partnership)
  and related notes thereto.

The
  Operating Partnership considers certain statements set forth herein to be forward-looking
  statements within the meaning of Section 27A of the Securities Act of 1933,
  as amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
  with respect to the Operating Partnerships expectations for future periods.
  Certain forward-looking statements, including, without limitation, statements
  relating to the timing and success of acquisitions and the completion of development
  or redevelopment of properties, the financing of the Operating Partnerships
  operations, the ability to lease vacant space and the ability to renew or relet
  space under expiring leases, the Operating Partnerships announced transaction
  with SL Green Realty Corp., involve risks and uncertainties. Many of the forward-looking
  statements can be identified by the use of words such as believes,
  may, expects, anticipates, intends
  or similar expressions. Although the Operating Partnership believes that the
  expectations reflected in such forward-looking statements are based on reasonable
  assumptions, the actual results may differ materially from those set forth in
  the forward-looking statements and the Operating Partnership can give no assurance
  that its expectation will be achieved. Among those risks, trends and uncertainties
  are: the general economic climate, including the conditions affecting industries
  in which our principal tenants compete; changes in the supply of and demand
  for office in and around New York City and the surrounding tri-state markets
  (the New York Tri-State Markets); changes in interest rate levels;
  changes in the Operating Partnerships credit ratings; changes in the Operating
  Partnerships cost and access to capital; downturns in rental rate levels
  in our markets and our ability to lease or re-lease space in a timely manner
  at current or anticipated rental rate levels; the availability of financing
  to us or our tenants; the financial condition of our tenants; changes in operating
  costs, including utility, security, real estate tax and insurance costs; repayment
  of debt owed to the Operating Partnership by third parties; risks associated
  with joint ventures; liability for uninsured losses or environmental matters;
  approval of the Companys announced transaction with SL Green Realty Corp.
  by shareholders of the Company, and other risks associated with the development
  and acquisition of properties, including risks that development may not be completed
  on schedule, that the tenants will not take occupancy or pay rent, or that development
  or operating costs may be greater than anticipated. Consequently, such forward-looking
  statements should be regarded solely as reflections of the Operating Partnerships
  current operating and development plans and estimates. These plans and estimates
  are subject to revisions from time to time as additional information becomes
  available, and actual results may differ from those indicated in the referenced
  statements.

Critical
  Accounting Policies

The
  consolidated financial statements of the Operating Partnership include accounts
  of the Operating Partnership and all majority-owned and controlled subsidiaries.
  The preparation of financial statements in conformity with U.S. generally accepted
  accounting principles (GAAP) requires management to make estimates
  and assumptions in certain circumstances that affect amounts reported in the
  Operating Partnerships consolidated financial statements and related notes.
  In preparing these financial statements, management has utilized information
  available including its past history, industry standards and the current economic
  environment, among other factors, in forming its estimates and judgments of
  certain amounts included in the consolidated financial statements, giving due
  consideration to materiality. It is possible that the ultimate outcome as anticipated
  by management in formulating its estimates inherent in these financial statements
  may not materialize. However, application of the critical accounting policies
  below involves the exercise of judgment and use of assumptions as to future
  uncertainties and, as a result, actual results could differ from these estimates.
  In addition, other companies may utilize different estimates, which may impact
  comparability of the Operating Partnerships results of operations to those
  of companies in similar businesses.

Revenue
  Recognition and Accounts Receivable

Minimum
  rental revenue is recognized on a straight-line basis, which averages minimum
  rents over the terms of the leases. The excess of rents recognized over amounts
  contractually due are included in deferred rents receivable on our balance sheets.
  Contractually due but unpaid rents are included in tenant receivables on our
  balance sheets. Certain lease agreements also provide for reimbursement of real
  estate taxes, insurance, common area maintenance costs and indexed rental increases,
  which are recorded on an accrual basis. Ancillary and other property related
  income is recognized in the period earned.

We
  make estimates of the collectibility of our accounts receivables related to
  base rents, tenant escalations and reimbursements and other revenue or income.
  We specifically analyze tenant receivables and historical bad debts, customer
  credit worthiness, current economic trends and changes in customer payment terms
  when evaluating the adequacy of our allowance for doubtful accounts. In addition,
  when tenants are in bankruptcy, we make estimates of the expected recovery of
  pre-petition administrative and damage claims. In some cases, the ultimate resolution
  of those claims can exceed a year. These estimates have a direct impact on our
  net income because a higher bad debt reserve results in less net income.

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We
  incurred approximately $175,000 and $445,000 and $253,000 and $645,000 of bad
  debt expense and related costs related to tenant receivables during the three
  and six month periods ended June 30, 2006 and 2005, respectively, which accordingly
  reduced our total revenues and reported net income during the period.

We
  record interest income on our investments in notes receivable on the accrual
  basis of accounting. We do not accrue interest on impaired loans where, in the
  judgment of management, collection of interest according to the contractual
  terms is considered doubtful. Among the factors we consider in making an evaluation
  of the collectibility of interest are: (i) the status of the loan, (ii) the
  value of the underlying collateral, (iii) the financial condition of the borrower
  and (iv) anticipated future events.

Reckson
  Construction & Development LLC and Reckson Construction Group New York,
  Inc. use the percentage-of-completion method for recording amounts earned on
  their contracts. This method records amounts earned as revenue in the proportion
  that actual costs incurred to date bear to the estimate of total costs at contract
  completion.

Gain
  on the sale of real estate is recorded when title is conveyed to the buyer,
  subject to the buyers financial commitment being sufficient to provide
  economic substance to the sale and us having no substantial continuing involvement
  with the buyer. Additionally, in connection with a sale of real estate, if we
  retain certain risks in the form of guarantees, the profit recognized on that
  sale shall be reduced and deferred by the maximum exposure to loss, until such
  exposure is relieved.

Real
  Estate

Land,
  buildings and improvements, furniture, fixtures and equipment are recorded at
  cost. Tenant improvements, which are included in buildings and improvements,
  are also stated at cost. Expenditures for ordinary maintenance and repairs are
  expensed to operations as they are incurred. Renovations and / or replacements,
  which improve or extend the life of the asset, are capitalized and depreciated
  over their estimated useful lives.

Depreciation
  is computed utilizing the straight-line method over the estimated useful lives
  of ten to thirty years for buildings and improvements and five to ten years
  for furniture, fixtures and equipment. Tenant improvements, which are included
  in buildings and improvements, are amortized on a straight-line basis over the
  term of the related leases.

We
  are required to make subjective assessments as to the useful lives of our properties
  for purposes of determining the amount of depreciation to reflect on an annual
  basis with respect to those properties. These assessments have a direct impact
  on our net income. Should we lengthen the expected useful life of a particular
  asset, it would be depreciated over more years, and result in less depreciation
  expense and higher annual net income.

Assessment
  by us of certain other lease related costs must be made when we have a reason
  to believe that the tenant will not be able to execute under the term of the
  lease as originally expected.

On
  July 1, 2001 and January 1, 2002, we adopted FASB Statement No.141, Business
  Combinations and FASB Statement No. 142, Goodwill and Other Intangibles,
  respectively (Statement No.s 141 and 142). As part of the
  acquisition of real estate assets, the fair value of the real estate acquired
  is allocated to the acquired tangible assets, consisting of land, building and
  building improvements, 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.

We
  allocate a portion of a propertys purchase price to tangible assets including
  the fair value of the building and building improvements on an as-if-vacant
  basis and to land determined either by real estate tax assessments, independent
  appraisals or other relevant data. Additionally, we assess fair value of identified
  intangible assets and liabilities based on estimated cash flow projections that
  utilize appropriate discount and capitalization rates and available market information.

Estimates
  of future cash flows are based on a number of factors including the historical
  operating results, known trends, and market/economic conditions that may affect
  the property. If we incorrectly estimate the values at acquisition or the undiscounted
  cash flows, initial allocation of purchase price and future impairment charges
  may be different.

Long
  Lived Assets

We
  are required to make subjective assessments as to whether there are impairments
  in the value of our real estate properties and other investments. An investments
  value is impaired only if managements estimate of the aggregate future
  cash flows (undiscounted and without interest charges) to be generated by the
  investment is less than the carrying value of the investment. Such assessments
  consider factors such as cash flows, expected future operating income, trends
  and prospects, as well as the effects of demand, competition and other factors.
  To the extent impairment has occurred it will be measured as the excess of the
  carrying amount of the property over the fair value of the property. These assessments
  have a direct impact on our net income, as the recognition of an impairment
  results in an immediate negative adjustment to net income. In determining impairment,
  if any, we have followed FASB Statement No. 144, Accounting for the Impairment
  or Disposal of Long Lived Assets (Statement No. 144). Statement
  No. 144 did not have an impact on net income. Statement No. 144 only impacts
  the presentation of the results of operations and gains on sales of real estate
  assets for those properties sold during the period within the consolidated statements
  of income.

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Share Based
  Payments

On
  December 16, 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based
  Payment (Statement No. 123R), which is a revision of Statement
  No. 123. Statement No. 123R supersedes Accounting Principles Board Opinion No.
  25, Accounting for Stock Issued to Employees, and amends FASB Statement
  No. 95, Statement of Cash Flows. Generally, the approach in Statement
  No. 123R is similar to the approach described in Statement No. 123. However,
  Statement No. 123R requires all share-based payments to employees, including
  grants of employee stock options, to be recognized in the income statement based
  on their fair values. We adopted Statement No. 123R on January 1, 2006. The
  adoption of Statement No. 123R did not have a material impact on our consolidated
  financial statements.

Accumulated
  Other Comprehensive Income (Loss)

We
  report comprehensive income or loss in accordance with the provisions of FASB
  Statement No. 130, Reporting Comprehensive Income, which establishes
  standards for reporting comprehensive income and its components in the financial
  statements. The components of other comprehensive income (loss) (OCI)
  consist of unrealized gains and losses on derivative instruments. OCI is presented
  in the accompanying consolidated statements of partners capital.

Variable
  Interest Entities

In
  January 2003, the FASB issued Interpretation No. 46, Consolidation of
  Variable Interest Entities (FIN 46), which explains how to
  identify variable interest entities (VIEs) and how to assess whether
  to consolidate such entities. VIEs are primarily entities that lack sufficient
  equity to finance their activities without additional financial support from
  other parties or whose equity holders lack adequate decision making ability.
  All VIEs which we are involved with must be evaluated to determine the primary
  beneficiary of the risks and rewards of the VIE. The primary beneficiary is
  required to consolidate the VIE for financial reporting purposes. The initial
  determination of whether an entity qualifies as a VIE shall be made as of the
  date at which a primary beneficiary becomes involved with the entity and reconsidered
  as of the date of a triggering event, as defined. The provisions of this interpretation
  are immediately effective for VIEs formed after January 31, 2003. In December
  2003 the FASB issued FIN 46R, deferring the effective date until the period
  ended March 31, 2004 for interests held by public companies in VIEs created
  before February 1, 2003, which were non-special purpose entities. We adopted
  FIN 46R during the period ended March 31, 2004 and have determined that our
  unconsolidated subsidiaries do not represent VIEs pursuant to such interpretation.
  We will continue to monitor any changes in circumstances relating to certain
  of our consolidated and unconsolidated joint ventures which could result in
  a change in our consolidation policy.

Current
  pronouncements

In
  July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
  in Income Taxes (FIN 48). This interpretation, among other
  things, creates a two step approach for evaluating uncertain tax positions.
  Recognition (step one) occurs when an enterprise concludes that a tax position,
  based solely on its technical merits, is more-likely-than-not to be sustained
  upon examination. Measurement (step two) determines the amount of benefit that
  more-likely-than-not will be realized upon settlement. De-recognition of a tax
  position that was previously recognized would occur when a company subsequently
  determines that a tax position no longer meets the more-likely-than-not threshold
  of being sustained. FIN 48 specifically prohibits the use of a valuation allowance
  as a substitute for de-recognition of tax positions, and it has expanded disclosure
  requirements. FIN 48 is effective for fiscal years beginning after December
  15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect
  adjustment to the beginning balance of retained earnings. We are currently evaluating
  FIN 48 and have not yet determined the impact the adoption will have on our
  consolidated financial statements.

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In
  June 2005, the FASB ratified the consensus in EITF Issue No. 04-5,
  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 (Issue 04-5), which provides guidance in determining
  whether a general partner controls a limited partnership. Issue 04-5 states
  that the general partner in a limited partnership is presumed to control that
  limited partnership. The presumption may be overcome if the limited partners
  have either (1) the substantive ability to dissolve the limited partnership
  or otherwise remove the general partner without cause or (2) substantive
  participating rights, which provide the limited partners with the ability to
  effectively participate in significant decisions that would be expected to be
  made in the ordinary course of the limited partnerships business and thereby
  preclude the general partner from exercising unilateral control over the partnership.
  The adoption of Issue 04-5 by us for new or modified limited partnership arrangements
  is effective June 30, 2005 and for existing limited partnership arrangements
  effective January 1, 2006. We have evaluated the guidance provided for
  under Issue 04-5 and have concluded that we are not required to consolidate
  our current unconsolidated joint venture investments nor do we expect Issue
  04-5 to have a material effect on our consolidated financial statements.

In
  May 2005, the FASB issued Statement No. 154, Accounting Changes and Error
  Corrections (Statement No. 154). Statement No. 154, which
  replaces APB Opinion No. 20, Accounting Changes and FASB Statement
  No. 3, Reporting Accounting Changes in Interim Financial Statements,
  changes the requirements for the accounting for and reporting of a change in
  accounting principle. The statement requires retrospective application of changes
  in accounting principle to prior periods financial statements unless it
  is impracticable to determine the period-specific effects or the cumulative
  effect of the change. Statement No. 154 is effective for accounting changes
  and corrections of errors made in fiscal years beginning after December 15,
  2005. We adopted Statement No. 154 on January 1, 2006. The adoption of Statement
  No. 154 did not have a material impact on our consolidated financial position,
  results of operations or cash flows.

In
  March 2005, FASB issued Interpretation No. 47, Accounting for Conditional
  Asset Retirement Obligations (FIN 47), which became effective
  December 31, 2005. Under FIN 47, a conditional asset retirement obligation (CARO)
  must be recorded if the liability can be reasonably estimated. A CARO is an
  obligation that is settled at the time an asset is retired or disposed of and
  for which the timing and/or method of settlement are conditional on future events.
  We own certain properties that currently have asbestos which under certain conditions
  must be remediated. As a result of adopting FIN 47, we will increase the value
  of our recorded tangible assets at the time we recognize the associated conditional
  retirement obligation.

As
  a result, during 2005, we recorded approximately $2.0 million which represents
  the fair value of the CARO related to asbestos removal in tenant spaces. In
  addition, for certain limited areas of our properties, management is unable
  to reasonably determine the fair value of potential remediation costs as there
  is an indeterminate settlement date for the asset retirement obligation because
  the range of time over which way we may choose to remediate this condition may
  not be estimated with any level of precision which would lend itself to a meaningful
  estimate.

Overview
  and Background

The
  Operating Partnership commenced operations on June 2, 1995. Reckson Associates
  Realty Corp. (the Company), which serves as the sole general partner
  of the Operating Partnership, is a fully integrated, self administered and self
  managed real estate investment trust (REIT). The Operating Partnership
  and the Company were formed for the purpose of continuing the commercial real
  estate business of Reckson Associates, the predecessor of the Operating Partnership,
  its affiliated partnerships and other entities (Reckson). On August
  3, 2006, we entered into an Agreement and Plan of Merger with SL Green Realty
  Corp., which agreement is further discussed below. Unless the context requires
  otherwise, the terms Company, we, us, our
  and similar terms include Reckson Associates Realty Corp., Reckson Operating
  Partnership, L. P. and their wholly-owned subsidiaries.

Reckson
  was engaged in the ownership, management, operation, leasing and development
  of commercial real estate properties, principally office and industrial / R&D
  buildings, and also owned undeveloped land located primarily on Long Island,
  New York. In June 1995, the Company completed an initial public offering (the
  IPO), succeeded to the Recksons real estate business and commenced
  operations.

The
  Operating Partnership is engaged in the ownership, management, operation, acquisition,
  leasing, financing and development of commercial real estate properties, principally
  office and to a lesser extent flex properties and also owns land for future
  development located in New York City and the surrounding tri-state area markets
  (the New York Tri-State Markets).

The
  Operating Partnerships growth strategy is focused on the commercial real
  estate markets in and around the New York Tri-State Markets. All of our interests
  in our real properties, land held for development and investments in mortgage
  notes and notes receivable are held directly or indirectly by, and all of our
  operations are conducted through the Operating Partnership.

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In
  connection with the IPO, we were granted an option to acquire the property located
  at 225 Broadhollow Road which is owned by certain Rechler family members including
  Scott H. Rechler, our CEO at a price based upon an agreed upon formula. Reckson
  Management Group, Inc. (RMG) currently leases approximately 26,000
  square feet of office space at this property for its corporate offices at an
  annual base rent of approximately $809,000. During 2005, RMG exercised a termination
  option to terminate this lease on November 30, 2006 without penalty and in August
  2006 will relocate its corporate headquarters to Reckson Plaza, a wholly owned
  property located in Uniondale, Long Island. During June 2006, we incurred approximately
  $211,000 of expense related to the repair of certain HVAC equipment at the 225
  Broadhollow Road property. Such expenditure was approved by the independent
  members of the Board of Directors. RMG also leases 10,722 square feet of warehouse
  space used for equipment, materials and inventory storage at a property owned
  by certain members of the Rechler family at an annual base rent of approximately
  $81,000. In addition, commencing April 1, 2004, RCD has been leasing approximately
  17,000 square feet of space at 225 Broadhollow Road, Melville, NY at an annual
  base rent of approximately $507,000, which is scheduled to terminate on September
  30, 2006. RCD has sub-let the entire 17,000 square feet to a third party for
  approximately $35,000 per month through RCDs September 2006 lease termination
  date. RCD will also relocate to Reckson Plaza.

During
  the three and six month periods ended June 30, 2006 and 2005, RCD billed approximately
  $29,000 and $30,000 and $17,000 and $26,000, respectively, of market rate services
  and RMG billed approximately $80,000 and $153,000 and $71,000 and $142,000,
  respectively, of market rate management fees to certain properties owned by
  members of the Rechler family including Scott H. Rechler, our CEO.

On
  March 28, 2005, an entity (REP) owned by members of the Rechler
  family (excluding Scott H. Rechler, but including his father, Roger, and brother,
  Gregg) exercised a Right of First Refusal (which was granted in connection with
  the 2003 sale of the industrial portfolio by us) to acquire a vacant parcel
  of land for a purchase price of $2.0 million. We have agreed to provide REP
  with the option to defer the closing on the purchase until September 2006, for
  a non-refundable deposit of $400,000 and a fee of $10,666 per month for each
  month that the closing is deferred. In connection therewith, REP agreed to settle
  a dispute concerning an easement on a separate parcel of land owned by us adjacent
  to one of the properties transferred to REP in November 2003.

A
  company affiliated with an independent director of the Company leases 15,566
  square feet in a property owned by us at an annual base rent of approximately
  $430,000. Such lease expired on October 31, 2005. We are currently in the process
  of renewing the lease for approximately 8,000 square feet upon market terms
  through 2011. Such renewal is subject to approval by the other independent directors
  of the Companys Board of Directors. In addition, since the leases
  expiration, the lessee has been operating consistent with terms of the expired
  lease.

In
  May 2005, we acquired a 1.4 million square foot, 50-story, Class A office tower
  located at One Court Square, Long Island City, NY. On November 30, 2005, we
  sold a 70% joint venture interest in One Court Square to certain institutional
  funds advised by JPMorgan Investment Management (the JPM Investor).
  The operating agreement of the Court Square JV requires approvals from members
  on certain decisions including annual budgets, sale of the property, refinancing
  of the propertys mortgage debt and material renovations to the property.
  In addition, after September 20, 2009 the members each have the right to recommend
  the sale of the property, subject to the terms of the mortgage debt, and to
  dissolve the Court Square JV. We have evaluated the impact of FIN 46R on our
  accounting for the Court Square JV and have concluded that the Court Square
  JV is not a VIE. We account for the Court Square JV under the equity method
  of accounting. We have also evaluated and determined that under Issue 04-5 the
  JPM Investor has substantive participating rights in the ordinary course of
  the Court Square JVs business. In accordance with the equity method of
  accounting, our proportionate share of the Court Square JV income was approximately
  $67,400 and $110,000 for the three and six months ended June 30, 2006, respectively.

On
  May 26, 2005, we entered into a contract to sell approximately 60 acres of land
  located in Chatham Township, NJ. The sale was contingent upon due diligence,
  environmental assessment, final re-zoning and other customary approvals. During
  July 2006, the contract was terminated.

On
  August 18, 2005, we entered into (i) an underwriting agreement relating to the
  public offering in Australia of approximately A$263.0 million (approximately
  US$202.0 million) of units (LPT Units) in a newly-formed Reckson-sponsored
  Australian listed property trust, Reckson New York Property Trust (Reckson
  LPT), a newly-formed listed property trust which is traded on the Australian
  Stock Exchange and (ii) contribution and sale agreements pursuant to which,
  among other things, we agreed to transfer 25 of our properties for an aggregate
  purchase price of approximately $563.0 million and containing an aggregate of
  3.4 million square feet, in three separate tranches, to the Australian JV in
  exchange for a 25 interest in the Australian JV and approximately $502.0 million
  in cash (inclusive of proceeds from mortgage debt to be assumed by the Australian
  JV). On September 21, 2005, Reckson LPT completed its public offering and the
  closing of the first of three tranches (Tranche I) of this transaction.

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In
  connection with the Tranche I closing, the Australian JV acquired from us 17
  of our suburban office properties containing approximately 2.0 million square
  feet for approximately $367.0 million (including the assumption of approximately
  $196.1 million in mortgage debt which had been incurred by us in August 2005
   see Note 2). In return, we received a 25% interest in the Australian
  JV and approximately $128.1 million in cash resulting in an aggregate gain of
  approximately $103.6 million. As discussed below relating to certain guarantees
  we have made, approximately $18 million of the aggregate gain has been deferred
  to future periods pursuant to Statement No. 66 to coincide with the release
  of the guarantees. As a result, gains on sales of real estate reported in 2005,
  related to theTranche I closing was approximately $86.1 million. Approximately
  $22.0 million of the cash received was used to repay certain of our secured
  mortgage indebtedness on September 30, 2005 and approximately $105.7 million
  of the cash received was used to establish an escrow account with a qualified
  intermediary for a future exchange of real property pursuant to Section 1031
  of the Code (a Section 1031 Exchange). A Section 1031 Exchange allows
  for the deferral of taxes related to the gain attributable to the sale of property
  if a qualified replacement property is identified within 45 days and such qualified
  replacement property is acquired within 180 days from the initial sale. On October
  7, 2005 we acquired a qualified replacement property for purposes of this Section
  1031 Exchange and thereby deferred a portion of the tax gain from the Tranche
  I sale.

In
  connection with the foregoing, on September 21, 2005, Reckson Australia Holdings
  LLC (Reckson Holdings), a wholly-owned subsidiary of the Operating
  Partnership, and Reckson Australia LPT Corporation (LPT REIT), a
  U.S. real estate investment trust which is wholly-owned by Reckson LPT, entered
  into the Amended and Restated Limited Liability Company Agreement governing
  the Australian JV (the Operating Agreement). Pursuant to the Operating
  Agreement, LPT REIT holds a 75% interest in, and acts as the managing member
  for, the Australian JV, and Reckson Holdings holds a 25% non-managing member
  interest therein. The Operating Agreement provides that, if at any time additional
  capital contributions are made to the Australian JV, Reckson Holdings will have
  a right to make additional capital contributions up to an amount necessary to
  maintain its 25% interest therein on the same terms and conditions as such other
  capital contributions.

As
  the managing member of the Australian JV, LPT REIT has the sole responsibility
  for managing its business and affairs on a day-to-day basis, other than with
  respect to certain identified major decisions, including but not
  limited to a merger or consolidation involving the Australian JV, a disposition
  of all or substantially all of its assets, or the liquidation or dissolution
  of the Australian JV. Such major decisions require the prior written consent
  of a majority of the non-managing members. As a result of the foregoing, we
  are accounting for our 25% non-managing member interest in the Australian JV
  under the equity method of accounting. In accordance with the equity method
  of accounting, our proportionate share of the Australian JVs income was
  approximately $1.6 million and $1.9 million for the three and six months ended
  June 30, 2006, respectively.

On
  January 6, 2006, Reckson LPT completed the second Tranche of this transaction
  (Tranche II) whereby the Australian JV acquired three of our suburban
  office properties: 6800 and 6900 Jericho Turnpike, Syosset, NY and 710 Bridgeport
  Avenue, Shelton, CT, (the Tranche II Properties) aggregating approximately
  761,000 square feet for approximately $84.6 million, including the assignment
  of approximately $20.1 million of mortgage debt. As a result, gains on sales
  of real estate related to Tranche II is approximately $35.4 million. Approximately
  $25.1 million of sales proceeds was used to establish an escrow account for
  the purpose of a future Section 1031 Exchange. During May 2006 we terminated
  the Section 1031 Exchange and received the sales proceeds previously held by
  the qualified intermediary, including accrued interest. Such proceeds were used
  to repay outstanding borrowings under our Credit Facility. The balance of the
  cash proceeds, received at the time of the sale was used to fund our development
  activities and for general corporate purposes. For federal income tax purposes
  we recognized a tax gain of approximately $26.7 million. We do not anticipate
  that such tax gain will require us to distribute more than our regular quarterly
  distribution in order to satisfy the distribution requirements necessary for
  the Company to qualify as a REIT.

The
  Tranche III closing (Tranche III), consisting of five of our suburban
  office properties valued at approximately $111.8 million, is scheduled to close
  in October 2006 and will include the assumption by the Australian JV of approximately
  $51.5 million of existing mortgage debt. It is anticipated that the Australian
  JV will pre-pay such mortgage debt in connection with the Tranche III closing.
  The Tranche III closing is subject to customary closing conditions and the Tranche
  III Properties consist of: 520 Broadhollow Road, 50 Marcus Avenue, 1660
  Walt Whitman Road, all of which are located in Melville, NY, 580 White Plains
  Road, Tarrytown, NY and 300 Executive Park Drive, West Orange, NJ.

Our
  Service Companies provide asset management, property management, leasing, construction
  and other services to the Australian JV. Affiliates of ours are entitled to
  transaction fees and ongoing fees for providing services to the Australian JV.
  During January 2006, in connection with the Tranche II closing we earned and
  received approximately $819,000 in transaction related fees. Also, during the
  three and six months ended June 30, 2006 we earned and received approximately
  $1.5 million and $2.4 million, respectively of ongoing service related fees.
  Such amounts are included in investment income and other on our consolidated
  statements of income. In addition, we also formed Reckson Australia Management
  Limited (RAML), a wholly owned subsidiary, that will manage Reckson
  LPT and serve as its Responsible Entity. The Responsible Entity
  will be managed by a six member board that includes three independent directors
  domiciled in Australia and three of the Companys executive officers. To
  address and mitigate any potential conflicts of interest with Reckson LPT or
  its affiliates the Company has adopted the following policies: (i) all transactions
  between the Company and Reckson LPT or its affiliates shall require the approval
  of a majority of the independent directors of both the Company and Reckson LPT,
  (ii) executive officers and directors of the Company are prohibited from owning
  equity in Reckson LPT, and  (iii) the adoption of an express policy which
  mandates that property services and leasing decisions shall be made without
  regard to the Companys percentage ownership of any property.

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Under
  the Operating Agreement, Reckson Holdings will have the right, beginning September
  21, 2007, to require LPT REIT to redeem all or a portion of Reckson Holdings
  membership interest in the Australian JV for cash or, at LPT REITs option,
  shares of LPT REITs common stock (which may be exchanged for LPT Units)
  on a one-for-one basis. Reckson Holdings also has the right to cause the liquidation
  of the Australian JV in the event that RAML is replaced as Reckson LPTs
  Responsible Entity. In addition, the Operating Agreement contains a right of
  first refusal granting Reckson Holdings the right to acquire any asset of the
  Australian JV, at fair market value, in the event of an attempted sale of such
  asset or the exercise of Reckson Holdings right to liquidate the Australian
  JV.

In
  connection with the Tranche I closing, on September 21, 2005, the Company, the
  Australian JV and LPT REIT entered into an Option Agreement (the Option
  Agreement) pursuant to which we granted the Australian JV options to acquire
  ten additional properties from the Operating Partnership over a two year period,
  beginning January 1, 2006. The properties contain an aggregate of approximately
  1.2 million square feet and will be priced based on the fair market value. The
  Option Agreement contains a right of first refusal granting the Australian JV
  the right to acquire any option property from Reckson in the event we receive,
  and are amenable to, an offer from a third party to purchase such option property.
  The Option Agreement will terminate under certain circumstances, including if
  (i) the Australian JV sends notice of its intent to exercise its option but
  fails to close as obligated, (ii) the Australian JV is in default under the
  Option Agreement, the contribution agreement or the sale agreement or (iii)
  RAML or an affiliate of ours is no longer the Responsible Entity of Reckson
  LPT.

In
  connection with the mortgage indebtedness securing nine of the Tranche I properties,
  which were transferred to the Australian JV on September 21, 2005, and three
  of the Tranche III properties scheduled to be transferred to the Australian
  JV during October 2006, we have guaranteed to the lender certain customary non-recourse
  carve-outs, as well as certain obligations relating to the potential termination
  of a number of leases at four of these properties. We have also guaranteed to
  the lender certain capital requirements related to these properties. We will
  be relieved of the customary non-recourse carve-outs and capital requirements
  upon transfer of the respective properties to the Australian JV and the Australian
  JV meeting a net worth test of at least $100.0 million. We will be relieved
  of all but two of the lease related obligations upon transfer of the respective
  properties to the Australian JV and the Australian JV meeting a net worth test
  of at least $200.0 million. The Australian JV has agreed to indemnify us for
  any loss, cost or damage it may incur pursuant to our guaranty of these obligations.
  The Australian JV has met the $100.0 million net worth threshold and there remain
  approximately $18 million of aggregate guarantees outstanding.

In
  accordance with FASB Statement No. 144, the assets and liabilities of the properties
  transferred and to be transferred, excluding the option properties, to the Australian
  JV are classified as held for sale on our consolidated balance sheets, for all
  periods presented.

During
  September 2005, we entered into a letter of intent with an entity owned by the
  owner of the New York Islanders professional hockey team to enter into a 50
  / 50 joint venture to potentially develop over five million square feet of office,
  residential, retail and hotel space located on 77 acres in the Mitchel Field,
  Long Island sub-market in and around Nassau Countys Veterans Memorial
  Coliseum where we are currently the largest owner of office properties. In March
  2006, the joint venture was selected by the County Executive for the development
  of the 77 acre site. In May 2006, the County Executive and the joint venture
  entered into a memorandum of understanding for the development of the site.
  The development remains subject to certain conditions and governmental approvals,
  including legislative, zoning and other customary approvals. In addition, there
  can be no assurances that we will enter into the aforementioned joint venture,
  that all applicable conditions will be satisfied or that all required approvals
  can be obtained.

On
  March 7, 2006, we sold our 354,000 square foot office building in Orlando, Florida
  for aggregate consideration of approximately $70.0 million which resulted in
  a gain of approximately $9.5 million. Such gain is reflected as a component
  of discontinued operations on our consolidated statements of income. This non-core
  real estate holding was acquired in May 1999 in connection with our initial
  New York City portfolio acquisition. Net proceeds from the sale were used to
  establish an escrow account with a qualified intermediary for a future Section
  1031 Exchange. During May 2006 we terminated the Section 1031 Exchange and received
  the sales proceeds previously held by the qualified intermediary, including
  accrued interest. Such proceeds were used to repay outstanding borrowings under
  our Credit Facility. For federal income tax purposes we recognized a tax gain
  of approximately $5.2 million. We do not anticipate that such tax gain will
  require us to distribute more than our regular quarterly distribution in order
  to satisfy the distribution requirements necessary for the Company to qualify
  as a REIT.

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On
  March 31, 2006, we sold a 161,000 square foot office building located in Westchester
  County for $35.3 million. Sales proceeds received were used for the repayment
  of the mortgage note encumbering the property located at 1350 Avenue of the
  Americas in New York, NY. This non-core real estate holding was acquired in
  December 2005 as part of a 14 office property portfolio acquisition.

On
  March 31, 2006, a group of institutional investors led by JPMorgan Investment
  Management, our joint venture partner in the Court Square JV and the property
  located at 919 Third Avenue, NY, purchased our option to acquire the existing
  minority partners 40% partnership interest in the Omni Property for net
  proceeds of approximately $9.0 million. Such proceeds have been included in
  investment income and other on our consolidated statements of income. In connection
  with this transaction, the original minority partner repaid to us approximately
  $22.1 million representing amounts due under a note receivable which was secured
  by their interest in the Omni Property. Such aggregate proceeds to us of approximately
  $31.2 million were used for the repayment of the mortgage note encumbering the
  property located at 1350 Avenue of the Americas in New York, NY.

As
  of June 30, 2006, we owned and operated 93 office properties (inclusive of twenty-six
  office properties owned through joint ventures) comprising approximately 19.3
  million square feet and eight flex properties (inclusive of two flex properties
  owned through joint ventures) comprising approximately 863,000 square feet located
  in the New York Tri-State Markets.

We
  also own certain land parcels throughout our markets in the New York Tri-State
  Markets (the Development Parcels). During July 2005, we commenced
  the ground-up development on one of the Development Parcels of a 37,000 square
  foot Class A retail property located within our existing six building Landmark
  Square office park in Stamford, Connecticut. In August 2005, we recommenced
  the ground-up development of one of the Development Parcels of a 313,000 square
  foot Class A office building located within our existing three building office
  park located in Princeton, NJ. Further, one of the Development Parcels, aggregating
  approximately 4.1 acres, is classified as held for sale on our balance sheets
  and is expected to close during September 2006 for aggregate consideration of
  $2.0 million. Excluding the foregoing, at June 30, 2006 our inventory of Development
  Parcels aggregated approximately 305 acres of land in 9 separate parcels in
  which we had invested approximately $124.3 million.

Management
  has made subjective assessments as to the value and recoverability of our investments
  in the Development Parcels based on current and proposed development plans,
  market comparable land values and alternative use values. Based on these assessments,
  we believe there is no impairment to the carrying value of the Development Parcels.

Proposed
  Merger with SL Green Realty Corp.

On
  August 3, 2006, the Company, the Operating Partnership, SL Green Realty Corp.
  (Parent), Wyoming Acquisition Corp. (Purchaser), Wyoming
  Acquisition GP LLC and Wyoming Acquisition Partnership LP entered into an Agreement
  and Plan of Merger (the Merger Agreement). Under the terms of the
  Merger Agreement, the Company will merge with and into Purchaser (the Merger),
  with Purchaser continuing after the Merger as the surviving entity. At the effective
  time of the Merger, each of the issued and outstanding shares of common stock
  of the Company will be converted into the right to receive (i) $31.68 in cash,
  and (ii) 0.10387 of a share of the common stock, par value $0.01 per share,
  of Parent (the Merger Consideration).

In
  addition, under the terms of the Merger Agreement, Wyoming Acquisition LP will
  merge with and into the Operating Partnership (the Partnership Merger),
  with the Operating Partnership continuing after the Partnership Merger as the
  surviving entity. At the effective time of the Partnership Merger, each common
  unit in the Operating Partnership will be converted into the right to receive
  the applicable amount of Merger Consideration, in respect of the number of shares
  of Reckson common stock issuable upon exchange of each such common unit in accordance
  with the Amended and Restated Agreement of Limited Partnership of the Operating
  Partnership as if such common units were converted or exchanged for an equal
  number of Reckson common shares immediately prior to the effective time of the
  Merger.

At
  the effective time of the Merger, any options which have not been exercised
  will be cancelled and holders will be paid the Merger Consideration in respect
  of such options; the exercise price of the options will first be deducted from
  the cash consideration and then second from the stock consideration, if necessary.
  All outstanding options are currently vested. Restricted stock, whether or not
  vested, will be converted into the right to receive the Merger Consideration
  as if such restricted stock had vested immediately prior to the effective time
  of the Merger. Restricted stock units, whether or not vested, and LTIP Units,
  whether or not vested, (other than certain LTIP Units held by Messrs. Rechler,
  Maturo and Barnett, the vesting and payment rights to which they are waiving
  pursuant to the Amendments described below) will be converted into the right
  to receive the Merger Cconsideration (on a one-for-one basis).

The
  Company has agreed to certain covenants, including, among others, subject to
  certain exceptions described in the Merger Agreement, an obligation not to initiate,
  solicit, encourage or facilitate (including by way of furnishing nonpublic information
  or assistance) any inquiries or the making of any proposal or other action that
  constitutes or may reasonably be expected to lead to any competing transaction
  (as defined in the Merger Agreement) or enter into discussions or negotiate
  with any person in furtherance of such inquiries or to obtain a competing transaction.
  Prior to the closing, the Company has agreed to operate its business in the
  ordinary course consistent with past practice and not to take certain actions
  specified in the Merger Agreement. The Company will be permitted to pay its
  regular quarterly dividends through the consummation of the Merger.

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Consummation
  of the Merger is subject to customary conditions, including the approval of
  the Merger by the holders of the Companys common stock, the registration
  of SL Greens shares of common stock to be issued in the Merger, the listing
  of such shares on the New York Stock Exchange and the absence of any order,
  injunction or legal restraint or prohibition preventing the consummation of
  the Merger. In addition, each partys obligation to consummate the Merger
  is subject to certain other conditions, including (i) the accuracy of the representations
  and warranties of the other party (subject to the materiality standards contained
  in the Merger Agreement), (ii) compliance in all material respects of the other
  party with its covenants, (iii) the absence of a material adverse effect (as
  defined in the Merger Agreement) on the other party and (iv) the delivery of
  opinions with respect to each others status as a real estate investment
  trust.

The
  Merger Agreement contains certain termination rights for both the Company and
  SL Green and provides that, upon termination of the Merger Agreement under specified
  circumstances described in the Merger Agreement, the Company would be required
  to pay SL Green a termination fee of $99.8 million, and/or that the Company
  would be required to reimburse SL Green for its out-of-pocket costs and expenses
  up to $13.0 million.

The
  Merger Agreement contains representations and warranties that the parties have
  made to each other as of specific dates. The assertions embodied in those representations
  and warranties were made solely for purposes of the contract between the parties,
  and may be subject to important qualifications and limitations agreed to by
  the parties in connection with negotiating its terms. Moreover, the representations
  and warranties are subject to a contractual standard of materiality that may
  be different from what may be viewed as material to shareholders, and the representations
  and warranties may have been intended not as statements of fact, but rather
  as a way of allocating risk among the parties.

This
  description of certain terms of the Merger Agreement does not purport to be
  complete and is qualified in its entirety by reference to the full text of the
  Merger Agreement, a copy of which is filed as an exhibit to this report.

Note
  Receivable Investments

At
  June 30, 2006, we had invested approximately $93.4 million in mezzanine loans
  and approximately $70.9 million in other loan investments (collectively, the
  Note Receivable Investments). In general these investments are secured
  by a pledge of either a direct or indirect ownership interest in the underlying
  real estate or leasehold, a first mortgage, other guaranties, pledges and assurances.

The
  following table sets forth the terms of the mezzanine loans at June 30, 2006
  (in thousands):



Property
      
      Amount
      
      Interest
          Rate
      
      Funding
      
      MaturityLong
          Island office portfolio
      
      $
      8,031
      
      9.00
      %
      Mar.,
          2005
      
      Apr.,
          2010
      (a)Long
          Island office portfolio
      
      
      20,356
      
      9.00
      %
      Mar.,
          2005
      
      Apr.,
          2012
      (a)72
          Madison Avenue, NY, NY (b)
      
      
      10,000
      
      20.00
      %
      Oct.,
          2005
      
      Oct.,
          20071166
          Avenue of the Americas, NY, NY (c)
      
      
      25,000
      
      17.50
      %
      Nov.,
          2005
      
      Nov.,
          2009100
          Wall Street, NY, NY
      
      
      30,000
      
      15.00
      %
      Dec.,
          2005
      
      Dec.,
          2007$
      93,387


|(a) | Prepayable
        without penalty after 18 months from initial funding.
|--- | ------------------------------------------------------------------------

|(b) | In
        addition to this mortgage loan, Reckson Construction and Development,
        LLC (RCD) entered into a development agreement with the owner
        of the property to perform certain predevelopment, development and / or
        other services with respect to the property. In exchange for its services,
        RCD will receive a development fee of $2.0 million which is payable in
        equal monthly installments over a two-year period which commenced during
        October 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Junior
        mezzanine loan secured by interests in a 550,000 square foot condominium
        interest.
|--- | ---------------------------------------------------------------------------------------------------------

In
  May 2005 we funded $55.3 million under an $85.0 million participating loan investment
  which is secured by an indirect interest in a 550,000 square foot condominium
  in a Class A office tower located at 1166 Avenue of the Americas, New York,
  NY. The loan accrues interest compounded at 9.0% and pays interest at an annual
  rate of 6.0% through March 2010, 8.5% thereafter through March 2015 and 11.0%
  thereafter through maturity in 2020. The loan is pre-payable only under certain
  circumstances and, in any case, not before 2009. Upon a capital event related
  to the indirect interest in the property which secures the loan, we are entitled
  to participate in 30% of the net proceeds derived from such capital event.

On
  March 30, 2006, we advanced approximately $14.2 million under three separate
  loan agreements which are secured by certain flex properties, aggregating approximately
  450,000 square feet, located in Nassau County, Long Island and in part by a
  personal guarantee of an affiliate of the borrower. These loans have an initial
  weighted average interest rate of 15.3% and mature on April 1, 2008. In addition,
  the loans are not prepayable, without penalty, prior to October 1, 2007.

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At
  June 30, 2006, we held one other note receivable, which aggregated $1.0 million
  and carried an interest rate of 10.50% per annum. This note receivable matures
  on January 31, 2010 and is secured in part by a minority partners preferred
  unit interest in the Operating Partnership.

The
  following table sets forth the terms of our other loan investments at June 30,
  2006 (in thousands):



Property
      
      Amount
      
      Interest
          Rate
      
      Funding
      
      MaturityNYC
          Class A office condominium interest
      
      $
      55,250
      
      9.00
      %
      May,
          2005
      
      Apr.,
          2008Flex
          property located in Nassau County, Long Island
      
      
      14,188
      
      15.29
      %
      Mar.,
          2006
      
      Dec.,
          2020Other
      
      
      1,000
      
      10.50
      %
      Oct.,
          2004
      
      Jan.,
          2010Other
      
      
      500
      
      5.35
      %
      Dec.,
          2004
      
      Dec.,
          2009$
      70,938


As
  of June 30, 2006, management has made subjective assessments as to the underlying
  security value on the Note Receivable Investments. Based on these assessments,
  we believe there is no impairment to their carrying value.

On
  July 27, 2006, we advanced $20.0 million under a loan agreement which is secured
  by certain pledges of project income and ownership interests and a personal
  guarantee of an affiliate of the borrower. This loan matures in August 2009,
  bears interest at 15% per annum (10% annual pay rate and 5% monthly compounded
  deferred rate). The loan is pre-payable at any time and with yield maintenance
  through August 1, 2007 if pre-paid prior to August 2007. This investment was
  funded through a borrowing under our Credit Facility.

Our
  market capitalization at June 30, 2006 was approximately $5.4 billion. Our market
  capitalization is based on the sum of (i) the market value of the Companys
  common stock and OP Units (assuming conversion) of $41.38 per share / unit (based
  on the closing price of the Companys common stock on June 30, 2006), (ii)
  the liquidation preference value of the Operating Partnerships preferred
  units of $1,000 per unit and (iii) approximately $1.9 billion (net of minority
  partners interests share of consolidated joint venture debt and
  including our share of consolidated and unconsolidated joint venture debt) of
  debt outstanding at June 30, 2006. As a result, our total debt to total market
  capitalization ratio at June 30, 2006 equaled approximately 35.2%.

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Results of Operations

The following table is a comparison of the results of operations for the three month period ended June 30, 2006 to the three month period ended June 30, 2005 (dollars in thousands):



Three
          months ended June 30,Change2006
      
      2005
      
      Dollars
      
      PercentProperty
          Operating Revenues:Base
          rents
      
      $
      128,575
      
      $
      118,048
      
      $
      10,527
      
      8.9
      %Tenant
          escalations and reimbursements
      
      
      19,235
      
      
      17,324
      
      
      1,911
      
      11.0
      %Total
          property operating revenues
      
      $
      147,810
      
      $
      135,372
      
      $
      12,438
      
      9.2
      %Property
          Operating Expenses:Operating
          expenses
      
      $
      32,821
      
      $
      29,710
      
      $
      3,111
      
      10.5
      %Real
          estate taxes
      
      
      24,153
      
      
      21,506
      
      
      2,647
      
      12.3
      %Total
          property operating expenses
      
      $
      56,974
      
      $
      51,216
      
      $
      5,758
      
      11.2
      %Interest
          and Investment Income and other
      
      $
      7,831
      
      $
      3,787
      
      $
      4,044
      
      >100
      %Other
          Expenses:Interest
          expense incurred
      
      $
      27,216
      
      $
      27,259
      
      $
      (43
      )
      (.2
      )%Amortization
          of deferred financing costs
      
      
      1,017
      
      
      1,068
      
      
      (51
      )
      (4.8
      )%Marketing,
          general and administrative
      
      
      9,475
      
      
      8,241
      
      
      1,234
      
      15.0
      %Total
          other expenses
      
      $
      37,708
      
      $
      36,568
      
      $
      1,140
      
      3.1
      %


Our property operating revenues, which include base rents and tenant escalations and reimbursements (Property Operating Revenues), increased by $12.4 million or 9.2% for the three months ended June 30, 2006 as compared to the 2005 period. The increase is a result of an $18.0 million increase in Property Operating Revenues from the acquisition of thirteen suburban office properties, containing approximately 2.4 million square feet which were acquired in the fourth quarter of 2005, $2.9 million attributable to straight line rental revenue increases in our same-store properties. In addition, during the 2006 period we earned approximately $11.8 million in lease termination fee revenue as opposed to approximately $800,000 earned during the 2005 period. These aggregate increases of approximately $31.9 million were offset by a $19.5 million decrease in Property Operating Revenues from the
sale of the Tranche I Properties in September 2005, 100 Wall Street in December 2005, the Tranche II Properties in January 2006 and One Orlando Center in March 2006.

Our property operating expenses, real estate taxes and ground rents (Property Expenses) increased by $5.8 million or 11.2% for the three months ended June 30, 2006 as compared to the 2005 period. The increase is a result of an $8.9 million increase in operating expenses and real estate taxes from the acquisition of the aforementioned suburban office properties which were acquired in the fourth quarter of 2005 and $4.2 million increase in operating expenses and real estate taxes in our same-store properties. These aggregate increases of approximately $13.1 million were offset by a $7.3 million decrease in Property Expenses from the aforementioned property sales. The increase in real estate taxes is attributable to higher taxes being levied by the municipalities in which the properties are located. The increase in property expenses is primarily driven by the recent increases in energy costs.

Gross operating margins (defined as Property Operating Revenues less Property Expenses, taken as a percentage of Property Operating Revenues) for the three month periods ended June 30, 2006 and 2005 were 61.5% and 62.2%, respectively. Our 2006 gross operating margin, before lease termination fee revenue was 58.1%. The decrease in our gross margins reflects the performance of thirteen suburban office properties, containing approximately 2.4 million square feet which were purchased in the fourth quarter of 2005 with below market occupancy levels. The addition of these properties resulted in a decrease in occupancy for our portfolio. In addition, we have experienced increases in real estate taxes and operating costs in our core portfolio, particularly energy costs, which were not entirely billable to our tenants.

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  to Contents

Interest and Investment income and other increased by $4.0 million for the three months ended June 30, 2006 as compared to the 2005 period. This increase is primarily a result of an increase in interest income earned on our Note Receivable Investments of $2.2 million due to a weighted average increase in our Note Receivable Investments of approximately $43.4 million from the 2005 period and $1.8 million in management fees earned during the 2006 period related to the Australian and Court Square JVs.

Interest expense incurred decreased by approximately $43,000 for the three months ended June 30, 2006 as compared to the 2005 period. The net decrease in interest expense is a result of decreases in interest expense of $4.3 million incurred under our Credit Facility which resulted from a weighted average decrease in outstanding borrowings under our Credit Facility of approximately $229.7 million from the 2005 period, a decrease of $242,000 incurred under our same-store mortgage portfolio, a decrease in mortgage interest expense of $1.9 million incurred during the 2005 period from three mortgage notes which were subsequently satisfied, $411,000 of mortgage interest expense related to two properties which were contributed to the Australian JV on January 6, 2006, subject to their debt, an increase of approximately $669,000 in capitalized interest due to increased development activities and a decrease
of 269,000 in other interest expense. These aggregate decreases of $7.8 million were off-set by a $2.8 million increase incurred from the Operating Partnerships issuance of $287.5 million of senior unsecured debentures in June 2005, $4.1 million related to the Operating Partnerships issuance of $275.0 million of senior unsecured debentures in March 2006, an increase of $680,000 incurred from our financing of three properties during September 2005 which are scheduled to be contributed to the Australian JV in the latter part of 2006 and $168,000 of mortgage interest expense incurred on a property which we acquired, subject to the debt in October 2005.

Marketing, general and administrative expenses increased by $1.2 million for the three months ended June 30, 2006 as compared to the 2005 period. This overall net increase is attributable to increased costs of maintaining offices and infrastructure in each of our five divisional markets, operating as a public company and higher compensation costs including amortization expense related to restricted stock awards to executive and non-executive officers. Marketing, general and administrative costs represented 6.0% of total revenues from continuing operations in the 2006 period as compared to 5.9% in the 2005 period.

During the June 2006 quarterly period, we incurred a $2.2 million charge related to our long-term incentive compensation plan with no comparable charge during the June 2005 quarterly period. For a further discussion of this charge, see Other Matters of this Item 2.

Discontinued operations, net of minority interests decreased by approximately $2.1 million for the three months ended June 30, 2006 as compared to the 2005 period. This increase is attributable to a decrease in the results of operations for those properties held for sale during the 2006 period as compared to the 2005 period.

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  to Contents

The following table is a comparison of the results of operations for the six month period ended June 30, 2006 to the six month period ended June 30, 2005 (dollars in thousands):



Six
          months ended June 30,Change2006
      
      2005
      
      Dollars
      
      PercentProperty
          Operating Revenues:Base
          rents
      
      $
      244,660
      
      $
      230,458
      
      $
      14,202
      
      6.2
      %Tenant
          escalations and reimbursements
      
      
      38,303
      
      
      35,102
      
      
      3,201
      
      9.1
      %Total
          property operating revenues
      
      $
      282,963
      
      $
      265,560
      
      $
      17,403
      
      6.6
      %Property
          Operating Expenses:Operating
          expenses
      
      $
      68,805
      
      $
      61,116
      
      $
      7,689
      
      12.6
      %Real
          estate taxes
      
      
      48,404
      
      
      42,840
      
      
      5,564
      
      13.0
      %Total
          property operating expenses
      
      $
      117,209
      
      $
      103,956
      
      $
      13,253
      
      12.7
      %Interest
          and Investment Income and other
      
      $
      25,407
      
      $
      6,914
      
      $
      18,493
      
      >100
      %Other
          Expenses:Interest
          expense incurred
      
      $
      55,205
      
      $
      50,825
      
      $
      4,380
      
      8.6
      %Amortization
          of deferred financing costs
      
      
      2,139
      
      
      2,059
      
      
      80
      
      3.9
      %Marketing,
          general and administrative
      
      
      18,957
      
      
      16,236
      
      
      2,721
      
      16.8
      %Total
          other expenses
      
      $
      76,301
      
      $
      69,120
      
      $
      7,181
      
      10.4
      %


Property Operating Revenues increased by $17.4 million or 6.6% for the six months ended June 30, 2006 as compared to the 2005 period. The increase is a result of a $37.2 million increase in Property Operating Revenues from the acquisition of thirteen suburban office properties, containing approximately 2.4 million square feet which were acquired in the fourth quarter of 2005, $8.2 million attributable to straight line rental revenue increases in our same-store properties. In addition, during the 2006 period we earned approximately $12.0 million in lease termination fee revenue as opposed to $1.3 million earned during the 2005 period. These aggregate increases of approximately $56.1 million were offset by a $38.7 million decrease in Property Operating Revenues from the sale of the Tranche I Properties in September 2005, 100 Wall Street in December 2005, the Tranche II Properties in January 2006 and
One Orlando Center in March 2006.

Property Expenses increased by $13.3 million or 12.7% for the six months ended June 30, 2006 as compared to the 2005 period. The increase is a result of a $20.3 million increase in operating expenses and real estate taxes from the acquisition of the aforementioned suburban office properties which were acquired in the fourth quarter of 2005 and a $9.6 million increase in operating expenses and real estate taxes in our same-store properties. These aggregate increases of approximately $29.9 million were offset by a $16.6 million decrease in Property Expenses from the aforementioned property sales. The increase in real estate taxes is attributable to higher taxes being levied by the municipalities in which the properties are located. The increase in property expenses is primarily driven by the recent increases in energy costs.

Gross operating margins for the six month periods ended June 30, 2006 and 2005 were 58.6% and 60.9%, respectively. Our 2006 gross operating margin, before lease termination fee revenue was 56.8 %. The decrease in our gross margins reflects the performance of thirteen suburban office properties, containing approximately 2.4 million square feet which were purchased in the fourth quarter of 2005 with below market occupancy levels. The addition of these properties resulted in a decrease in occupancy for our portfolio. In addition, we have experienced increases in real estate taxes and operating costs in our core portfolio, particularly energy costs, which were not entirely billable to our tenants.

Interest and Investment income and other increased by $18.5 million for the six months ended June 30, 2006 as compared to the 2005 period. This increase is primarily a result of the sale of our option in March 2006 to acquire the minority partners 40% partnership interest in the Omni Property for net consideration of approximately $9.0 million. In addition, this increase is attributable to an increase in interest income earned on our Note Receivable Investments of $5.2 million which resulted from a weighted average increase in our Note Receivable Investments of approximately $61.7 million from the 2005 period, $3.7 million in transaction and management fees earned during the 2006 period related to the Australian and Court Square JVs, and an increase in interest income of $1.1 million related to property sales proceeds held pursuant to Section 1031 Exchanges.

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Interest expense incurred increased by $4.4 million or 8.6% for the six months ended June 30, 2006 as compared to the 2005 period. Approximately $5.8 million of the increase is attributable to the Operating Partnerships issuance of $287.5 million of senior unsecured debentures in June 2005 and $4.1 million related to the Operating Partnerships issuance of $275.0 million of senior unsecured debentures in March 2006. Interest expense also increased by $2.9 million incurred under an unsecured term loan, which was funded in January 2006, used to purchase the Eastridge portfolio and repaid later in the first quarter of 2006, $1.3 million incurred from our financing of three properties during September 2005 which are scheduled to be contributed to the Australian JV in the latter part of 2006 and $336,000 of mortgage interest expense incurred on a property which we acquired, subject to the
debt in October 2005. These aggregate increases of $14.4 million were off-set by decreases in interest expense of $4.5 million incurred under our Credit Facility which resulted from a weighted average decrease in outstanding borrowings under our Credit Facility of approximately $173.5 million from the 2005 period, $339,000 incurred under our same-store mortgage portfolio, a decrease in mortgage interest expense of $2.7 million incurred during the 2005 period from three mortgage notes which were subsequently satisfied, $802,000 of mortgage interest expense related to two properties which were contributed to the Australian JV on January 6, 2006, subject to their debt, an increase of approximately $1.5 million in capitalized interest expense due to increased development activities and a decrease of $215,000 in other interest expense.

Marketing, general and administrative expenses increased by $2.7 million for the six months ended June 30, 2006 as compared to the 2005 period. This overall net increase is attributable to increased costs of maintaining offices and infrastructure in each of our five divisional markets, operating as a public company and higher compensation costs including amortization expense related to restricted stock awards to executive and non-executive officers. Marketing, general and administrative costs represented 6.1% of total revenues from continuing operations (excluding gains on sales of depreciable real estate assets) in the 2006 period as compared to 6.0% in the 2005 period.

Liquidity and Capital Resources

Historically, rental revenue has been the principal source of funds to pay operating expenses, debt service and non-incremental capital expenditures, excluding incremental capital expenditures. We expect to meet our short-term liquidity requirements generally through our net cash provided by operating activities along with our $500 million unsecured credit facility (the Credit Facility) described below. The Credit Facility contains several financial covenants with which we must be in compliance in order to borrow funds thereunder. During the prior two years, we have incurred significant leasing costs in the form of tenant improvement costs, leasing commissions and free rent. This trend is a result of market demands from tenants and high levels of leasing transactions to re-tenant scheduled expirations or space vacated due to early terminations of leases. We are also expending costs on
tenants that are renewing or extending their leases earlier than scheduled. For the years ended December 31, 2005 and 2004, we paid or accrued approximately $67.7 million and $52.2 million, respectively, for tenanting costs including tenant improvement costs and leasing commissions. Primarily, as a result of these factors, our cash available for distribution from operating activities was not sufficient to cover 100% of the dividends paid on our common equity. However, we are beginning to experience a moderation in the cost of re-tenanting our properties, primarily in terms of free rent concessions and costs to renew existing tenants. We are not yet experiencing significant reductions in the cost of re-leasing vacant or vacated space. Recently we have experienced an economic recovery in our markets, including an accelerated recovery in our New York City and Long Island markets. We are beginning to also see this trend in certain of our Stamford, Connecticut properties. This is resulting
in rental rate increases which is positively impacting our cash flow. To meet the short-term funding requirements relating to the higher leasing costs, we have used proceeds from non-core property sales or borrowings under our Credit Facility. Based on our forecasted leasing, we anticipate that we will continue to incur shortfalls during 2006. Subject to the restrictive covenants contained in the Merger Agreement, we currently intend to fund any shortfalls with proceeds from sales of non-income producing assets or borrowings under our Credit Facility. We periodically review our distribution policy to determine the appropriateness of our distribution rate relative to our cash flows. We adjust our distribution rate based on such factors as leasing activity, market conditions and forecasted increases and decreases in our cash flow as well as required distributions of taxable income to maintain the Companys REIT status. The Merger Agreement contains limitations on our ability to
make dividends and distributions. There can be no assurance that we will maintain the current quarterly distribution level on our common equity.

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Subject to the restrictive covenants contained in the Merger Agreement, we expect to meet most of our financing requirements through long-term unsecured borrowings and the issuance of debt and equity securities of the Operating Partnership or the Company, as the case may be. In certain situations, primarily in joint venture transactions, we use secured debt in connection with the acquisition of properties. During March 2006, the Operating Partnership issued $275 million of senior unsecured debt securities and during June 2005 issued $287.5 million of exchangeable senior debentures. There can be no assurance that there will be adequate demand for the Companys equity at the time or at the price in which the Company desires to raise capital through the sale of additional equity. Similarly, there can be no assurance that the Operating Partnership will be able to access the unsecured debt markets
at the time when the Operating Partnership desires to sell its unsecured notes. In addition, when valuations for commercial real estate properties are high, we will seek to sell non-core operating properties or certain land inventory to realize value and profit created, subject to the restrictive covenants contained in the Merger Agreement. We will then seek opportunities to reinvest the capital realized from these dispositions back into value-added assets in our core New York Tri-State Markets. However, there can be no assurances that we will be able to identify such opportunities that meet our underwriting criteria. Additionally, we have been actively seeking joint venture relationships to access new sources of equity capital. In September 2005, we completed a series of transactions whereby we sponsored the IPO of Reckson LPT, a newly-formed Australian listed property trust which is traded on the Australian Stock Exchange. Proceeds received from the IPO were used by Reckson LPT to
form a joint venture with us, the Australian JV, and to purchase 17 of our properties. In addition, during January 2006, we sold three additional properties to the Australian JV and are under contract to sell an additional five of our properties to the Australian JV during October 2006. Subject to the restrictive covenants contained in the Merger Agreement, it is our intention to purchase additional assets, within our New York Tri-State Markets, with Reckson LPT through the Australian JV. Joint ventures often involve relinquishing sole decision making authority relating to material events such as sale and financing. Loss of control of these decisions may adversely affect our financial flexibility, particularly relating to liquidating joint venture assets. There can be no assurances that we will be able to successfully execute this strategy.

Subject to the restrictive covenants contained in the Merger Agreement, we expect to refinance existing mortgage indebtedness, senior unsecured notes or indebtedness under our Credit Facility at maturity through the issuance of unsecured debt securities or additional equity securities. We anticipate that the current balance of cash and cash equivalents and cash flows from operating activities, together with cash available from borrowings, equity offerings and proceeds from sales of land and non-income producing assets, will be adequate to meet our capital and liquidity requirements in both the short and long-term. Our senior unsecured debt is currently investment grade rated BBB- by Fitch Ratings, BBB- by Standard & Poors and Baa3 by Moodys Investors Service. The rating agencies review the ratings assigned to an issuer such as us on an ongoing
basis. Negative changes in our ratings may result in increases in our borrowing costs, including borrowings under our Credit Facility.

Our markets are currently in the recovery stage in the economic cycle. As a result of current economic conditions, we have generally experienced higher renewal rates and a lower number of lease terminations. Vacancy rates in our markets are generally stable or decreasing and asking rents in our markets have stabilized and in some instances, particularly in New York City and Long Island, are trending higher. Landlords are still required to grant concessions such as free rent and tenant improvements but generally at a more moderate rate than had been experienced in the prior year, particularly on renewal space. Our markets continue to experience higher real estate taxes and utility rates. The recent volatility in the energy markets has had a substantial impact on cost of utilities in the northeast where we own our properties. In certain of our markets, the increase in real estate taxes and utility
costs will be included as part of expenses subject to escalation above a base year and billed to tenants consistent with the terms of their underlying leases. We are also experiencing a similar increase in cost of building materials to fit out tenant space, maintain our buildings and in new development costs. We believe that trends are moving positively from a landlords perspective particularly in terms of increased demand and limited new supply and that the above average tenant costs relating to leasing are moderating. This trend is supported by increased occupancy and reduced vacancy rates in most of our markets, the general economic recovery in the market resulting in job growth, and the scarcity of available land in which to develop a new supply of office space.

We carry comprehensive liability, fire, extended coverage and rental loss insurance on all of our properties. Six of our properties are located in New York City. As a result of the events of September 11, 2001, insurance companies were limiting coverage for acts of terrorism in all risk policies. In November 2002, the Terrorism Risk Insurance Act (TRIA) of 2002 was signed into law, which, among other things, requires insurance companies to offer coverage for losses resulting from defined acts of terrorism through 2005. The TRIA was subsequently extended, with certain modifications, through 2007 with the enactment of the Terrorism Insurance Extension Act of 2005. Our current property insurance coverage, which was recently renewed, provides for full replacement cost of our properties, including for acts of terrorism up to $600.0 million on a per occurrence basis.
One of our New York City properties, One Court Square, is operated under a net lease to Citibank, N.A. whereby they are required to maintain adequate property and liability insurance including coverage for acts of terrorism.

The potential impact of terrorist attacks in the New York City and New York Tri-State Markets may adversely affect the value of our properties and our ability to generate cash flow. As a result, there may be a decrease in demand for office space in metropolitan areas that are considered at risk for future terrorist attacks, and this decrease may reduce our revenues from property rentals.

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In order to qualify as a REIT for federal income tax purposes, the Company is required to make distributions to its stockholders of at least 90% of REIT taxable income. As a result, it is anticipated that the Operating Partnership will make distributions in amounts to meet this requirement. We expect to use our cash flow from operating activities for distributions to unitholders and for payment of recurring, non-incremental revenue-generating expenditures. We intend to invest amounts accumulated for distribution in short-term investments.

We currently maintain our $500 million Credit Facility with JPMorgan Chase Bank, as administrative agent, Wells Fargo Bank, National Association as syndication agent and Citicorp, North America, Inc. and Wachovia Bank, National Association as co-documentation agents. The Credit Facility matures in August 2008, provides for a one-year extension subject to a fee of 25 basis points and, upon receiving additional lender commitments, for an increase to the maximum revolving credit amount to $750 million. The Credit Facility has a competitive bid feature, which allows us to solicit bids from lenders under the Credit Facility to borrow up to 50% of the maximum revolving credit amount at interest rates less than the current LIBOR plus 80 basis point spread. In addition, the Credit Facility carries a facility fee of 20 basis points per annum. In the event of a change in the Operating Partnerships
senior unsecured credit ratings the interest rates and facility fee are subject to change. At June 30, 2006, the outstanding borrowings under the Credit Facility aggregated $92.0 million and carried a weighted average interest rate of 5.86% per annum.

We utilize the Credit Facility primarily to finance real estate investments, fund our real estate development activities and for working capital purposes. At June 30, 2006, we had availability under the Credit Facility to borrow approximately an additional $407.9 million, subject to compliance with certain financial covenants. Such amount is net of approximately $100,000 in an outstanding undrawn standby letter of credit, which is issued under the Credit Facility.

In connection with the acquisition of certain properties, contributing partners of such properties have provided guarantees on certain of our indebtedness. As a result, we maintain certain minimum outstanding balances on our Credit Facility.

On January 13, 2006, we obtained a $250.0 million term loan (the Term Loan) from Goldman Sachs Mortgage Company. The Term Loan was for an initial period of three months and had terms, including interest rates and financial covenants, substantially similar to our Credit Facility. Proceeds from the Term Loan were used to repay outstanding borrowings under our Credit Facility. On March 31, 2006, in conjunction with net proceeds received from the issuance of Senior Unsecured Notes, we repaid the entire amount outstanding under the Term Loan. As a result, the Term Loan has been retired and is no longer available for borrowings thereunder.

As a result of increased market values for our commercial real estate assets, we have sold certain non-core assets or interests in assets where significant value has been created. During 2004, we sold assets or interests in assets with aggregate sales prices of approximately $51.4 million, net of minority partners joint venture interests. During 2005 we sold approximately $909.8 million of our real estate assets including disposition of interests to joint ventures and during the first quarter of 2006, we sold two of our non-core assets, the Tranche II LPT Properties and an option to acquire our minority partners 40% partnership interest in the Omni Property for aggregate sales proceeds of approximately $178.9 million. We used the proceeds from these sales primarily to pay down borrowings under the Credit Facility, for general corporate purposes and to invest in short-term liquid
investments until such time as alternative real estate investments could be made.

A Class A OP Unit and a share of common stock have similar economic characteristics as they effectively share equally in the net income or loss and distributions of the Operating Partnership. As of June 30, 2006, the Operating Partnership had issued and outstanding 1,546,133 Class A OP Units and 456,621 Class C OP Units.  The Class A OP Units and the Companys common stock currently receive a quarterly distribution of $.4246 per unit/share. The Class C OP Units were issued in August 2003 in connection with the contribution of real property to the Operating Partnership and currently receive a quarterly distribution of $.4664 per unit. Subject to certain holding periods, OP Units may either be redeemed for cash or, at the election of the Company, exchanged for shares of common stock on a one-for-one basis.

As of June 30, 2006, the Company had approximately 1.3 million shares of its common stock reserved for issuance under its stock option plans, in certain cases subject to vested terms, at a weighted average exercise price of $24.63 per option. In addition, the Company has approximately 2.7 million shares of its common stock reserved for future issuance under its stock option plans.

The Operating Partnership issues additional units to the Company, and thereby increases the Companys general partnership interest in the Operating Partnership, with terms similar to the terms of any securities (i.e., common stock or preferred stock) issued by the Company (including any securities issued by the Company upon the exercise of stock options). Any consideration received by the Company in respect of the issuance of its securities is contributed to the Operating Partnership. In addition, the Operating Partnership or a subsidiary funds the compensation of personnel, including any amounts payable under the Companys LTIP.

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During June 2005, the Operating Partnership issued $287.5 million aggregate principal amount of 4.00% exchangeable senior debentures due June 15, 2025. The debentures were issued at 98% of par and are exchangeable for shares of common stock of the Company on or after June 15, 2024 at an initial exchange rate of 24.6124 common shares per $1,000 of principal amount of debentures. The debentures are also exchangeable: (i) if the market price of the Companys common stock over a specified period of time is more than 125% of the exchange price per share then in effect; (ii) if the trading price of the debentures over a specified period of time is less than 98% of the product of the closing price of the Companys shares multiplied by the applicable exchange rate; (iii) during a specified period of time, for any debentures that have been called for redemption; (iv) under certain circumstances,
upon the occurrence of a distribution to holders of the Companys shares of (a) rights to purchase the Companys common stock at a price below the market price of the Companys shares or (b) assets, debt securities or rights to purchase the Companys securities or securities of the Operating Partnership that have a per share/unit value exceeding 10% of the market price of the Companys shares; (v) if the Companys common stock is not listed on a national or regional securities exchange or quoted on NASDAQ for 30 consecutive trading days; or (vi) if the Operating Partnership or the Company is party to a consolidation, merger or binding share exchange pursuant to which all of the Companys common stock would be exchanged for cash, securities or other property.

The initial exchange price of $40.63 represents a premium of approximately 25% to the closing price of the Companys common stock on the issuance date of $32.50 per share. If exchanged in accordance with their terms, the debentures will be settled in cash up to their principal amount and any remaining exchange value will be settled, at our option, in cash, the Companys common stock or a combination thereof. In accordance with the exchange rate terms of the debentures the Company has reserved approximately 8.8 million shares of its authorized common stock, $.01 par value, for potential future issuance upon the exchange of the debentures. Such amount is based on an exchange rate of 30.7692 common shares per $1,000 of principal amount of debentures. Although we have reserved these shares pursuant to the exchange rate terms, we believe the issuance of the Companys shares, if any,
would be significantly less than 8.8 million shares. The debentures are guaranteed by the Company. We have the option to redeem the debentures beginning June 18, 2010 for the principal amount plus accrued and unpaid interest. Holders of the debentures have the right to require us to repurchase their debentures at 100% of the principal amount thereof plus accrued and unpaid interest on June 15, 2010, June 15, 2015 and June 15, 2020 or, in the event of certain change in control transactions (including the Merger), prior to June 15, 2010.

During the three month period ended June 30, 2006, certain limited partners in the Operating Partnership exchanged 12,224 OP Units for an equal number of shares of the Companys common stock.

The Board of Directors of the Company initially authorized the purchase of up to 5.0 million shares of the Companys common stock. Transactions conducted on the New York Stock Exchange have been, and will continue to be, effectuated in accordance with the safe harbor provisions of the Securities Exchange Act of 1934 and may be terminated by the Company at any time. Since the Boards initial authorization, the Company has purchased 3,318,600 shares of its common stock for an aggregate purchase price of approximately $71.3 million. In June 2006, the Board of Directors authorized the re-institution of the Companys common stock repurchase program, which had been inactive since March 2003. Subject to the restrictive covenants contained in the Merger Agreement, the Company may repurchase up to an aggregate of 5.0 million shares of its common stock under the re-instituted plan.

The Operating Partnership has issued and outstanding 1,200 preferred units of limited partnership interest with a liquidation preference value of $1,000 per unit and a stated distribution rate of 7.0%, which is subject to reduction based upon terms of their initial issuance (the Preferred Units). The terms of the Preferred Units provide for this reduction in distribution rate in order to address the effect of certain mortgages with above market interest rates, which were assumed by the Operating Partnership in connection with properties contributed to the Operating Partnership in 1998. As a result of the aforementioned reduction, there are currently no distributions being made on the Preferred Units.

Capitalization

Our indebtedness at June 30, 2006 totaled approximately $1.9 billion (net of minority partners interests share of consolidated joint venture debt and including our share of consolidated and unconsolidated joint venture debt) and was comprised of approximately $99.6 million of floating rate unsecured debt, approximately $1.25 billion of senior unsecured notes and approximately $564.7 million of fixed rate mortgage indebtedness with a weighted average interest rate of approximately 6.0% and a weighted average maturity of approximately 4.9 years. Based on our total market capitalization of approximately $5.4 billion at June 30, 2006 (calculated based on the sum of (i) the market value of the Companys common stock and OP Units, assuming conversion, (ii) the liquidation preference value of the Preferred Units and (iii) the $1.9 billion of debt), our debt represented approximately
35.2% of our total market capitalization.

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CONTRACTUALOBLIGATIONS ANDCOMMERCIALCOMMITMENTS

The following table sets forth our significant consolidated debt obligations by scheduled principal cash flow payments and maturity date and our commercial commitments by scheduled maturity at June 30, 2006 (in thousands):



MATURITYDATE2006
      
      2007
      
      2008
      
      2009
      
      2010
      
      Thereafter
      
      TotalMortgage
          notes payable (1)
      
      $
      5,229
      
      $
      8,406
      
      $
      7,370
      
      $
      6,774
      
      $
      4,665
      
      $
      3,236
      
      $
      35,680Mortgage
          notes payable (2)
      
      
      40,402
      
      
      60,642
      
      
      
      
      
      100,254
      
      
      62,105
      
      
      228,435
      
      
      491,838Senior
          unsecured notes
      
      
      
      
      
      200,000
      
      
      
      
      
      200,000
      
      
      287,500
      
      
      575,000
      
      
      1,262,500Credit
          Facility
      
      
      
      
      
      
      
      
      92,000
      
      
      
      
      
      
      
      
      
      
      
      92,000Land
          lease obligations (3)
      
      
      6,227
      
      
      12,471
      
      
      12,498
      
      
      12,644
      
      
      12,566
      
      
      342,849
      
      
      399,255Air
          rights lease obligations
      
      
      181
      
      
      362
      
      
      362
      
      
      362
      
      
      362
      
      
      3,257
      
      
      4,886Capital
          leases
      
      
      335
      
      
      671
      
      
      671
      
      
      671
      
      
      671
      
      
      3,188
      
      
      6,207Operating
          leases
      
      
      660
      
      
      194
      
      
      196
      
      
      14
      
      
      
      
      
      
      
      
      1,064$
      53,034
      
      $
      282,746
      
      $
      113,097
      
      $
      320,719
      
      $
      367,869
      
      $
      1,155,965
      
      $
      2,293,430


|(1) | Scheduled principal amortization payments.
|--- | ------------------------------------------

|(2) | Principal payments due at maturity.
|--- | -----------------------------------

|(3) | We lease, pursuant to noncancellable operating leases, the land on which ten of our buildings were constructed. The leases, certain of which contain renewal options at our direction, expire between 2043 and 2090. The leases either contain provisions for scheduled increases in the minimum rent at specified intervals or for adjustments to rent based upon the fair market value of the underlying land or other indices at specified intervals. Minimum ground rent is recognized on a straight-line basis over the terms of the leases and includes lease renewals if reasonably assured that we will exercise that option.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At June 30, 2006, approximately $41.0 million, or 7.8%, of our mortgage debt was recourse to the Company.

The following table sets forth our significant consolidated interest expense obligations on our fixed rate debt by scheduled cash flow payments at June 30, 2006, excluding interest expense obligations related to those properties classified as held for sale on our consolidated balance sheet (in thousands):



YEARENDEDDECEMBER31,2006
      
      2007
      
      2008
      
      2009
      
      2010
      
      Thereafter
      
      TotalMortgage
          notes payable
      
      $
      16,711
      
      $
      28,422
      
      $
      24,782
      
      $
      21,633
      
      $
      16,105
      
      $
      10,041
      
      $
      117,694Senior
          unsecured notes
      
      
      33,231
      
      
      57,113
      
      
      48,538
      
      
      36,267
      
      
      33,038
      
      
      118,892
      
      
      327,079Exchangeable
          debentures(a)
      
      
      5,750
      
      
      11,500
      
      
      11,500
      
      
      11,500
      
      
      11,500
      
      
      166,271
      
      
      218,021$
      55,692
      
      $
      97,035
      
      $
      84,820
      
      $
      69,400
      
      $
      60,643
      
      $
      295,204
      
      $
      662,794


(a)

        Callable after June 17, 2010 at par.


Interest
  expense obligations related to those properties classified as held for sale
  on our consolidated balance sheet at June 30, 2006 over the next five years
  aggregated approximately $15.3 million.

Interest expense incurred under our variable rate Credit Facility amounted to approximately $2.4 million for the three months ended June 30, 2006 and was based on a weighted average balance and interest rate of $151.8 million and 6.37%, respectively. Our rental revenues are our principal source of funds along with our net cash provided by operating activities to meet these and future interest obligations.

We had undrawn letters of credit outstanding of approximately $100,000 at June 30, 2006.

Certain of the mortgage notes payable are guaranteed by the Company and/or certain limited partners in the Operating Partnership. In addition, consistent with customary practices in non-recourse lending, certain non-recourse mortgages may be recourse to the Company under certain limited circumstances including environmental issues and breaches of material representations.

Corporate Governance

In February 2006 the Company amended its Bylaws to implement certain corporate governance policies, including (i) a requirement that at least two-thirds of the members of the Board of Directors consist of independent directors and (ii) the establishment of an Affiliate Transaction Committee, which consists of all of the independent directors.

The corporate governance policies implemented by the amendments to the Bylaws supplement the Companys previously-enacted corporate governance enhancements, which include:  (i) the de-staggering of the Board of Directors so that shareholders can vote on the entire slate of directors each year; (ii) the establishment of an independent lead director position; (iii) the mandatory rotation of at least one independent director every three years; (iv) a requirement that independent directors own a minimum equity stake in the Company of $100,000 of common stock; (v) a requirement that a substantial portion of directors compensation be in the Companys equity, which equity must be held during each directors tenure on the Board; (vi) opting out of the Maryland Business Combination Statute; and (vii) modifying the Companys five or fewer limitation on the ownership of
its common stock so that such limitation may only be used to protect the Companys REIT status and not for anti-takeover purposes.

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On July 10, 2006, Dr. Edward R. Casas was appointed as an independent director of the Companys Board of Directors. At such time, Dr. Casas also was appointed as a member of the Executive Committee, Nominating and Corporate Governance Committee, the Compensation Committee and Affiliate Transaction Committee of the Board of Directors. There are no arrangements or understandings between Dr. Casas and any other person pursuant to which Dr. Casas was appointed as a director, and neither Dr. Casas nor any member of his immediate family has or had, since the beginning of the Companys last fiscal year, a material interest in any transaction or proposed transaction with the Company.

Affiliate Transaction Committee of the Board of Directors

The Affiliate Transaction Committee of the Board has reviewed and approved the Merger Agreement after considering, among other things, managements participation in the proposed transaction and the opinions of its financial and legal advisors. The committee determined that the proposed transaction is fair to and in the best interests of the Company and of its shareholders. Additional information concerning the proposed transaction and the Affiliate Transaction Committees determination can be found in the Overview of the Reckson - SL Green Transaction filed by the Company on Schedule 14A on August 8, 2006, and in the joint proxy statement/prospectus when it becomes available.

Other Matters

In July 2002, as a result of certain provisions of the Sarbanes-Oxley Act of 2002, we discontinued the use of stock loans in our Long Term Incentive Programs (LTIP). In connection with LTIP grants made prior to the enactment of the Sarbanes-Oxley Act of 2002, we currently have stock loans outstanding to certain executive officers which were used to purchase 385,000 shares of the Companys common stock. The stock loans were priced at the market prices of the Companys common stock at the time of issuance, bear interest at the mid-term Applicable Federal Rate and are secured by the shares purchased. Such stock loans (including accrued interest) are scheduled to vest and be ratably forgiven each year on the anniversary of the grant date based upon initial vesting periods ranging from seven to ten years. Such forgiveness is based on continued service and in part on the Company
attaining certain annual performance measures. These stock loans had an initial aggregate weighted average vesting period of approximately nine years. As of June 30, 2006, there remains 139,000 shares of common stock subject to the original stock loans which are anticipated to vest between 2007 and 2011. Approximately $627,000  and $1.4 million and $573,000 and $1.1 million of compensation expense (inclusive of cash payments in respect of taxes payable by the borrower resulting from such forgiveness) was recorded for the three and six month periods ended June 30, 2006 and 2005, respectively, related to these loans. Such amounts have been included in marketing, general and administrative expenses on the accompanying consolidated statements of income.

The outstanding stock loan balances due from executive officers aggregated approximately $2.9 million and $3.8 million at June 30, 2006 and December 31, 2005, respectively, and have been included as a reduction of additional paid in capital on the accompanying consolidated balance sheets. Other outstanding loans to executive and senior officers at June 30, 2006 and December 31, 2005 amounted to approximately $1.6 million and $2.5 million, respectively, and are included in investments in affiliate loans and joint ventures on the accompanying consolidated balance sheets and are primarily related to tax payment advances on stock compensation awards and life insurance contracts made to certain executive and non-executive officers.

In November 2002 and March 2003, an award of rights was granted to certain executive officers of the Company (the 2002 Rights and 2003 Rights, respectively, and collectively, the Rights). Each Right represents the right to receive, upon vesting, one share of the Companys common stock if shares are then available for grant under one of the Companys stock option plans or, if shares are not so available, an amount of cash equivalent to the value of such stock on the vesting date. The 2002 Rights vest in four equal annual installments beginning on November 14, 2003 (and shall be fully vested on November 14, 2006). The 2003 Rights were earned on March 13, 2005 and vest in three equal annual installments beginning on March 13, 2005 (and shall be fully vested on March 13, 2007). Dividends on the shares will be held by the Company until such shares become
vested, and will be distributed thereafter to the applicable officer. The 2002 Rights also entitle the holder thereof to cash payments in respect of taxes payable by the holder resulting from the 2002 Rights. The 2002 Rights aggregate 62,835 shares of the Companys common stock and the 2003 Rights aggregate 26,040 shares of common stock. As of June 30, 2006, there remains 15,709 shares of common stock reserved related to the 2002 Rights and 8,682 shares of common stock reserved related to the 2003 Rights. Approximately $120,000 and $240,000 and $120,000 and $224,000 of compensation expense was recorded for the three and six month periods ended June 30, 2006 and 2005, respectively, related to the Rights. Such amounts have been included in marketing, general and administrative expenses on the accompanying consolidated statements of income.

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In March 2003, the Company established a new LTIP for its executive and senior officers (the 2003 LTIP). The four-year plan has a core award, which provides for annual stock based compensation based upon continued service and in part based on the Company attaining certain annual performance measures. The plan also has a special outperformance component in the form of a bonus pool equal to 10% of the total return in excess of a 9% cumulative and compounded annual total return on the Companys common equity for the period through the four-year anniversary after the date of grant (the Special Outperformance Pool). The aggregate amount payable to such officers from the Special Outperformance Pool is capped at an amount calculated based upon a total cumulative and compounded annual return on the common equity of 15%. An officers special outperformance award represents
an allocation of the Special Outperformance Pool and will become vested on the fourth anniversary of the date of grant, provided that the officer remains in continuous employment with the Company or any of its affiliates until such date, and the Company has achieved on a cumulative and compounded basis, during the four fiscal years completed on the applicable anniversary date, a total return to holders of the common equity that (i) is at or above the 60th percentile of the total return to stockholders achieved by members of the peer group during the same period and (ii) equals at least 9% per annum. Special outperformance awards will be paid in cash; however, the Compensation Committee, in its sole discretion, may elect to pay such an award in shares of common stock, valued at the date of vesting, if shares are available at such time under any of the Companys existing stock option plans. The LTIP provides that no dividends or dividend equivalent payments will accrue
with respect to the special outperformance awards. On March 13, 2003, the Company made available 827,776 shares of its common stock under its existing stock option plans in connection with the core award of the 2003 LTIP for certain of its executive and senior officers. During May 2003, the special outperformance awards of the 2003 LTIP were amended to increase the per share base price above which the four year cumulative return is measured from $18.00 to $22.40.

The Board of Directors approved an amendment to the 2003 LTIP to revise the peer group used to measure relative performance. The amendment eliminated the mixed office and industrial companies and added certain other pure office companies in order to revise the peer group to office sector companies. The Board has also approved the revision of the performance measurement dates for future vesting under the core component of the 2003 LTIP from the anniversary of the date of grant to December 31 of each year. This was done in order to have the performance measurement coincide with the performance period that the Company believes many investors use to judge the performance of the Company.

On December 27, 2004, the Operating Partnership entered into definitive agreements with certain executive and senior officers of the Company to revise their incentive awards under the 2003 LTIP. The revised agreements provide for (i) the rescission of the unvested portion of their core awards and (ii) an award in exchange for the rescinded core awards of an equal number of units of a new class of limited partnership interests (LTIP Units) of the Operating Partnership.

Each executive and senior officer participating in the 2003 LTIP was offered the option to retain all or a portion of his core awards or to rescind them in exchange for new awards of LTIP Units. On December 27, 2004, certain executive and senior officers accepted such offer and thereby amended their Amended and Restated Long-Term Incentive Award Agreement to cancel, in the aggregate, 362,500 shares of restricted stock of the Company representing all or a portion of their unvested core award, and received an equal number of LTIP Units.

The revised awards under the 2003 LTIP were designed to provide the potential for executives to retain a greater equity interest in the Company by eliminating the need for executives to sell a portion of the core awards immediately upon vesting in order to satisfy personal income taxes which are due upon vesting under the original core awards.

With respect to the 2003 LTIP, the Company met its annual performance measure with respect to the 2005, 2004 and 2003 annual measurement periods, respectively. As a result, the Company issued to the participants of the 2003 LTIP 86,111, 102,779 and 206,944 shares of its common stock, respectively, related to the core component of the 2003 LTIP.

The terms of each award of LTIP Units are substantially similar to those of the core awards under the 2003 LTIP. The vesting, performance hurdles and timing for vesting remain unchanged. However, an LTIP Unit represents an equity interest in the Operating Partnership, rather than the Company. At issuance, the LTIP Unit has no value but may over time accrete to a value equal to (but never greater than) the value of one share of common stock of the Company (a REIT Share). Initially, LTIP Units will not have full parity with OP Units with respect to liquidating distributions. Upon the occurrence of certain triggering events (such as the issuance of additional OP Units by the Operating Partnership), the Operating Partnership will revalue its assets for the purpose of the capital accounts of its partners and any increase in valuation of the Operating Partnerships assets
from the date of the issuance of the LTIP Units through the triggering event will be allocated to the capital accounts of holders of LTIP Units until their capital accounts are equivalent to the capital accounts of holders of OP Units. If such equivalence is reached, LTIP Units would achieve full parity with OP Units for all purposes, and therefore accrete to an economic value equivalent to REIT Shares on a one-for-one basis. In addition, if such parity is reached, vested LTIP Units may only be converted into an equal number of OP Units after two years from the date of grant. However, in the absence of an increase in the value of the assets of the Operating Partnership and the occurrence of triggering events, such economic equivalence would not be reached. Until and unless such economic equivalence is reached, the value that the officers will realize for vested LTIP Units will be less than the value of an equal number of REIT Shares. In addition, LTIP Units are
subject to specific performance related vesting requirements. In addition, unlike core awards under the 2003 LTIP (wherein dividends that accumulate are paid upon vesting), LTIP Units will receive the same quarterly distributions as OP Units on a current basis, thus providing full dividend equivalence with REIT Shares. Each LTIP Unit awarded is deemed equivalent to an award of one share of common stock reserved under one of the Companys stock option plans, reducing availability for other equity awards on a one-for-one basis. At the scheduled March 2005 vesting date, the specified performance hurdles were met, and officers that received LTIP Units received a one-time cash payment that represented payment of the full vested amount of the accrued unpaid dividends under the core award of the 2003 LTIP through December 27, 2004, the issuance date of the LTIP Units. In addition, the officers, in the aggregate, vested in 104,167 LTIP Units. At the scheduled March 2006 vesting date, the
specified performance hurdles were met and officers that received LTIP Units, in the aggregate, vested in 120,833 LTIP Units. On April 4, 2006 (the Measurement Date), as a result of the Company issuing 207,000 LTIP Units (discussed below) a triggering event occurred and the Company completed an analysis to determine the increase in the valuation, if any of the Operating Partnerships assets from the issuance of 362,500 LTIP Units on December 27, 2004 through the Measurement Date and with respect to the issuance of 272,100 LTIP Units issued on March 11, 2005 through the Measurement Date. The results of the analysis indicated that a sufficient increase in value to the Operating Partnerships assets was achieved. As a result the aforementioned LTIP Units achieved full parity with an OP Unit. In order to more closely replicate the terms of the core awards being rescinded, the Company also entered into agreements with three executive officers, which
provide that in the event of a change of control the executive shall receive the equivalent value of one REIT Share for each LTIP Unit.

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For each of the calendar years ended December 31, 2004 and 2005, following the recommendations of the Compensation Committee, eight senior and executive officers of the Company were awarded, in the aggregate, 272,100 LTIP Units and 207,000 LTIP Units, respectively, for outperformance and to continue to incentivize them for the long-term (the Restricted Equity Awards). Initially, the terms  of the Restricted Equity Awards were generally consistent with the terms of the 2003 LTIP, including with respect to the impact upon vesting in the event of a change of control. On June 12, 2006, with respect to the 2005 Restricted Equity Awards, the vesting periods were extended so that they will vest over a four-year period in lieu of a two-year period, provided that the officer remains in continuous employment with the Company until such dates and the Company has achieved certain specified
performance requirements during the year ending December 31, 2006. If the performance requirements are not met in 2006, the awards will become vested on any subsequent annual vesting date on which the performance requirements are met on a cumulative and compounded basis. In addition, with respect to the 2004 Restricted Equity Award to Scott Rechler, the Companys Chief Executive Officer, was similarly extended provided that Mr. Rechler remains in continuous employment with the Company.

As a result of the foregoing, there remains 69,443 shares of common stock reserved for future issuance under the core award of the 2003 LTIP and 616,600 shares of common stock reserved for issuance with respect to the issuance of LTIP Units. With respect to the core award of the 2003 LTIP, the Company recorded approximately $305,000 and $610,000 of compensation expense for each of the three and six month periods ended June 30, 2006 and 2005, respectively. In addition, with respect to the LTIP Units and the Restricted Equity Awards, the Company recorded compensation expense of approximately $941,000 and $1.8 million and $822,000 and $1.3 million, respectively, for the three and six month periods ended June 30, 2006 and 2005. Such amounts have been included in marketing, general and administrative expenses on the accompanying consolidated statements of income.  Based on the terms of the 2003 LTIP,
potential outcomes of the Special Outperformance Pool are estimated to range from $0, assuming the requisite four year cumulative performance measures are not met, to a maximum of approximately $35.7 million, assuming relative peer group performance measures are met and a cap of 15% cumulative and compounded return on common equity.  As of June 30, 2006, we have accrued approximately $29.4 million of compensation expense with respect to the Special Outperformance Pool of which $2.2 million and $5.9 million was accrued during the three months ended June 30, 2006. This amount is calculated on the closing stock price of the Companys common stock on June 30, 2006 and is based on managements determination of the probability of requisite performance measures being met. The accrual represents approximately 82% of the total estimated Special Outperformance Pool reflecting the service period through June 30, 2006.

Compensation expense with respect to the core component of the 2003 LTIP, which relates to the Company attaining certain annual performance measures, is recognized as a target stock price plan. Under this type of plan, compensation expense is recognized for the target stock price awards whether or not the targeted stock price condition is achieved as long as the underlying service conditions are achieved. Accordingly, we obtained an independent third party valuation of the 2003 LTIP awards and recognize compensation expense on a straight-line basis through the performance and vesting period for awards to employees who remain in service over the requisite period regardless of whether the target stock price has been reached.

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Compensation expense with respect to the core component of the 2003 LTIP, which relates to the continued service of the grantee, is recognized as compensation expense on a straight-line basis through the vesting period based on the fair market value of the stock on the date of grant.

As a result of the election of certain executive and senior officers to exchange all or a portion of their unvested core awards under the 2003 LTIP into an equal number of LTIP Units we again obtained an independent third party valuation of the newly granted LTIP Units and determined that the fair value of the LTIP Units was not greater than the exchanged 2003 LTIP awards on the date of the exchange. As such, compensation expense to be recognized, on a straight-lined basis, over the vesting period of the LTIP Units equals the amount of unamortized compensation expense cost for the 2003 LTIP awards as of the exchange date.

On January 1, 2006, we adopted Statement No. 123R and have determined that the adoption of Statement No. 123R did not have a material impact on our consolidated financial statements.

Nine of our office properties, which were acquired by the issuance of OP Units, are subject to agreements limiting our ability to transfer them prior to agreed upon dates without the consent of the limited partner who transferred the respective property to us. In the event we transfer any of these properties prior to the expiration of these limitations, we may be required to make a payment relating to taxes incurred by the limited partner. These limitations expire between 2011 and 2015.

Two of our office properties that are held in joint ventures contain certain limitations on transfer. These limitations include requiring the consent of the joint venture partner to transfer a property prior to various specified dates, rights of first offer, and buy / sell provisions.

Under various Federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The cost of any required remediation and the owners liability therefore as to any property is generally not limited under such enactments and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owners ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be
liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws govern the removal, encapsulation or disturbance of asbestos-containing materials (ACMs) when such materials are in poor condition, or in the event of renovation or demolition. Such laws impose liability for release of ACMs into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, we may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and
property.

All of our properties have been subjected to a Phase I or similar environmental audit (which involved general inspections without soil sampling, ground water analysis or radon testing) completed by independent environmental consultant companies.  These environmental audits have not revealed any environmental liability that would have a material adverse effect on our business.

Off Balance Sheet Arrangements

The
  Operating Partnership has a net investment of approximately $55.2 million in
  loans and REIT-qualified joint ventures with FrontLine Capital Group (FrontLine)
  and Reckson Strategic Venture Partners, LLC (RSVP), a real estate
  venture capital fund whose common equity is held indirectly by FrontLine (collectively,
  the RSVP / FLCG Investments). Frontline was formed by the Company
  in 1997. The net carrying value of the RSVP / FLCG Investments was reassessed
  with no change by management at June 30, 2006 and is included in investments
  in affiliate loans and joint ventures on our consolidated balance sheets.

FrontLine is in default under the loans from the Operating Partnership and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.

The RSVP REIT-qualified joint ventures are managed subject to a management agreement with the former managing directors of RSVP, which expires in September 2006. The management agreement provides for an annual base management fee and disposition fees equal to 2% of the net proceeds received by RSVP on asset sales which are subject to a maximum of $7.5 million. In addition, the former managing directors of RSVP retained a one-third residual interest in RSVPs assets which is subordinated to the distribution of an aggregate amount of $75.0 million to RSVP and/or us in respect of RSVP-controlled joint ventures.

Scott H. Rechler, our CEO and Chairman of the Board of Directors, serves as CEO and is FrontLines sole board member. Mr. Rechler also serves as a member of the management committee of RSVP.

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In November 2004, a joint venture in which RSVP owns approximately 47% executed a binding agreement to contribute its Catskills, NY resort properties (excluding residentially zoned land) to Empire Resorts Inc. (NASDAQ: NYNY) (Empire) for consideration of 18.0 million shares of Empires common stock and the right to appoint five members of their Board of Directors. On December 29, 2005, the agreement was terminated and the joint venture received options to purchase approximately 5.2 million shares of common stock of Empire at a price of $7.50 per share. The options will be exercisable until December 29, 2006. On June 30, 2006, the closing price of a share of Empires common stock was $6.95 per share.

We have discontinued the accrual of interest income with respect to the loans from the Operating Partnership and our share of GAAP equity in earnings, if any, from the RSVP-controlled REIT-qualified joint ventures until such income is realized through cash distributions.

In addition to the foregoing, our off-balance sheet arrangements consist of our approximate 5% indirect ownership interest in a joint venture that owns an investment in a New York City Class A office tower where our share of unconsolidated joint venture debt is approximately $11.7 million with an interest rate of 6.35% per annum and a remaining term of approximately 15 years, our 25% joint venture interest in the Australian JV where our share of unconsolidated joint venture debt is approximately $74.6 million with a weighted average interest rate of  5.3% per annum and a weighted average term of 5.3 years and our 30% joint venture interest in the property located at One Court Square, Long Island City, NY where our share of unconsolidated joint venture debt is $94.5 million with an interest rate of 4.91% per annum and a remaining term of approximately 9.1 years.

Funds from Operations

Funds from Operations (FFO) is defined by the National Association of Real Estate Investment Trusts (NAREIT) as net income or loss, excluding gains or losses from sales of depreciable properties plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. As a result,
FFO provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, interest costs and other matters without the inclusion of depreciation and amortization, providing perspective that may not necessarily be apparent from net income.

We compute FFO in accordance with the standards established by NAREIT. FFO does not represent cash generated from operating activities in accordance with GAAP and is not indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity. Since all companies and analysts do not calculate FFO in a similar fashion, our calculation of FFO presented herein may not be comparable to similarly titled measures as reported by other companies.

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The following table presents our FFO calculations (in thousands):



Three
          months endedJune 30,
      
      Six
          months endedJune 30,2006
      
      2005
      
      2006
      
      2005Net
          income
      
      $
      20,392
      
      $
      18,336
      
      $
      79,574
      
      $
      36,389Adjustments
          for basic Funds From OperationsAdd:Real
          estate depreciation and amortization
      
      
      33,505
      
      
      30,175
      
      
      65,656
      
      
      57,488Minority
          partners interests in consolidated partnerships
      
      
      7,382
      
      
      6,791
      
      
      14,616
      
      
      13,503Deduct:Gains
          on sales of depreciable real estate
      
      
      
      
      
      
      
      
      44,669
      
      
      Amounts
          distributable to minority partners in consolidated partnerships
      
      
      6,860
      
      
      5,478
      
      
      13,205
      
      
      11,202Basic
          and Diluted Funds From Operations
      
      $
      54,419
      
      $
      49,824
      
      $
      101,972
      
      $
      96,178Diluted
          Weighted Average units outstanding
      
      
      85,758
      
      
      84,913
      
      
      85,705
      
      
      84,845


Inflation

The office leases generally provide for fixed base rent increases or indexed escalations. In addition, the office leases provide for separate escalations of real estate taxes, operating expenses and electric costs over a base amount. The flex leases generally provide for fixed base rent increases, direct pass through of certain operating expenses and separate real estate tax escalations over a base amount. We believe that inflationary increases in expenses will be mitigated by contractual rent increases and expense escalations described above. As a result of the impact of the events of September 11, 2001, we have realized increased insurance costs, particularly relating to property and terrorism insurance, and security costs. We have included these costs as part of our escalatable expenses and have billed them to our tenants consistent with the terms of the underlying leases and believe they are
collectible. To the extent our properties contain vacant space, we will bear such inflationary increases in expenses.

The Credit Facility and one of our Note Receivable Investments bear interest at variable rates, which will be influenced by changes in short-term interest rates, and are sensitive to inflation.

ITEM3. QUANTITATIVE AND QUALITATIVE
  DISCLOSURES ABOUT MARKET RISK

The primary market risk facing us is interest rate risk on our long-term debt and notes receivable. We do not enter into derivative financial instruments for trading or speculative purposes. However, in the normal course of our business and to help us manage our debt issuances and maturities, we do use derivative financial instruments in the form of cash flow hedges to protect ourselves against potentially rising interest rates. We are not subject to foreign currency risk.

The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

As required by Statement No. 133, we record all derivatives on our balance sheet at fair value. For effective hedges, depending on the nature of the hedge, changes in the fair value of the derivative will be offset against the corresponding change in fair value of the hedged asset, liability, or firm commitment through earnings or recognized in OCI on our balance sheet until the hedged item is recognized in earnings.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in OCI and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings.

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The fair market value (FMV) of our long term debt and Note Receivable Investments is estimated based on discounting future cash flows at interest rates that we believe reflects the risks associated with long term debt and notes receivable of similar risk and duration.

The following table sets forth our long-term debt obligations by scheduled principal cash flow payments and maturity date, weighted average interest rates and estimated FMV at June 30, 2006 (dollars in thousands):



For
          the Year Ending December 31,2006
      
      2007
      
      2008
      
      2009
      
      2010
      
      Thereafter
      
      Total
          (1)
      
      FMVLong
          term debt:Fixed
          rate
      
      $
      45,631
      
      $
      269,048
      
      $
      7,370
      
      $
      307,028
      
      $
      354,270
      
      $
      806,671
      
      $
      1,790,018
      
      $
      1,830,908Weighted
          average interest rate
      
      
      7.97
      %
      
      7.13
      %
      
      7.22
      %
      
      7.71
      %
      
      4.33
      %
      
      4.00
      %
      
      5.29
      %Variable
          rate
      
      $
      
      
      $
      
      
      $
      92,000
      
      $
      
      
      $
      
      
      $
      
      
      $
      92,000
      
      $
      92,000Weighted
          average interest rate
      
      
      
      
      
      
      
      
      5.86
      %
      
      
      
      
      
      
      
      
      
      
      5.86
      %


|(1) | Includes aggregate unamortized issuance discounts of approximately $7.6 million on the senior unsecured notes which are due at maturity.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

In addition, we have assessed the market risk for our variable rate debt, which is based upon LIBOR, and believe that a one percent increase in the LIBOR rate would have a $920,000 annual increase in interest expense based on $92.0 million of variable rate debt outstanding at June 30, 2006.

The following table sets forth our Note Receivable Investments by scheduled maturity date, weighted average interest rates and estimated FMV at June 30, 2006 (dollars in thousands):



For the Year Ending December 31,2006

        

        2007

        

        2008

        

        2009

        

        2010

        

        Thereafter

        

        Total (1)

        

        FMVNote Receivable Investments:Fixed rate

        

        $

        

        

        $

        40,000

        

        $

        14,188

        

        $

        25,000

        

        $

        9,031

        

        $

        96,760

        (2)

        $

        184,979

        

        $

        184,912

        (2)Weighted average interest rate

        

        

        

        

        

        16.25

        %

        

        15.29

        %

        

        17.50

        %

        

        9.17

        %

        

        9.00

        %

        

        12.21

        %Variable rate

        

        $

        

        

        $

        

        

        $

        

        

        $

        500

        

        $

        

        

        $

        

        

        $

        500

        

        $

        500Weighted average interest rate

        

        

        

        

        

        

        

        

        

        

        

        5.35

        %

        

        

        %

        

        

        

        

        5.35

        %


|(1) | Excludes interest receivables and unamortized acquisition costs aggregating approximately $5.5 million.
|--- | -------------------------------------------------------------------------------------------------------

|(2) | Our investment balance, with respect to a participating loan investment, includes approximately $21.2 million of accretive interest which is due at maturity. The FMV calculation considers only accretive interest recorded through June 30, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, we have assessed the market risk for our variable rate receivables, which are based upon LIBOR, and believe that a one percent increase in the LIBOR rate would have an approximate $5,000 annual increase in interest income based on a $500,000 variable rate note receivable outstanding at June 30, 2006.

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ITEM4. CONTROLS
  ANDPROCEDURES

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is reported within the time periods specified in the SECs rules and forms. In this regard, we have formed a Disclosure Committee currently comprised of all of our executive officers as well as certain other members of our senior management with knowledge of information that may be considered in the SEC reporting process. The Committee has responsibility for the development and assessment of the financial and non-financial information to be included in the reports filed by us with the SEC and supports our Chief Executive Officer and Chief Financial Officer in connection with their certifications contained in our SEC reports. The Committee meets regularly and reports to the Audit Committee on a quarterly or more frequent basis. Our
Chief Executive Officer and Chief Financial Officer have evaluated, with the participation of our senior management, our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that such disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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SELECTEDPORTFOLIOINFORMATION

The following table sets forth our schedule of top 25 tenants based on base rental revenue as of July 1, 2006:



Tenant Name(1) (2)


      


      Wtd. AvgTerm Remaining(years)


      


      TotalSquare Feet


      


      Percent of Pro RataShare of AnnualizedBase Rental Revenue*Citigroup / Citibank


      


      12.1


      


      1,988,060


      


      4.2


      %*Debevoise & Plimpton

        

        15.5

        

        586,528

        

        3.6

        %D.E. Shaw

        

        7.5

        

        192,837

        

        2.3

        %Amerada Hess Corporation

        

        15.6

        

        180,822

        

        2.0

        %*Schering-Plough Corporation

        

        0.4

        

        152,970

        

        1.8

        %King & Spalding

        

        7.5

        

        148,675

        

        1.7

        %*Schulte Roth & Zabel

        

        14.4

        

        279,746

        

        1.6

        %*Verizon Communications Inc.

        

        1.4

        

        271,384

        

        1.5

        %*American Express

        

        7.8

        

        125,305

        

        1.5

        %*Bank of America / Fleet Bank

        

        4.4

        

        199,089

        

        1.4

        %County of Nassau

        

        15.3

        

        219,066

        

        1.4

        %*MCI

        

        4.2

        

        180,305

        

        1.2

        %*Fuji Photo Film USA

        

        6.2

        

        194,984

        

        1.2

        %Westpoint Stevens

        

        0.5

        

        86,800

        

        1.0

        %Arrow Electronics Inc.

        

        7.5

        

        163,762

        

        1.0

        %Dun & Bradstreet Corp.

        

        6.3

        

        123,000

        

        1.0

        %Westdeutsche Landesbank

        

        9.8

        

        53,000

        

        0.9

        %*Banque Nationale De Paris

        

        10.1

        

        145,834

        

        0.8

        %Washington Mutual

        

        0.7

        

        127,465

        

        0.8

        %*JP Morgan Chase

        

        5.4

        

        88,060

        

        0.8

        %North Fork Bank

        

        12.5

        

        126,770

        

        0.8

        %Practicing Law Institute

        

        7.7

        

        77,500

        

        0.8

        %*HQ Global

        

        4.5

        

        193,414

        

        0.8

        %Vytra Healthcare

        

        1.5

        

        105,613

        

        0.8

        %*Draft Worldwide Inc.

        

        7.4

        

        141,260

        

        0.7

        %


|(1) | Ranked by pro-rata share of annualized base rental revenue adjusted for pro rata share of joint venture interests.
|--- | ------------------------------------------------------------------------------------------------------------------

|(2) | Total square footage is based on currently leased space and excludes expansions or leases with future start dates.
|--- | ------------------------------------------------------------------------------------------------------------------

|* | Part or all of space occupied by tenant is in a joint venture building.
|- | -----------------------------------------------------------------------

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Historical
  Non-Incremental Revenue-Generating Capital Expenditures, Tenant Improvement
  Costs and Leasing Commissions

The
  following table sets forth annual and per square foot non-incremental revenue-generating
  capital expenditures in which we paid or accrued, during the respective periods,
  to retain revenues attributable to existing leased space (at 100% of cost) for
  the years 2002 through 2005 and for the six month period ended June 30, 2006
  for our consolidated office and industrial / flex properties:



2002
      
      2003
      
      2004
      
      2005
      
      Average2002-2005
      
      YTD2006Suburban
          Office PropertiesTotal
      
      $
      5,283,674
      
      $
      6,791,336
      
      $
      7,034,054
      
      $
      8,402,936
      
      $
      6,878,000
      
      $
      4,539,844Per
          Square Foot
      
      $
      0.53
      
      $
      0.67
      
      $
      0.69
      
      $
      0.78
      (2)(3)
      $
      0.67
      
      $
      0.40
      (5)NYC
          Office PropertiesTotal
      
      $
      1,939,111
      
      $
      1,922,209
      
      $
      2,515,730
      
      $
      2,017,360
      
      $
      2,098,603
      
      $
      1,319,682Per
          Square Foot
      
      $
      0.56
      
      $
      0.55
      
      $
      0.56
      
      $
      0.42
      (4)
      $
      0.52
      
      $
      0.32
      (4)Flex
          / Industrial PropertiesTotal
      
      $
      1,881,627
      
      $
      1,218,401
      (1)
      $
      207,028
      
      $
      38,723
      (2)
      $
      836,445
      
      $
      11,344Per
          Square Foot
      
      $
      0.28
      
      $
      0.23
      
      $
      0.23
      
      $
      0.05
      
      $
      0.20
      
      $
      0.03  (1)
      Excludes
          non-incremental capital expenditures of $435,140 incurred during the
          fourth quarter of 2003 for the industrial properties which were sold
          during the period. (2)
      Includes
          costs related to the 17 properties sold to the Australian JV on September
          21, 2005. (3)
      Per
          square foot calculations for suburban submarkets-office properties exclude
          68 South Service Road and the Eastridge Portfolio. (4)
      Per
          square foot calculations, for NYC office properties, exclude One Court
          Square, a 1,401,609 square foot, triple net leased building in Long
          Island City, New York. (5)
      Per
          square foot calculations for suburban office properties exclude 68 South
          Service Road, a building that was recently placed in service.


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The
  following table sets forth annual and per square foot non-incremental revenue-generating
  tenant improvement costs and leasing commissions (at 100% of cost) which we
  committed to perform, during the respective periods, to retain revenues attributable
  to existing leased space for the years 2002 through 2005 and for the six month
  period ended June 30, 2006 for our consolidated office and industrial / flex
  properties:



2002
      
      2003
      
      2004
      
      2005
      
      Average2002-2005
      
      YTD2006
      
      New
      
      RenewalLong
          Island Office PropertiesTenant
          Improvements
      
      $
      1,917,466
      
      $
      3,774,722
      
      $
      4,856,604
      
      $
      4,768,833
      
      $
      3,829,406
      
      $
      1,409,801
      
      $
      1,121,068
      
      $
      288,733Per
          Square Foot Improved
      
      $
      7.81
      
      $
      7.05
      
      $
      8.78
      
      $
      11.25
      
      $
      8.72
      
      $
      13.72
      
      $
      21.23
      
      $
      5.78Leasing
          Commissions
      
      $
      1,026,970
      
      $
      2,623,245
      
      $
      2,345,325
      
      $
      1,546,354
      
      $
      1.885,474
      
      $
      598,802
      
      $
      306,250
      
      $
      292,552Per
          Square Foot Leased
      
      $
      4.18
      
      $
      4.90
      
      $
      4.24
      
      $
      3.65
      
      $
      4.24
      
      $
      5.83
      
      $
      5.80
      
      $
      5.86Total
          Per Square Foot
      
      $
      11.99
      
      $
      11.95
      
      $
      13.02
      
      $
      14.90
      
      $
      12.96
      
      $
      19.55
      
      $
      27.03
      
      $
      11.64Westchester
          Office PropertiesTenant
          Improvements
      
      $
      6,391,589
      (1)
      $
      3,732,370
      
      $
      6,323,134
      
      $
      5,296,662
      
      $
      5,435,939
      
      $
      3,788,661
      
      $
      1,444,490
      
      $
      2,344,171Per
          Square Foot Improved
      
      $
      15.05
      
      $
      15.98
      
      $
      11.95
      
      $
      12.37
      
      $
      13.84
      
      $
      11.45
      
      $
      22.40
      
      $
      8.80Leasing
          Commissions
      
      $
      1,975,850
      (1)
      $
      917,487
      
      $
      2,671,548
      
      $
      1,923,552
      
      $
      1,872,109
      
      $
      1,528,326
      
      $
      483,171
      
      $
      1,045,155Per
          Square Foot Leased
      
      $
      4.65
      
      $
      3.93
      
      $
      5.05
      
      $
      4.49
      
      $
      4.53
      
      $
      4.62
      
      $
      7.49
      
      $
      3.93Total
          Per Square Foot
      
      $
      19.70
      
      $
      19.91
      
      $
      17.00
      
      $
      16.86
      
      $
      18.37
      
      $
      16.07
      
      $
      29.89
      
      $
      12.73Connecticut
          Office PropertiesTenant
          Improvements
      
      $
      491,435
      
      $
      588,087
      
      $
      3,051,833
      
      $
      3,895,369
      
      $
      2,006,681
      
      $
      3,288,712
      
      $
      2,755,883
      
      $
      532,829Per
          Square Foot Improved
      
      $
      3.81
      
      $
      8.44
      
      $
      12.71
      
      $
      11.86
      
      $
      9.20
      
      $
      19.29
      
      $
      32.64
      
      $
      6.19Leasing
          Commissions
      
      $
      307,023
      
      $
      511,360
      
      $
      1,493,664
      
      $
      1,819,504
      
      $
      1,032,888
      
      $
      1,225,212
      
      $
      1,086,500
      
      $
      138,712Per
          Square Foot Leased
      
      $
      2.38
      
      $
      7.34
      
      $
      6.22
      
      $
      5.54
      
      $
      5.37
      
      $
      7.19
      
      $
      12.87
      
      $
      1.61Total
          Per Square Foot
      
      $
      6.19
      
      $
      15.78
      
      $
      18.93
      
      $
      17.40
      
      $
      14.57
      
      $
      26.48
      
      $
      45.51
      
      $
      7.80New
          Jersey Office PropertiesTenant
          Improvements
      
      $
      2,842,521
      
      $
      4,327,295
      
      $
      1,379,362
      
      $
      2,421,779
      
      $
      2,742,739
      
      $
      2,762,533
      
      $
      1,847,668
      
      $
      914,865Per
          Square Foot Improved
      
      $
      10.76
      
      $
      11.57
      
      $
      7.12
      
      $
      15.49
      
      $
      11.24
      
      $
      11.56
      
      $
      13.34
      
      $
      9.10Leasing
          Commissions
      
      $
      1,037,012
      
      $
      1,892,635
      
      $
      832,658
      
      $
      1,394,470
      
      $
      1,289,194
      
      $
      1,902,200
      
      $
      964,279
      
      $
      937,921Per
          Square Foot Leased
      
      $
      3.92
      
      $
      5.06
      
      $
      4.30
      
      $
      8.92
      
      $
      5.55
      
      $
      7.96
      
      $
      6.97
      
      $
      9.33Total
          Per Square Foot
      
      $
      14.68
      
      $
      16.63
      
      $
      11.42
      
      $
      24.41
      
      $
      16.79
      
      $
      19.52
      
      $
      20.31
      
      $
      18.43Total
          Suburban Markets -Office
          PropertiesTenant
          Improvements
      
      $
      11,643,011
      
      $
      12,422,474
      
      $
      15,610,933
      
      $
      16,382,643
      
      $
      14,014,765
      
      $
      11,249,707
      
      $
      7,169,109
      
      $
      4,080,598Per
          Square Foot Improved
      
      $
      10.95
      
      $
      10.24
      
      $
      10.30
      
      $
      12.25
      
      $
      10.48
      
      $
      13.34
      
      $
      21.07
      
      $
      8.11Leasing
          Commissions
      
      $
      4,346,855
      
      $
      5,944,728
      
      $
      7,343,194
      
      $
      6,683,880
      
      $
      6,079,664
      
      $
      5,254,540
      
      $
      2,840,200
      
      $
      2,414,340Per
          Square Foot Leased
      
      $
      4.09
      
      $
      4.90
      
      $
      4.84
      
      $
      5.00
      
      $
      4.55
      
      $
      6.23
      
      $
      8.35
      
      $
      4.80Total
          Per Square Foot
      
      $
      15.04
      
      $
      15.14
      
      $
      15.14
      
      $
      17.25
      
      $
      15.03
      
      $
      19.57
      
      $
      29.42
      
      $
      12.91New
          York City Office PropertiesTenant
          Improvements
      
      $
      4,350,106
      
      $
      5,810,017
      (2)(3)
      $
      9,809,822
      (3)(4)
      $
      10,648,442
      (2)(4)
      $
      7,654,597
      
      $
      2,341,897
      (5)
      $
      2,315,161
      (5)
      $
      26,736Per
          Square Foot Improved
      
      $
      18.39
      
      $
      32.84
      
      $
      23.21
      
      $
      28.20
      
      $
      25.66
      
      $
      36.86
      
      $
      41.77
      
      $
      3.29Leasing
          Commissions
      
      $
      2,019,837
      
      $
      2,950,330
      (2)
      $
      3,041,141
      (4)
      $
      4,418,706
      (2)(4)
      $
      3,107,504
      
      $
      1,019,877
      (5)
      $
      1,002,265
      (5)
      $
      17,612Per
          Square Foot Leased
      
      $
      8.54
      
      $
      16.68
      
      $
      7.19
      
      $
      11.70
      
      $
      11.03
      
      $
      16.05
      
      $
      18.08
      
      $
      2.17Total
          Per Square Foot
      
      $
      26.93
      
      $
      49.52
      
      $
      30.40
      
      $
      39.90
      
      $
      36.69
      
      $
      52.91
      
      $
      59.85
      
      $
      5.46Industrial
          / Flex PropertiesTenant
          Improvements
      
      $
      1,850,812
      
      $
      1,249,200
      
      $
      310,522
      
      $
      112,781
      
      $
      880,829
      
      $
      0.00
      
      $
      0.00
      
      $
      0.00Per
          Square Foot Improved
      
      $
      1.97
      
      $
      2.42
      
      $
      2.27
      
      $
      2.46
      
      $
      2.28
      
      $
      0.00
      
      $
      0.00
      
      $
      0.00Leasing
          Commissions
      
      $
      890,688
      
      $
      574,256
      
      $
      508,198
      
      $
      65,740
      
      $
      509,720
      
      $
      0.00
      
      $
      0.00
      
      $
      0.00Per
          Square Foot Leased
      
      $
      0.95
      
      $
      1.11
      
      $
      3.71
      
      $
      1.43
      
      $
      1.80
      
      $
      0.00
      
      $
      0.00
      
      $
      0.00Total
          Per Square Foot
      
      $
      2.92
      
      $
      3.53
      
      $
      5.98
      
      $
      3.89
      
      $
      4.08
      
      $
      0.00
      
      $
      0.00
      
      $
      0.00  (1)
      Excludes
          tenant improvements and leasing commissions related to a 163,880 square
          foot leasing transaction with Fuji Photo Film U.S.A. Leasing commissions
          on this transaction amounted to $5.33 per square foot and tenant improvement
          allowance amounted to $40.88 per square foot. (2)
      Excludes
          $15.5 million of tenant improvements and $2.2 million of leasing commissions
          related to a 121,108 square foot lease to Debevoise & Plimpton that
          was signed during the third quarter of 2003 with a lease commencement
          date in 2005. (3)
      2003
          numbers exclude tenant improvements of $0.2 million for Sandler ONeil
          & Partners (7,446 square feet) for expansion space with a lease
          commencement date in the second quarter of 2004. The tenant improvement
          allowance is reflected in the 2004 numbers. (4)
      Excludes
          86,800 square foot WestPoint Stevens early renewal. There were no tenant
          improvement or leasing costs associated with this transaction. Also
          excludes $1.4 million of tenant improvements and $1.2 million of leasing
          commissions related to a 74,293 square foot lease to Harper Collins
          Publishers with a lease commencement date in 2006. Also excludes Bank
          of America retail lease with $0.6 million of tenant improvements and
          $0.8 million of leasing commissions. (5)
      Excludes
          133,727 square foot lease to National Hockey League at 1185 Avenue of
          the Americas. Tenant allowance was granted in the form of a rent concession
          for the deal.


As
  noted, incremental revenue-generating tenant improvement costs and leasing commissions
  are excluded from the tables previously set forth. The historical capital expenditures,
  tenant improvement costs and leasing commissions previously set forth are not
  necessarily indicative of future non-incremental revenue-generating capital
  expenditures or non-incremental revenue-generating tenant improvement costs
  and leasing commissions that may be incurred to retain revenues on leased space.

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The
  following table sets forth our components of paid or accrued non-incremental
  and incremental revenue-generating capital expenditures, tenant improvements
  and leasing costs for the periods presented as reported on our Statements
  of Cash Flows  Investment Activities contained in our consolidated
  financial statements (in thousands):



Six
          months endedJune 30,2006
      
      2005Capital
          expenditures:Non-incremental
      
      $
      3,700
      
      $
      4,864Incremental
      
      
      4,732
      
      
      5,059Tenant
          improvements:Non-incremental
      
      
      12,027
      
      
      11,871Incremental
      
      
      9,081
      
      
      8,697Additions
          to commercial real estate properties
      
      $
      29,540
      
      $
      30,491Leasing
          costs:Non-incremental
      
      $
      6,012
      
      $
      6,833Incremental
      
      
      4,526
      
      
      2,275Payment
          of deferred leasing costs
      
      $
      10,538
      
      $
      9,108Acquisition
          and development costs
      
      $
      30,780
      
      $
      22,590


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The
  following table sets forth our lease expiration schedule, as adjusted for pre-leased
  space and inclusive of joint venture interests, at July 1, 2006 for our total
  portfolio of properties, our office portfolio and our flex portfolio:



Total
          PortfolioYear
          ofExpiration
      
      Number
          ofLeasesExpiring
      
      SquareFeetExpiring
      
      Percentage
          of TotalPortfolioSquare Footage
      
      CumulativePercentage of TotalPortfolio Square Footage2006
      
      128
      
      755,553
      
      3.7
      %
      3.7
      %2007
      
      163
      
      1,503,666
      
      7.5
      %
      11.2
      %2008
      
      177
      
      1,352,702
      
      6.7
      %
      17.9
      %2009
      
      152
      
      1,373,750
      
      6.8
      %
      24.7
      %2010
      
      185
      
      2,181,972
      
      10.8
      %
      35.5
      %2011
          and thereafter
      
      537
      
      11,165,350
      
      55.3
      %
      90.8
      %Total/Weighted
          Average
      
      1,342
      
      18,332,993
      
      90.8
      %Total
          Portfolio Square Feet
      
      
      
      20,190,094




Office
          PortfolioYear
          ofExpiration
      
      Number
          ofLeasesExpiring
      
      SquareFeetExpiring
      
      Percentage
          of TotalOfficeSquare Footage
      
      CumulativePercentage of TotalPortfolio Square Footage2006
      
      127
      
      719,494
      
      3.7
      %
      3.7
      %2007
      
      160
      
      1,451,144
      
      7.5
      %
      11.2
      %2008
      
      175
      
      1,320,459
      
      6.8
      %
      18.0
      %2009
      
      151
      
      1,328,769
      
      6.9
      %
      24.9
      %2010
      
      182
      
      1,926,276
      
      10.0
      %
      34.9
      %2011
          and thereafter
      
      528
      
      10,963,204
      
      56.7
      %
      91.6
      %Total/Weighted
          Average
      
      1,323
      
      17,709,346
      
      91.6
      %Total
          Office Portfolio Square Feet
      
      
      
      19,326,702




Flex
          PortfolioYear
          ofExpiration
      
      Number
          ofLeasesExpiring
      
      SquareFeetExpiring
      
      Percentage
          of TotalFlex Square Footage
      
      CumulativePercentage of TotalPortfolio Square Footage2006
      
      1
      
      36,059
      
      4.2
      %
      4.2
      %2007
      
      3
      
      52,522
      
      6.1
      %
      10.3
      %2008
      
      2
      
      32,243
      
      3.7
      %
      14.0
      %2009
      
      1
      
      44,981
      
      5.2
      %
      19.2
      %2010
      
      3
      
      255,696
      
      29.6
      %
      48.8
      %2011
          and thereafter
      
      9
      
      202,146
      
      23.4
      %
      72.2
      %Total/Weighted
          Average
      
      19
      
      623,647
      
      72.2
      %Total
          Flex Portfolio Square Feet
      
      
      
      863,392


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PART
  II - OTHER INFORMATION

Item 1. Legal Proceedings

On or about June 23, 2006, a lawsuit was commenced in the Superior Court of New Jersey, Chancery Division, Morris County, New Jersey against Reckson Associates Realty Corp. and Reckson Operating Partnership, L.P. (collectively Reckson), among other parties, in which the plaintiff alleges that Reckson tortiously interfered with the plaintiffs purported right under a non-binding term sheet executed between the plaintiff and a former tenant at Three Giralda Farms, Madison, New Jersey (the Property), a property owned by Reckson. The plaintiff seeks, among other things, a judgment for damages against Reckson relating to this alleged tortious interference.  The plaintiff also seeks to enjoin Reckson from leasing the Property pending the disposition of the lawsuit, and the Court granted temporary restraints on June 27, 2006, which were continued
on July 25, 2006 through August 28, 2006. Reckson has indemnified its former tenant against the claims alleged by plaintiff in the lawsuit. Reckson intends to vigorously contest all of the plaintiffs claims, which it believes to be without merit.

On August 4, 2006, Robert Lowinger filed a purported class action lawsuit in the Supreme Court of the State of New York, Nassau County, on behalf of himself and all other Reckson stockholders against the Company, and its Board of Directors, seeking to enjoin the sale of the Company to SL Green Realty Corp. (SL Green)  and related transactions in which the Reckson Investment Group (consisting of defendant Scott Rechler and certain other members of Recksons executive management) and Marathon Asset Management will acquire certain assets of the Company from SL Green. Lowinger alleges that in exchange for agreeing to sell the Company to SL Green for a value less than its true value, the Reckson Investment Group was able to acquire valuable Reckson assets on very favorable terms, at the expense of Recksons stockholders. Lowinger asserts claims of breach of fiduciary duty against
Reckson and its directors, and aiding and abetting breach of fiduciary duty against SL Green. Lowinger seeks an injunction prohibiting the transaction (or, in the event the transaction is consummated, an order rescinding it), as well as damages and costs, including plaintiffs attorneys and experts fees.

Except as provided above, we are not presently subject to any material litigation nor, to our  knowledge, is any litigation threatened against us, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.

Item 1A. Risk Factors

The announcement of our proposed Merger with SL Green may have a negative effect on our business, financial condition and operating results.

In response to our announcement and the potential uncertainty about our future operating strategy and decisions, tenants may delay, defer or cancel leases or contracts with us, which could negatively affect our revenues and results of operations. In addition, current and prospective employees may experience uncertainty about their future role with the combined company, which may impair our ability to attract and retain key management, development, marketing and other personnel, which could further affect our operating results. Declining results could have negative consequences on our relationships with and obligations to tenants, joint venture partners, creditors and others with whom we have business relationships. A negative impact on operating results could also cause a decline in the Companys stock price.

If we are unable to realize our proposed merger with SL Green, our business, financial condition, operating results and the Companys stock price could suffer.

If the Companys shareholders do not approve the transactions contemplated by the Merger Agreement or we otherwise fail to satisfy the closing conditions to the transaction, we could face adverse consequences, including:


      we
          would remain liable for significant costs relating to the transaction,
          including, among others, legal, accounting, financial advisory and financial
          printing expenses;



      activities
          relating to the proposed Merger and related uncertainties could divert
          managements attention from our day-to-day business and disrupt
          our operations;



      an
          announcement that we have abandoned the proposed Merger could trigger
          a decline in the Companys stock price to the extent that the Companys stock price reflects
          a market assumption that we will complete the Merger;



      we
          could be required to pay SL Green a termination fee and/or expense reimbursement
          if the Merger Agreement is terminated under certain circumstances; and



      we
          may forego alternative business opportunities or fail to respond effectively
          to competitive pressures.


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The Merger Agreement limits our ability to pursue alternatives to the proposed Merger.

Under the Merger Agreement, we are generally precluded from encouraging or participating in any discussions that could lead to an alternative acquisition proposal. Similarly the Companys Board of Directors is restricted in its ability to withdraw or modify its recommendation that the Companys shareholders approve this Merger. In certain circumstances, the Companys Board of Directors may terminate the Merger Agreement or withdraw or modify its recommendation that the Companys shareholders approve this Merger in order to pursue a proposal that it deems to be superior. In these circumstances, we would be required to pay SL Green a termination fee and expense reimbursement.

The effect of these provisions could be to discourage or prevent a party interested in a possible acquisition of our Company from pursuing an offer to acquire us. The occurrence of these events individually or in combination could have a material adverse effect on our business, financial condition, cash flows and operating results.

Certain restrictive pre-closing covenants in the Merger Agreement may negatively affect our business, financial condition, operating results and cash flows.

Pending completion of the proposed Merger, we have agreed to conduct our business in the ordinary course and consistent with our past practices. We have also agreed to restrictions on the conduct of our business. These restrictions could have a material adverse effect on our business, financial condition, cash flows, operating results and stock price.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - None

Item 3. Defaults Upon Senior Securities  None

Item 4. Submission of Matters to a Vote of Securities Holders - None

Item 5. Other information

a)

        On July 10, 2006, Dr. Edward R. Casas was appointed as an independent director of the Companys Board of Directors. At such time, Dr. Casas also was appointed as a member of the Executive Committee, Nominating and Corporate Governance Committee, the Compensation Committee and Affiliate Transaction Committee of the Board of Directors. There are no arrangements or understandings between Dr. Casas and any other person pursuant to which Dr. Casas was appointed as a director, and neither Dr. Casas nor any member of his immediate family has or had, since the beginning of the Companys last fiscal year, a material interest in any transaction or proposed transaction with the Company.


b)

        On August 3, 2006, the Company, the Operating Partnership, SL Green Realty Corp. (Parent), Wyoming Acquisition Corp. (Purchaser), Wyoming Acquisition GP LLC and Wyoming Acquisition Partnership LP entered into an Agreement and Plan of Merger (the Merger Agreement). Under the terms of the Merger Agreement, the Company will merge with and into Purchaser (the Merger), with Purchaser continuing after the Merger as the surviving entity. At the effective time of the Merger, each of the  issued and outstanding shares of common stock of the Company will be converted into the right to receive (i) $31.68 in cash, and (ii) 0.10387 of a share of the common stock, par value $0.01 per share, of Parent (the Merger Consideration).


In addition, under the terms of the Merger Agreement, Wyoming Acquisition LP will merge with and into the Operating Partnership (the Partnership Merger), with the Operating Partnership continuing after the Partnership Merger as the surviving entity. At the effective time of the Partnership Merger, each common unit in the Operating Partnership will be converted into the right to receive the applicable amount of Merger Consideration, in respect of the number of shares of Reckson common stock issuable upon exchange of each such common unit in accordance with the Amended and Restated Agreement of Limited Partnership of the Operating Partnership as if such common units were converted or exchanged for an equal number of Reckson common shares immediately prior to the effective time of the Merger.

At the effective time of the Merger, any options which have not been exercised will be cancelled and holders will be paid the Merger Consideration in respect of such options; the exercise price of the options will first be deducted from the cash consideration and then second from the stock consideration, if necessary. All outstanding options are currently vested. Restricted stock, whether or not vested,  will be converted into the right to receive the Merger Consideration as if such restricted stock had vested immediately prior to the effective time of the Merger. Restricted stock units, whether or not vested, and LTIP Units, whether or not vested, (other than certain LTIP Units held by Messrs. Rechler, Maturo and Barnett, the vesting and payment rights to which they are waiving pursuant to the Amendments described below)  will be converted into the right to receive the
Merger Consideration (on a one-for-one basis).

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The Company has agreed to certain covenants, including, among others, subject to certain exceptions described in the Merger Agreement, an obligation not to initiate, solicit, encourage or facilitate (including by way of furnishing nonpublic information or assistance) any inquiries or the making of any proposal or other action that constitutes or may reasonably be expected to lead to any competing transaction (as defined in the Merger Agreement) or enter into discussions or negotiate with any person in furtherance of such inquiries or to obtain a competing transaction. Prior to the closing, the Company has agreed to operate its business in the ordinary course consistent with past practice and not to take certain actions specified in the Merger Agreement. The Company will be permitted to pay its regular quarterly dividends through the consummation of the Merger.

Consummation of the Merger is subject to customary conditions, including the approval of the Merger by the holders of the Companys common stock, the registration of SL Greens shares of common stock to be issued in the Merger, the listing of such shares on the New York Stock Exchange and the absence of any order, injunction or legal restraint or prohibition preventing the consummation of the Merger. In addition, each partys obligation to consummate the Merger is subject to certain other conditions, including (i) the accuracy of the representations and warranties of the other party (subject to the materiality standards contained in the Merger Agreement), (ii) compliance in all material respects of the other party with its covenants, (iii) the absence of a material adverse effect (as defined in the Merger Agreement) on the other party and (iv) the delivery of
opinions with respect to each others status as a real estate investment trust.

The Merger Agreement contains certain termination rights for both the Company and SL Green and provides that, upon termination of the Merger Agreement under specified circumstances described in the Merger Agreement, the Company would be required to pay SL Green a termination fee of $99.8 million, and/or that the Company would be required to reimburse SL Green for its out-of-pocket costs and expenses up to $13.0 million.

The Merger Agreement contains representations and warranties that the parties have made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract between the parties, and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating its terms. Moreover, the representations and warranties are subject to a contractual standard of materiality that may be different from what may be viewed as material to shareholders, and the representations and warranties may have been intended not as statements of fact, but rather as a way of allocating risk among the parties.

In connection with the Merger Agreement, Scott Rechler, Michael Maturo, and Jason Barnett each entered into an Agreement to Amend their existing Employment and Noncompetition Agreement and Severance Agreement (the Amendments). Pursuant to the Amendments, each executive agreed to: (1) reduce the period of time he will be entitled to receive severance following a termination of employment in connection with a change in control from five years to three years, and to cap the cash severance he is entitled to receive under his existing severance agreement, (2) waive all rights to vesting and payment of certain outstanding long-term incentive awards, (3) further reduce the payments and benefits he is otherwise entitled to receive in connection with a change in control if the total amount of payments and benefits exceed his safe harbor amount under the Internal
Revenue Codes so-called golden parachute rules by 5% or less so that the total change in control-related payments and benefits paid or provided to him will not exceed his safe harbor amount, and (4) not compete with the Company in the acquisition, operation or management of any office real estate property in any of the submarkets in the borough of Manhattan, New York for the period commencing on August 3, 2006 through the earlier of August 3, 2007 or the six-month anniversary of the closing.  The parties also agreed to extend the terms of their existing Employment and Noncompetition Agreements and Severance Agreements through April 30, 2007. In addition, the Company agreed to assign certain existing split-dollar life insurance policies to the executives at their request in connection with a change in control of the Company.

c)

        There have been no material changes to the procedures by which stockholders may recommend nominees to the Companys Board of Directors.


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Item 6. Exhibits

Exhibits

2.1

        Agreement and Plan of Merger dated as of August 3, 2006 by and among SL Green Realty Corp., others, the Company and the Operating Partnership.


10.1

        Indemnification Agreement, dated July 10, 2006, between the Company and Edward R. Casas.


10.2

        Agreement to Amend Employment and Non-competition Agreement and Severance Agreement by and between Scott Rechler and the Company dated August 3, 2006.


10.3

        Agreement to Amend Employment and Non-competition Agreement and Severance Agreement by and between Michael Maturo and the Company dated August 3, 2006.


10.4

        Agreement to Amend Employment and Non-competition Agreement and Severance Agreement by and between Jason Barnett and the Company dated August 3, 2006.


31.1

        Certification of Scott H. Rechler, Chairman of the Board, Chief Executive Officer and Director of the Company, the sole general partner of the Registrant, pursuant to Rule 13a  14(a) or Rule 15(d)  14(a).


31.2

        Certification of Michael Maturo, President, Treasurer, Chief Financial Officer and Director of the Company, the sole general partner of the Registrant, pursuant to Rule 13a  14(a) or Rule 15(d)  14(a).


32.1

        Certification of Scott H. Rechler, Chairman of the Board, Chief Executive Officer and Director of the Company, the sole general partner of the Registrant, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.


32.2

        Certification
    of Michael Maturo, President, Treasurer, Chief Financial Officer and Director
    of the Company, the sole general partner of the Registrant, pursuant to Section
    1350 of Chapter 63 of Title 18 of the United States Code.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

RECKSON
  OPERATING PARTNERSHIP, L.P.



By:

        /s/ Scott H. Rechler

        

        By:

        /s/ Michael MaturoScott H. RechlerChairman of the Board, ChiefExecutive Officer and Director of Reckson AssociatesRealty Corp., the sole general partner of the Registrant

        

        

        Michael MaturoPresident, Treasurer, Chief Financial Officerand Director of Reckson Associates Realty Corp.,the sole general partner of the Registrant


DATE:August 14, 2006

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