Table of Contents


UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


_________________________________________________________________________


Form 10-Q


_________________________________________________________________________


xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2011oroTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from                     toCommission file number 0-50854


________________________________________________________________________


Thomas Properties Group, Inc.


(Exact name of registrant as specified in its charter)


_________________________________________________________________________


Delaware20-0852352(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification Number)515 South Flower Street, Sixth Floor,Los Angeles, CA90071(Address of principal executive offices)(Zip Code)


(213) 613-1900


Registrant’s telephone number, including area code





____________________________________________________________


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








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





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o No o





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


Large accelerated fileroAccelerated filerxNon-accelerated filero(Do not check if a smaller reporting company)Smaller reporting companyo


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





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


ClassOutstanding at May 9, 2011Common Stock, $.01 par value per share37,094,995





---

Table of Contents


THOMAS PROPERTIES GROUP, INC.


FORM 10-Q


FOR THE QUARTER ENDED MARCH 31, 2011


TABLE OF CONTENTS


Page No.PART I.FINANCIAL INFORMATIONITEM 1.Consolidated Financial Statements of Thomas Properties Group Inc. and SubsidiariesConsolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010 (audited)3Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (unaudited)4Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)5Notes to Consolidated Financial Statements (unaudited)6ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations23ITEM 3.Quantitative and Qualitative Disclosures About Market Risk33ITEM 4.Controls and Procedures34PART II.OTHER INFORMATIONITEM 1A.Risk Factors35ITEM 6.Exhibits46SIGNATURES47





2


---

Table of Contents


PART I. FINANCIAL INFORMATION


ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS


THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)


March 31, 2011December 31, 2010ASSETS(unaudited)(audited)Investments in real estate:Operating properties, net of accumulated depreciation of $107,635 and $105,271as of March 31, 2011 and  December 31, 2010, respectively$265,484$266,859Land improvements—development properties96,58096,585362,064363,444Condominium units held for sale49,54149,827Improved land held for sale2,8232,819Investments in unconsolidated real estate entities16,32217,975Cash and cash equivalents, unrestricted39,60242,363Restricted cash8,41413,069Rents and other receivables, net2,0141,754Receivables from unconsolidated real estate entities2,2862,979Deferred rents14,85514,592Deferred leasing costs, net11,77212,127Deferred loan costs, net1,2101,411Other assets, net22,49917,875Total assets$533,402$540,235LIABILITIES AND EQUITYLiabilities:Mortgage loans$254,190$254,612Other secured loans46,19745,924Accounts payable and other liabilities, net25,19929,020Prepaid rent and deferred revenue3,4882,888Total liabilities329,074332,444Commitments and Contingencies——Equity:Stockholders’ equity:Preferred stock, $.01 par value, 25,000,000 shares authorized, noneissued or outstanding as of March 31, 2011 and December 31, 2010——Common stock, $.01 par value, 225,000,000 shares authorized, 37,094,995and 36,943,394 shares issued and outstanding as of March 31, 2011and December 31, 2010, respectively371369Limited voting stock, $.01 par value, 20,000,000 shares authorized,12,313,331shares issued and outstanding as of March 31, 2011 and December 31, 2010123123Additional paid-in capital208,220207,953Retained deficit and dividends, including $13 and $2 of other comprehensiveincome (loss) as of March 31, 2011 and December 31, 2010, respectively(64,064)(60,790)Total stockholders’ equity144,650147,655Noncontrolling interests:Unitholders in the Operating Partnership50,49651,478Partners in consolidated real estate entities9,1828,658Total noncontrolling interests59,67860,136Total equity204,328207,791Total liabilities and equity$533,402$540,235


See accompanying notes to consolidated financial information.


3


---

Table of Contents


THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except share and per share data)


(Unaudited)





Three months ended March 31,20112010Revenues:Rental$7,312$7,248Tenant reimbursements6,3295,039Parking and other8021,004Investment advisory, management, leasing anddevelopment services8111,983Investment advisory, management, leasing anddevelopment services — unconsolidated real estateentities4,6613,504Reimbursement of property personnel costs1,5321,412Condominium sales4804,153Total revenues21,92724,343Expenses:Property operating and maintenance6,5876,252Real estate and other taxes1,8871,761Investment advisory, management, leasing anddevelopment services3,0292,359Reimbursable property personnel costs1,5321,412Cost of condominium sales3343,018Interest4,6644,809Depreciation and amortization3,3933,470General and administrative3,9303,675Total expenses25,35626,756Interest income139Equity in net loss of unconsolidated real estate entities(694)(840)Loss before provision for income taxesand noncontrolling interests(4,110)(3,244)Provision for income taxes(96)(159)Net loss(4,206)(3,403)Noncontrolling interests’ share of net loss:Unitholders in the Operating Partnership1,0761,026Partners in consolidated real estate entities(155)(44)921982TPGI share of net loss$(3,285)$(2,421)Loss per share-basic$(0.09)$(0.08)Loss per share-diluted$(0.09)$(0.08)Weighted average common shares outstanding—basic36,534,50530,436,364Weighted average common shares outstanding—diluted36,534,50530,436,364


See accompanying notes to consolidated financial information.





4


---

Table of Contents


THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)Three months ended March 31,20112010Cash flows from operating activities:Net loss$(4,206)$(3,403)Adjustments to reconcile net loss to net cash used in operating activities:Gain on sale of condominiums(146)(1,135)Equity in net loss of unconsolidated real estate entities694840Deferred rents(63)(540)Deferred income taxes50109Depreciation and amortization expense3,3933,470Allowance for doubtful accounts11964Amortization of loan costs202255Amortization of above and below market leases, net21Non-cash amortization of share-based compensation361508Distributions from operations of unconsolidated real estate entities—800Changes in operating assets and liabilities:Rents and other receivables(383)(86)Receivables from unconsolidated real estate entities692(249)Deferred leasing and loan costs(202)(721)Other assets(4,818)(3,341)Deferred interest payable231245Accounts payable and other liabilities(3,900)(1,081)Prepaid rent and deferred revenue60593Net cash used in operating activities:(7,369)(4,171)Cash flows from investing activities:Expenditures for improvements to real estate(1,503)(2,259)Proceeds from sale of condominiums4323,917Return of capital from unconsolidated real estate entities968782Contributions to unconsolidated real estate entities—(813)Net cash (used in) provided by investing activities(103)1,627Cash flows from financing activities:Noncontrolling interest expense reimbursements370—Principal payments of mortgage and other secured loans(848)(6,210)Costs of prior period equity offering—(23)Proceeds from mortgage and other secured loans468242Change in restricted cash4,7214,817Net cash provided by (used in) financing activities4,711(1,174)Net decrease in cash and cash equivalents(2,761)(3,718)Cash and cash equivalents at beginning of period42,36335,935Cash and cash equivalents at end of period$39,602$32,217Supplemental disclosure of cash flow information:Cash paid for interest, net of capitalized interest of $0 and $110, for the three months   ended March 31, 2011 and 2010, respectively$4,239$4,284Supplemental disclosure of non-cash investing and financing activities:Investments in real estate included in accounts payable and other liabilities(983)(878)Decrease in investments in real estate and accumulated depreciation for removal of fully   amortized improvements273315Decrease in leasing costs and accumulated amortization for removal of fully   amortized leasing costs139—Reclassification of noncontrolling interest for limited partnership units in the Operating   Partnership from additional paid in capital—(288)Other comprehensive income1111





See accompanying notes to consolidated financial information.


5


---

Table of Contents
 
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION (unaudited)
 FOR THE THREE MONTHS ENDED MARCH 31, 2011
 (Tabular amounts in thousands, except share and per share amounts)





1.     Organization and Description of Business





The terms “Thomas Properties”, “us”, “we”, “our” and "the Company" as used in this report refer to Thomas Properties Group, Inc. ("TPGI") together with our Operating Partnership, Thomas Properties Group, L.P. (the “Operating Company” or "TPG").





We own, manage, lease, acquire and develop real estate, consisting primarily of office properties and related parking garages, located in Southern California; Sacramento, California; Philadelphia, Pennsylvania; Northern Virginia; Houston, Texas and Austin, Texas.





We were incorporated in the State of Delaware on March 9, 2004. On October 13, 2004, we completed our initial public offering (the “Offering”). Our operations are carried on through our Operating Partnership of which we are the sole general partner. The Operating Partnership holds our direct and indirect interest in real estate properties, and it carries on our investment advisory, property management, leasing and real estate development operations. Mr. James A. Thomas, our Chairman, Chief Executive Officer and President, and affiliates of Mr. Thomas hold limited partnership units in the Operating Partnership.  As of March 31, 2011 , we held a 74.7% interest in the Operating Partnership which we consolidate, as we have control over the major decisions of the Operating Partnership.





As of March 31, 2011 , we were invested in the following real estat


6


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


e properties: PropertyTypeLocationConsolidated properties:One Commerce SquareHigh-rise officePhiladelphia Central Business District, Pennsylvania (“PCBD”)Two Commerce SquareHigh-rise officePCBDMuranoResidential condominiums held for salePCBD2100 JFK BoulevardUndeveloped land;Residential/Office/RetailPCBDFour Points CentreSuburban office; Undeveloped land; Office/Retail/Research and Development/HotelAustin, TexasCampus El SegundoDevelopable land and land held for sale; Site infrastructure complete; Office/Retail/ Research and Development/HotelEl Segundo, CaliforniaMetro Studio@LankershimEntitlements and pre-development in progress; Office/Studio/Production/RetailLos Angeles, CaliforniaProperty table continued on next page.
 PropertyTypeLocationUnconsolidated properties:2121 Market StreetResidential and retailPCBDTPG/CalSTRS, LLC (“TPG/CalSTRS”):City National PlazaHigh-rise officeLos Angeles Central Business District, CaliforniaReflections ISuburban officeReston, VirginiaReflections IISuburban office—single tenancyReston, VirginiaFour Falls Corporate Center (1)Suburban officeConshohocken, PennsylvaniaOak Hill Plaza (1)Suburban officeKing of Prussia, PennsylvaniaWalnut Hill Plaza (1)Suburban officeKing of Prussia, PennsylvaniaSan Felipe PlazaHigh-rise officeHouston, Texas2500 City WestSuburban officeHouston, TexasBrookhollow Central I-IIISuburban officeHouston, TexasCityWestPlaceSuburban office and undeveloped landHouston, TexasCenterpointe I & IISuburban officeFairfax, VirginiaFair Oaks PlazaSuburban officeFairfax, VirginiaTPG-Austin Portfolio Syndication Partners JV, LP (“Austin Portfolio Joint Venture”):San Jacinto CenterHigh-rise officeAustin Central Business District, Texas, (“ACBD”)Frost Bank TowerHigh-rise officeACBDOne Congress PlazaHigh-rise officeACBDOne American CenterHigh-rise officeACBD300 West 6th StreetHigh-rise officeACBDResearch Park Plaza I & IISuburban OfficeAustin, TexasPark CentreSuburban OfficeAustin, TexasGreat Hills PlazaSuburban OfficeAustin, TexasStonebridge Plaza IISuburban OfficeAustin, TexasWestech 360 I-IVSuburban OfficeAustin, Texas


_________________________


|    |                                                             
|--- | ------------------------------------------------------------
|(1) | Properties with loans subject to special servicer oversight.




2.     Summary of Significant Accounting Policies


Interim Financial Data


The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2011 . The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 .





The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions. These estimates and assumptions are subjective and affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.


7


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)





Principles of Consolidation and Combination





The accompanying consolidated financial statements of our company include all the accounts of Thomas Properties Group, Inc., the Operating Partnership and the subsidiaries of the Operating Partnership.





The real estate entities included in the consolidated financial statements have been consolidated only for the periods that such entities were under control by us, whereby we had the power to direct major decisions, or in which we were considered to be the primary beneficiary of an entity that we determined to be a variable interest entity. The equity method of accounting is utilized to account for investments in real estate entities over which we have significant influence, but not control over major decisions, including the decision to sell or refinance the properties owned by such entities. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.





The 25% preferred equity interests in One Commerce Square and Two Commerce Square (beginning December 2010),  owned by Brandywine Operating Partnership LP ("Brandywine") are reflected under the "Noncontrolling Interests" caption on our consolidated balance sheet. Our interest in these two partnerships is a variable interest, which we consolidate because we are considered to be the primary beneficiary.





We consolidate our Murano residential condominium project.  Our unaffiliated partner's interest is reflected in our consolidated balance sheets under the "Noncontrolling Interests" caption.  After full repayment of the Murano construction loan, which has a balance of $21.8 million at March 31, 2011 , net proceeds from the project will be distributed, to the extent available, as follows:


|   |                                                                                                                                                      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|i. | First, to the Company as repayment of our first priority capital and a return on such capital, which has a balance of$8.6 millionas ofMarch 31, 2011;

|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ii. | Second, to the Company and our partner equally for repayment of second priority capital and a return on such capital. The Company's share of this tranche is$1.3 millionas ofMarch 31, 2011;

|     |                                                                                     
|---- | ------------------------------------------------------------------------------------
|iii. | Third, the next$3.0 millionto be split equally between the Company  and our partner;

|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|iv. | Fourth, to the Company for repayment of our original preferred equity contribution and a return on such capital, which has a balance of$31.4 millionas ofMarch 31, 2011;

|   |                                                                                         
|-- | ----------------------------------------------------------------------------------------
|v. | Fifth, the next$3.0 millionto be split equally between the Company  and our partner; and

|    |                                                                                               
|--- | ----------------------------------------------------------------------------------------------
|vi. | Any residual amounts will be allocated to the Company and our partner73%and 27%, respectively.




We are the general partner and hold an interest in the Thomas High Performance Green Fund, L.P. ("Green Fund"); the interests not owned by us are reflected in our consolidated balance sheets under the "Noncontrolling Interests" caption. As of March 31, 2011 , the Green Fund did not own any real estate assets.








Impairment of Long-Lived Assets





We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.





Assets held for sale are reported at the lower of the carrying amount or fair value, less costs to sell. We record the Murano condominium units at the lower of cost or estimated fair value as the condominium units meet the held for sale criteria of FASB ASC 360, “Property, Plant, and Equipment.”





We use the equity method of accounting to account for investments in real estate entities over which we have significant influence, but not control over major decisions. In these situations, the unit of account for measurement purposes is the equity investment and not the real estate. Accordingly, if our joint venture investments meet the other-than-temporary criteria of FASB ASC 323, “Investments—Equity Method and Joint Ventures”, we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of our investment.





We are selectively considering certain wholly-owned land assets and certain joint venture assets (both operating properties


8


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


and land) for disposition in 2011, in an effort to redeploy sales proceeds and expand our wholly-owned asset base through acquisitions of operating properties. If any of these assets under consideration meet the held for sale criteria in a later period, we will report the asset at the lower of carrying amount or estimated fair value, which could result in a write down of the asset or our joint venture investment.





We did not record an impairment for any long-lived assets during the three months ended March 31, 2011.





Development Activities


Project costs associated with the development and construction of a real estate project are capitalized on our balance sheet. In addition, interest, loan fees, real estate taxes, and general and administrative expenses that are directly associated with and incremental to our development activities and other costs are capitalized during the period in which activities necessary to get the property ready for its intended use are in progress, including the pre-development and lease-up phases. Once the development and construction of the building shell of a real estate project is completed, the costs capitalized to construction in progress are transferred to operating properties; in the case of Murano, the costs capitalized are transferred to condominium units held for sale. Cumulative capitalized interest as of March 31, 2011 and December 31, 2010 , is $18.7 million and $18.8 million , respectively. There was no interest capitalized for the three months ended March 31, 2011 .





Revenue Recognition - Condominium Sales





We have one high-rise condominium project for which we use the deposit method of accounting to recognize sales revenue and costs. Under the provisions of FASB ASC 360-20, “Property, Plant and Equipment” subsection “Real Estate and Sales”, revenue and costs for projects are recognized when all parties are bound by the terms of the contract, all consideration has been exchanged, any permanent financing for which the seller is responsible has been arranged and all conditions precedent to closing have been performed. This results in profit from the sale of condominium units recognized at the point of settlement as compared to the point of sale. Revenue is recognized on the contract price of individual units. Total estimated costs, net of impairment charges, are allocated to individual units which have closed on a relative value basis. Total estimated revenue and construction costs are reviewed periodically, and any change is applied to current and future periods.





Forfeited customer deposits are recognized as revenue in the period in which we determine that the customer will not complete the purchase of the condominium unit and when we determine that we have the right to keep the deposit. There were no forfeitures in the three months ended March 31, 2011 and 2010 .





Earnings (loss) Per Share


The computation of basic income (loss) per share is based on net income (loss) and the weighted average number of shares of our common stock outstanding during the period. The computation of diluted income (loss) per share includes the assumed exercise of outstanding stock options and the effect of the vesting of restricted stock and incentive units that have been granted to employees in connection with stock based compensation, all calculated using the treasury stock method. In accordance with FASB ASC 260-10-45, “Earnings Per Share”, the Company's unvested restricted stock and unvested incentive units are considered to be participating securities and are included in the computation of earnings per share to calculate a two class earnings per share. We only present the earnings per share attributable to the common shareholders. See Note 5 - Income (Loss) Per Share and Dividends Declared.





Recent Accounting Pronouncements





Changes to U.S. generally accepted accounting principles (“GAAP”) are established by the FASB in the form of accounting standards updates (ASUs) to the FASB's Accounting Standards Codification. We consider the applicability and impact of all ASUs. Newly issued ASUs not listed below are expected to have no impact on our consolidated financial position and results of operations, because either the ASU is not applicable or the impact is expected to be immaterial.





In December 2010, the FASB issued ASU No. 2010-29, "Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations." This guidance clarifies that the disclosure of supplementary proforma information for business combinations should be presented such that revenues and earnings of the combined entity are calculated as though the relevant business combinations that occurred during the current reporting period had occurred as of the beginning of the comparable prior annual reporting period. The guidance also improves the usefulness of the supplementary proforma information by requiring a description of the nature and amount of material, non-recurring


9


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


proforma adjustments that are directly attributable to the business combinations. The adoption of this ASU did not have a material impact on our financial position or results of operations as the Company had no business combinations during the applicable periods.


Subsequent Events


We have evaluated subsequent events through the date of this report, which is concurrent with the date we filed this report with the SEC. We had no subsequent events requiring disclosure.





Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


3.     Unconsolidated Real Estate Entities





The unconsolidated real estate entities include our share of the entities that own 2121 Market Street, the TPG/CalSTRS properties and the Austin Portfolio Joint Venture properties. TPG/CalSTRS owns the following properties:


|  |                                            
|- | -------------------------------------------
|• | City National Plaza (acquired January 2003)

|  |                                      
|- | -------------------------------------
|• | Reflections I (acquired October 2004)

|  |                                       
|- | --------------------------------------
|• | Reflections II (acquired October 2004)

|  |                                                      
|- | -----------------------------------------------------
|• | Four Falls Corporate Center (acquired March 2005) (1)

|  |                                         
|- | ----------------------------------------
|• | Oak Hill Plaza (acquired March 2005) (1)

|  |                                            
|- | -------------------------------------------
|• | Walnut Hill Plaza (acquired March 2005) (1)

|  |                                        
|- | ---------------------------------------
|• | San Felipe Plaza (acquired August 2005)

|  |                                      
|- | -------------------------------------
|• | 2500 City West (acquired August 2005)

|  |                                                         
|- | --------------------------------------------------------
|• | Brookhollow Central I, II and III (acquired August 2005)

|  |                                            
|- | -------------------------------------------
|• | CityWestPlace land (acquired December 2005)

|  |                                   
|- | ----------------------------------
|• | CityWestPlace (acquired June 2006)

|  |                                              
|- | ---------------------------------------------
|• | Centerpointe I and II (acquired January 2007)

|  |                                        
|- | ---------------------------------------
|• | Fair Oaks Plaza (acquired January 2007)




(1) Properties with loans subject to special servicer oversight.





The following investment entity that held a mortgage loan receivable related to Brookhollow Central was accounted for using the equity method of accounting. The note receivable held by this subsidiary was paid off during the quarter ended September 30, 2010, and this entity was dissolved during the year ended December 31, 2010:


|  |                                               
|- | ----------------------------------------------
|• | BH Note B Lender, LLC (formed in October 2008)

TPG/CalSTRS also owns a 25% interest in the Austin Portfolio Joint Venture which owns the following properties that were acquired in June 2007:


|  |                   
|- | ------------------
|• | San Jacinto Center

|  |                 
|- | ----------------
|• | Frost Bank Tower

|  |                   
|- | ------------------
|• | One Congress Plaza

|  |                    
|- | -------------------
|• | One American Center

|  |                    
|- | -------------------
|• | 300 West 6th Street

|  |                           
|- | --------------------------
|• | Research Park Plaza I & II

|  |            
|- | -----------
|• | Park Centre

|  |                  
|- | -----------------
|• | Great Hills Plaza

|  |                     
|- | --------------------
|• | Stonebridge Plaza II

|  |                 
|- | ----------------
|• | Westech 360 I-IV




Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements. Following are the stated ownership percentages, prior to any preferred or special allocations, as of March 31, 2011 .





10


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


2121 Market Street50.00%TPG/CalSTRS:Austin Portfolio Joint Venture Properties6.25%City National Plaza7.94%All properties, excluding Austin Portfolio Joint Venture and City National Plaza (1)25.00%(1) With respect to Centerpointe I and II, TPG has a 5% interest in the preferred equity and a 25% interest in the residual equity.





Investments in unconsolidated real estate entities as of March 31, 2011 and December 31, 2010 are as follows (in thousands):


March 31, 2011December 31, 2010TPG/CalSTRS$8,418$9,564Austin Portfolio Joint Venture10,13510,726Subtotal - TPG/CalSTRS and Austin Portfolio Joint Venture18,55320,2902121 Market Street and Harris Building Associates(2,231)(2,315)$16,322$17,975





The following is a summary of the investments in unconsolidated real estate entities for the three months ended March 31, 2011 (in thousands):





Investment balance, December 31, 2010$17,975Contributions—Other comprehensive income13Equity in net loss of unconsolidated real estate entities(694)Distributions(968)Other(4)Investment balance, March 31, 2011$16,322





TPG/CalSTRS was formed to acquire office properties on a nationwide basis classified as moderate risk (core plus) and high risk (value add) properties. Core plus properties consist of under-performing properties that we believe can be brought to market potential through improved management. Value-add properties are characterized by unstable net operating income for an extended period of time, occupancy less than 90% and/or physical or management problems which we believe can be positively impacted by introduction of new capital and/or management. We are required to use diligent efforts to sell each joint venture property within five years of that property reaching stabilization, except for certain stabilized properties, as to which we are required to perform a hold/sell analysis at least annually and make a recommendation to the TPG/CalSTRS’ management committee regarding the appropriate holding period.





The total capital commitment to the joint venture was $511.7 million as of March 31, 2011 , of which approximately $24.9 million and $13.9 million was unfunded by CalSTRS and us, respectively.


A buy-sell provision may be exercised by either CalSTRS or us. Under this provision, the initiating party sets a price for its interest in the joint venture, and the other party has a specified time to elect to either buy the initiating party's interest or to sell its own interest to the initiating party. Upon the occurrence of certain events, CalSTRS also has a buy-out option to purchase our interest in the joint venture. The buyout price is based upon a 3% discount to the appraised fair market value.


During the second quarter of 2009, TPG/CalSTRS redeemed a 15% membership interest held by a noncontrolling owner in the City National Plaza (“CNP”) partnership. The redemption price of $19.8 million was financed with a promissory note issued by the former partner and due in July 2012.


During the first quarter of 2010, CalSTRS, our partner in CNP, acquired all of the property's mezzanine debt. On July 6, 2010, CalSTRS contributed this debt to the equity in TPG/CalSTRS, reducing the leverage on CNP by the full $219.1 million balance on the mezzanine loans. Solely with respect to the interest of TPG/CalSTRS in CNP, CalSTRS' percentage interest


11


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


increased from 75.0% to 92.1% and TPG's percentage interest decreased from 25.0% to 7.9%. We are in discussions with CalSTRS to obtain an option to participate in up to an additional 17.1% interest in CNP through TPG/CalSTRS. On July 6, 2010, a subsidiary of TPG/CalSTRS that owns CNP entered into a new non-recourse first mortgage loan in the amount of $350.0 million. The loan bears interest at a fixed rate of 5.9% and is for a term of ten years, to mature on July 1, 2020.





On October 19, 2010, TPG/CalSTRS invested $40.0 million as new equity in our Centerpointe partnership, which was used to retire $46.6 million of mezzanine debt, realizing a 14.2% discount from the face amount of the debt which included releasing loan reserves of approximately $11.7 million held by the lenders to TPG/CalSTRS to use for capital needs at the property. This new equity, of which the Company contributed $2.0 million or 5%, is treated as preferred equity with a priority on distributions of available project cash and capital proceeds. Prior to February 9, 2012, we have the right to increase our interest percentage in the preferred equity to 25%, and commensurately reduce CalSTRS' interest percentage in preferred equity to 75%, by contributing to the Centerpointe partnership an amount equal to 20% of the face amount of the retired debt, equal to approximately $9.3 million. After February 9, 2012, the Company may be required, at the election of CalSTRS, to increase its interest in the preferred equity to 25%, and commensurately reduce CalSTRS' interest to 75%, by contributing an amount equal to approximately $9.3 million. The contribution to increase our interest percentage would be distributed to CalSTRS.


In connection with the provisions of ASC 810, TPG/CalSTRS and the Austin Portfolio Joint Venture are deemed to be variable interest entities for which we are not considered to be the primary beneficiary. In connection with the TPG/CalSTRS joint venture, CalSTRS and TPG acting together are considered to have the power to direct the activities of the joint venture that most significantly impact the joint venture economic performance and therefore neither TPG nor CalSTRS is considered to be the primary beneficiary. We determined the key activities that drive the economic performance of the joint venture to be (1) the acquisition and development of real estate (including capital improvements), (2) financing, and (3) leasing. In connection with these key activities, the TPG/CalSTRS venture agreement requires unanimous approval by the two members.


In connection with the Austin Portfolio Joint Venture, TPG/CalSTRS is not considered to be the primary beneficiary due to the fact that the power to direct the activities of the joint venture is shared among multiple unrelated parties such that no one party has the power to direct the activities of the joint venture that most significantly impact the joint venture's economic performance. In connection with the Austin Portfolio Joint Venture, we determined the key activities that drive the economic performance of the joint venture to be (1) the acquisition and development of real estate (including capital improvements), (2) financing, and (3) leasing. In connection with these key activities, the Austin Portfolio Joint Venture partnership agreement requires either unanimous or majority approval of decisions by the respective partners. We therefore determined the power to direct the activities to be shared amongst the partners so that no one partner has the power to direct the activities that most significantly impact the partnership's economic performance. As of March 31, 2011 , our total maximum exposure to loss to TPG/CalSTRS and the Austin Portfolio Joint Venture is:


(1)    Our equity investment in the various properties controlled by TPG/CalSTRS and the Austin Portfolio Joint Venture as of March 31, 2011 , which was $18.6 million , as presented earlier in this note.


(2)    The potential loss of future fee revenues which we earn in connection with the management and leasing agreements with the various properties controlled by the respective joint ventures. We earn fee revenues in connection with those management and leasing agreements for services such as property management, leasing, asset management and property development. The management and leasing agreements with the various properties generally expire on an annual basis and are automatically renewed for successive periods of one year each, unless we elect not to renew the agreements. As of March 31, 2011 , we had total receivables of $1.5 million and $0.7 million related to TPG/CalSTRS and the Austin Portfolio Joint Venture, respectively.


(3)    The unfunded capital commitment to the TPG/CalSTRS joint venture was $13.9 million as of March 31, 2011 . There were no unfunded capital commitments to the Austin Portfolio Joint Venture as of March 31, 2011 , however, TPG has committed to advance funds to the Austin Portfolio Joint Venture under a senior secured priority credit facility established and funded on a pro rata basis by all of the Austin Portfolio Joint Venture partners, of which our unfunded share is $ 0.5 million . As of March 31, 2011 , approximately $ 51.5 million of the priority credit facility has been advanced by the partners, of which the Company has advanced $ 3.2 million . The funds advanced under the priority credit facility have a first priority mortgage lien on three of the Austin buildings and a first priority right to payment on a pledge of the equity interests in the other seven Austin buildings owned by the Austin Partnership.


On March 6, 2010, an aggregate of $96.5 million in mortgage loans owed by subsidiaries of TPG/CalSTRS (the “borrowers”) on unconsolidated properties at Four Falls Corporate Center, Oak Hill Plaza, and Walnut Hill Plaza matured and became due in full. The borrowers under these loans elected not to make payment on these loans and they are currently in


12


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


default. These loans are non-recourse to the borrowers and the Company, both of which do not anticipate making any payments or equity contributions to support the repayment or refinancing of these loans. The borrowers are currently in discussions with the special servicer regarding a cooperative resolution including the likely appointment of a receiver and the judicial transfer of the properties. We do not believe that the loss of our equity interests, if any, in these properties or our fee revenue from these properties will have a material effect on our business or results of operations.  For the three months ended March 31, 2011 , we recognized property management fees from these properties of $0.4 million .





Following is summarized financial information for the unconsolidated real estate entities as of March 31, 2011 and December 31, 2010 and for the three months ended March 31, 2011 and 2010 (in thousands):





Summarized Balance Sheets





March 31, 2011December 31, 2010(unaudited)ASSETSInvestments in real estate, net$2,156,265$2,169,185Receivables including deferred rents, net108,492103,618Deferred leasing and loan costs, net133,176134,889Other assets85,70395,477Total assets$2,483,636$2,503,169LIABILITIES AND OWNERS’ EQUITYMortgage and other secured loans$1,942,515$1,925,798Below market rents, net45,24448,337Accounts payable and other liabilities83,700101,127Total liabilities2,071,4592,075,262Owners’ equity including $65 and $128 of other comprehensive loss as of March 31, 2011and December 31, 2010, respectively412,177427,907Total liabilities and owners’ equity$2,483,636$2,503,169





13


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


Summarized Statements of Operations


(unaudited)


Three months ended March 31,20112010Revenues$79,845$79,024Expenses:Operating and other expenses39,15739,887Interest expense28,34325,060Depreciation and amortization27,16229,096Total expenses94,66294,043Equity in net income of unconsolidated real estate entities—29Net loss$(14,817)$(14,990)Thomas Properties’ share of net loss, prior to intercompany eliminations$(1,415)$(1,696)Intercompany eliminations721856Equity in net loss of unconsolidated real estate entities$(694)$(840)





Included in the preceding summarized balance sheets as of March 31, 2011 and December 31, 2010 , are the following balance sheets of TPG/CalSTRS, LLC (in thousands):





March 31, 2011December 31, 2010(unaudited)(audited)ASSETSInvestments in real estate, net$1,110,919$1,117,889Receivables including deferred rents, net85,99081,785Investments in unconsolidated real estate entities46,67344,087Deferred leasing and loan costs, net80,60180,029Other assets62,43874,312Total assets$1,386,621$1,398,102LIABILITIES AND MEMBERS’ EQUITYMortgage and other secured loans$1,044,151$1,043,692Other liabilities61,17965,254Total liabilities1,105,3301,108,946Members’ equity:Thomas Properties, including $12 and $25 of other comprehensive loss as ofMarch 31, 2011 and December 31, 2010, respectively13,78414,843CalSTRS, including $37 and $77 of other comprehensive loss as of March 31, 2011 andDecember 31, 2010, respectively267,507274,313Total members’ equity281,291289,156Total liabilities and members’ equity$1,386,621$1,398,102





14


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


Following is summarized financial information by real estate entity for the three months ended March 31, 2011 and 2010 (in thousands):


Three months ended March 31, 20112121 MarketStreet and HarrisBuildingAssociatesTPG/CalSTRS,LLCAustinPortfolioPropertiesEliminationsTotalRevenues (1)$1,016$52,156$26,835$(162)$79,845Expenses:Operating and other expenses35126,58112,655(430)39,157Interest expense29115,52512,999(472)28,343Depreciation and amortization22615,35811,578—27,162Total expenses86857,46437,232(902)94,662Income (loss) from continuingoperations148(5,308)(10,397)740(14,817)Equity in net loss of unconsolidated realestate entities—(1,939)—1,939—Net income (loss)$148$(7,247)$(10,397)$2,679$(14,817)Thomas Properties’ share of net income(loss)$74$(839)$(650)$—$(1,415)Intercompany eliminations721Equity in net loss of unconsolidated real estate entities$(694)





Three months ended March 31, 20102121 MarketStreet and HarrisBuildingAssociatesTPG/CalSTRS,LLCAustinPortfolioPropertiesEliminationsTotalRevenues (1)$907$50,753$27,517$(153)$79,024Expenses:Operating and other expenses35526,85913,080(407)39,887Interest expense28812,39912,606(233)25,060Depreciation and amortization23416,01712,845—29,096Total expenses87755,27538,531(640)94,043Income (loss) from continuingoperations30(4,522)(11,014)487(15,019)Equity in net (loss)/income ofunconsolidated real estate entities—(2,389)—2,41829Net income (loss)$30$(6,911)$(11,014)$2,905$(14,990)Thomas Properties’ share of net income(loss)$15$(1,023)$(688)$—$(1,696)Intercompany eliminations856Equity in net loss of unconsolidated real estate entities$(840)


_________________________


(1)    Total includes interest income of $17 and $19 for the three months ended March 31, 2011 , and 2010 , respectively.





15


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


4.     Mortgage and Other Secured Loans





A summary of the outstanding mortgage and other secured loans as of March 31, 2011 and December 31, 2010 is as follows (in thousands). None of these loans are recourse to us, except that we have guaranteed the Campus El Segundo mortgage loan and partially guaranteed the Four Points Centre construction loan, under which our liability is currently limited to a maximum of $11.3 million . In connection with some of the loans listed in the table below, our operating partnership is subject to customary non-recourse carve out obligations.





Outstanding DebtMaturity DateMaturity Dateat End ofExtensionOptionsSecured DebtInterest Rate atMarch 31, 2011As ofMarch 31,             2011As ofDecember 31, 2010One Commerce Square mortgageloan (1)5.67%$129,703$130,0001/6/20161/6/2016Two Commerce Square mortgageloan (2)6.30%107,487107,6125/9/20135/9/2013Campus El Segundo mortgage loan (3)LIBOR + 3.75%17,00017,0007/31/20117/31/2014Four Points Centre constructionloan (4)LIBOR + 3.50%24,38723,6877/31/20127/31/2014Murano construction loan (5)9.50%21,81022,2377/31/20117/31/2012Total secured debt$300,387$300,536


_________________________


|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|(1) | The mortgage loan may be defeased, and is subject to yield maintenance payments for any prepayments prior to October 2015.

|    |                                                                                
|--- | -------------------------------------------------------------------------------
|(2) | The mortgage loan may be defeased, and beginning February 2012, may be prepaid.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | The interest rate as ofMarch 31, 2011was4.1%per annum. The loan  has three one-year extension options, at our election, subject to our compliance with certain covenants, with a final maturity date of July 31, 2014 if all extension options are exercised. The lender has the right to require payment of $2.5 million at the time of each extension.  We have notified the lender of our intent to extend the loan to July 31, 2012.  We have guaranteed 100% of the principal, interest and any other sum payable under this loan. We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance with as ofMarch 31, 2011.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | The loan has two one-year extension options at our election subject to certain conditions.  As ofMarch 31, 2011,$8.3 millionis available to be drawn to fund tenant improvement costs and certain other project costs related to  two office buildings. The interest rate as ofMarch 31, 2011was3.8%per annum. The first option to extend is subject to a 75% loan-to-value ratio and a minimum debt yield, among other things.  The second option to extend is subject to a 75% loan-to-value ratio, executable leases representing at least 90% of the net rentable area, and a minimum debt yield, among other things.  As of May 31, 2011, if the office buildings are not at least 65% leased on terms consistent with the appraisal pro forma, we must pre-fund 18 months of interest into a restricted cash account with the lender; if the buildings are less than 35% leased at that time, we will also have to pay $2.0 million as a principal reduction of the loan.  We are in discussions with the lender to execute a forbearance agreement related to these requirements. We have provided a repayment and completion guaranty up to 46.5% of the balance of the outstanding principal, interest and any other sum payable under this loan, which results in a maximum guarantee of$11.3 millionas ofMarch 31, 2011.  Upon occurrence of certain events, our maximum liability as guarantor will be reduced to 31.5% of all sums payable under this loan, and upon the occurrence of further events, our maximum liability as guarantor will be reduced to 25% of all sums payable under the loan.  We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance with during the three months endedMarch 31, 2011.  We have also provided additional collateral of approximately 62.4 acres of fully entitled unimproved land, which is immediately adjacent to the office buildings.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | This loan is nonrecourse to the Company, but the Company and its development partners jointly and severally guarantee the payment of interest on the loan during the term of the loan.  The interest rate is equal to  the greater of 9.5% or three month LIBOR plus 3.25%. This loan has two six-month extensions options at our election subject to certain conditions and   requires payment of an extension fee equal to 1% of the unpaid principal balance as of July 1, 2011 and January 1, 2012, respectively.  The first six-month extension is also subject to a “loan exposure” measurement whereby the outstanding principal balance of the loan divided by saleable square footage of the units yet to settle shall be no greater than $150 per saleable square foot.  If the loan exposure measurement is not met, then the borrower must make a payment to achieve the

16


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


$150 per saleable square foot requirement to qualify for the extension.  If the rebalancing had been done as of March 31, 2011 , based on the number of units yet to settle as of March 31, 2011 , the loan balance would need to be reduced from $21.8 million to $15.4 million to meet the loan exposure limitation.





The loan agreements for One Commerce Square and Two Commerce Square require that all receipts collected from these properties be deposited in lockbox accounts under the control of the lenders to fund reserves such as capital improvements, taxes, insurance, leasing commissions, debt service and operating expenditures. Included in restricted cash on our consolidated balance sheet at March 31, 2011 , are lockbox, reserve funds and/or security deposits as follows (in thousands):





March 31, 2011One Commerce Square$3,419Two Commerce Square4,814Murano181Restricted cash - consolidated properties$8,414





As of March 31, 2011 , subject to certain extension options exercisable by the Company, principal payments due for the secured outstanding debt are as follows (in thousands):





Amount Due atOriginal MaturityDateAmount Due atMaturity DateAfter Exercise ofExtension Options2011$40,359$1,549201226,54723,9702013108,392108,39220141,88443,27120151,9961,996Thereafter121,209121,209$300,387$300,387








5.     Income (Loss) per Share and Dividends Declared





Basic earnings per share is calculated based on dividends declared on common shares and other participating securities (“distributed earnings”) and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends accruing during the respective period. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding securities. Basic earnings per common share and participating security represent the summation of the distributed and undistributed earnings per common share and participating security divided by the total weighted average number of common shares outstanding and the total weighted average number of participating securities outstanding during the respective years. We only present the earnings per share attributable to the common shareholders.





Net losses, after deducting the dividends to participating securities, are allocated in full to the common shares since the participating security holders do not have an obligation to share in the losses, based on the contractual rights and obligations of the participating securities. Because we incurred losses for the three months ended March 31, 2011 and 2010 , all potentially dilutive instruments are anti-dilutive and have been excluded from our computation of weighted average dilutive shares outstanding.





In December 2009, our board of directors suspended our quarterly dividends to common stockholders. There were no dividends declared for the three months ended March 31, 2011 .





The following is a summary of the elements used in calculating basic and diluted loss per share for the three months ended March 31, 2011 and 2010 (in thousands except share and per share amounts):





17


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


Three months ended March 31,20112010Net loss attributable to common shares$(3,285)$(2,421)Dividends to participating securities——Net loss attributable to common shares, net of dividends to participating securities$(3,285)$(2,421)Weighted average common shares outstanding—basic and diluted36,534,50530,436,364Loss per share—basic and diluted$(0.09)$(0.08)Dividends declared per share$—$—





The following is a summary of elements that were anti-dilutive due to our net loss position and thereby excluded from the calculation of basic and diluted loss per share for the three months ended March 31, 2011 and 2010 :


20112010Nonvested restricted stock units448,000569,000Vested incentive units249,000321,000Nonvested incentive units111,000145,000





Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


6.     Equity





Common Stock and Operating Partnership Units





The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of our common stock vote together as a single class with holders of our limited voting stock on those matters upon which the holders of limited voting stock are entitled to vote. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably any dividends when, if, and as may be declared by the board of directors out of funds legally available for dividend payments.  A Unit and a share of our common stock have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership. A Unit may be redeemed by the holder in exchange for cash or shares of common stock at our election, on a one-for-one basis. As of March 31, 2011 and December 31, 2010 , we held a 74.7% interest in the Operating Partnership.





Issuances of Common Stock





During the year ended December 31, 2010, we sold 4.3 million shares of common stock at prices ranging from $3.67 to $5.03 per share in our “at-the-market” equity offering program. These sales resulted in net proceeds of $15.5 million, which are being used for general corporate purposes.





Limited Voting Stock





Each Operating Partnership unit issued in connection with the formation of our Operating Partnership at the time of our initial public offering in 2004 was paired with one share of limited voting stock. Operating Partnership units issued under other circumstances, including upon the conversion of incentive units granted under the Incentive Plan, are not paired with shares of limited voting stock. These shares of limited voting stock are not transferable separate from the limited partnership units they are paired with, and each Operating Partnership unit is redeemable together with one share of limited voting stock by its holder for cash, or, at our election, one share of our common stock. Each share of limited voting stock entitles its holder to one vote on the election of directors, certain extraordinary transactions, including a merger or sale of our Company, and amendments to our certificate of incorporation. Shares of limited voting stock are not entitled to any regular or special dividend payments or other distributions, including any dividends or other distributions declared or paid with respect to shares of our common stock or any other class or series of our stock, and are not entitled to receive any distributions in the event of liquidation or dissolution of our Company. Shares of limited voting stock have no class voting rights, except to the extent required by Delaware law. Any redemption of a unit in our Operating Partnership will be redeemed together with a share of limited voting stock in accordance with the redemption provisions of the Operating Partnership agreement, and the share of limited voting stock will be canceled and not subject to reissuance.


18


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)





Incentive Partnership Units





We have issued a total of 1,377,714 incentive units as of March 31, 2011 to certain employees. Incentive units represent a profits interest in the Operating Partnership and generally will be treated as regular Units in the Operating Partnership and rank pari passu with the Units as to payment of distributions, including distributions of assets upon liquidation. Incentive units are subject to vesting, forfeiture and additional restrictions on transfer as may be determined by us as general partner of the Operating Partnership. The holder of an incentive unit has the right to convert all or a part of his vested incentive units into Units, but only to the extent of the incentive units’ economic capital account balance. As general partner, we may also cause any number of vested incentive units to be converted into Units to the extent of the incentive units’ economic capital account balance. We had 37,094,995 shares of common stock and 12,313,331 Operating Partnership Units outstanding as of March 31, 2011 , and 359,934 incentive units outstanding which were issued under our Incentive Plan.   The share of the Company owned by the Operating Partnership unit holders is reflected as a separate component called noncontrolling interests in the equity section of our consolidated balance sheets.





Exchange of Noncontrolling Operating Partnership Units





During the year ended December 31, 2010, 1.5 million noncontrolling Operating Partnership Units were redeemed for shares of the Company’s common stock on a one-for-one basis, respectively. Neither the Company nor the Operating Partnership received any proceeds from the issuance of the common stock to the noncontrolling Operating Partnership unitholders.





Stock Compensation





We adopted the 2004 Equity Incentive Plan of Thomas Properties Group, Inc. as amended, (the “Incentive Plan”) effective upon the closing of our initial public offering and amended it in May 2007 and June 2008 to increase the shares reserved under the plan. The Incentive Plan provides incentives to our employees and is designed to attract, reward and retain personnel. Our Incentive Plan permits the granting of awards in the form of options to purchase common stock, restricted shares of common stock and restricted incentive units in our Operating Partnership. We may issue up to 3,361,906 shares as either stock option awards, restricted stock awards or incentive unit awards of which 378,483 , remain available for grant as of March 31, 2011 . In addition, under our Non-Employee Directors Restricted Stock Plan (“the Non-Employee Directors Plan”) a total of 60,000 shares are reserved for grant, of which 29,065 remain available for grant.





For more information on our stock incentive plan, please refer to the notes to the consolidated financial statements in our 2010 Annual Report on Form 10-K, which was filed with the SEC on March 10, 2011, and our proxy statement, which was filed with the SEC on April 26, 2011.





During the first quarter of 2011, we granted 151,601 restricted shares with a total fair market value of approximately $0.2 million and 74,378 incentive units with a total fair market value of approximately $0.1 million. Fifty percent of the restricted shares and incentive units vest based on stock performance. The other fifty percent are discretionary vesting shares/units based on individual and Company goals, which are currently reserved and will be considered granted upon vesting. During the first quarter of 2010, we granted 100,000 of restricted shares with a total fair market value of approximately $0.3 million. Both the 2011 and 2010 grants are subject to vesting.





19


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


We recognized non-cash compensation expense and the related income tax benefit for the vesting of stock grants for the three months ended March 31, 2011 and 2010 as follows (in thousands):





Three months ended March 31,20112010Compensation expense$294$297Income tax benefit$118$119





For the three months ended March 31, 2011 and 2010, a full valuation allowance was recorded against the income tax benefit.





Noncontrolling Interests





Noncontrolling interests on our consolidated balance sheets relate primarily to the partnership and incentive units in the Operating Partnership (collectively, the “Units”) that are not owned by the Company. In conjunction with the formation of the Company, certain persons and entities contributing interests in properties to the Operating Partnership received partnership units. In addition, certain employees of the Operating Partnership have received incentive units in connection with services rendered or to be rendered to the Operating Partnership. Limited partners who have been issued incentive units have the right to require the Operating Partnership to redeem part or all of their incentive units upon vesting of the Units, if applicable. The Company may elect to acquire those incentive units in exchange for shares of the Company’s common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events, or pay cash based upon the fair market value of an equivalent number of shares of the Company’s common stock at the time of redemption.





The Company periodically evaluates individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity in the consolidated balance sheets. Any noncontrolling interest that fails to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.





The redemption value of the 359,934 outstanding incentive units not owned by the Company at March 31, 2011 was approximately $1.2 million based on the closing price of the Company’s common stock of $3.35 per share as of March 31, 2011 .





A charge is recorded each period to the consolidated statements of income (loss) for the noncontrolling interests' proportionate share of the Company's net income (loss).





Equity is allocated between controlling and noncontrolling interests as follows (in thousands):





Stockholders’EquityNoncontrollingInterestsTotalEquityBalance, December 31, 2010$147,655$60,136$207,791Net loss(3,285)(921)(4,206)Amortization of stock-based compensation26991360Other comprehensive income recognized11213Reimbursements—370370Balance, March 31, 2011$144,650$59,678$204,328





20


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


Phantom Shares





During the first quarter of 2011, a Phantom Share Plan was approved by the Compensation Committee of the Board of Directors and adopted by the full Board of Directors, to be effective as of March 1, 2011. The purpose of the Plan is to reward and retain senior executive officers of the Company.  This Plan is an incentive award plan that pays cash or, if the stockholders of the Company approve and authorize the issuance of additional shares, common stock. Generally, the recipient must still be employed with the Company to receive the cash or stock. There were 677,933 phantom shares granted under the plan. Each phantom share award vests upon the earlier of (i) ratably, one-third on each anniversary of the grant date, subject to achievement of (x) with respect to 50% of each award, a Company stock appreciation target rate of up to 12% pro-rated, and (y) with respect to 50% of each award, other goals determined by the Compensation Committee, in each case only to the extent that at or after such time the Company's stockholders have approved the issuance of sufficient shares of common stock under the Company's 2004 Equity Incentive Plan, as amended, or any successor thereto, to settle awards under the Plan in common stock, and (ii) the fifth anniversary of the grant date, subject to such grantee's continued employment with the Company and achievement of the Company and other goals.





We have determined these grants should be treated as liability awards rather than equity awards in accordance with ASC 718 "Compensation - Stock Compensation", and as such, the obligation is reflected in the accounts payable and other liabilities caption on our consolidated balance sheet. We recognized non-cash compensation expense and the related income tax benefit for the vesting of phantom shares for the three months ended March 31, 2011 and 2010 as follows (in thousands).





Three months ended March 31,20112010Compensation expense$9$—Income tax benefit$4$—





For the three months ended March 31, 2011, a full valuation allowance was recorded against the income tax benefit.





7.     Income Taxes





All operations are carried on through the Operating Partnership and its subsidiaries. The Operating Partnership is not subject to income tax, and all of the taxable income, gains, losses, deductions, and credits are passed through to its partners. However, the Operating Partnership and some of its subsidiaries are subject to income taxes in the state of Texas. We are responsible for our share of taxable income or loss of the Operating Partnership allocated to us in accordance with the Operating Partnership’s limited partnership agreement. As of March 31, 2011 , we held a 74.7% capital interest in the Operating Partnership. For the three months ended March 31, 2011 , we were allocated a weighted average of 74.8% , of the income and losses from the Operating Partnership.





Our effective tax rate for the three months ended March 31, 2011 was (2.34)%, compared to the federal statutory rate of 35%. The difference from the statutory rate is due primarily to income attributable to the non-controlling interests and the valuation allowance related to the Company's deferred tax assets for which no benefit could be provided due to their realization not meeting the “more-likely-than-not” threshold.





A net deferred tax asset is included in “other assets” on the Company's balance sheet. The Company's existing federal and state net operating loss carryforwards, which existed as of a deemed ownership change in 2007 is subject to the gross annual limitation under Internal Revenue Code Section 382 (“Section 382”), which is $9.9 million per year. The net operating loss carryforwards generated subsequent to the 2007 ownership change are not subject to the Section 382 limitation.  As of December 31, 2010 , the Company anticipates having net operating loss carryforwards of $ 22.7 million for federal purposes and $ 25.8 million for state purposes. The Company’s net operating loss carryforwards are subject to varying expirations from 2018 through 2031 .





FASB ASC 740-10-30-17 “Accounting for Income Taxes,” requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. Future realization of the deferred tax asset is dependent on the reversal of existing taxable temporary differences, carryback potential, tax-planning strategies and on us generating sufficient taxable income in future years as the deferred income tax charges become currently deductible for tax reporting purposes. We have recorded a valuation allowance on the net deferred tax assets in excess of their liability for unrecognized tax benefits discussed below, due to uncertainty of future realization.


21


---

Table Of Contents
 THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)


FASB ASC 740-10-25 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense, which for the three months ended March 31, 2011 was $50,153. We have not recorded any penalties with respect to unrecognized tax benefits. We do not anticipate any significant increases or decreases to the remaining amounts of the existing unrecognized tax benefits within the next twelve months, other than a reversal of accrued interest relating to unrecognized tax benefits for which the statute of limitations period will lapse during 2011.





8.     Fair Value of Financial Instruments





FASB ASC 825-10-50-8, “Financial Instruments,” requires us to disclose fair value information about all financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate fair value.  We measure and disclose the estimated fair value of financial assets and liabilities utilizing a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity's own assumptions about market participant assumptions.  This hierarchy consists of three broad levels as follows: (1) using quoted prices in active markets for identical assets or liabilities, (2) “significant other observable inputs,” and (3) “significant unobservable inputs.”  “Significant other observable inputs” can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.  “Significant unobservable inputs” are typically based on an entity's own assumptions, since there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.





The carrying amounts of cash and cash equivalents, restricted cash, rent and other receivables, other assets, accounts payable and other liabilities approximate fair value.  The fair value of our mortgage and other secured loans was estimated using “significant other observable inputs” such as available market information and discounted cash flows analyses based on borrowing rates we believe we could obtain with similar terms and maturities.  Because the valuations of our financial instruments are based on these types of estimates, the actual fair value of our financial instruments may differ materially if our estimates do not prove to be accurate.  Additionally, the use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.  As of March 31, 2011 , the estimated  fair value of our mortgage and other secured loans aggregates $293.2 million compared to the aggregate carrying value of $300.4 million on our consolidated balance sheet.











22


---

Table of Contents


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled “Forward-Looking Statements.” Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this report entitled “Risk Factors.”





When you read the financial statements and the information included in this report, you should be aware that our operations are significantly affected by both macro and micro economic forces. Our operations are directly affected by actual and perceived trends in various national and regional economic conditions that affect national and regional markets for commercial real estate services, including interest rates, the availability of credit to finance commercial real estate transactions, and the impact of tax laws affecting real estate. Periods of economic slowdown or recession, rising interest rates, tightening of the credit markets, declining demand for or increased supply of real estate, or the public perception that any of these events may occur can adversely affect our business. These conditions could result in a general decline in rents, which in turn would reduce revenue from property management fees and brokerage commissions derived from leases. In addition, these conditions could lead to a decline in property values as well as a decline in funds invested in commercial real estate and related assets, which in turn may reduce revenues from investment advisory, property management, leasing and development fees.


Forward-Looking Statements


Forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated and you should not rely on them as predictions of future events. Although information is based on our current estimates, forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise. You are cautioned not to place undue reliance on this information as we cannot guarantee that any future expectations and events described will happen as described or that they will happen at all. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions.





Overview and Background





We are a full-service real estate Operating Company that owns, acquires, develops and manages primarily office, as well as mixed-use and residential properties on a nationwide basis. We conduct our business through our Operating Partnership, of which we own 74.7% as of March 31, 2011 and have control over the major decisions of the Operating Partnership.





Factors That May Influence Future Results of Operations





The following is a summary of the more significant factors we believe may affect our results of operations. For a more detailed discussion regarding the factors that you should consider before making a decision to acquire shares of our common stock, see the information under the caption “Risk Factors” elsewhere in this report.





Rental income . The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space, to lease currently available space as well as space in newly developed or redeveloped properties and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in the submarkets where our properties are located.





Los Angeles, Philadelphia, Austin, and Houston—Submarket Information . A significant portion of our income is derived from properties located in Los Angeles, Philadelphia, Austin and Houston. The market conditions in these submarkets have a significant impact on our results of operations.





Development and redevelopment activities . We believe that our development activities present growth opportunities for us over the next several years. We continually evaluate the size, timing and scope of our development and redevelopment initiatives and, as necessary, sales activity to reflect the economic conditions and the real estate fundamentals that exist in our submarkets. However, we may not be able to lease committed development or redevelopment properties at expected rental rates or within projected time frames or complete projects on schedule or within budgeted amounts. The occurrence of one or more of these events could adversely affect our financial condition, results of operations and cash flows. We currently own interests


23


---

Table of Contents


in four development projects, and TPG/CalSTRS owns one redevelopment property and two development sites. As of March 31, 2011 , we had incurred, on a consolidated basis, approximately $96.6 million of costs related to land acquisition, predevelopment and infrastructure that are reflected in Land improvements-development properties on our balance sheet. To the extent that we, or joint ventures we are a partner in, do not proceed with projects as planned, development and/or redevelopment costs would need to be evaluated for impairment.





Results of Operations





The results of operations reflect the consolidation of the affiliates that own One Commerce Square, Two Commerce Square, Murano, 2100 JFK Boulevard, Four Points Centre, Campus El Segundo and our investment advisory, property management, leasing and real estate development operations. Included in our investment advisory, property management, leasing and development services operations are development fees we earn from unaffiliated third parties related to two separate entitlement projects—Universal Village and Wilshire Grand. The following properties are accounted for using the equity method of accounting (the date of acquisition is listed for each with the exception of 2121 Market Street whose date represents the year it was co-developed with our joint venture partner):





• 2121 Market Street (as of 2001)


• City National Plaza (as of January 2003)


• Reflections I (as of October 2004)


• Reflections II (as of October 2004)


• Four Falls Corporate Center (as of March 2005)


• Oak Hill Plaza (as of March 2005)


• Walnut Hill Plaza (as of March 2005)


• San Felipe Plaza (as of August 2005)


• 2500 City West (as of August 2005)


• Brookhollow Central I, II, and III (as of August 2005)


• CityWestPlace land (as of December 2005)


• CityWestPlace (as of June 2006)


• Centerpointe I & II (as of January 2007)


• Fair Oaks Plaza (as of January 2007)





The following investment entity that held a mortgage loan receivable related to Brookhollow Central was accounted for using the equity method of accounting. The note receivable held by this subsidiary was paid off and this entity was dissolved during the year ended December 31, 2010:





• BH Note B Lender, LLC (as of October 2008, the date of formation)





TPG/CalSTRS, LLC also owns a 25% interest in the Austin Portfolio Joint Venture which owns the following properties that were acquired in June 2007 (“Austin Portfolio Joint Venture Properties”):





• San Jacinto Center


• Frost Bank Tower


• One Congress Plaza


• One American Center


• 300 West 6th Street


• Research Park Plaza I & II


• Park Centre


• Great Hills Plaza


• Stonebridge Plaza II


• Westech 360 I-IV


Comparison of the three months ended March 31, 2011 to the three months ended March 31, 2010 .


Total revenues .  Total revenues decreased by $2.4 million , or 9.9% , to $21.9 million for the three months ended March 31, 2011 compared to $24.3 million for the three months ended March 31, 2010.  The significant components of revenue are discussed below.


Rental revenues. Rental revenue remained consistent for the three months ending March 31, 2011 as compared to the three months ending March 31, 2010.


Tenant reimbursements. Tenant reimbursements increased by $1.3 million , or 26.0% , to $6.3 million for the three months ended March 31, 2011 compared to $5.0 million for the three months ended March 31, 2010.  The increase was primarily


24


---

Table of Contents


attributable the change of a significant lease at Two Commerce Square from a gross lease to a net lease in the fourth quarter of 2010, in addition to higher reimbursable expenses during 2011.


Parking and other revenues. Parking and other revenues decreased by $0.2 million , or 20.0% , to $0.8 million for the three months ended March 31, 2011 compared to $1.0 million for the three months ended March 31, 2010.  The decrease was primarily related to lease termination fees recognized at One Commerce Square during 2010.


Investment advisory, management, leasing and development services revenues. This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest.  Revenues from these services decreased by $1.2 million , or 60.0% , to $0.8 million for the three months ended March 31, 2011 compared to $2.0 million for the three months ended March 31, 2010.  The decrease was primarily due to the cessation of development fee revenue relating to our NBC Universal ("NBCU") project, which was partially offset by an increase in development fees from our Wilshire Grand project.


Investment advisory, management, leasing and development services revenues - unconsolidated real estate entities. This caption represents revenues earned from services provided to entities for which we use the equity method to account for our ownership interest since we have significant influence, but not control, over the entities.  Revenues from these services increased by $1.2 million , or 34.3% , to $4.7 million for the three months ended March 31, 2011 compared to $3.5 million for the three months ended March 31, 2010.  The increase was primarily attributable to higher leasing commission revenues from City National Plaza, as well as the Austin portfolio.





Reimbursement of property personnel costs. This caption represents the reimbursement for property personnel salary, payroll taxes and benefits.  Reimbursement revenue increased by $0.1 million , or 7.1% , to $1.5 million for the three months ended March 31, 2011 compared to $1.4 million for the three months ended March 31, 2010, primarily due to an increase in accrued bonus compensation.


Condominium sales. This caption represents the revenue recognized for the Murano condominium units and parking spaces.  The decrease of $3.7 million , or 88.1% to $0.5 million for the three months ended March 31, 2011, compared to $4.2 million , for the three months ended March 31, 2010 is due to the settlement of one unit in 2011 as compared to nine units in 2010.


Total expenses. Total expenses decreased by $1.4 million or 5.2% , to $25.4 million for the three months ended March 31, 2011, compared to $26.8 million for the three months ended March 31, 2010. The significant components of expense are discussed below.


Property operating and maintenance expense. Property operating and maintenance expenses increased by $0.3 million , or 4.8% , to $6.6 million for the three months ended March 31, 2011 compared to $6.3 million for the three months ended March 31, 2010.  The increase was primarily due to increased costs for janitorial services, engineering services, security services, and tax and audit fees.


Real estate taxes .  Real estate taxes increased by $0.1 million , or 5.6% , to $1.9 million for the three months ended March 31, 2011 compared to $1.8 million for the three months ended March 31, 2010 due to an increase in the property tax rates in  Philadelphia.


Investment advisory, management, leasing and development services expenses. Expenses for these services increased by $0.6 million , or 25.0% , to $3.0 million for the three months ended March 31, 2011, compared to $2.4 million for the three months ended March 31, 2010, primarily as a result of higher commission and bonus compensation.


Reimbursable property personnel costs .  This caption represents the reimbursement of property personnel salary, payroll taxes and benefits.  Reimbursable expenses increased by $0.1 million , or 7.1% , to $1.5 million for the three months ended March 31, 2011, compared to $1.4 million for the three months ended March 31, 2010, primarily due to an increase in accrued bonus compensation in 2011.


Cost of condominium sales. The decrease of $2.7 million , or 90.0% , to $0.3 million for the three months ended March 31, 2011 compared to $3.0 million for the three months ended March 31, 2010 is due to the settlement of one unit in 2011, as compared to nine units in 2010.


Interest expense. Interest expense remained consistent for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.


Depreciation and amortization expense. Depreciation and amortization remained consistent for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.


25


---

Table of Contents


General and administrative. General and administrative expenses increased by $0.2 million , or 5.4% , to $3.9 million for the three months ended March 31, 2011 compared to $3.7 million for the three months ended March 31, 2010.  This was primarily due to an increase in accrued bonus compensation.





Equity in net income (loss) of unconsolidated real estate entities. Set forth below is a summary of the condensed financial information for the unconsolidated real estate entities and our share of net income (loss) for the three months ended March 31, 2011 and 2010 (in thousands):





Three months ended March 31,20112010Revenue$79,845$79,024Expenses:Operating and other expenses39,15739,887Interest expense28,34325,060Depreciation and amortization27,16229,096Total expenses94,66294,043Equity in net income of unconsolidated real estate entities—29Net loss$(14,817)$(14,990)Thomas Properties’ share of net loss$(1,415)$(1,696)Intercompany eliminations721856Equity in net loss of unconsolidated real estate entities$(694)$(840)





Aggregate revenues for the three months ended March 31, 2011 increased approximately $0.8 million , or 1.0% , to $79.8 million compared to $79.0 million for the three months ended March 31, 2010.  The increase is primarily due to higher revenues within our TPG/CalSTRS joint venture on account of increased parking and other revenues from our properties in Houston.  Aggregate operating and other expenses for unconsolidated real estate entities decreased by $0.7 million , or 1.8% , to $39.2 million for the three months ended March 31, 2011 compared to $39.9 million for the three months ended March 31, 2010.  The decrease was due primarily to lower real estate taxes resulting from changes in the assessed value of our buildings.  Interest expense increased by approximately $3.2 million , or 12.7% , to $28.3 million for the three months ended March 31, 2011 as compared to $25.1 million for the three months ended March 31, 2010.  The increase was due primarily to increased interest rates associated with the refinancing of our City National Plaza and City West Place properties in the second half of 2010.  Depreciation and amortization decreased by approximately $1.9 million , or 6.5% , to $27.2 million for the three months ended March 31, 2011 as compared to $29.1 million for the three months ended March 31, 2010.  The decrease was primarily due to a lower overall base of depreciable assets within our Austin portfolio.





Provision for income taxes. Provision for income taxes decreased by $0.1 million to a provision of $0.1 million for the three months ended March 31, 2011, compared to a provision of $0.2 million for the three months ended March 31, 2010.





Liquidity and Capital Resources





Analysis of liquidity and capital resources


As of March 31, 2011 , we have unrestricted cash and cash equivalents of $39.6 million . We believe that we will have sufficient capital to satisfy our liquidity needs over the next 12 months through working capital. We expect to meet our long-term liquidity requirements, including debt service, property acquisitions and additional future development and redevelopment activity, through cash flow from operations, additional secured and unsecured long-term borrowings, dispositions of non-strategic assets, and the potential issuance of additional debt, or common or preferred equity securities, including convertible securities.


In an effort to redeploy sales proceeds and expand our wholly-owned asset base through acquisitions of operating properties, we are selectively considering certain wholly-owned land assets and certain joint venture assets (both operating properties and developable land) for disposition in 2011. Although we anticipate that any such sales would generate sufficient proceeds to pay off any debt or other obligations related to these properties, one or more of these asset sales could result in the recognition of a book loss.


Assuming the exercise of extension options available to us, there is no debt maturing in our portfolio until 2012, although there are potential principal payments and loan rebalancing payments due in 2011 on the Four Points Centre and Murano loans


26


---

Table of Contents


discussed further below. With respect to debt maturing in 2012 and thereafter, we will seek to refinance this debt at maturity or retire it through the issuance of securities, as market conditions permit. There can be no assurances that such debt refinancing will be available at the time of such maturities on acceptable terms, if at all, and our cost of capital could increase as a result of any such debt refinancing. If we are unable to obtain debt refinancing for properties in which we own an interest at maturity, we may lose some or all of our equity interests in such properties. Additionally, existing stockholders could experience substantial dilution in the event we are required to issue additional equity capital.


As indicated in the table below under the caption "Contractual Obligations," upon exercise of extension options, we have $1.5 million of scheduled principal payments on consolidated debt remaining in 2011 and $2.2 million in 2012. We believe that we have sufficient capital to satisfy these payments. See "Contractual Obligations" and the corresponding notes to the table thereunder for further detail. With respect to the debt owed by our unconsolidated real estate entities, upon exercise of extension options, there are no remaining maturity dates in 2011 and no additional principal payments due in 2011. See "Off-Balance Sheet Arrangements - Indebtedness of Unconsolidated Real Estate Entities."


As of March 31, 2011 , we have unfunded capital commitments to (1) our joint venture with CalSTRS of $13.9 million ; and (2) the Thomas High Performance Green Fund (the “Green Fund”) of $50.0 million. With respect to our joint venture with CalSTRS, we are not obligated to fund our share of the capital commitment for the acquisition of any new project, but we are obligated to fund tenant improvements and other capital improvements for projects that were acquired prior to June 1, 2007. We estimate we will fund $3.7 million in 2011 to cover our share of contractual obligations existing at March 31, 2011 for capital improvements, tenant improvements and leasing commissions. Our requirement to fund all or a portion of our commitments to the Green Fund is subject to our identifying properties to acquire at our discretion. Our cash requirements for the Green Fund could be reduced by contributions by us of assets in which we have an interest. The Green Fund's original investment period expired in December 2010, which we extended together with an institutional investor to December 2011. CalSTRS is no longer a partner in the Green Fund.


On March 6, 2010, an aggregate of $96.5 million in mortgage loans owed by subsidiaries of TPG/CalSTRS (the “borrowers”) on unconsolidated properties at Four Falls Corporate Center, Oak Hill Plaza and Walnut Hill Plaza matured and became due in full. The borrowers elected not to make payment on these loans and they are currently in default. These loans are non-recourse to the borrowers and the Company, both of which do not anticipate making any payments or equity contributions to support the repayment or refinancing of these loans. The borrowers are currently in discussions with the special servicer regarding a cooperative resolution on each of these assets including the likely appointment of a receiver and the judicial transfer of the properties. We do not believe that the loss of our equity interests in these properties will have a material effect on our business or results of operations.


In December 2009, our board of directors suspended its quarterly dividends to common stockholders. The availability of funds to pay dividends is impacted by property-level restrictions on cash flows. With respect to our joint venture properties, we do not solely control decision making with respect to these properties, and may not be able to obtain monies from these properties even if funds are available for distribution to us. In addition, we may enter future financing arrangements that contain restrictions on our use of cash generated from our properties. The payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition, and any other factors deemed relevant by our board of directors.





Development and Redevelopment Projects


We own interests in four development projects, and our joint venture with CalSTRS includes one redevelopment property and two development sites.


We anticipate seeking to mitigate our development risk on all of our development projects by obtaining significant pre-leasing and guaranteed maximum cost construction contracts. There can be no assurance we will be able to successfully implement these risk mitigation measures.


We completed construction of the Murano, a 302-unit high-rise residential condominium project in downtown Philadelphia in September 2008. We have closed sales on 221 units as of March 31, 2011 . During the three months ended March 31, 2011 , we entered into contracts for two units and two parking spaces, had no forfeitures and recognized a gain on sale of approximately $0.1 million . Murano is classified as condominium units held for sale on our balance sheet.


The amount and timing of costs associated with our development and redevelopment projects is inherently uncertain due to market and economic conditions. We presently intend to fund development and redevelopment expenditures primarily through construction or refurbishment financing.


|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Construction of the Murano was financed in part with a construction loan, which has a balance of$21.8 millionas ofMarch 31, 2011. Repayment of this loan is being made with proceeds from the sales of condominium units. The loan, which is scheduled to mature on July 31, 2011, has two six-month extensions. The loan bears interest at the greater of 9.5% or three month LIBOR plus 3.25%. We have no guarantees on this debt other than the payment of interest

27


---

Table of Contents


through the maturity date. Both six-month extensions require payment of an extension fee equal to 1% of the unpaid principal balance as of July 1, 2011 and January 1, 2012, respectively.  The first six-month extension is also subject to a “loan exposure” measurement whereby the outstanding principal balance of the loan divided by saleable square footage of the units yet to settle shall be no greater than $150 per saleable square foot.  If the loan exposure measurement is not met, then the borrower must make a payment to achieve the $150 per saleable square foot requirement to qualify for the extension. If the rebalancing had been done as of March 31, 2011 , based on the number of units yet to settle as of March 31, 2011 , the loan balance would need to be reduced from $21.8 million to $15.4 million to meet the loan exposure limitation.


|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | The completed core and shell construction of two office buildings at our development site at Four Points Centre was financed in part with a construction loan, which has an outstanding balance as ofMarch 31, 2011of$24.4 millionwith additional borrowing capacity of$8.3 millionto fund tenant improvements and other project costs. The Four Points Centre construction loan has a maturity date of July 31, 2012 with two one-year extension options subject to certain conditions.  The interest rate on the loan is LIBOR plus 3.5% per annum. Additionally, we have guaranteed 46.5% of the balance of the outstanding principal, interest and any other sum payable under this loan, which results in a maximum guarantee amount of$11.3 million. We also provided collateral of approximately 62.4 acres of fully entitled unimproved land, which is immediately adjacent to our Four Points Centre office buildings. As ofMay 31, 2011, if the Four Points Centre office buildings are not at least 65% leased on terms consistent with the appraisal pro forma, we must pre-fund 18 months of interest into a restricted cash account with the lender; if the buildings are less than 35% leased at that time, we will also have to pay $2.0 million as a principal reduction of the loan.

|  |                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | We have a mortgage loan on our Campus El Segundo project in the amount of$17.0 million. Refer to note (3) to the Contractual Obligations table onpage 29 for further detail on this loan. Presently, we have not obtained construction financing for this development project.

If we finance development projects through construction loans and are unable to obtain permanent financing on advantageous terms or at all, we would need to fund these obligations from cash flow from operations or seek alternative capital sources. If unsuccessful, this could adversely impact our financial condition and results of operations and impair our ability to satisfy our debt service obligations. If we are successful in obtaining construction or refurbishment financing and permanent financing, we anticipate that the corresponding interest costs would represent both a significant use of our cash flow and a material component of our results of operations.


We are also involved in managing the following three entitlement projects:


|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | We are entitling approximately 14.4 acres in Los Angeles, California, for office, production facility, residential and retail uses. The project, called Metro Studio@Lankershim, will include up to approximately 1.5 million square feet. Upon completion of entitlements, the project would be located on a long-term ground lease with the Los Angeles County Metropolitan Transportation Authority, which owns the land, depending on the space requirements of NBCU, the prospective tenant for the project.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Under our contract with NBCU for the Universal Studios Hollywood backlot entitlement, we have a right of first offer (ROFO) to develop approximately 124 acres for residential and related retail and community-serving uses. We are pursuing environmental clearance and governmental approvals for approximately 2,900 residential units and180,000square feet of retail and community-serving space. Upon successful completion of the entitlement process and our exercise of the ROFO, it is anticipated this project will be developed in phases over several years, subject to market conditions.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Korean Air, a subsidiary of Hanjin Group, has retained us as fee developer for the entitlement, design and redevelopment of the 2.7 acre Wilshire Grand property in downtown Los Angeles. The Wilshire Grand project envisions the development of two buildings, one approximately 65 stories and the other approximately 45 stories, to include approximately 1.5 million square feet of office, 560 hotel rooms, and up to 100 residential condominiums, with supporting retail and restaurant uses, for a total project size of up to approximately 2.5 million gross square feet. On March 29, 2011, we secured final Los Angeles City Council approval of the entitlement package, which allows Korean Air to redevelop the full city block site.




Leasing, Tenant Improvement and Capital Needs





In addition to our development and redevelopment projects, our One Commerce Square and Two Commerce Square properties require capital maintenance and expenditures for leasing commissions and tenant improvement costs. The level of these expenditures varies from year to year based on several factors, including lease expirations. We are contractually committed to incur expenditures of approximately $3.1 million in capital improvements, tenant improvements, and leasing commissions for Commerce Square collectively, during 2011 through 2013. Additionally, we expect to expend additional amounts in connection with a value-enhancement program at Commerce Square. The funding for both the $3.1 million of


28


---

Table of Contents


existing commitments and future expenditures under the value-enhancement program are discussed in the paragraph below.


During November 2010, subsidiaries of TPG and Brandywine entered into partnership agreements with respect to both One Commerce Square and Two Commerce Square. Brandywine contributed capital of $5 million at closing with the balance to be contributed by December 31, 2012, totaling $25 million of preferred equity in return for a 25% limited partnership interest in each property. The preferred equity will be invested in a value-enhancement program designed to increase rental rates and occupancy at Commerce Square, and to also fund the $3.1 million of existing commitments discussed in the preceding paragraph.


Annual capital expenditures may fluctuate in response to the nature, extent and timing of improvements required to maintain our properties. Tenant improvements and leasing costs may also fluctuate depending upon other factors, including the type of property involved, the existing tenant base, terms of leases, types of leases, the involvement of leasing agents and overall market conditions.





Contractual Obligations





A summary of our contractual obligations at March 31, 2011 is as follows (in thousands). For loans with extension options, the principal payment is reflected in the table below in the year of original maturity until such time as any extension is executed.





20112012201320142015ThereafterTotalRegularly scheduledprincipal payments$1,549$2,160$1,946$1,884$1,996$—$9,535Balloon payments due atmaturity (1)(2)(3)38,81024,387106,446——121,209290,852Interest payments—fixedrate debt (4)10,75514,20510,0557,1357,02459149,765Interest payments—variablerate debt (4)———————Capital commitments (5)6,589100353110306,795Operating lease (6)234322335123——1,014Obligations associated withuncertain tax positions (7)———————Total$57,937$41,174$118,817$9,173$9,030$121,830$357,961


_________________________


(1)    Included within these balloon payments are amounts due under the Four Points Centre construction loan, which matures on July 31, 2012 with two one-year extension options subject to certain conditions. We have provided a guarantee for a portion of principal and interest payable. We have also provided collateral of approximately 62.4 acres of fully entitled unimproved land, which is immediately adjacent to our Four Points Centre office buildings. The loan has an unfunded balance of $8.3 million which is available to fund any remaining project costs. The interest rate on the loan is LIBOR plus 3.50% per annum. The balance of the loan as of March 31, 2011 was $24.4 million . As of May 31, 2011, if the Four Points Centre office buildings are not at least 65% leased on terms consistent with the appraisal pro forma, we must pre-fund 18 months of interest into a restricted cash account with the lender; if the buildings are less than 35% leased at that time, we will also have to pay $2.0 million as a principal reduction of the loan. These contingent payments are not included in the table above.





(2)    The Murano construction loan has a balance of $21.8 million as of March 31, 2011 . The loan is scheduled to mature on July 31, 2011, with two six-month extension options. The extension fees and potential loan rebalancing payments are not included in the table above. See further discussion of these potential payments in the Development and Redevelopment Projects section presented earlier under Liquidity and Capital Resources. The loan bears interest at the greater of 9.5% or three month LIBOR plus 3.25%. This loan is nonrecourse to the Company, but the Company and its development partners jointly and severally guarantee the payment of interest during the term of the loan. We amortize the principal balance of the loan with approximately 93% of the sales proceeds as we close on the sale of condominium units.


(3)    The Campus El Segundo mortgage loan has a balance of $17.0 million as of March 31, 2011 . The loan is scheduled to mature on July 31, 2011 with three one-year extension options, at our election, subject to us complying with certain covenants, with a final maturity date of July 31, 2014 if all extension options are exercised. The interest rate as of March 31, 2011 was 4.1% per annum. We have guaranteed 100% of the principal, interest and any other sum payable under this loan. We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance


29


---

Table of Contents


with as of March 31, 2011 .


(4)    As of March 31, 2011 , 79.0% of our debt was at contractually fixed rates. The information in the table above reflects our projected interest obligations for the fixed-rate payments based on the contractual interest rates and scheduled maturity dates. The remaining 21.0% of our debt bears interest at variable rates based on LIBOR plus a spread that ranges from 3.25% to 3.75%. The interest payments on the variable rate debt have not been reported in the table above because we cannot reasonably determine the future interest obligations on our variable rate debt as we cannot predict what LIBOR rates will be in the future. As of March 31, 2011 , one-month LIBOR was 0.24% .


(5)    Capital commitments of our Company and consolidated subsidiaries include approximately $ 3.1 million of tenant improvements and leasing commissions for certain tenants in One Commerce Square and Two Commerce Square, of which $2.9 million is expected to be paid in 2011. The full amount will be funded by Brandywine's preferred equity contributions. We have an unfunded capital commitment of $13.9 million to our TPG/CalSTRS joint venture, of which we estimate we will fund $3.7 million in 2011 for contractual obligations existing as of March 31, 2011 . We are not obligated to fund our share for the acquisition of any new project, but we are obligated to fund tenant improvements and other capital improvements for projects that were acquired prior to June 1, 2007.


(6)    Represents the future minimum lease payments on our operating lease for our corporate office at City National Plaza, which expires in May 2014. The table does not reflect available extension options.


(7)    The obligations associated with uncertain tax provisions in the table above should represent amounts associated with uncertain tax positions related to temporary book-tax differences. However, reasonable estimates cannot be made about the amount and timing of payment, if any, for these obligations. As of March 31, 2011 , $13.4 million of unrecognized tax benefits have been recorded as liabilities in accordance with FASB ASC 740, and we are uncertain as to if and when such amounts may be settled. Additionally, as of March 31, 2011 , there is $1.0 million of accrued interest recorded with respect to such unrecognized tax benefits. We have not recorded any penalties with respect to unrecognized tax benefits.





Off-Balance Sheet Arrangements—Indebtedness of Unconsolidated Real Estate Entities





As of March 31, 2011 , our Company had investments in entities owning unconsolidated properties with stated ownership percentages ranging from 6.25% to 50% . We account for these investments using the equity method of accounting.





30


---

Table of Contents


The table below summarizes the outstanding debt for these properties as of March 31, 2011 (in thousands). None of these loans are recourse to us other than as noted in footnote 4 below. Some of the loans listed in the table below subject TPG/CalSTRS to customary non-recourse carve out obligations.





Interest Rateat March 31,2011PrincipalAmountMaturityDateMaturityDate at End ofExtension OptionsCity National PlazaMortgage loan5.90%$350,0007/1/20207/1/2020Note payable to former partner (1)5.75%19,7587/1/20121/4/2016CityWestPlaceFixed6.16%121,0007/6/20167/6/2016Floating (2)5.03%95,0003/5/20203/5/2020San Felipe PlazaMortgage loan4.78%110,00012/1/201812/1/20182500 City WestMortgage loan5.53%65,00012/5/201912/5/2019Brookhollow Central I, II and IIIMortgage loan (2) (3)LIBOR+2.63%37,5007/21/20137/21/20152121 Market Street mortgage loan (4)6.05%18,0788/1/20338/1/2033Reflections I mortgage loan5.23%21,2794/1/20154/1/2015Reflections II mortgage loan5.22%8,8654/1/20154/1/2015Centerpointe I & IISenior mortgage loan (2)LIBOR+0.60%55,0002/9/20122/9/2012Mezzanine loan (2) (5)LIBOR+3.26%22,1622/9/20122/9/2013Fair Oaks Plaza5.52%44,3002/9/20172/9/2017Austin Portfolio Joint Venture Properties:San Jacinto CenterMortgage loan-Note A6.05%43,0006/11/20176/11/2017Mortgage loan-Note B6.05%58,0006/11/20176/11/2017Frost Bank TowerMortgage loan-Note A6.06%61,3006/11/20176/11/2017Mortgage loan-Note B6.06%88,7006/11/20176/11/2017One Congress PlazaMortgage loan-Note A6.08%57,0006/11/20176/11/2017Mortgage loan-Note B6.08%71,0006/11/20176/11/2017One American CenterMortgage loan-Note A6.03%50,9006/11/20176/11/2017Mortgage loan-Note B6.03%69,1006/11/20176/11/2017300 West 6th Street6.01%127,0006/11/20176/11/2017Research Park Plaza I & II (2) (6)Senior mortgage loanLIBOR+0.55%23,5606/9/20116/9/2012Mezzanine loanLIBOR+2.01%27,9406/9/20116/9/2012Stonebridge Plaza II (2) (6)Senior mortgage loanLIBOR+0.63%19,8006/9/20116/9/2012Mezzanine loanLIBOR+1.76%17,7006/9/20116/9/2012Austin Portfolio Bank Term Loan (7)LIBOR+3.25%120,9346/1/20136/1/2014Austin Senior Secured Priority Facility (8)10% to 20%59,1356/1/20126/1/2012Total outstanding debt of unconsolidated properties, excludingloans subject to special servicer oversight$1,863,011Loans on properties subject to special servicer oversight (9):Four Falls Corporate CenterMortgage loan-Note A5.31%$42,2003/6/2010N/AMortgage loan-Note B (10)(11)LIBOR+3.25%9,8673/6/2010N/A


31


---

Table of Contents


Interest Rateat March 31,2011PrincipalAmountMaturityDateMaturityDate at End ofExtension OptionsOak Hill Plaza/Walnut Hill PlazaMortgage loan-Note A5.31%35,3003/6/2010N/AMortgage loan-Note B (10)(12)LIBOR+3.25%9,1523/6/2010N/ATotal outstanding debt of unconsolidated properties subject tospecial servicer oversight$96,519Total outstanding debt of all unconsolidated properties$1,959,530





The 30 day LIBOR rate for the loans above was 0.24% at March 31, 2011 , except for the Austin Bank Term Loan (see footnotes 7 and 8).


_________________________


(1)    During the second quarter of 2009, TPG/CalSTRS redeemed a 15% membership interest held by a noncontrolling owner in the CNP partnership. The redemption price of $19.8 million was financed with a promissory note issued by the former partner and due in 2012. The former partner may extend the maturity date to January 4, 2016 with respect to $0.5 million or more of the principal amount of this promissory note.


(2)    The partnership that owns each property has purchased interest rate cap agreements for the funded portion of these loans.


(3)    As of March 31, 2011, $37.5 million of the loan was funded, with an additional $2.5 million to be funded ratably over the next ten quarters and $15.0 million available for future funding of construction costs related to the redevelopment of Brookhollow Central I. The loan has two one-year extensions, subject to certain conditions.


(4)    The 2121 Market Street mortgage loan is prepayable without penalty after May 1, 2013, at which date the outstanding principal amount of this loan will be approximately $17.2 million. The interest rate will increase to the greater of 8.1% or the treasury rate plus 2.0% on August 1, 2013. Any amounts over the initial interest rate may be deferred to the extent excess cash is not available to make such payments. Provided there is no deferred interest, the loan balance will be fully amortized on August 1, 2033, the maturity date of the loan. The loan is guaranteed by our Operating Partnership and our co-general partner in the partnership that owns 2121 Market Street, up to a maximum amount of $3.3 million.


(5)    The mezzanine loan provides us with the right to prepay the loan equal to a 50% discount on the principal plus a participation feature for the lender.  The loan has a one-year extension option at our election.


(6)    The loan has a one-year extension option at our election.  The borrower notified the lender that it elected to exercise the last extension option for both the senior mortgage and mezzanine loans, which extends the maturity date to June 9, 2012.


(7)    This loan has a one-year extension option at our election. The margin above LIBOR on the bank term loan is subject to adjustment under certain circumstances. The term loan is secured by mortgages on three of the Austin Portfolio Joint Venture properties and a pledge of equity interests in the remaining seven Austin Portfolio Joint Venture properties. These mortgage liens and equity pledges also secure the Austin senior secured priority facility, which has a priority right to repayment ahead of the Austin Portfolio Bank Term Loan.


(8)    We and our partners in the Austin Portfolio have committed to fund $60.0 million of senior priority financing, which is senior to the Austin Portfolio bank loan.  $51.5 million of the $60.0 million commitment has been funded as of March 31, 2011, of which our share is $3.2 million, and is accounted for as equity. The Austin senior secured priority facility bears interest at 10% per annum on the first $24 million, 15% per annum on the next $12 million and 20% per annum on the last $24 million. Accrued interest as of March 31, 2011, was $7.6 million.


(9)    Subsidiaries of TPG/CalSTRS (the “borrowers”) elected not to repay the loans by the maturity date of March 6, 2010 and therefore, the loans are in default. We are in discussions with the special servicer regarding a cooperative resolution on each of these assets, including the likely appointment of a receiver and the judicial transfer of the properties. Pending a resolution of these loan defaults, we expect that we will continue to manage the properties pursuant to our management agreement with the borrowers. The management and leasing agreements expired on March 1, 2010, and are automatically renewed for successive periods of one year each, unless we elect not to renew the agreements. Due to the maturity date default, the lender has the authority to terminate us as the property manager. We are in discussions with the special servicer regarding a cooperative resolution on each of these assets, including the likely appointment of a receiver and the judicial transfer of the properties. The borrowers are accruing interest on these loans at a default rate, which ranges from 10.3% to 10.5% per annum beginning on the maturity date of March 6, 2010.


(10)    These loans are subject to exit fees equal to 1% of the loan amounts; however, under certain circumstances the exit fees will be waived. These loans bear interest at the greater of the one month LIBOR or 2.25% per annum, plus the applicable margin. Due to the maturity date default discussed in note 9 above, the borrower is accruing interest at a default rate, which ranges from 10.3% to 10.5% per annum beginning on the maturity date of March 6, 2010.


(11)    This loan is secured by both a subordinate lien on the property and a payment guaranty issued by the special purpose


32


---

Table of Contents


entity which owns Oak Hill Plaza/Walnut Hill Plaza.


(12)    This loan is secured by both a subordinate lien on the property and a payment guaranty issued by the special purpose entity which owns Four Falls Corporate Center.





Cash Flows


Comparison of three months ended March 31, 2011 to three months ended March 31, 2010


Operating activities - Our cash flows from operating activities is primarily dependent upon the occupancy level of our portfolio, the rental rates achieved on our leases, the collectability of rent and recoveries from our tenants, revenues generated and collected from our investment advisory, management, leasing and development services and the level of operating expenses and other general and administrative costs. Our use of cash in operating activities increased by $3.2 million to $7.4 million for the three months ended March 31, 2011 compared to $4.2 million for the three months ended March 31, 2010.  The net loss for the three months ended March 31, 2011 increased by $0.8 million to $4.2 million compared to a net loss of $3.4 million for the comparable period. Accounts payable and other liabilities decreased by $3.9 million for the three months ended March 31, 2011, predominately related to the payout of bonuses, which were accrued at December 31, 2010. Other assets, primarily the payment of 2011 real estate taxes at Commerce Square in the amount of $6.0 million, was also a significant use of cash in the first quarter of 2011.


Investing activities - Our net cash related to investing activities is generally impacted by the sale of condominium units at Murano, contributions and distributions related to our investments in unconsolidated real estate entities, the funding of development and redevelopment projects and recurring and non-recurring capital expenditures. Net cash used in investing activities increased by $1.7 million, to $0.1 million, for the three months ended March 31, 2011, compared to $1.6 million provided by investing activities for the three months ended March 31, 2010.  The decrease is the result of a decrease in proceeds from the sale of condominiums at our Murano project of $3.5 million due to a decrease in the number of settlements during 2011.  The decrease was partially offset by a decrease in expenditures for improvements to real estate of $0.8 million to $1.5 million for 2011, as compared to $ 2.3 million for 2010, resulting from a decrease in development activity.


Financing activities - Our net cash related to financing activities is generally impacted by our borrowings, and capital activities. Net cash provided by (used in) financing activities increased by $5.9 million to a $4.7 million source of cash for the three months ended March 31, 2011 compared to a $1.2 million use of cash for the three months ended March 31, 2010.  The increase was primarily a result of lower principal repayments on the Murano loan due to fewer settlements in 2011, in addition to expense reimbursements from our non-controlling partner in the High Performance Green Fund venture of $0.4 million in 2011 with no corresponding expense reimbursements during 2010.  Also, in 2011 we received draws from our Four Points Centre construction loan of $0.5 million to fund tenant improvements and related costs.  In 2010, we had similar loan draws for Four Points totaling $0.2 million.





Inflation





Substantially all of our office leases provide for tenants to reimburse us for increases in real estate taxes and operating expenses related to the leased space at the applicable property. In addition, many of the leases provide for increases in fixed base rent. We believe that inflationary increases in real estate taxes and operating expenses may be partially offset by the contractual rent increases and expense reimbursements as described above. We have one multi-family residential rental property, which is located in the Philadelphia central business district and subject to short-term leases. Inflationary increases can often be offset by increased rental rates; however, a weak economic environment may restrict our ability to raise rental rates.





ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





A primary market risk faced by our Company is interest rate risk. Our strategy is to match as closely as possible the expected holding periods and income streams of our assets with the terms of our debt. In general, we use floating rate debt on assets with higher growth prospects and less stability to their income streams. Correspondingly, with respect to stabilized assets with lower growth rates, we will generally use longer-term fixed-rate debt. As of March 31, 2011 , our Company had $63.2 million of outstanding consolidated floating rate debt, which is not subject to an interest rate cap.





The unconsolidated real estate entities have total debt, excluding loans on properties subject to special servicer oversight, of $1.9 billion , of which $0.3 billion bears interest at floating rates. As of March 31, 2011 , interest rate caps have been purchased for $0.2 billion of the floating rate loans.





Our fixed and variable rate consolidated long-term debt at March 31, 2011 consisted of the following (in thousands):





33


---

Table of Contents


Year of MaturityFixed RateVariableRateTotal2011$1,549$38,810$40,35920122,16024,38726,5472013108,392—108,39220141,884—1,88420151,996—1,996Thereafter121,209—121,209Total$237,190$63,197$300,387Weighted average interest rate5.95%5.85%5.93%





We utilize sensitivity analyses to assess the potential effect on interest costs of our variable rate debt. At March 31, 2011 , our variable rate long-term debt represents 21.0% of our total long-term debt. If interest rates were to increase by 75 basis points, or by approximately 12.8% of the weighted average variable rate at March 31, 2011 , the net impact would be increased interest costs of $0.5 million per year.





As of March 31, 2011 , the estimated fair value of our mortgage and other secured loans aggregates $293.2 million , compared to the aggregate carrying value of $300.4 million .








ITEM 4.    CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures





We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.





As required by Rule 13a-15(b), promulgated by the SEC under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.





Changes in Internal Controls over Financial Reporting





There were no changes in our internal control over financial reporting as defined in Rules 13a-15(f) or 15(d)-15(f) under the Exchange Act that occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





Limitations on Controls





Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.








34


---

Table of Contents


PART II. OTHER INFORMATION





ITEM 1A.    RISK FACTORS





Risks Related to Our Business and Our Properties


We generate a significant portion of our revenues from our joint venture and our separate account management agreements with CalSTRS, and if we were to lose these relationships, our financial results would be significantly negatively affected.


Our joint venture and separate account management agreement relationships with CalSTRS provide us with substantial fee revenues. For the three months ended March 31, 2011 , approximately 24.5% of our revenue has been derived from fees earned from these relationships.


We cannot assure you that our joint venture and separate account management relationships with CalSTRS will continue, and, if they do not, we may not be able to replace these relationships with other strategic alliances that would provide comparable revenues. Our interest in the TPG/CalSTRS joint venture is subject to a buy-sell provision, which permits CalSTRS to purchase our interest in TPG/CalSTRS at any time. Under the buy-sell provision either our Operating Partnership or CalSTRS can initiate a buy-out of the other's interest at any time by delivering a notice to the other specifying a purchase price for all the joint venture's assets; the other venture partner then has the option to sell its joint venture interest or purchase the interest of the initiating venture partner. The purchase price is based on what each venture partner would receive on liquidation if the joint venture's assets were sold for the specified price and the joint venture's liabilities paid and the remaining assets distributed to the joint venture partners.


In addition, upon the occurrence of certain events of default by the Operating Partnership under the joint venture agreement or related management, development service and leasing agreements, upon bankruptcy of our Operating Partnership, or upon the death or disability of either James A. Thomas, our Chairman, President and CEO, or John R. Sischo, our Co-Chief Operating Officer, or the failure of either of them to devote the necessary time to perform their duties (unless replaced by an individual approved by CalSTRS) (each, a “Buyout Default”), CalSTRS may elect to purchase our joint venture interest based on a three percent discount to the appraised fair market value at the time of the Buyout Default.


The joint venture agreement with CalSTRS also prohibits any transfer of securities of the Company or limited partnership units in our Operating Partnership that would result in Mr. Thomas, his immediate family and any entities controlled thereby owning less than 30% of our securities entitled to vote for the election of directors; provided, that in connection with the issuance of additional Company shares in one or more public offerings, Mr. Thomas, his immediate family and controlled entities may reduce their collective ownership interest to no less than 10% of the total common shares and Operating Partnership units and no less than 15.0 million shares and Operating Partnership units on a collective basis.


Most of our fee arrangements under our separate account relationship with CalSTRS are terminable on 30 days' notice. Termination of either our joint venture or separate account relationship with CalSTRS would adversely affect our revenue and profitability and our ability to achieve our business plan by reducing our fee income and access to co-investment capital to acquire additional properties.


Our joint venture investments may be adversely affected by our lack of control or input on decisions or shared decision-making authority or disputes with our co-venturers.


Many of our operating properties are or may be owned through a joint venture or partnership with other parties. As a result, in some cases we do not exercise sole decision-making authority regarding such joint venture properties, including with respect to cash distributions or the sale of such properties. Investments in partnerships, joint ventures, funds or other entities may, under certain circumstances, involve risks, including partners who may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. These investments may also have the risk of impasses on significant decisions if we do not have full control over the partnership or joint venture. Future disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their full time and effort on our business. In addition, under the principles of agency and partnership law, we may in certain circumstances be liable for certain actions of our partners, such as if a partner became bankrupt and defaulted on its monetary obligations to the venture, if a partner subjects the property owned by the partnership or joint venture to liabilities in excess of those contemplated by the partnership or joint venture agreement, or if the partner incurred debts or liabilities on behalf of the partnership or joint venture in excess of the authority granted by the partnership or joint venture agreement. In the joint ventures in which we are a general partner we may be liable for all the liabilities of the partnership, although we attempt to limit such liability to our investment in such partnership by investing through a special purpose subsidiary.


35


---

Table of Contents


Our joint venture partners have rights under our joint venture agreements that could adversely affect us.


As of March 31, 2011 , we held interests in 22 of our properties through TPG/CalSTRS, 10 of which are held indirectly through TPG/CalSTRS' interest in the Austin Portfolio Joint Venture. TPG/CalSTRS requires a unanimous vote of the joint venture's management committee on certain major decisions, including approval of annual business plans and budgets, financings and refinancings, and additional capital calls not in compliance with an approved annual plan. The management committee currently consists of two members appointed by CalSTRS and one member appointed by the Operating Partnership. All other decisions, including sales of properties, are made based upon a majority decision of the management committee. Thus CalSTRS has the ability to control certain decisions for the joint venture that may result in an outcome contrary to our interests. The Operating Partnership has the responsibility and authority to carry out day to day management of the joint venture and to implement the annual plans approved by the management committee. In addition to CalSTRS' ability to control certain decisions relating to the joint venture, our joint venture agreement with CalSTRS includes provisions negotiated for the benefit of CalSTRS that could adversely affect us. Unless otherwise determined by the management committee of the joint venture, we are required to use diligent efforts to sell each joint venture property generally within five years of that property reaching stabilization, except that the holding period for Reflections I and Reflections II will be separately determined by the joint venture management committee. With respect to these two properties, we are required to perform a hold/sell analysis at least annually, and make a recommendation to the management committee regarding the appropriate holding period. We have a right of first offer to purchase a joint venture property upon a required sale at a price we propose, and if CalSTRS accepts our offer we must close within 90 days. If we do not exercise the right of first offer and we subsequently fail to effect a sale by the end of the specified holding period, CalSTRS has the right to assume control of the sale process. This may require us to sell one or more of our assets at an inopportune time, or for prices that are lower than could be achieved if we had more flexibility in the timing for effecting sales.


In June 2007, a wholly-owned subsidiary of TPG/CalSTRS entered into a partnership agreement and syndication agreement with an affiliate of Lehman in relation to the Austin Portfolio Joint Venture. As of March 31, 2011 , one-third of the Lehman affiliate's original 75% equity interest in the Austin Portfolio Joint Venture had been sold to an unrelated institutional investor and the Lehman affiliate held 50% of the equity in the Austin Portfolio Joint Venture. The Lehman affiliate has the right to reduce or eliminate certain fees and payments otherwise payable to TPG/CalSTRS under the partnership agreement. The Lehman affiliate has certain approval rights with respect to major decisions of the Austin Portfolio Joint Venture, although the TPG/CalSTRS subsidiary is in charge of operating, leasing and managing the Austin Portfolio Joint Venture assets within approved budgets and guidelines.


The major decision approval rights of the Lehman affiliate include, but are not limited to, the right to approve annual business plans and budgets, financings and refinancings, sales of properties, additional capital calls not in compliance with an approved annual plan, and agreements with affiliates. The other limited partner in the Austin Portfolio Joint Venture also has approval rights over some of these major decisions.


In addition, the Lehman affiliate can require the sale of one Central Business District asset and one suburban asset by the Austin Portfolio Joint Venture at any time after June 1, 2011; further, the Lehman affiliate and its successors and assigns can require the sale of the balance of the Austin Portfolio Joint Venture assets after June 1, 2012, in each case subject to a right of first offer in favor of the other partners in the Austin Portfolio Joint Venture. The limited partners also have the right to remove the general partner under certain circumstances. These rights could adversely affect TPG/CalSTRS and us.


In November 2010, our subsidiaries entered into amended and restated partnership agreements, contribution agreements with subsidiaries of Brandywine Operating Partnership, L.P., a Delaware limited partnership (“Brandywine”), with respect to our One Commerce Square and Two Commerce Square buildings in Philadelphia, Pennsylvania. Brandywine contributed capital, and committed to additional capital contributions to the existing owners of the buildings, in return for a 25% limited partnership interest in each building. Our wholly-owned subsidiaries are the general partners of the Commerce Square partnerships, with authority to manage and carry out the day to day business of the partnerships, subject only to approval by Brandywine of certain specified major decisions, including approval of certain capital budgets, leasing budgets and leasing guidelines, financing or refinancing of each building, and certain major leases. We retained sole approval over the operating budgets and other decisions that are not major decisions. We retain, as general partner, the right to sell the Commerce Square buildings at any time, but Brandywine has certain rights to acquire our interests in Commerce Square in lieu of such a sale of the buildings to a third party, as long as we receive the same amount we would have received on a sale to a third party. Brandywine has the right to purchase all of the Company's interest in each of the buildings subject to the retention of a nominal interest by the Company with an allocation of mortgage debt for a minimum of five years, which right is exercisable between October 31, 2016 and April 30, 2017. The exercise of such call right triggers certain rights and obligations of the Company, including the right to elect to market our interests in the buildings to third parties to achieve a price for our interests that we deem to be acceptable. If the Company deems a third party bid for our interests to be acceptable, then under certain conditions Brandywine will have a right of first refusal to purchase our interests for the same price and terms offered by the third party. If


36


---

Table of Contents


Brandywine does not exercise, or does not have, such right of first refusal, and if we elect to sell our interests in Commerce Square to a third party, Brandywine has a right to “piggyback” on such sale and sell its interests in Commerce Square to the third party on the same terms. Finally, on or after the 10 th anniversary of the admission of Brandywine as a partner, either the Company or Brandywine may elect to cause the sale of the Commerce Square buildings and dissolve the partnerships, which will give the other party the right to trigger a buy-sell procedure for the purchase of the electing partner's interest in the partnerships.


We may not receive funding from our joint venture partners in connection with proposed acquisitions, which could adversely affect our growth.


We have entered into, and may enter into in the future, certain joint venture acquisition arrangements with third parties in which we identify potential acquisition properties on behalf of the joint venture, and a portion (in some cases, a substantial portion) of the capital required for each project would be funded by our joint venture partners. Although our joint venture partners have committed to fund property acquisitions, such joint venture partners may decide not to fund a particular or any potential acquisition properties for any number of reasons, including such entities may not have the capital necessary to fund projects at the time of the proposed acquisition. Accordingly, if we identify potential acquisition opportunities in the future for these programs, we may not receive approval and/or funding from joint venture partners, notwithstanding any prior commitments for funding. If we do not make any acquisitions under existing or future joint ventures, it could adversely affect our ability to grow our business in accordance with our business plan.


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


As of March 31, 2011 , the 20 largest tenants for properties in which we held an ownership interest, collectively leased 33.7% of the rentable square feet of space at properties in which we hold an ownership interest, excluding those properties controlled by a special servicer, representing 39.8% of the total annualized rent generated by these properties.


Any of our tenants may experience a downturn in its business, which may weaken such tenant's financial condition. As a result, tenants may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent, declare bankruptcy or default under their leases. Certain of our tenants also have termination rights under their leases with us, which they might choose to exercise if they experience a downturn in their business. In addition, current economic and market conditions increase the possibility that one or more of our tenants will become insolvent. Any tenant bankruptcy or insolvency, leasing delay, failure to make rental payments when due, or default under a lease could result in the termination of the tenant's lease and material losses to our Company.


In particular, if a significant tenant becomes insolvent, suffers a downturn in its business and decides not to renew its lease or vacates a property, it may seriously harm our business. Failure on the part of a tenant to comply with the terms of a lease may give us the right to terminate the lease, repossess the applicable property and enforce the payment obligations under the lease. In those circumstances, we would be required to find another tenant. We cannot assure you that we would be able to find another tenant without incurring substantial costs, or at all, or that if another tenant were found, we would be able to enter into a new lease on favorable terms to us or at the same rental rates.


Bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that tenant or their property. A tenant bankruptcy would delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these amounts. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy amounts due under the lease must be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claim in the event of the bankruptcy of a large tenant, which could adversely impact our financial condition.


Our operating results depend upon the regional economies in which our properties are located and the demand for office and other mixed-use space, and unique or disproportionate economic downturns or adverse regulatory or taxation policies in any of these regions could harm our operating results.


Our operating and development properties are located in three geographic regions of the United States: the West Coast, Southwest and Mid-Atlantic regions. Historically, the largest part of our revenues has been derived from our ownership and management of properties consisting primarily of office buildings.


A decrease in the demand for office space in these geographic regions, and for Class A office space in particular, may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio.


37


---

Table of Contents


We are also susceptible to disproportionate or unique adverse developments in these regions and in the national office market generally, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, terrorist targeting of high-rise structures, infrastructure quality, increases in real estate and other taxes, costs of complying with government regulations or increased regulation, oversupply of or reduced demand for office space, and other factors. Some of the regional issues we face include the more highly regulated and taxed economy of Southern California and high local and municipal taxes for our Philadelphia properties. Any adverse economic or real estate developments in one or more of our regions, or any decrease in demand for office space resulting from the local regulatory environment, business climate or energy or fiscal problems, could adversely impact our revenue and profitability, thereby causing a significant decline in our financial condition, results of operations, cash flow, the trading price of our common stock and impairing our ability to satisfy our debt service obligations.


Our need for additional debt financing, our existing level of debt and the limitations imposed by our debt agreements could have significant adverse consequences on us.


We may seek to incur additional debt to finance future acquisition and development activities; however debt financing may not be available to us on acceptable terms under current market conditions. In addition, it is possible the required payments of principal and interest on borrowings may leave us with insufficient cash to operate our properties profitably. Our need for debt financing, our existing level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:


|  |                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------
|• | our cash flow may be insufficient to meet our required principal and interest payments or to pay dividends;

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

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

|  |                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|• | we may be unable to distribute funds from a property to our Operating Partnership or apply such funds to cover expenses related to another property;

|  |                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------
|• | we could be required to dispose of one or more of our properties, possibly on disadvantageous terms and/or at disadvantageous times;

|  |                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | we could default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases;

|  |                                                                                                                                                                                                                                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | we could violate covenants in our loan documents or our joint venture agreements, including provisions that may limit our ability to further mortgage a property, make distributions, acquire additional properties, repay indebtedness prior to a set date without payment of a premium or other pre-payment penalties, all of which would entitle the lenders to accelerate our debt obligations;

|  |                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------
|• | a default under any one of our mortgage loans with cross default provisions could result in a default on other of our indebtedness; and

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | because we have agreed to use commercially reasonable efforts to maintain certain debt levels to provide the ability for Mr. Thomas and entities controlled by him to guarantee debt of $210 million, including $11 million of debt available for guarantee by Mr. Edward Fox, one of our non-employee directors, and by Mr. Richard Gilchrist, an individual formerly affiliated with Maguire Thomas Partners, we may not be able to refinance our debt when it would otherwise be advantageous to do so or to reduce our indebtedness when our board of directors determines it is prudent.

If any one or more of these events were to occur, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock, and could impair our ability to satisfy our debt service obligations.


Because we have debt at our unconsolidated properties which bears interest at variable rates, our failure to hedge effectively against interest rate changes may adversely affect our results of operations.


As of March 31, 2011 , $324.6 million of our unconsolidated debt, excluding loans on properties subject to special servicer oversight, was at variable interest rates; we have purchased interest rate caps covering $ 186.2 million of the unconsolidated floating rate loans. The interest rate hedging arrangements we enter into to cap our interest rate exposure involve risks, including that our hedging transactions might not achieve the desired effect in eliminating the impact of interest rate fluctuations, or that counterparties may fail to honor their obligations under these arrangements. As a result, these arrangements may not be effective in reducing our exposure to interest rate fluctuations and this could reduce our revenue,


38


---

Table of Contents


require us to modify our leverage strategy, and adversely affect our expected investment returns.


We may be unable to complete acquisitions necessary to grow our business, and even if consummated, we may fail to successfully operate these acquired properties.


Our planned growth strategy includes the acquisition of additional properties as opportunities arise with a focus on the West Coast region of the United States. We regularly evaluate approximately 10 markets in the United States for strategic opportunities to acquire office, mixed-use and other properties. Our ability to acquire properties on favorable terms and successfully operate them is subject to the following significant risks:


|  |                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | we may be unable to generate sufficient cash from operations, or obtain the necessary debt or equity to consummate an acquisition or, if obtainable, such financing may not be on favorable terms;

|  |                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------
|• | we may need to spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;

|  |                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | we may be unable to acquire a desired property because of competition from other real estate investors with more available capital, including other real estate operating companies, real estate investment trusts and investment funds;

|  |                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------
|• | competition from other potential acquirers may significantly increase the purchase price, even if we are able to acquire a desired property;

|  |                                                                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | agreements for the acquisition of office properties are typically subject to customary conditions to closing, including satisfactory completion of due diligence investigations, and we may spend significant time and money on a potential acquisition we eventually decide not to pursue;

|  |                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations;

|  |                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------
|• | market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and

|  |                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | we may acquire properties subject to liabilities without any recourse, or with only limited recourse, for unknown liabilities such as clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

If we cannot complete property acquisitions on favorable terms or at all, or operate acquired properties to meet our expectations, our revenue and profitability could be adversely impacted.


Any real estate acquisitions that we consummate may result in disruptions to our business as a result of the burden of integrating operations placed on our management.


Our business strategy includes acquisitions and investments in real estate on an ongoing basis as market conditions warrant. These acquisitions may cause disruptions in our operations and divert management's attention from our other day-to-day operations, which could impair our relationships with our current tenants and employees. If we acquire real estate by acquiring another entity, we may be unable to effectively integrate the operations and personnel of the acquired business. In addition, we may be unable to train, retain and motivate any key personnel from the acquired business. If our management is unable to effectively implement our acquisition strategy, we may experience disruptions to our business, which could harm our results of operations.


We may be unable to successfully complete and operate properties under development, which would impair our financial condition and operating results.


Part of our business is devoted to the development of office, mixed-use and other properties, and the redevelopment of core plus and value-add properties. Our development and redevelopment activities involve the following significant risks:


|  |                                                                   
|- | ------------------------------------------------------------------
|• | we may be unable to obtain financing on favorable terms or at all;

|  |                                                                                                                                   
|- | ----------------------------------------------------------------------------------------------------------------------------------
|• | if we finance projects through construction loans, we may be unable to obtain permanent financing at all or on advantageous terms;

|  |                                                                     
|- | --------------------------------------------------------------------
|• | we may not complete projects on schedule or within budgeted amounts;

|  |                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------
|• | we may underestimate the expected costs and time necessary to achieve the desired result with a redevelopment project;

39


---

Table of Contents


|  |                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | we may discover structural, environmental or other feasibility issues with properties acquired as redevelopment projects following our acquisition, which may render the redevelopment as planned not possible;

|  |                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | we may encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy, and other required governmental permits and authorizations;

|  |                                                                                                                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | occupancy rates and rents, or condominium prices and absorption rates in the case of the Murano, may fluctuate depending on a number of factors, including market and economic conditions, and may result in our investment not being profitable;

|  |                                                           
|- | ----------------------------------------------------------
|• | adverse weather that damages the project or causes delays;

|  |                                                      
|- | -----------------------------------------------------
|• | unanticipated changes to the plans or specifications;

|  |                                                        
|- | -------------------------------------------------------
|• | unanticipated shortages of materials and skilled labor;

|  |                                                         
|- | --------------------------------------------------------
|• | unanticipated increases in material and labor costs; and

|  |                                            
|- | -------------------------------------------
|• | fire, flooding and other natural disasters.

If we are not successful in our property development initiatives, it could adversely impact our revenue and profitability, causing a significant downturn in our business, including our financial condition, results of operations, and the trading price of our common stock.


We face significant competition, which may decrease or prevent increases of the occupancy and rental rates of our properties.


We face significant competition from other managers and owners of office and mixed-use real estate, many of which own or manage properties similar to ours in the same regional markets in which our properties are located. We also compete with other diversified real estate companies and companies focused solely on offering property investment management and brokerage services. A number of our competitors are larger and better able to take advantage of efficiencies created by size, have better financial resources, or increased access to capital at lower costs, and may be better known in regional markets in which we compete. Our smaller size as compared to some of our competition may increase our susceptibility to economic downturns and pressures on rents. Our failure to compete successfully in our industry would materially affect our business prospects and operating results.


We may be unable to renew leases, lease vacant space or re-lease space as leases expire resulting in increased vacancy rates, lower revenue and an adverse effect on our operating results.


As of March 31, 2011 , leases representing 4.1% and 5.9% of the rentable square feet of the office and retail space of our consolidated and unconsolidated properties (at 100%), excluding those properties controlled by a special servicer, will expire in 2011 and 2012, respectively. Further, an additional 14.5% of the square feet of these properties was available for lease as of March 31, 2011 . If the rental rates for our properties decrease, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock and impairing our ability to satisfy our debt service obligations.


Our growth depends on external sources of capital, some of which are outside of our control. If we are unable to access capital from external sources, we may not be able to implement our business strategy.


Our business strategy requires us to rely significantly on third-party sources to fund our capital needs. We may not be able to obtain debt or equity on favorable terms or at all. As a result of the recent downturn in the financial markets, we may experience difficulty refinancing some of our existing debt or obtaining new debt to complete acquisitions. Any additional debt we incur will increase our leverage and may impose operating restrictions on us. Any issuance of equity by our Company to fund our portion of equity capital requirements could be dilutive to our existing stockholders, and could have a negative impact on our stock price. Our access to third-party sources of capital depends, in part, on:


|  |                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------
|• | our current debt levels, which were$300.4 millionof consolidated debt and$2.0 billionof unconsolidated debt as ofMarch 31, 2011;

|  |                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------
|• | our lack of current cash flow from operating activities, which was a use of cash of$7.4 millionfor thethree months ended March 31, 2011;

|  |                                          
|- | -----------------------------------------
|• | our current and expected future earnings;

|  |                                                 
|- | ------------------------------------------------
|• | the market's perception of our growth potential;

|  |                                      
|- | -------------------------------------
|• | the market price of our common stock;

40


---

Table of Contents


|  |                                                                      
|- | ---------------------------------------------------------------------
|• | the perception of the value of an investment in our common stock; and

|  |                           
|- | --------------------------
|• | general market conditions.

If we cannot obtain capital from third-party sources when needed, we may not be able to acquire or develop properties when strategic opportunities exist, or to repay existing debt as it matures.


As a result of the limited time which we have to perform due diligence of many of our acquired properties, we may become subject to significant unexpected liabilities and our properties may not meet projections.


When we enter into an agreement to acquire a property or portfolio of properties, we often have limited time to complete our due diligence prior to acquiring the property. To the extent we underestimate or fail to investigate or identify risks and liabilities associated with the properties we acquire, we may incur unexpected liabilities or the properties may fail to perform as we expected. If we do not accurately assess the liabilities associated with properties prior to their acquisition, we may pay a purchase price that exceeds the current fair value of the net identifiable assets of the acquired property. As a result, intangible assets would be required to be recorded, which could result in significant accounting charges in future periods. These charges, in addition to the financial impact of significant liabilities that we may assume, and any failure of properties to perform as expected, could adversely impact our revenue and profitability, causing a significant downturn in our financial condition, results of operations and the trading price of our common stock and impairing our ability to satisfy our debt service obligations.


Our efforts to expand our geographic presence and diversify into other regional real estate markets may not be successful, thereby constraining our growth to markets in which we currently operate.


We intend to expand our business to new geographic regions where we expect the ownership and management of property to result in favorable risk-adjusted investment returns. In order for us to achieve economies of scale, we generally target ownership of 500,000 or more rentable square feet in a market. It may be difficult for us to achieve this level of ownership and our initial entry into a particular market may result in higher administrative expenses for us initially. Presently, we do not possess the same level of familiarity with the development, ownership and management of properties in locations other than the West Coast, Southwest and Mid-Atlantic regions in the United States, which lack of familiarity could adversely affect our ability to own, manage or develop properties outside these regions successfully or at all or to achieve expected performance.


As the current or previous owner or operator of real property, we could become subject to liability for environmental contamination, regardless of whether we caused such contamination.


Under various federal, state and local environmental laws, regulations and ordinances, a current or previous owner or operator (e.g., tenant or manager) of real property may be liable for the cost to remove or remediate contamination resulting from the presence or discharge of hazardous or toxic substances, wastes or petroleum products on, under, from or in such property. These costs could be substantial and liability under these laws may attach without regard to fault, or whether the owner or operator knew of, or was responsible for, the presence of the contamination. The liability may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs to the extent such contributions are possible to obtain. In addition, the current or previous owner or operator of property may be subject to damage awards for personal injury or property damage resulting from contamination at or migrating from its property. Previous owners used some of our properties for industrial and retail purposes, so those properties may contain some level of environmental contamination. In addition, the presence of contamination, or the failure to properly remediate contamination on a property may limit the ability of the owner or operator to sell, develop or rent that property or to borrow using the property as collateral, and may cause our investment in that property to decline in value.


As the owner of real property, we could become subject to liability for asbestos-containing building materials in the buildings on our property.


Some of our properties may contain asbestos-containing materials. Environmental laws require that owners or operators of buildings with asbestos-containing building materials properly manage and maintain these materials, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements. In addition, these laws may also allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.


We have removed or abated asbestos-containing building materials from certain tenant and common areas at our City National Plaza and Brookhollow Central properties. We continue to remove or abate asbestos from various areas of the building


41


---

Table of Contents


structures and as of March 31, 2011 , had accrued approximately $1.3 million for estimated future costs of such removal or abatement at these properties.


Our properties may contain or develop harmful mold or suffer from other adverse conditions, which could lead to liability for adverse health effects and costs of remediation.


When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.


As the owner of real property, we could become subject to liability for failure to comply with environmental requirements regarding the handling and disposal of regulated substances and wastes or for non-compliance with health and safety requirements.


Environmental laws and regulations regarding the handling of regulated substances and wastes apply to our properties. The properties in our portfolio are also subject to various federal, state and local health and safety requirements, such as state and local fire requirements. If we or our tenants fail to comply with these various requirements, we might incur governmental fines or private damage awards. Moreover, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will materially adversely impact our financial condition, results of operations, cash flow, cash available for distribution, the per share trading price of our common stock and our ability to satisfy our debt service obligations. Environmental noncompliance liability could also affect a tenant's ability to make rental payments to us.


Tax indemnification obligations that may arise in the event we or our Operating Partnership sell an interest in either of two of our properties could limit our operating flexibility.


We and our Operating Partnership agreed at the time of our public offering to indemnify Mr. Thomas against adverse direct and indirect tax consequences in the event that our Operating Partnership or the underlying property owner directly or indirectly sells, exchanges or otherwise disposes (including by way of merger, sale of assets or otherwise) of any portion of its interests, in a taxable transaction, in either One Commerce Square or Two Commerce Square. These two properties represented 15.5% of annualized rent for properties in which we held an ownership interest as of March 31, 2011 . The indemnification obligation currently expires October 13, 2013, which may be further extended to October 13, 2016 provided Mr. Thomas and his controlled entities collectively retain at least 50% of the Operating Partnership units received by them in connection with our formation transactions at the time of our initial public offering.


We also agreed at the time of the initial public offering to use commercially reasonable efforts to make approximately $210 million of debt available to be guaranteed by entities controlled by Mr. Thomas, including $11 million of debt available for guarantee by Mr. Fox, a non-employee member of our board of directors, and by Mr. Gilchrist, an individual formerly affiliated with Maguire Thomas Partners. We agreed to make this debt available for guarantee in order to assist Mr. Thomas and these other persons in preserving their tax position after their contributions at the time of our initial public offering.


Risks Related to the Real Estate Industry


The current economic environment for real estate companies may significantly adversely impact our results of operations and business prospects.


The success of our business and profitability of our operations are dependent on continued investment in the real estate markets and access to capital and debt financing. A long term crisis of confidence in real estate investing and lack of available credit for acquisitions would be likely to constrain our business growth. As part of our business goals, we intend to grow our properties portfolio with strategic acquisitions of core properties at advantageous prices, and core plus and value added properties where we believe we can bring necessary expertise to bear to increase property values. In order to pursue acquisitions, we need access to equity capital and also property-level debt financing. Conditions in the financial markets may adversely impact the availability and cost of credit in the near future. Our ability to make scheduled payments or to refinance our obligations with respect to indebtedness depends on our operating and financial performance, which in turn is subject to prevailing economic conditions.


42


---

Table of Contents


Illiquidity of real estate investments and the susceptibility of the real estate industry to economic conditions could significantly impede our ability to respond to adverse changes in the performance of our properties.


Our ability to achieve desired and projected results for growth of our business depends on our ability to generate revenues in excess of expenses, and make scheduled principal payments on debt and fund capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may adversely impact our results of operations and the value of our properties. These events include:


|  |                                                             
|- | ------------------------------------------------------------
|• | vacancies or our inability to rent space on favorable terms;

|  |                                        
|- | ---------------------------------------
|• | inability to collect rent from tenants;

|  |                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------
|• | difficulty in accessing credit in the present economic environment, in particular for larger mortgage loans;

|  |                                                                               
|- | ------------------------------------------------------------------------------
|• | inability to finance property development and acquisitions on favorable terms;

|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|• | increased operating costs, including real estate taxes, insurance premiums and utilities;

|  |                                                                                 
|- | --------------------------------------------------------------------------------
|• | local oversupply, increased competition or reduction in demand for office space;

|  |                                                             
|- | ------------------------------------------------------------
|• | costs of complying with changes in governmental regulations;

|  |                                                     
|- | ----------------------------------------------------
|• | the relative illiquidity of real estate investments;

|  |                                     
|- | ------------------------------------
|• | changing submarket demographics; and

|  |                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------
|• | the significant transaction costs related to property sales, including a high transfer tax rate in the City of Philadelphia.

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If any of these events were to happen, our revenue and profitability could be impaired, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock, and our ability to satisfy our debt service obligations could be impaired.


Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our financial condition.


All of our commercial properties are required to comply with the Americans with Disabilities Act, or ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. The obligation to make readily achievable accommodations is an ongoing one, and we assess our properties and make alterations as appropriate. Compliance with the ADA requirements could require removal of access barriers.


If one or more of our properties is not in compliance with the ADA, we would be required to incur additional costs to bring the property or properties into compliance. In addition, non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. Typically, we are responsible for changes to a building structure that are required by the ADA, which can be costly. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations. We may be required to make substantial capital expenditures to comply with these requirements thereby limiting the funds available to operate, develop and redevelop our properties and acquire additional properties. As a result, these expenditures could negatively impact our revenue and profitability.


Potential losses to our properties may not be covered by insurance and may result in our inability to repair damaged properties; as a result we could lose invested capital.


We carry comprehensive liability, fire, flood, extended coverage, wind, earthquake, terrorism, pollution legal liability, business interruption and rental loss insurance under our blanket policy covering all of the properties in which we own an interest in or manage for third parties, including our development properties (although we carry only liability insurance for the California Environmental Protection Agency (“CalEPA”) headquarters building under our blanket policy because the tenant has the right to provide all other forms of coverage it deems necessary, and it has elected to do so, and we do not insure 816 Congress under our blanket policy because the third party owner has elected to carry it under its policy). We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice.


We either own or have interests in a number of properties in Southern California, an area especially prone to earthquakes.


43


---

Table of Contents


We carry earthquake insurance on our properties located in seismically active areas, which includes our Southern California properties, wind insurance on our properties located in “tier 1” wind zones, which includes our Houston, Texas properties, and terrorism insurance on all of our properties. Our terrorism insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants, and biological and chemical weapons as more specifically excluded under the actual terrorism policies. Some of our policies, like those covering losses due to earthquakes and terrorism, are subject to limitations involving deductibles and policy limits which may not be sufficient to cover potential losses.


Under their leases, our tenants are generally required to indemnify us from liabilities resulting from injury to persons, air, water, land or property, on or off the premises due to activities conducted by them on our properties. There is an exception for claims arising from the negligence or intentional misconduct by us or our agents. Additionally, tenants are generally required, with the exception of governmental entities and other entities that are self-insured, to obtain and keep in force during the term of the lease liability and property damage insurance policies issued by companies holding ratings at a minimum level at their own expense.


Although we have not experienced such a loss to date, if we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged property as well as the anticipated future cash flows from that property, including lost revenue from unpaid rent from tenants. In addition, if the damaged property is subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if the property was irreparably damaged. In the event of a significant loss at one or more of the properties covered by our blanket policy, the remaining insurance under our policy, if any, could be insufficient to adequately insure our remaining properties. In this event, securing additional insurance, if possible, could be significantly more expensive than our current policy.


Risks Related to Our Organization and Structure


Our senior management has existing conflicts of interest with us and our public stockholders that could result in decisions adverse to our Company.


In addition to the common stock owned by Mr. Thomas as of March 31, 2011 , he owned or controlled a significant interest in our Operating Partnership consisting of 12,313,331 units, or a 24.8% interest in the Operating Partnership as of such date. In addition, our senior executive officers, excluding Mr. Thomas, collectively held an interest in incentive units (vested and unvested) representing an aggregate 3.9% equity interest in the Operating Partnership.


Members of senior management could make decisions that could have different implications for our Operating Partnership and for us, our stockholders, and our senior executive officers. For example, the tax treatment of a transaction may have differing consequences as to the Operating Partnership unitholders and as to the TPGI stockholders.


Our success depends on key personnel, the loss of whom could impair our ability to operate our business successfully.


We depend on the efforts of key personnel, particularly Mr. Thomas, our Chairman, Chief Executive Officer, and President. Among the reasons that Mr. Thomas is important to our success is that he has an industry reputation developed over more than 30 years in the real estate industry that attracts business and investment opportunities and assists us in negotiations with lenders, existing and potential tenants and industry personnel. If we lost his services, our relationships with these parties could diminish. Mr. Thomas is 74 and, although he has informed us that he does not currently plan to retire, we cannot be certain how long he will continue working on a full-time basis.


Mr. Sischo, our co-Chief Operating Officer, has significant experience in real estate investments including acquisition, financing and capital markets. A departure of either Mr. Thomas or Mr. Sischo could have adverse effects on our joint venture relationship with CalSTRS, including, pursuant to a right granted to CalSTRS in our joint venture agreement with CalSTRS, the possible required sale of our joint venture interest to CalSTRS at 97% of fair value, unless within 180 days the Company names a replacement for such departed executive who is reasonably acceptable to CalSTRS.


We have a holding company structure and rely upon funds received from our Operating Partnership to pay liabilities.


We are a holding company. Our primary asset is our general partnership interest in our Operating Partnership. We have no independent means of generating revenues. To the extent we require funds to pay taxes or other liabilities incurred by us, to pay dividends or for any other purpose, we must rely on funds received from our Operating Partnership. If our Operating Partnership should become unable to distribute funds to us, we would be unable to continue operations after a short period. Most of the properties owned by our subsidiaries and joint ventures are encumbered by loans. These loans generally contain lockbox arrangements and reserve requirements that may affect the amount of cash available for distribution from the subsidiaries that own the properties to the Operating Partnership. Some of the loans include cash sweep and other restrictions and provisions that prior to an event of default may prevent the distribution of funds from the subsidiaries who own these properties to our Operating Partnership. In the event of a default under any of these loans, the defaulting subsidiary or joint


44


---

Table of Contents


venture would be prohibited from distributing cash to our Operating Partnership. As a result, our Operating Partnership may be unable to distribute funds to us and we may be unable to use funds from one property to support the operation of another property. As we acquire new properties and refinance our existing properties, we may finance these properties with new loans that contain similar provisions. Some of the loans to our subsidiaries and joint ventures may contain provisions that restrict us from loaning funds to our other subsidiaries or joint ventures. If we are permitted to loan funds to our subsidiaries or joint ventures, our loans generally will be subordinated to the existing debt on our properties.


Mr. Thomas has a significant vote in certain matters as a result of his control of 100% of our limited voting stock.


Each entity that received Operating Partnership units in our formation transactions received shares of our limited voting stock that are paired with units in our Operating Partnership on a one-for-one basis. All of these entities are directly or indirectly controlled by Mr. Thomas, and, as a result, Mr. Thomas controls 100% of our outstanding limited voting stock, or 31.1% of our outstanding voting stock (including outstanding shares of common stock owned by Mr. Thomas and his affiliates) as of March 31, 2011 . These limited voting shares are entitled to vote in the election of directors, for the approval of certain extraordinary transactions including any merger, sale or liquidation of the Company, amendments to our certificate of incorporation and any other matter required to be submitted to a separate class vote under Delaware law. Mr. Thomas may have interests that differ from that of our public stockholders, including by reason of his interests held in Operating Partnership units, and may accordingly vote as a stockholder in ways that may not be consistent with the interests of our public stockholders. This significant voting influence over certain matters may have the effect of delaying, preventing or deterring a change of control of our Company, or could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our Company.


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


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


|  |                                                                                   
|- | ----------------------------------------------------------------------------------
|• | vacancies on our board of directors may only be filled by the remaining directors;

|  |                                                                
|- | ---------------------------------------------------------------
|• | only the board of directors can change the number of directors;

|  |                                                           
|- | ----------------------------------------------------------
|• | there is no provision for cumulative voting for directors;

|  |                                             
|- | --------------------------------------------
|• | directors may only be removed for cause; and

|  |                                                              
|- | -------------------------------------------------------------
|• | our stockholders are not permitted to act by written consent.

In addition, our certificate of incorporation authorizes the board of directors to issue up to 25,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which will be determined at the time of issuance by our board of directors without further action by our stockholders. These terms may include voting rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current stockholders' control of our Company.


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


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





We could authorize and issue stock without stockholder approval, which could cause our stock price to decline and which could dilute the holdings of our existing stockholders.


Our certificate of incorporation authorizes our board of directors to issue authorized but unissued shares of our common stock or preferred stock to classify or reclassify any unissued shares of our preferred stock and to set the preferences, rights and other terms of the classified or unclassified shares. Our board of directors could establish a series of preferred stock that could,


45


---

Table of Contents


depending on the terms of the series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.


The payment of dividends on our common stock is at the discretion of our board of directors and subject to various restrictions and considerations and, consequently, may be changed or discontinued at any time.


Although we historically paid quarterly dividends on our common stock until December 2009, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition, and any other factors deemed relevant by our board of directors. In December 2009, our board of directors suspended the quarterly dividends to common stockholders. Until and unless dividend payments are reinstated, the only opportunity to achieve a positive return on an investment in our common stock is if the market price of our common stock appreciates.





ITEM 6.    EXHIBITS


(a) Exhibits





10.68Second Amendment to Employment Agreement between the Registrant and Mr. James A. Thomas.10.69Second Amendment to Employment Agreement between the Registrant and Mr. Paul S. Rutter.10.70Second Amendment to Employment Agreement between the Registrant and Mr. John R. Sischo.31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


In accordance with SEC Release 33-8212, the following exhibits are being furnished, and are not being filed as part of this report or as a separate disclosure document, and are not being incorporated by reference into any registration statement filed under the Securities Act of 1933.


32.1Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


_________________________











46


---

Table of Contents


SIGNATURES


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


Dated: May 10, 2011





THOMASPROPERTIESGROUP, INC.By:/s/ James A. ThomasJames A. ThomasChief Executive OfficerBy:/s/ Diana M. LaingDiana M. LaingChief Financial Officer











47