**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

| **(Mark One)**                                       | ** **                                                                                              |
|------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| x                                                    | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
| **For the fiscal year ended December 31, 2005** |
| **OR**                                               |
| o                                                    | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                    to                    **

**Commission file number 1-14462**

**AMERIVEST PROPERTIES INC.**

(Exact name of Registrantas Specified in Its Charter)

| **Maryland**                                                      | ** ** | **84-1240264**                            |
|-------------------------------------------------------------------|------------|-------------------------------------------|
| (State or other  jurisdiction   of incorporation or organization) | ** ** | (I.R.S. Employer   Identification Number) |

 

**1780 South BellaireStreet, Suite 100Denver, Colorado 80222**(Addressof principal executive offices and zip code)

**(303) 297-1800**(Registrant’telephone number, including area code)

Securities registered under Section 12(b) ofthe Exchange Act:

| **Title of Each Class**        |   | **Name of  Each Exchange on Which Registered** |
|--------------------------------|--------|------------------------------------------------|
| Common Stock,  $.001 par value |   | American Stock  Exchange                       |

 

Securities registered under Section 12(g) ofthe Exchange Act:

**None.**(Titleof Class)

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No þ

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No þ

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. Yes þ  No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of the Form 10-Kor any amendment to this Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

| Large accelerated filer o |   | Accelerated filer þ |   | Non-accelerated filer o |
|--------------------------------|--------|-------------------------------|--------|------------------------------|

 

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

Basedon the closing price of the registrant’s common shares on June 30, 2005(the last business day of the registrant’s most recently completed secondfiscal quarter), the aggregate market value of the voting common equity held bynon-affiliates of the registrant was approximately $88,600,000. As of March 15,2006, there were approximately 24,124,000 of the registrant’s common sharesoutstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the issuer’sdefinitive proxy statement for its 2006 annual meeting of stockholders areincorporated by reference into Part III of this Annual Report on Form 10-K.

 

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**TABLE OF CONTENTS**
|            | ** ** | ** **                                                                                                         | ** ** | **Page** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** ** |       | **Part I**                                                                                                    |       |     |
| Item  1    |       | Business                                                                                                           |       | 1        |
| Item  1A   |       | Risk  Factors                                                                                                      |       | 10       |
| Item 1B    |       | Unresolved Staff  Comments                                                                                         |       | 24       |
| Item  2    |       | Properties                                                                                                         |       | 25       |
| Item  3    |       | Legal  Proceedings                                                                                                 |       | 32       |
| Item 4     |       | Submission of  Matters to a Vote of Security Holders                                                               |       | 32       |
| ** ** |       | **Part II**                                                                                                   |       |     |
| Item 5     |       | Market for  Common Equity, Related Stockholder Matters and Purchases of Equity Securities                |       | 33       |
| Item 6     |       | Selected Financial  Data                                                                                           |       | 34       |
| Item 7     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |       | 35       |
| Item 7A    |       | Quantitative  and Qualitative Disclosures about Market Risk                                                        |       | 47       |
| Item 8     |       | Financial  Statements and Supplementary Data                                                                       |       | 48       |
| Item 9     |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                              |       | 48       |
| Item 9A    |       | Controls and  Procedures                                                                                           |       | 48       |
| Item 9B    |       | Other Information                                                                                                  |       | 49       |
| ** ** |       | **Part III**                                                                                                  |       |     |
| Item 10    |       | Directors and  Executive Officers of the Registrant                                                                |       | 50       |
| Item 11    |       | Executive  Compensation                                                                                            |       | 50       |
| Item 12    |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters    |       | 50       |
| Item 13    |       | Certain  Relationships and Related Transactions                                                                    |       | 50       |
| Item 14    |       | Principal  Accounting Fees and Services                                                                            |       | 50       |
| ** ** |       | **Part IV**                                                                                                   |       |     |
| Item 15    |       | Exhibits,  Financial Statements and Schedules                                                                      |       | 51       |

 

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**DisclosureRegarding Forward-Looking Statements And Cautionary Statements**

*This annual reportincludes statements that are not historical facts. These statements are “forward-lookingstatements” (as defined in the Private Securities Litigation Reform Act of1995) based, among other things, on our current expectations and beliefs andare subject to a number of risks, uncertainties, assumptions and other factorsthat could cause actual results to differ materially from those described inthe forward-looking statements. There are forward-looking statements throughoutthis annual report, including in statements containing the words “will,” “plan,”“believe,” “expect,” “anticipate,” “should,” “target,” “intend,” “may,” “could,”“would” and similar expressions. Forward-looking statements are subject to anumber of risks, uncertainties, assumptions and other factors that could causeactual results to differ materially from those described in the forward-lookingstatements. Many of these risks and uncertainties are beyond our control andtheir potential effect on our company is difficult or impossible to predictaccurately.*

*You should not place undue reliance on forward-lookingstatements. In light of the significant uncertainties inherent inforward-looking statements, the inclusion of such information in this annualreport should not be regarded as a representation by our company or any otherperson that our objectives or plans will be realized. The forward-lookingstatements contained in this annual report speak only as of the date that theyare made and we do not undertake any obligation to update these forward-lookingstatements to reflect actual results, changes in assumptions, or changes inother factors affecting these forward-looking statements.*

**PART I**

**ITEM 1.   DESCRIPTION OF BUSINESS**

**Overview**

As used herein, “we”, “us”, “our” and “the Company”refer to AmeriVest Properties Inc., a Maryland corporation. We wereincorporated in the State of Maryland in 1999. We are a Real Estate InvestmentTrust (“REIT”) investing in, operating and leasing commercial office buildingsprimarily to small and medium size tenants. At December 31, 2005, we owned14 properties, which included an aggregate of approximately 2,160,000 squarefeet located in metropolitan Denver, Dallas, Phoenix and Indianapolis. In January 2006,we sold two properties in Phoenix and Indianapolis, reducing our totalownership to 12 properties with approximately 1,730,000 square feet in Denver,Dallas and Phoenix.

We have elected to betaxed as a REIT for federal income tax purposes and generally will not besubject to federal income tax if we distribute at least 90% of our taxableincome and comply with a number of organizational and operational requirements.

**Plan of Liquidation**

On February 9, 2006, our Board of Directorsadopted a plan for the complete liquidation and dissolution of our Company (the“Plan”). We intend to present this Plan to stockholders for their approval atthe 2006 annual stockholders meeting. Management and the Board of Directorsestimate that, if stockholders approve the Plan, total liquidatingdistributions to common stockholders will be within the range of $4.20 to $4.80per share and will be paid within 6 to 24 months after adoption of the Plan, asour assets are sold and we wind up our operations and dissolve the Company . Thisestimated distribution range is based on numerous assumptions, notablyincluding the sales price of assets for which no definitive sale agreements orletters of intent are currently in place. Although management and the Board ofDirectors believe our assumptions are reasonable and have solicited andreceived input from various outside investment and real estate brokers, theassumptions may prove to be inaccurate and the ultimate amount of liquidatingdistributions to stockholders may be reduced or delayed.

If, prior to stockholder approval of the Plan, theCompany receives a binding offer for a corporate transaction that will, in theview of the Board of Directors, provide a superior value to stockholders than 

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the value of the estimatednet distributions under the Plan from the sale of the assets, taking intoaccount all factors that could affect valuation, including timing and certaintyof close, real estate and investment market risks, transaction, operating, leasingand loan prepayment costs and other factors, the Plan could be abandoned infavor of such a transaction.

If a binding offer for a corporate transaction is notreceived and the Plan is submitted to, but not approved by, our stockholders,our Board of Directors will meet to consider the best remaining alternativecourse of action for the Company. In that event, we cannot currently predictwhat that course of action would be, since it would depend upon facts andcircumstances at that time.

Throughout this report, wedescribe our historical business strategy. Since adoption of the Plan in February 2006,we have departed  from our historicalstrategy and are working towards completing an orderly sale of the Company orliquidation of our assets. Under Maryland law, the sale of all or substantiallyall of our assets requires stockholder approval. However, if the Company is notsold or the stockholders do not approve the Plan, we may decide to continuemaking strategic dispositions, within the limits of the law. We have no currentintent to engage in acquisitions in the foreseeable future.

**Business Strategy**

Our primary businessobjectives are to increase cash available for distribution per share tostockholders and to enhance stockholder value. If the Plan is approved, ourprimary objective will be to maximize distributions to stockholders by sellingour properties for the best price attainable in an orderly liquidation pursuantto the Plan.

**Strategic Alternative Review**

In November 2004, theBoard authorized and retained the investment banking firm of Bear, Stearns andCo., Inc. to advise the Company on various strategic, financial andbusiness alternatives, including the potential sale or merger of the Companyand other possible transactions, including a recapitalization or otheralternatives that would keep the Company independent. In September 2005the Company announced a strategic asset sale and operational restructuring planto dispose of five properties, repay and restructure outstanding bank debt andtransition property management to third parties, all of which were subsequentlycompleted. As a result of information gathered in this process, the continuingreview of the strategic alternatives available and based upon advice from thirdparty advisors with respect to the value of the remaining properties and thereal estate and capital markets, in February 2006 the Board of Directorsconcluded that it was in the best interest of the Company’s stockholders toapprove the Plan.

**Historical Business Strategy**

Our primary strategies have traditionally been tofocus our efforts on the acquisition, rehabilitation and development of multi-tenantoffice buildings with a targeted average smaller tenant size (generally between2,000 and 4,000 square feet) in select cities. However, for approximately thepast year, we have not made any acquisitions and we have no current intent toengage in additional acquisitions in the foreseeable future. Until a corporatesale is completed or the Plan is approved, or should neither event occur, ourintent is to operate our properties in such a manner as to maximize cash flowwhile increasing the value of the properties and continuing to provide ourtenants with a high standard of service.

We continue to believethat office space for small to medium size businesses is a large andunderserved market. Small to medium size businesses often have specific needsand limitations that are different from larger businesses. For example, smalland medium size businesses generally cannot afford large corporate staffs tomanage their office leasing requirements. These businesses have needs similarto larger firms, such as access to cutting edge technology, conferencefacilities, high quality telecommunications services and other amenities, but maynot have a comparable budget. Our strategy is 

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to focuson providing an office product targeted to this large market and its unmetneeds in a cost effective manner. The key elements of our traditional strategyare described below.

*Provide a Superior,Consistent Product*

We provide amenities forthe small and medium size businesses in our office properties that usually onlylarger companies would be able to obtain, such as conference rooms with thelatest telecommunication and presentation equipment, high levels of common areaand tenant finish, including well-designed, pre-built move-in ready space, anddepending on location, various other technology and service amenities relativeto the needs of our targeted small business tenant.

*Streamline theLeasing Process*

Our leasing process isdesigned to meet the unique needs of a small to medium size tenant with limitedreal estate expertise, through our “no hassle” leasing philosophy which reducesthe lease transaction time and cost for the tenant and us.

*Provide a HighLevel of Service*

With our deliberate focuson small and medium size businesses, we have developed a positive,service-oriented approach specifically tailored for our customer base. During the latter part of 2005, wetransitioned our on-site management to third party property managementcompanies. We have worked with these managers to ensure that we continue toprovide a high level of service in the most cost-effective manner possible. Thethird party managers report to a senior director in our Denver corporateheadquarters, providing direct and regular feedback on tenant concerns. Webelieve that our customer-focused management strategy improves our tenantretention rates over the long-term.

*Target SelectCities*

Historically, we have focused on employing ourstrategy in buildings or projects containing at least 100,000 square feet,within select cities where we have worked to build meaningful multi-propertyportfolios. We have also focused on markets in relatively close proximity toour headquarters in Denver, Colorado, in order to maximize managementefficiencies.

As a result of our focusedstrategy, we believe that our properties provide office space that isparticularly attractive for small to medium size tenants. By executing on ourhistorical business strategy we believe we have been able to maintain highoccupancy rates while maximizing rate per square foot as compared toalternative strategies.

**Significant Transactions**

**2006 Transactions**

On February 9, 2006, we announced that our Boardof Directors had approved the Plan for the Company. The Plan is subject toapproval by the Company’s stockholders holding a majority of the Company’soutstanding shares of common stock. The Company expects to present the Plan toour stockholders for approval  at the Company’s 2006 annual meeting. (See “Plan ofLiquidation” above for additional information).

On January 24, 2006, the Company sold KeystoneOffice Park, a 114,980 square foot office property located in Indianapolis, forapproximately $9.4 million to a foreign institutional investor. Subsequent torecording an impairment of $1.6 million, the Company recognized a gain ofapproximately $250,000. Of the $8.6 million in net proceeds received from thesale, the Company used approximately $4.6 million to pay the outstandingmortgage balances and approximately $300,000 to repay the remaining balance dueon 

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the Company’s creditfacility with KeyBank (“Unsecured Credit Facility”) leaving the Company withapproximately $3.7 million in cash.

On January 23, 2006, the Company sold FinancialPlaza, a 310,838 square foot office property located in Phoenix, for $55.0million to a publicly traded REIT, recording an estimated net gain on the saleof approximately $16 million in the first quarter of 2006. The net cashproceeds of approximately $30 million were used to repay indebtedness under theUnsecured Credit Facility.

On January 23, 2006,the Company completed a loan agreement with its primary bank group which amendsits unsecured revolving credit agreement and reinstates a revolving creditfacility of up to $10 million to be used for working capital and other limitedcorporate purposes. The revolver is secured by the Company’s Greenhill Parkproperty and matures December 28, 2006. The amendment also modifiescertain covenant requirements and collateral provisions and requires theCompany to extend the employment agreement with its Chief Executive Officerthrough the maturity of the loan. There were no borrowings outstanding in thisfacility on March 15, 2006.

**2005 Transactions**

*Dispositions ofProperties:*

On December 15, 2005, the Company sold AmeriVestPlaza at Inverness, a 120,171 square foot office property located in southeastDenver for approximately $15.5 million. The Company recognized a gain ofapproximately $199,000, subsequent to recording an impairment charge of $2.3million. Net proceeds of $14.6 million were used to pay the first mortgage of$14.2 million, which had a fixed interest rate of 7.9% and a maturity date of January 10,2006. The remaining $400,000 together with lender reserves released at the timeof sale of $380,000 were paid on the Unsecured Credit Facility.

On December 12, 2005, the Company sold ChateauPlaza, a 171,294 square foot office property located in Dallas, Texas, forapproximately $31.3 million. A gain of approximately $8.7 million was recordedin conjunction with the transaction. Net proceeds of $29 million were paid onthe Company’s secured credit facility with KeyBank (“Secured Credit Facility”).The transaction also effected a $1.8 million escrow release of the $3.1millioncollateral reserve held by the Secured Facility lenders. Of this amount, $1.6million was paid on the Secured Credit Facility, paying all outstanding amountsin full; the remaining $200,000 was paid on the Unsecured Credit Facility.

On September 30, 2005, the Company sold its 20%joint venture interest in the Panorama Falls property in Englewood, Colorado toits joint venture partner. The Company was paid in full for the $4.4 millionmortgage it held on the property and received a $364,170 promissory note with asix-month term. The Company recognized a net loss of approximately $117,000. Priorto the sale, the Company recorded an impairment charge of approximately$420,000. The net proceeds from the transaction were used to pay approximately$2.2 million on the Secured Credit Facility and $2.2 million on the UnsecuredCredit Facility.

On March 3, 2005, theCompany completed a Deed-In-Lieu Agreement to return our 13 non-core TexasState Buildings to the lender. The properties, consisting of 222,542 squarefeet, were leased primarily to various agencies of the State of Texas and arelocated in Temple, Clint, El Paso, Hempstead, Lubbock, Marshall, Columbus,Paris, Mission, Arlington, Bellville and Amarillo Texas. The buildings secureda loan in the amount of $5.6 million, bearing interest at 7.66% through August 1,2028 and had a net book value of $5.2 million (excluding certain depositsmaintained by the lender), subsequent to an impairment charge of$1.2 million recognized during the fourth quarter of 2004. The Companyrecognized a loss of approximately $92,000 on the disposition.

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*Credit FacilityTransactions*

On March 15, 2005, the Company amended itsSecured Credit Facility and Unsecured Credit Facility due to the Company notbeing in compliance with its leverage, interest coverage and fixed chargecoverage covenants required by the Secured Credit Facility. The amendment tothe Secured Credit Facility involved: (i) a waiver for the events ofnon-compliance, noted above, as of December 31, 2004, (ii) changes tothe debt covenant calculations to set them at the same levels as thosepreviously established for the Unsecured Credit Facility, (iii) mandatoryrepayments of at least $2.5 million by July 1, 2005 and at least$10.0 million by September 1, 2005, (iv) removal of therevolving feature of the Secured Credit Facility, and (v) the eliminationof the obligation of the lender to make any further loans under the SecuredCredit Facility. The amendment to the Unsecured Credit Facility involved: (i) awaiver for the events of non-compliance as of December 31, 2004 due tocross default provisions with the Secured Credit Facility (ii) moving upthe maturity date from November 12, 2007 to April 1, 2006, (iii) mandatoryrepayments of at least $5.0 million by September 2005 and at least$10.0 million by January 2006, (iv) removal of the revolvingfeature of the Unsecured Credit Facility, (v) a requirement that anyfurther borrowings, including borrowings to pay dividends, be subject to theapproval of the lender in its sole and absolute discretion, (vi) alimitation on the incurrence of any other indebtedness by the Company withoutthe prior written consent of the lender and (vii) a requirement that allnet proceeds from a property sale, refinancing or other capital transaction beused to pay down any amounts outstanding.

On June 6, 2005, theagreements were further amended to eliminate the July 1 payment on theSecured Credit Facility and extend the maturity date with respect to theSecured Facility from November 12, 2005 to January 31, 2006. On September 1,2005, the agreements were amended to extend the payment dates from September 1,2005 to September 14, 2005. On September 14, 2005, the agreementswere additionally amended to extend the initial pay down date from September 14,2005 to January 17, 2006, at which time an aggregate payment of $15million would be due against the facilities, the maturity date on both theUnsecured and Secured Credit Facilities was extended to April 1, 2006,certain modifications were made to  thecovenant requirements and collateral provisions, and the Company was requiredto enter into an employment agreement with Charles Knight, President and CEO. Boththe Secured and Unsecured Credit Facilities were entirely paid off by January 24,2006.

*Dividends*

On March 9, 2005, theCompany’s Board of Directors suspended the payment of the common dividend forthe first quarter of 2005, and subsequently continued the suspension throughall of 2005. As of March 15, 2006, the Board has not reinstated thequarterly common dividend.

*Other transactions:*

On December 27, 2005, the Company transitionedthe on-site property management of its Dallas properties to TranswesternCommercial Services, a national real estate management and leasing company.

On November, 11, 2005, the Company transitioned itson-site property management of its Phoenix properties to Trammell Crow Services, Inc.,a national real estate management and leasing company. As part of this transition,Trammell Crow Services assumed approximately six property level positions inPhoenix.

On October 1, 2005, the Company transitionedon-site property management of its Denver properties to Trammell Crow Services, Inc.

Oversight and strategicmanagement of all of the Company’s properties continues to be provided bypersonnel at corporate headquarters.

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**2004 Transactions**

On November 21, 2004,the Company engaged Bear, Stearns & Co., Inc. to assistour Board of Directors in undertaking a review of a broad range of strategicalternatives for the Company. These alternatives include identifying aninstitutional capital partner to assist in the Company’s growth going forward,a sale or recapitalization of all or a portion of the Company’s properties, thepotential sale or merger of the Company, and other possible transactionsdesigned to enhance stockholder value.

On November 12, 2004, the Company acquired theHampton Court office building. Hampton Court is located in Dallas, Texas andcontains approximately 108,200 square feet. The purchase price for HamptonCourt was $16.3 million, which was funded with $8.4 million of cash and theassumption of a $7.9 million non-recourse five-year mortgage loan from asecuritized lender.

In October 2004, KeyBank National Association(KeyBank) assumed and amended the Company’s unsecured credit facility fromFleet Bank of Boston, increasing the immediate availability from $30 million to$40 million, and modifying other terms. KeyBank also assumed our secured creditfacility.  All references to the SecuredFacility or Unsecured Facility prior to this date pertain to the previousagreement with Fleet.

On October 25, 2004, the Company acquired the 5.2acres of land underlying its Greenhill Park office property in Addison, Texasfor $14.5 million in cash. The Greenhill Park building, purchased by theCompany in December 2003, was subject to a ground lease with 80 yearsremaining on the term.

On September 13, 2004, the Company acquired theParkway Centre III office building. The Parkway Centre III is located in Plano,Texas and contains approximately 152,600 square feet. The purchase price of$23.4 million was funded with $5.5 million of cash and a $15.2 millionnon-recourse five-year mortgage. The remaining $2.7 million of acquisitionfunds came from tax-deferred exchange proceeds from the disposition of ourTexas Bank Buildings in March 2004.

On May 7, 2004, the Company acquired theHackberry View office property located in Irving, Texas and containsapproximately 114,600 square feet. The purchase price was $16.8 million, whichwas paid with approximately $12.2 million from the assumption of the existingfirst and second mortgage loans and the balance in cash.

On March 16, 2004, the Company acquired theCamelback Lakes office building. Camelback Lakes is located in Phoenix, Arizonaand contains approximately 203,000 square feet on 12.04 acres of land. Thepurchase price for Camelback Lakes was $32.0 million, which was paid with $21.0million from our Secured Credit Facility and the balance from our Unsecured Credit Facility. In August 2004,the Company refinanced the property with $21.0 million of debt. The debtconsists of two notes maturing in September 2014.

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On March 16, 2004, theCompany sold its Texas Bank Buildings for $4.1 million.  The four properties are located in Clifton,Georgetown, Henderson and Mineral Wells, Texas, contain an aggregate of 60,095square feet and had an aggregate net book value of approximately $3.2 millionat disposition.

**2003 Transactions**

On December 4, 2003, the Company acquired theGreenhill Park office building. Greenhill Park is located in Addison, Texas and contains approximately252,000 square feet.  Greenhill Park wassubject to a ground lease. See “2004 Transactions” for a discussion of thepurchase of the land.  The purchase pricefor Greenhill Park was $10.5 million, which was paid with $5.3 million from theSecured Credit Facility and the balance in cash from a portion of the proceedsfrom our 2003 public offering.

On October 7, 2003, the Company acquired theScottsdale Norte office building. Scottsdale Norte is located in Scottsdale,Arizona and contains approximately 79,000 square feet on 5.45 acres of land. Thepurchase price for Scottsdale Norte was $12.3 million, which was paid with$6.6 million from the assumption of the existing loan from Southern FarmBureau Life Insurance Company and the balance in cash from a portion of theproceeds from our 2003 public offering.

On September 10, 2003, the Company acquired theFinancial Plaza office building. Financial Plaza is located in Mesa, Arizonaand contains approximately 311,000 square feet on approximately 6.07 acres ofland. The purchase price for Financial Plaza was $39.0 million, which waspaid with $24.8 million from the assumption of the existing loan fromAllstate Life Insurance Company and the balance in cash from a portion of theproceeds from our 2003 public offering.

During 2003, the Company completed the construction ofan approximately 18,000 square foot building adjacent to the existing KeystoneOffice Park in Indianapolis, Indiana for approximately $1.3 million. Thisbuilding was constructed to accommodate the expansion needs of some of theexisting tenants as well as market demand. The building opened for occupancy inAugust.

On February 6, 2003,the Company acquired the Southwest Gas office building. The Southwest GasBuilding is located in Phoenix, Arizona and contains approximately 148,000square feet on 7.38 acres of land. The purchase price for the Southwest GasBuilding was $17.0 million, which was paid with $11.9 million fromthe Secured Credit Facility and the balance from a short-term loan from FleetNational Bank. This short-term loan was refinanced with the Unsecured Credit Facility.

**2002 Transactions**

On November 25, 2002, the Company acquired theChateau Plaza office building. Chateau Plaza is located in Dallas, Texas andcontains approximately 171,000 square feet on one acre of land. The purchaseprice for Chateau Plaza was $22.0 million, which was paid with $15.4 millionfrom the Secured Fleet and the balance paid in cash from a portion of theproceeds from our 2002 public offering.

On November 12, 2002, the Company acquired theCenterra office building. Centerra is located in Denver, Colorado and containsapproximately 186,000 square feet on 1.15 acres of land. The purchaseprice for Centerra was $18.7 million, which was paid with $13.1 millionfrom the Secured Facility and the balance paid in cash from a portion of theproceeds from our 2002 public offering.

On September 6, 2002, the Company acquired2.55 acres of undeveloped land, adjacent to Keystone Office Park inIndianapolis, Indiana, from Sheridan Realty Partners, L.P., an affiliate, for$320,000. The purchase price was determined based on the fair market value ofthe land and was paid through the issuance of 52,893 shares of our common stock($6.05 per share). In late 2002, the Company commenced construction of anapproximately 18,000 square foot building on this land.

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On September 5, 2002,the Company acquired the Parkway Centre II office building. ParkwayCentre II is located in Plano, Texas and contains approximately 152,000square feet on 6.4 acres of land. The purchase price for Parkway Centre IIwas $22.0 million which was paid with $17.0 million from theassumption of the existing loan from J.P. Morgan Chase Commercial MortgageSecurities Corp. and the balance paid in cash from a portion of the proceedsfrom our 2002 public offering.

**2001 Transactions**

On December 21, 2001, the Company acquired theKellogg Building. The Kellogg Building is located in Littleton, Colorado andcontains approximately 112,000 square feet on five acres of land. The purchaseprice for the Kellogg Building was $13.6 million, which was paid with $9.5 millionfrom the proceeds of a loan from US Bank National Association and the balancepaid in cash from a portion of the proceeds from our 2001 public offering.

On December 6, 2001, the Company sold an 80%tenancy-in-common interest in the Panorama Falls building to a long-terminvestor affiliated with a large shareholder. Panorama Falls is located inEnglewood, Colorado and contains approximately 60,000 square feet on six acresof land. The sales price for the interest in Panorama Falls was $4.9 millionpayable as follows: (i) $2.2 million to KeyBank National Associationto pay down a portion of the mortgage loan, (ii) assumption of 80% of theremaining mortgage loan in the amount of $2.4 million, and (iii) theremainder of $304,268 in cash, less closing costs.

On November 19, 2001, the Company acquired theArrowhead Fountains office building. Arrowhead Fountains is located in Peoria,Arizona and contains approximately 96,000 square feet on five acres of land.The purchase price for Arrowhead Fountains was $12.8 million, which waspaid with $9.3 million from the assumption of the existing loan fromNationwide Life Insurance Company and the balance paid in cash from a portionof the proceeds from our 2001 public offering.

On October 23, 2001, the Company sold its officebuilding in Odessa, Texas for $132,500. The sale resulted in a gain on sale of$12,747.

On June 1, 2001, the Company sold the Giltedgeoffice building in Appleton, Wisconsin for $3.7 million. The sale resultedin a gain on sale of approximately $1.1 million. The cash proceeds fromthis transaction of $458,030 were used to complete a tax-deferred exchangeunder Section 1031 of the Internal Revenue Code.

On April 1, 2001, the Company acquired fromSheridan Investments, LLC, an affiliate, 100% of the ownership interests ofSheridan Plaza at Inverness, LLC. Sheridan Plaza at Inverness, LLC owns twooffice buildings (which are known as AmeriVest Plaza at Inverness) located inEnglewood, Colorado containing approximately 119,000 square feet on6.7 acres of land. The purchase price was $22.9 million and consistedof: (i) $705,135 for our 9.639% preferred membership interest in SheridanInvestments, LLC, the owner of all of the membership interests in SheridanPlaza at Inverness LLC, which was transferred back to Sheridan Investments,LLC; (ii) $6.5 million paid with 1,057,346 shares of our common stockand the cash proceeds from the sale of the Giltedge building; (iii) assumptionof the mortgage loan in the amount of $15.0 million; and (iv) assumptionof other liabilities in the amount of $761,178.

The acquisition wasstructured as a tax-deferred exchange of the Giltedge office building under Section 1031of the Internal Revenue Code. Due to the related party nature of thistransaction, accounting principles generally accepted in the United Statesrequire us to record this acquisition at its historical net book value. Thedifference between the purchase price and the historical net book value was$4,507,557 and was recorded as a non-cash dividend during 2001.

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**Competition**

The leasing of real estateis highly competitive. We compete for tenants in our markets primarily on thebasis of property location, rents, services provided and the design andcondition of improvements. In addition, we also experience competition whenattempting to acquire or divest ownership in real estate, including competitionfrom larger and better capitalized domestic and foreign financial institutions,other REITs, life insurance companies, pension trusts, partnerships andindividual investors. All of our buildings are located in developed areas thatinclude other commercial properties. This competition could limit our abilityto lease our properties, increase or maintain rental rates, or secure attractiveinvestment opportunities.

**Employees**

We currently employ 11full-time and 1 part-time individuals that provide real estate operations,leasing, financial and accounting, acquisition, disposition and marketingexpertise. We consider our relationship with our employees to be good.

**Environmental Matters**

Under various federal, state and local laws andregulations, an owner or operator of real property may be liable for the costsof removal or remediation of certain hazardous or toxic substances on that property.These laws often impose such liability regardless of whether the owner causedor knew of the presence of hazardous or toxic substances and regardless ofwhether the storage of those substances was in violation of a tenant’s lease.Furthermore, the costs of remediation or removal of those substances may besubstantial, and the presence of hazardous or toxic substances, or the failureto promptly remediate those substances, may adversely affect the owner’sability to sell the property or to borrow money using the property ascollateral. In connection with the ownership and operation of the properties,we may be potentially liable for such costs.

We obtained an environmental assessment of each of ourproperties upon acquisition. These environmental assessments did not reveal anyenvironmental conditions that management believes will subject us to materialliability. In addition, we have not been, nor do we have knowledge that any ofthe previous owners of the properties have been, notified by any governmentalauthority of any material noncompliance, liability or claim relating tohazardous or toxic substances or other environmental substances in connectionwith any of the properties. Although we have obtained environmental assessmentsof the properties, and although we are not aware of any notifications by anygovernmental authority of any material noncompliance, it is possible that ourassessments do not reveal all environmental liabilities or that there arematerial environmental liabilities of which we are unaware.

After the acquisition ofthe Sheridan Center buildings in Denver in 2000, we embarked on an asbestosremediation program in accordance with applicable federal and staterequirements, using licensed contractors to remove, wherever accessible or otherwiserequired, asbestos-containing materials in the buildings, includingceiling tiles, drywall joint compound, wood and metal fire doors, wall texture,mudded pipe elbows and valves, thermal systems insulation, floor tile andmastic and boiler insulation. Most of the remediation has been completed,except for one building, which we expect to be completed over the next fewyears as tenants vacate spaces, allowing access to the asbestos materials. Managementhas prepared an analysis of remaining costs to complete the remediation of theSheridan Center buildings and does not believe the total liability would bematerial in nature. During 2005, the Company received a $450,000 settlementfrom the engineering firm that had done the initial environmental report on theSheridan Center buildings. This money was a reimbursement of remediation costsalready incurred by the Company and, as such, was recorded as a reduction tothe basis of the Sheridan Center buildings.

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**AdditionalInformation and Code of Ethics**

Our website is http://www.AMVproperties.com. We makeavailable free of charge, on or through our web site, our annual, quarterly,and current reports, as well as any amendments to these reports, as soon asreasonably practicable after electronically filing these reports with theSecurities and Exchange Commission. The reference to our web site does notincorporate by reference the information contained in the web site and suchinformation should not be considered a part of this report. We have adopted acode of ethics and business conduct applicable to our Board and officers andemployees. A copy of our code of ethics and business conduct is availablethrough our web site. In addition, copies of the code of ethics and businessconduct can be obtained, free of charge, upon written request to InvestorRelations, 1780 South Bellaire Street, Suite 100, Denver, Colorado 80222.Any amendments to, or waivers of, our code of ethics and business conduct thatapply to any matters enumerated in Item 406(b) of Regulation S-K will bedisclosed on our web site. Any reference to our web site in this annual reportdoes not incorporate by reference the information contained in the web site andsuch information should not be considered part of the annual reports.

**ITEM 1A. RISK FACTORS**

**RisksRelated to Historical Business**

**Ouraccess to capital may be extremely limited and may affect our ability toexecute our business plan.**

Subsequent to December 31,2005, the Company’s existing Secured and Unsecured Credit Facilities were paidin full. As a result, the Secured Credit Facility was terminated and theUnsecured Credit Facility was amended to a $10 million credit facility thatwill mature on December 28, 2006. The amended facility is secured by theGreenhill Office Park property in Dallas, Texas.  Should the Company need funds in excess of the$10 million facility or subsequent to the maturity date, we could be limited inour ability to fund tenant improvements or make other necessary or desirableportfolio capital expenditures or pay dividends unless we have sold additionalproperties. Due to the Company seeking to effect a corporate sale transactionor receive approval for the Plan, our ability to raise equity or refinanceproperties would be unlikely. In addition, we would be dependent upon cash flowfrom our operations to cover capital expenditures and our corporate operatingexpenses. As a result, should a corporate sale not be completed nor the Plan beadopted or if under the Plan the projected sales are not completed at expectedprices, our limited access to capital could have a material adverse effect onour financial condition and our operations.

**Ourdecision to actively pursue a plan of liquidation may result in unanticipatedcosts and distract management.**

On November 22, 2004, we announced that our Boardof Directors would undertake a review of a broad range of strategicalternatives for the company, including the identification of an institutionalcapital partner to assist in the company’s growth going forward, a sale orrecapitalization of all or a portion of the company’s properties, the potentialsale or merger of the company and other possible transactions designed toenhance shareholder value. On February 9, 2006, it was announced that theBoard of Directors had adopted the Plan, subject to stockholder approval.

As a result of our pursuitof potential buyers for our properties, we face considerable operationaluncertainty. This uncertainty may disrupt our business operations and mayresult in the loss of business opportunities we would otherwise pursue. Ourmanagement team may be distracted from the day-to-day operations of ourbusiness as a result of this uncertainty and some members of management maydecide to leave their employment.

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**Ourvariable rate debt subjects us to interest rate risk.**

At December 31, 2005,our Unsecured Credit Facility with an outstanding balance of approximately$29.9 million, or 16%, of our total debt was at variable rates of 350basis points over LIBOR. The weighted-average interest rate on thisvariable rate debt was approximately 6.9% at December 31, 2005. This debtwas to mature in April 2006. The Unsecured Credit Facility was paid infull in January 2006 and amended to provide for a $10 million creditfacility at LIBOR plus 250 basis points, secured by an office property in asubmarket of Dallas. (see “Future Sources of Capital” for information on theamended facility). Increases in interest rates could increase our interestexpense, which would adversely affect net earnings and cash available forpayment of our debt obligations and distributions to our stockholders.

**Weface a competitive market, which could limit our ability to lease ourproperties or secure attractive investment opportunities.**

Our historical businessstrategy had contemplated expansion through acquisition. The commercial realestate industry is highly competitive, and we compete with substantially largercompanies, including substantially larger REITs, for the acquisition, developmentand operation of properties. Some of these companies are national or regionaloperators with far greater resources than we have. As a result, we havesuspended acquisition activity for the Company and should we not complete acorporate sales transaction or receive approval for the Plan, we may not havethe opportunity to make suitable investments on favorable terms in the future.Competition in a particular area also could adversely affect our ability tolease our properties or to increase or maintain rental rates. The presence ofthese competitors may impede the continuation and development of our business,causing lower occupancy rates and lower values obtainable under the plannedsales of the properties included in the Plan.

**Wemay not be able to pay dividends to our stockholders regularly anddistributions under the Plan may be lower than estimated.**

Our ability to paydividends in the future depends on our ability to operate profitably and togenerate cash from our operations in excess of debt service obligations andrequired capital expenditures. Historically, because we have had to finance ourgrowth, we have not been able to generate sufficient cash from our operationsto cover all these obligations and have had to fund certain capitalexpenditures from external sources, including borrowings and equity offerings.The payment of dividends is in the sole discretion of our Board of Directors.During  2005, we suspended all dividendpayments. Under the Plan, the Company has estimated liquidating distributionsof $4.20 to $4.80, payable six to twenty-four months subsequent to thepotential approval of the Plan by a majority of common stockholders. Thisestimated distribution range is based on numerous assumptions, notablyincluding the sales price of assets for which no definitive sale agreements orletters of intent are currently in place. Although management and the Board ofDirectors believe our assumptions are reasonable and have solicited andreceived input from various outside investment and real estate brokers, theassumptions may prove to be inaccurate and the ultimate amount of liquidatingdistributions to stockholders may be reduced or delayed.

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**Ourdebt level may have a negative impact on our income and our ability to pay dividends.**

We have incurredindebtedness in connection with the acquisition of our properties, and we mayincur new indebtedness in the future in connection with our operatingactivities. At December 31, 2005, we had approximately $185.8 millionof long-term indebtedness including properties deemed held-for-sale, of whichapproximately $44.1 million in the aggregate is due in 2006 and 2007. Ofthe amounts due at December 31, 2005, $58.2 million was paid inconjunction with property sales closed in January 2006, including $29.9million that was due in 2006. As a result of our use of debt, we are subject tothe risks normally associated with debt financing, including:

·       thatour cash flow will be insufficient to make required payments of principal andinterest;

·       thatwe will be unable to refinance some or all of our indebtedness or that anyrefinancing will not be on terms as favorable as those of the existingindebtedness;

·       thatrequired payments on mortgages and on our other indebtedness are not reduced ifthe economic performance of any property declines;

·       thatdebt service obligations will reduce funds available for distribution to ourstockholders; and

·       thatany default on our indebtedness could result in acceleration of thoseobligations.

If the economic performance of any of our propertiesdeclines, our ability to make debt service payments would be adverselyaffected. If a property is mortgaged to secure payment of indebtedness and weare unable to meet mortgage payments, we may lose that property to lenderforeclosure with a consequent loss of income and asset value. Should any of theindividual properties be sold under the Plan at a sales price less than theoutstanding mortgage due on that property, funds for repayment would have todrawn from proceeds from other sales transactions and would reduce liquidatingdistributions to stockholders.

We do not have a policylimiting the amount of debt that we may incur; however, as of December 31,2005, our Unsecured Credit Facility limited our total liabilities to 70% ofgross assets, as calculated in accordance with the loan agreement. Thislimitation was reduced to 65% under the amended loan agreement signed in January 2006.Our total liabilities to gross asset value at December 31, 2005 was 63%. Ourtotal liabilities to total market capitalization ratio was approximately 67% atDecember 31, 2005. Our leverage levels and our current strategicalternative review process (including but not limited to the liquidation ofproperties) may make it difficult to obtain any additional financing based onour current portfolio or to refinance existing debt on favorable terms or atall. Our leverage levels also may adversely affect the market value of ourstock if we are perceived as more risky than our peers.

**Someof our buildings are subject to special income tax considerations, which couldresult in substantial tax liability upon their sale.**

If we sell any of ourSheridan Center buildings before 2006 (ten years after the original acquisitiondate of the property or the property exchanged for that property), we will berequired to pay tax at the highest applicable corporate rate on the excess ofthe buildings’ fair market value at the effective time of our REIT electionover its adjusted basis at such time (or, if lesser, the excess of the fairmarket value of the building at the time of the sale over its adjusted basis atthe time of the sale). Given our current estimate of fair market value, we donot expect to face any adverse tax consequences because of the built-in gain limitationswith respect to Sheridan Center.

**Newdevelopments and acquisitions may fail to perform as we expect.**

Over the last few years,we have focused our efforts on the acquisition and redevelopment of multi-tenantoffice buildings. In deciding whether to acquire or develop a particularproperty, we made 

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assumptionsregarding the expected future performance of that property. In particular, weestimated the return on our investment based on expected occupancy and rentalrates. If the property is unable to achieve the expected occupancy and rentalrates, it may fail to perform as we expected in analyzing our investment. Whenwe acquire a property, we often reposition or redevelop that property with thegoal of increasing profitability. Our estimate of the costs of repositioning orredeveloping an acquired property may prove inaccurate, which may result in ourfailure to meet our profitability goals. If one or more of these properties donot perform as initially expected, our financial performance may be adverselyaffected.

**Constructionrisks could adversely affect our profitability.**

We continue toinvest in necessary improvements and maintenance capital in our existingproperties. Our construction activities may subject us to the following risks:

·       Wemay be unable to obtain, or suffer delays in obtaining, necessary zoning,land-use, building, occupancy and other required governmental permits andauthorizations, which could result in increased costs or our abandonment ofthese projects.

·       Wemay incur construction costs for a property that exceed our original estimatesdue to increased costs for materials or labor or other costs, such as asbestosor mold abatement, which we did not anticipate.

·       Wemay not be able to obtain financing on favorable terms, which may make usunable to proceed with our development activities.

·       Wemay be unable to complete construction and lease-up of a property on schedule,which could result in increased debt service expense or construction costs.

Additionally, the timeframe required for lease-up of these properties means that we may have to waityears for a significant cash return. Because we are required to make cashdistributions to our stockholders to maintain our REIT tax status, if the cashflow from operations or refinancing is not sufficient, we may be forced toborrow additional money to fund such distributions.

**Realestate investments are inherently risky, which could adversely affect ourprofitability and our ability to make distributions to our stockholders.**

Real estateinvestments are subject to varying degrees of risk. If we own properties thatdo not generate sufficient operating cash flow to meet operating expenses,including debt service, capital expenditures and tenant improvements, our incomeand ability to pay dividends to our stockholders is adversely affected. Incomefrom properties may be adversely affected by:

·       decreasesin rent and/or occupancy rates due to competition, economic or other factors;

·       increasesin operating costs such as real estate taxes, insurance premiums, sitemaintenance and utilities;

·       changesin interest rates and the availability of financing; and

·       changes in laws andgovernmental regulations, including those governing real estate usage, zoningand taxes.

**Futureterrorist attacks in the United States and international hostilities may resultin declining economic activity, which could reduce the demand for and the valueof our properties.**

Future terrorist attacks in the United States, such asthe attacks that occurred in New York and Washington, D.C. on September 11,2001, and other acts of terrorism or war, whether in the United States orabroad, may result in declining economic activity and reduced demand for ourproperties. A decrease in 

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demand would make it difficultfor us to renew or re-lease our properties at lease rates equal to or abovehistorical rates. Terrorist activities also could directly impact the value ofour properties through damage, destruction or loss. We have obtained insurancecoverage with respect to some of these risks. We cannot predict whether suchcoverage will actually cover such risks or whether the risks for which weobtained insurance will actually occur. To the extent that our tenants areimpacted by future attacks, their businesses similarly could be adverselyaffected, including their ability to continue to honor obligations under theirexisting leases.

These types of events alsomay adversely affect the markets in which our securities trade. These acts maycause further erosion of business and consumer confidence and spending and mayresult in increased volatility in national and international financial marketsand economies. Any one of these events may cause a decline in the demand forreal estate, delay the time in which our new or renovated properties reachstable occupancy, increase our operating expenses due to increased physicalsecurity and insurance costs for our properties and limit our access to capitalor increase our cost of raising capital.

**Generaleconomic conditions may adversely affect our financial condition, results ofoperations and potential distributions under the Plan.**

Periods of economicslowdown or recession in the United States and in other countries, risinginterest rates or declining demand for real estate, or the public perceptionthat any of these events may occur, could result in a general decline in rentsor an increased incidence of defaults by our tenants under existing leases,which would adversely affect our financial position, results of operations andcash flow, as well as the trading price of our securities and our ability tosatisfy our debt service obligations and to make distributions to ourstockholders.

**Unfavorablechanges in local market and economic conditions could hurt occupancy or rentalrates.**

At December 31, 2005,our properties were located in metropolitan Denver, Dallas, Phoenix andIndianapolis. Economic conditions in our local markets can significantly affectoccupancy and rental rates. Occupancy and rental rates, in turn, maysignificantly affect our profitability and our ability to satisfy our financialobligations. The economic condition of our local markets may depend on one ormore industries and, therefore, an economic downturn in one of these industrysectors may adversely affect our performance in that market. Local real estatemarket conditions may include a large supply of competing space, and we competefor tenants based on rental rates, attractiveness and location of a property,and quality of maintenance and management services. Changes in marketconditions could affect the timing and prices received for the properties soldunder the Plan.

**Weare subject to the credit risk of our tenants, which could result in leasepayments not being made and a significant decrease in our revenues.**

Many of our tenants aresmall companies with nominal net worth. We cannot assure you that our tenantswill not default on their leases and fail to make rental payments to us. Inparticular, local economic conditions and factors affecting the industries inwhich our tenants operate may affect our tenants’ ability to make leasepayments to us. Moreover, we may be unable to locate a replacement tenant in atimely manner or on comparable or better terms if a tenant defaults on itslease. The loss of rental revenues from a number of our tenants may adverselyaffect our profitability and our ability to meet our financial obligations.

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**Wemay be unable to renew leases or re-lease space on a timely basis or oncomparable or better terms, which could significantly decrease our revenues.**

A significant number ofleases on our properties (excluding the two properties sold in January 2006),representing approximately 16% of our annualized lease revenue, expire on orbefore December 31, 2006. Current tenants may elect not to renew theirleases upon the expiration of their terms. Alternatively, current tenants mayattempt to terminate their leases prior to the expiration of their currentterms. Many of our leases are for relatively short terms of a few years. Ifnon-renewals or terminations occur, we may not be able to locate a qualifiedreplacement tenant and, as a result, we would lose a source of revenue whileremaining responsible for the payment of our obligations. Moreover, the termsof a renewal or new lease may be less favorable than current lease terms. Thismay cause affected properties to be impaired and/or to be sold for prices lessthan currently estimated under the Plan.

**Lossof a significant tenant could lead to a substantial decrease in our cash flowand an impairment of the value of our real estate.**

Although we target tenantsseeking 2,000 to 4,000 square feet of office space, we may have severalsignificant tenants from time to time, the loss of any of which could adverselyaffect our cash flow and may cause affected properties to be impaired.

**Ouruninsured and underinsured losses could result in loss of value of ourproperties.**

There are certain types oflosses, generally of a catastrophic nature, such as earthquakes and floods,that may be uninsurable or not economically insurable, as to which ourfacilities are at risk in their particular locations. Our management uses itsdiscretion in determining amounts, coverage limits and deductibility provisionsof insurance, with a view to obtaining appropriate insurance on our investmentsat a reasonable cost and on suitable terms. These decisions may result in ourhaving insurance coverage that, in the event of a substantial loss, would notbe sufficient to repay us for the full current market value or currentreplacement cost. Also, due to inflation, changes in codes and ordinances,environmental considerations, and other factors, it may not be feasible to useinsurance proceeds to replace a building after it has been damaged ordestroyed.

**The success of our company depends on the continuingcontributions of our key personnel.**

We have a highly skilledmanagement team and specialized workforce managing our property operations.Although we have employment agreements in place with our CEO only throughDecember 31, 2006 and with our CFO only through May 31, 2006, we alsohave in place retention agreements with other employees. Notwithstanding theseagreements, any executive officer or key employee may terminate his or her relationshipwith us at any time.

**Thereis limited liquidity in our real estate investments, which could limit ourflexibility.**

Real estate investments are relatively illiquid. Ourability to vary our portfolio in response to changes in economic and other conditionswill be limited. We may not be able to dispose of an investment when we finddisposition advantageous or necessary, and the sales price of any dispositionmay not recoup or exceed the amount of our investment. With respect to anyliquidating distribution, we expect to continue to qualify as a REIT and beentitled to a dividends paid deduction. In order to qualify as a liquidatingdistribution, the distribution must be made within a twenty-four month periodafter the adoption of the Plan. We may not be able to liquidate our entireportfolio within this time period, and may have to create on behalf of our shareholders a liquidating trust forproperties not sold within the given time frame. Liquidating distributions aresubject to special tax rules.

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**Wemay suffer environmental liabilities that could result in substantial costs.**

Under various environmental laws, a current orprevious owner or operator of real property may be liable for the costs ofremoval or remediation of hazardous or toxic substances, including asbestos-containingmaterials and mold, that are located on or under the property. These laws oftenimpose liability whether the owner or operator knew of, or was responsible for,the presence of those substances. In connection with our ownership andoperation of properties, we may be liable for these costs, which could besubstantial. Also, our ability to arrange for financing secured by that realproperty might be adversely affected because of the presence of hazardous ortoxic substances or the failure to properly remediate any contamination. Inaddition, we may be subject to claims by third parties based on damages andcosts resulting from environmental contamination at or emanating from ourproperties.

After the acquisition ofthe Sheridan Center buildings, we embarked on an asbestos remediation programin accordance with applicable federal and state requirements, using licensedcontractors to remove, wherever accessible or otherwise required, asbestos-containingmaterials in the buildings, including ceiling tiles, drywall joint compound,wood and metal fire doors, wall texture, mudded pipe elbows and valves, thermalsystems insulation, floor tile and mastic and boiler insulation. Most of theremediation has been completed, except for one building that is expected to becompleted over the next few years as tenants vacate spaces, allowing access tothe asbestos materials.

**Non-compliancewith the Americans with Disabilities Act could result in compliance costs andfines.**

Under the Americans withDisabilities Act of 1990, or the ADA, all public accommodations are required tomeet certain federal requirements related to physical access and use bydisabled persons. While we believe we are in compliance with the ADArequirements, a determination that we are not in compliance with the ADA couldrequire capital expenditures to remove access barriers and non-compliance couldresult in the imposition of fines or an award of damages to private litigants.If we were required to make modifications to comply with the ADA or othergovernmental rules and regulations, our ability to make expecteddistributions to our stockholders could be adversely affected.

**Theability of our stockholders to control our policies or effect a change incontrol of our company is limited, which may not be in our stockholders’ bestinterests.**

*Charter and BylawsProvisions.**  *Someprovisions of our charter and bylaws may delay or prevent a change in controlof our company or other transactions that could provide our stockholders with apremium over the then-prevailing market price of our common or preferred stockor that might otherwise be in the best interests of our stockholders. Theseprovisions include:

·       *Two-thirds stockholder vote required to approve someamendments to the charter.  *Some amendments to our charter mustbe approved by the affirmative vote of stockholders holding at least 662¤3%of the outstanding shares of our common stock, voting together as a singleclass. These voting requirements may make amendments to our charter thatstockholders believe desirable more difficult to effect.

·       *Issuance of preferred stock without stockholderapproval.  *Our Board of Directors has the ability to authorizethe issuance of preferred stock without stockholder approval and to set orchange the designation, preferences, conversion or other rights, voting powers,restrictions, limitations as to dividends and other distributions,qualifications, or terms or conditions of redemption of the preferred stock.Our Board of Directors could therefore authorize series of preferred stock thatmay have voting provisions that could delay or prevent a change in control or othertransaction that might involve a premium price or otherwise be in the bestinterests of our stockholders.

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·       *Ownership Limitation.  *In order toassist us in maintaining our qualification as a REIT, our Articles ofIncorporation contain provisions generally limiting the ownership of shares ofour capital stock by any single stockholder to 9% of our outstanding shares,unless waived by our Board of Directors. These provisions could also delay orprevent an acquisition or change in control of our company that could benefitour stockholders.

*Maryland Business Statutes.**  *As a Maryland corporation, we aresubject to the provisions of the Maryland General Corporation Law. Maryland lawimposes restrictions on some business combinations and requires compliance withstatutory procedures before some mergers and acquisitions can occur. Theseprovisions of Maryland law may have the effect of discouraging offers toacquire us even if the acquisition would be advantageous to our stockholders.These provisions include:

·       *Unsolicited takeover provisions*.   Marylandlaw provides that the Board of Directors of a Maryland corporation is notsubject to higher duties with regard to actions taken in a takeover context.These provisions may make it more difficult to effect an unsolicited takeoverof a Maryland corporation. Maryland law also allows publicly held corporationswith at least three independent directors to elect to be governed, withoutshareholder approval, by all or any part of Maryland law provisions relating toextraordinary actions and unsolicited takeovers.

·       *Business combination with interested stockholders*.   TheMaryland Business Combination Act provides that, unless exempted, a Marylandcorporation may not engage in business combinations, including mergers,dispositions of 10% or more of its assets, issuances of shares and otherspecified transactions, with an “interested stockholder” or its affiliates, forfive years after the most recent date on which the interested stockholderbecame an interested stockholder and thereafter unless specified criteria aremet.

*Controlshare acquisition.**  *TheMaryland Control Shares Acquisition Act provides that shares acquired by anyperson over one-tenth, one-third and a majority of the voting power of acorporation do not have voting rights, except to the extent approved by thevote of two-thirds of the shares of common stock entitled to be cast on thematter.

*Otherconstituencies.**  *Marylandlaw expressly authorizes a Maryland corporation to include in its charter aprovision that allows the Board of Directors to consider the effect of apotential acquisition of control on stockholders, employees, suppliers,customers, creditors and communities in which offices or other establishmentsof the corporation are located. Our current charter does not include aprovision of this type. Maryland law also provides, however, that the inclusionor omission of this type of provision in the charter of a Maryland corporationdoes not create an inference concerning factors that may be considered by theBoard of Directors regarding a potential acquisition of control. This law mayallow our Board of Directors to reject an acquisition proposal even though theproposal is in the best interests of our stockholders.

*Other Maryland laws.**  *Maryland law also permits the Boardof Directors, without stockholder approval, and even if contrary to a company’sbylaws or charter, to classify the Board of Directors, require a two-thirdsvote for the removal of directors and give the Board of Directors sole power tofill Board vacancies occurring for any reason.

**Thereis a limited market for our common stock, which could hinder the ability of ourstockholders to sell our shares.**

Historically, there hasbeen limited trading volume for our common stock and, in the event that weissue preferred stock, there may be a limited trading volume for our preferredstock. Our equity market capitalization places us at the low end of marketcapitalization among all REITs. We cannot assure you that the market for oursecurities will remain at current levels or expand. Due to our limited trading 

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volumeand small market capitalization, many investors may not be interested in owningour securities because of the inability to acquire or sell a substantial blockof our stock at one time. This illiquidity could have an adverse effect on themarket price of our securities. In addition, a stockholder may not be able toborrow funds using our securities as collateral because lenders may beunwilling to accept the pledge of securities having such a limited market. Anysubstantial sale of our securities could have a material adverse effect on themarket price of our securities.

**Wemay incur tax liabilities if we fail to qualify as a REIT.**

We believe that we have been organized and operated soas to qualify as a REIT under the Internal Revenue Code of 1986, as amended,since our taxable year ended December 31, 1996. However, we cannot assureyou that we will continue to be qualified as a REIT. Qualification as a REITinvolves the application of highly technical and complex Internal Revenue Codeprovisions for which there are only limited judicial or administrativeinterpretations. The determination of various factual matters and circumstancesnot entirely within our control may affect our ability to qualify as a REIT. Inaddition, legislation, new regulations, administrative interpretations or courtdecisions may significantly change the requirements for qualification as a REITor the federal income tax consequences of that qualification.

In order to qualify as a REIT, at all times during thesecond half of each taxable year following our first taxable year, no more than50% in value of our shares may be owned, directly or indirectly and by applyingconstructive ownership rules, by five or fewer individuals, including sometax-exempt entities. Our Articles of Incorporation provide restrictionsregarding the transfer of shares, including a 9% limitation on the ownership ofour shares by any stockholder, that are intended to assist us in continuing tosatisfy this share ownership requirement.

If we were unable toqualify as a REIT in any taxable year, we would not be allowed a deduction fordistributions to stockholders in computing our taxable income and would besubject to federal income tax on our taxable income at regular corporate ratesand possibly to the alternative minimum tax. Unless we are entitled to reliefunder certain Internal Revenue Code provisions, we also would be disqualifiedfrom treatment as a REIT for the four taxable years following the year duringwhich REIT qualification was lost. As a result, the funds available fordistribution to our stockholders would be reduced for each of the yearsinvolved. In addition, we may have to incur substantial indebtedness or mayhave to liquidate substantial investments in order to pay the resulting federalincome tax liabilities if differences in timing exist between the receipt ofincome and payment of our tax obligations. Although we currently intend tooperate in a manner designed to qualify as a REIT, it is possible that futureeconomic, market, legal, tax or other considerations may cause us to revoke ourREIT election.

**Wemay have to borrow money to make required distributions to our stockholders.**

In order to qualify as aREIT, we generally are required each year to distribute to our stockholders atleast 90% of our REIT taxable income, excluding any net capital gains. To theextent that we satisfy the distribution requirement, but distribute less than100% of our taxable income, we will be subject to federal corporate income taxon our undistributed taxable income. In addition, we will be subject to a 4%nondeductible excise tax on the amount, if any, by which certain distributionspaid by us with respect to any calendar year are less than the sum of 85% ofour ordinary income for that year plus 95% of our capital gain net income forthat year plus any undistributed taxable income from prior periods. On March 9,2005, we suspended our dividend payment. Our Board will review and consider theresumption of a dividend on our common stock based on a number of factors, including the adoption of the Plan,completion of a strategic transaction or other significant capital event, suchas a refinancing or asset sales, the Company’s financial results, capitalresources and liquidity needs at that time. We have determined that in 2005, wewill generate a taxable loss and do not need to make a distribution of our REITtaxable income. However if we should generate REIT taxable income, we intend tomake distributions to our stockholders to comply 

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with the90% distribution requirement and to avoid corporate income tax and thenondeductible excise tax. We may have to borrow funds on a short-term basis tomeet the 90% distribution requirement and to avoid corporate income tax and thenondeductible excise tax if differences in timing between taxable income andcash available for distribution exist. As noted above, we may not be able toborrow these funds. Additionally, any such borrowings may not be at favorableinterest rates.

**Adverselegislative or regulatory tax changes may affect the tax treatment of us or ourstockholders.**

At any time, thefederal income tax laws governing REITs or the administrative interpretationsof those laws may be amended. Any of those new laws or interpretations thereofmay take effect retroactively and could adversely affect our company or you, asa shareholder. For example, on May 28, 2003, the President signed into lawtax legislation that reduced the federal tax rate on both dividends andlong-term capital gains for individuals to 15% through 2008. Because REITsgenerally are not subject to corporate income tax, this reduced tax rategenerally does not apply to ordinary REIT dividends, which continue to be taxedat the higher tax rates applicable to ordinary income. The 15% tax rate appliesto:

·       long-termcapital gains recognized on the disposition of REIT shares;

·       REITcapital gain distributions (except to the extent attributable to real estatedepreciation, in which case such distributions continue to be subject to a 25%tax rate);

·       REITdividends attributable to dividends received by a REIT from non-REITcorporations, such as taxable REIT subsidiaries; and

·       REITdividends attributable to income that was subject to corporate income tax atthe REIT level (e.g., to the extent that a REIT distributes less than 100% ofits taxable income).

This law could be causingshares in non-REIT corporations to be a relatively more attractive investmentto individual investors than shares in REITs. The legislation also could behaving an adverse effect on the market price of our securities.

**Risks Related to Plan of Liquidation**

**We donot know the exact amount or timing of liquidation distributions.**

We cannot assure you of the precise nature and amountof any distributions to our stockholders pursuant to the Plan. Furthermore, thetiming of our distributions will be affected, in large part, by our ability tosell in a timely and orderly manner our remaining assets.

The methods used by management in estimating thevalues of our assets (other than cash and cash equivalents) and liabilities arebased on estimates which are inexact and may not approximate values actuallyrealized or the actual costs incurred. Our board of directors’****assessment assumes that the estimates of our assets,liabilities, construction and operating costs, and sale prices of our remainingassets are accurate, but those estimates are subject to numerous uncertaintiesbeyond our control, including any new contingent liabilities that maymaterialize and other matters discussed below. In addition, our board ofdirectors****has relied on (i) management’sestimates as to the value of our company’s properties, other assets, costs andoperating expenses, and (ii) Bear Stearns’ mathematical compilations andcomputations of such estimates and has not obtained or sought an appraisal ofany of the properties that it proposes to liquidate. For all of these reasons,the actual net proceeds distributed to stockholders in liquidation may be moreor less than the estimated amounts.

We have estimated the range of distributions basedupon management’s estimates of the values of the assets after considering,among other factors, internally prepared budgets, projections and models,comparable sales figures, and values ascribed to certain assets duringdiscussions with bidders and brokers for our company. Bear Stearns assisted usby helping to develop financial models and providing 

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sophisticated analyses ofthese models. There can be no assurance that we will be able to find buyers forall the remaining assets, and if we are able to sell such assets, there can beno guaranty that the value received upon such sale will be consistent withmanagement’s estimates.

If our stockholders approve the Plan, potentialpurchasers of our assets may try to take advantage of our liquidation processand offer less-than-optimal prices for our assets. We intend to seek and obtainthe highest sales prices reasonably available for our assets, and believe thatwe can out-wait bargain-hunters; however, we cannot predict how changes inlocal real estate markets or in the national economy may affect the prices thatwe can obtain in the liquidation process. Therefore, there can be no assurancethat the announcement and approval of the Plan will not hinder management’sability to obtain the best price possible in the liquidation of our assets.

We currently estimate that an aggregate of between$101.3 million and $115.8 million may be available for distribution toholders of our shares of common stock under the Plan, which would result in atotal distribution of between $4.20 and $4.80 per share of common stock. Theactual amount available for distribution could be more or less or could bedelayed, depending on a number of other factors including (i) unknownliabilities or claims, (ii) unexpected or greater or lesser than expectedexpenses, and (iii) greater or lesser than anticipated net proceeds ofasset sales.

Although we anticipate making an initial distributionof substantially all of the net proceeds from the sale of our properties,interim and final distributions will depend on the amount of proceeds wereceive, when we receive them, and the extent to which we must establishreserves for current or future liabilities. In addition, although we expectthat a distribution of substantially all of the remaining amount will be madeto stockholders within two years following the adoption of the Plan by ourstockholders, the actual time of distribution may be longer in the event thatwe have difficulties disposing of our assets or if a creditor seeks theintervention of the Maryland courts to enjoin dissolution.

We are currently unable topredict the precise timing of any distributions pursuant to the Plan. Thetiming of any distribution will depend upon and could be delayed by, amongother things, the timing of the sale of our company’s assets. Additionally, acreditor could seek an injunction against our making distributions to ourstockholders on the ground that the amounts to be distributed were needed forthe payment of the liabilities and expenses. Any action of this type coulddelay or substantially diminish the amount, if any, available for distributionto our stockholders.

**Valuationsof our real estate assets are subject to general risks associated with realestate assets and within the real estate industry.**

The value of ourreal estate assets and consequently the value of your investment, is subject tocertain risks applicable to our assets and inherent in the real estate industry.The following factors, among others, may adversely affect the value of our realestate assets:

·       downturnsin the national, regional and local economic climate where our properties arelocated;

·       downturnin general economic conditions as well as a downturn in specific regional andlocal market conditions;

·       competitionfrom other commercial real estate entities;

·       localreal estate market conditions, such as oversupply of, or reduction in demandfor, leasing of commercial real estate;

·       decreasesin rent and/or occupancy rates due to competition, economic or other factors;

·       increasesin operating costs such as real estate taxes, insurance premiums, sitemaintenance and utilities;

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·       changesin interest rates and the availability of financing; and

·       changes in laws andgovernmental regulations, including those governing real estate usage, zoningand taxes.

**Weface potential risks with asset sales.**

Risksassociated with the sale of properties which, if they materialize, may have amaterial adverse effect on amounts you may receive, include:

·       lackof demand by prospective buyers;

·       inabilityto find qualified buyers;

·       inabilityof buyers to obtain satisfactory financing;

·       lowerthan anticipated sale prices; and

·       the inability to close onsales of properties under contract.

**Ourstockholders could vote against the Plan.**

Our stockholders couldvote against the Plan. If our stockholders do not approve the Plan, we wouldhave to continue our business operations from a difficult position, in light ofthe announced intent to liquidate and dissolve. Employees, customers and otherthird parties may refuse to continue to conduct business with us if they areuncertain as to our future, particularly with respect to long-termrelationships that would be advantageous to the conduct of our business as agoing concern. In addition, our company will have to continue operations whilebeing faced with the same strategic issues it considered in determining toadopt the Plan.

**If weare unable to satisfy all of our obligations to creditors, or if we haveunderestimated our future expenses, the amount of liquidation proceeds will bereduced.**

We have current and futureobligations to creditors. Claims, liabilities and expenses from operations(such as operating costs, salaries, directors’ and officers’ insurance, payrolland local taxes, legal, accounting and consulting fees and miscellaneous officeexpenses) will continue to be incurred through the liquidation process. As partof this process, we will attempt to satisfy any obligations with creditorsremaining after the sale of our assets. These expenses will reduce the amountof assets available for ultimate distribution to our stockholders. To theextent our liabilities exceed the estimates that we have made, the amount ofliquidation proceeds will be reduced.

**Stockholdersmay be liable to our creditors for amounts received from us if our reserves areinadequate.**

If the Plan is approved bythe stockholders, we intend to file Articles of Dissolution with the StateDepartment of Assessments and Taxation of Maryland promptly after the sale ofall our remaining assets or at such time as our directors have transferred ourcompany’s remaining assets, subject to its liabilities, into a liquidatingtrust. Pursuant to Maryland law, our company will continue to exist for thepurpose of discharging any debts or obligations, collecting and distributingits assets, and doing all other acts required to liquidate and wind up itsbusiness and affairs. We intend to pay for all liabilities and distribute allof our remaining assets before we file our Articles of Dissolution.

Under Maryland law,certain obligations or liabilities imposed by law on our stockholders,directors, or officers cannot be avoided by the dissolution of a company. Forexample, if we make distributions to our stockholders without making adequateprovisions for payment of creditors’ claims, our stockholders would be liableto the creditors to the extent of the unlawful distributions. The liability ofany stockholder is, however, limited to the amounts previously received by suchstockholder from us (and from any liquidating 

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trust). Accordingly,in such event, a stockholder could be required to return all liquidatingdistributions previously made to such stockholder and a stockholder couldreceive nothing from us under the Plan. Moreover, in the event a stockholderhas paid taxes on amounts previously received as a liquidation distribution, arepayment of all or a portion of such amount could result in a stockholderincurring a net tax cost if the stockholder’s repayment of an amount previouslydistributed does not cause a commensurate reduction in taxes payable. Therefore,to the extent that we have underestimated the size of our contingency reserveand distributions to our stockholders have already been made, our stockholdersmay be required to return some or all of such distributions.

**Youwill not be able to buy or sell our shares of common stock after we file ourArticles of Dissolution.**

If the stockholdersapprove the Plan, we intend to close our transfer books on the date on which wefile Articles of Dissolution with the State Department of Assessments andTaxation of Maryland (the “Final Record Date”). We anticipate that the FinalRecord Date will be shortly after the sale of all of our assets or such earliertime as when our board of directors transfers all of our remaining assets intoa liquidating trust. The Final Record Date is likely to be 6 to 24 months afterthe approval of the Plan by our stockholders. Your interests in a liquidatingtrust are likely to be non-transferable except in certain limited circumstances.After the Final Record Date, we will not record any further transfers of ourshares of common stock except pursuant to the provisions of a deceasedstockholder’s will, intestate succession or operation of law and we will notissue any new stock certificates other than replacement certificates orcertificates representing your interest in a liquidating trust. In addition,after the Final Record Date, we will not issue any shares of common stock uponexercise of outstanding options. It is anticipated that no further transfers ofour shares of common stock will occur after the Final Record Date.

**Oursuccess depends on key personnel whose continued service is not guaranteed.**

We have a highly skilledmanagement team and specialized workforce managing our properties. Although weentered into employment and change of control agreements with our chiefexecutive officer and chief financial officer, and retention agreements withother key employees, any executive officer or key employee may terminate his orher relationship with us at any time. The employment agreement with our chiefexecutive officer expires December 31, 2006 and the employment agreementwith our chief financial officer expires May 31, 2006  Although we intend to complete our sale ofour properties before the expiration of our chief executive officer’semployment agreement, our business operations and ability to complete the Planin a timely manner and sell our assets for the estimated proceeds could benegatively impacted if we are unable to retain the services of other keypersonnel or hire suitable replacements.

**Ourchief executive officer and chief financial officer have conflicts of interest.**

The employment agreementsof each of our chief executive officer and chief financial officer containprovisions that entitle the officer to certain benefits and payments if thatofficer terminates that employment agreement following a “change of control”(as defined in his employment agreements and which definition includes adoptionof a Plan as a “change of control”). Accordingly, if the stockholders approvethe Plan and either officer elects to terminate employment with our company,that officer would be entitled to severance payments. Consequently, thoseofficers may have been influenced by the potential severance payments tosupport, or in the case of the chief executive officer who is also a director,to vote to approve, the Plan.

**Liquidationand dissolution may not maximize value for our stockholders.**

Although our board ofdirectors****believes that the Plan is more likelyto result in greater returns to stockholders than if we continued the statusquo or pursued other alternatives, it is possible that one or more of the otheralternatives would be better for us and our stockholders, in which case, wewill be foregoing such alternatives if we implement the Plan.

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**Approvalof the Plan may reduce our stock price, increase its volatility and reduce theliquidity of our shares.**

If our stockholders approve the Plan, but believe thatwe will be unable to complete the Plan in a timely manner, the price of ourshares of common stock may decline. In addition, as we sell our assets, pay offour liabilities and make liquidating distributions to stockholders, our stockprice will likely decline and our shares of common stock will likely becomeless liquid.

In addition, ourshares of common stock may no longer be eligible for listing on the AmericanStock Exchange as a result of adopting the Plan, thus reducing liquidity of theshares of common stock. Being delisted by the American Stock Exchange wouldfurther decrease the market demand and liquidity for, and price of, our sharesof common stock. The policy of the American Stock Exchange is to considerdelisting a company if, among other reasons:

·       thetotal number of public stockholders is less than 300;

·       ifthe aggregate market value of shares publicly held is less than $1 million; or

·       ifliquidation has been authorized by a company’s board of directors andstockholders.

Furthermore, in the eventthat our board of directors****elects totransfer our company’s remaining assets into a liquidating trust, the trustcertificates to be issued to each stockholder will not be transferable exceptin certain very limited circumstances, such as upon death of the holder.

**Approvalof the Plan may lead to stockholder litigation which could result insubstantial costs and distract management.**

Historically,extraordinary corporation actions, such as the proposed Plan, often lead tosecurities class action lawsuits being filed against a company. Such litigationis likely to be expensive and, even if we ultimately prevail, the process willbe time consuming and divert management’s attention from implementing the Planof liquidation and otherwise operating our business. If we do not prevail inany such lawsuit, we may be liable for damages, the validity of a stockholdervote approving the Plan may be challenged, or we may be unable to complete sometransactions that we contemplate as part of the Plan. We cannot predict thecost of defense or the amount of such damages but they may be significant andwould likely reduce our cash available for distribution.

**Approvalof the Plan could cause our methodology of accounting to change, which mayrequire us to reduce the net carrying value of our assets.**

Once our stockholders approve the proposed Plan, wecould change our basis of accounting from the going-concern basis to that ofthe liquidation basis of accounting.

In order for our financial statements to be inaccordance with generally accepted accounting principles under the liquidationbasis of accounting, all of our assets must be stated at their estimated netrealizable value, and all of our liabilities (including those related tocommitments under employment agreements) must be recorded at the estimatedamounts at which the liabilities are expected to be settled. Based on the mostrecent available information, if the Plan is adopted, we expect to makeliquidating distributions that exceed the carrying amount of our net assets. However,we cannot assure you what the ultimate amounts of such liquidating distributionswill be. Therefore, there is a risk that the liquidation basis of accountingmay entail write downs of certain of our assets to values substantially lessthan their current respective carrying amounts, and may require that certain ofour liabilities be increased or certain other liabilities be recorded toreflect the anticipated effects of an orderly liquidation.

Until we determine that the Plan is about to beapproved, we will continue to use the going-concern basis of accounting. If ourstockholders do not approve the Plan, we will continue to account for ourassets 

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and liabilities under thegoing-concern basis of accounting. Under the going-concern basis, assets andliabilities are expected to be realized in the normal course of business. However,long-lived assets to be sold or disposed of should be reported at the lower ofcarrying amount or estimated fair value less costs to sell. For long-livedassets to be held and used, when a change in circumstances occurs, ourmanagement must assess whether we can recover the carrying amounts of ourlong-lived assets. If our management determines that based on all of theavailable information, we cannot recover those carrying amounts, an impairmentof value of our long-lived assets has occurred and the assets would be writtendown to their estimated fair value.

Our management believesthat the carrying amounts of our long-lived assets at March 15, 2006, hadnot been impaired, other than to the extent of amounts already recorded inprior accounting periods. We may, however, be required to make write downs ofour assets in the future based on estimated net realizable value of our assetsat that time. Such write downs could reduce our stock price.

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

We have received nowritten comments regarding our periodic or current reports from the staff ofthe Securities and Exchange Commission that were issued 180 days or morepreceding the end of our 2005 fiscal year and that remain unresolved.

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**ITEM 2. PROPERTIES**

At December 31, 2005, we owned and operated 14office properties which included an aggregate of 2,159,679 square feet locatedin metropolitan Denver, Dallas, Phoenix and Indianapolis. In January 2006,the Company sold the Keystone property in Indianapolis and Financial Plaza inPhoenix, which aggregated 424,751 square feet.

The following tableprovides certain information about each of our office properties at December 31,2005:

| ** **                                      | ** ** | ** ** | ** ** | ** **             | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Building / Location**               | ** ** | ** ** | ** ** | **Year**

**Acquired** | ** ** | **Rentable  Area(1)**           | ** ** | **Occupancy  Rate(2)**          | ** ** | **Average  Rent Per  SF(3)** | ** ** | **Occupancy  Rate(4)** | ** ** | **Average  Rent Per  SF(3)** | ** ** |
| ***Same Store***                                |       |       |       |                   |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Sheridan Center  Denver, CO                     |       | 2000       |       | 139,561                |       |                            | 79.7       | %                               |       |   | $ | 15.95 |   |   |   | 82.0 | % |   |   | $ | 15.94 |   |   |
| Arrowhead Fountains  Peoria, AZ                 |       | 2001       |       | 96,203                 |       |                            | 100.0      | %                               |       |   | 22.08 |   |   |   | 100.0 | % |   |   | 21.85 |   |   |
| Kellogg Building  Littleton, CO                 |       | 2001       |       | 110,940                |       |                            | 95.1       | %                               |       |   | 19.56 |   |   |   | 93.0 | % |   |   | 19.56 |   |   |
| Parkway Centre II  Plano, TX                    |       | 2002       |       | 151,880                |       |                            | 85.5       | %                               |       |   | 19.61 |   |   |   | 94.8 | % |   |   | 19.01 |   |   |
| Centerra  Denver, CO                            |       | 2002       |       | 187,562                |       |                            | 84.2       | %                               |       |   | 17.36 |   |   |   | 85.2 | % |   |   | 18.09 |   |   |
| Southwest Gas Building  Phoenix, AZ             |       | 2003       |       | 144,821                |       |                            | 90.3       | %                               |       |   | 23.08 |   |   |   | 87.1 | % |   |   | 22.64 |   |   |
| Scottsdale Norte  Scottsdale, AZ                |       | 2003       |       | 78,800                 |       |                            | 100.0      | %                               |       |   | 22.76 |   |   |   | 94.4 | % |   |   | 22.74 |   |   |
| Greenhill Park  Addison, TX                     |       | 2003       |       | 247,269                |       |                            | 86.5       | %                               |       |   | 17.41 |   |   |   | 77.0 | % |   |   | 17.71 |   |   |
| Camelback Lakes  Phoenix, AZ                    |       | 2004       |       | 202,720                |       |                            | 100.0      | %                               |       |   | 23.78 |   |   |   | 98.9 | % |   |   | 21.97 |   |   |
| Hackberry View  Irving, TX                      |       | 2004       |       | 114,598                |       |                            | 95.7       | %                               |       |   | 21.01 |   |   |   | 100.0 | % |   |   | 19.78 |   |   |
| Parkway Centre III  Plano, TX                   |       | 2004       |       | 152,391                |       |                            | 91.2       | %                               |       |   | 20.61 |   |   |   | 93.8 | % |   |   | 20.94 |   |   |
| Hampton Court  Dallas, TX                       |       | 2004       |       | 108,183                |       |                            | 98.0       | %                               |       |   | 21.46 |   |   |   | 100.0 | % |   |   | 21.13 |   |   |
|                                            |       | Subtotal   |       | 1,734,928              |       |                            | 91.2       | %                               |       |   | 20.26 |   |   |   | 90.8 | % |   |   | 19.97 |   |   |
| ***Held-for-Sale***                             |       |       |       |                   |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Keystone Office Park(5)  Indianapolis, IN       |       | 1999/2003  |       | 114,980                |       |                            | 79.1       | %                               |       |   | 17.35 |   |   |   | 76.8 | % |   |   | 17.69 |   |   |
| Financial Plaza(5)  Mesa, AZ                    |       | 2003       |       | 309,771                |       |                            | 90.8       | %                               |       |   | 23.59 |   |   |   | 83.0 | % |   |   | 23.51 |   |   |
|                                            |       | Subtotal   |       | 424,751                |       |                            | 87.7       | %                               |       |   | 21.82 |   |   |   | 81.3 | % |   |   | 22.03 |   |   |
| ***Disposed of Properties***                    |       |       |       |                   |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| AmeriVest Plaza at  Inverness(6)  Englewood, CO |       | 2001       |       | n/a                    |       |                            | n/a        |                            |       |   | n/a |   |   |   | 93.9 | % |   |   | 21.03 |   |   |
| Chateau Plaza(6)  Dallas, TX                    |       | 2002       |       | n/a                    |       |                            | n/a        |                            |       |   | n/a |   |   |   | 99.5 | % |   |   | 23.42 |   |   |
| Panorama Falls—JV(7)  Englewood, CO        |       | 2000       |       | n/a                    |       |                            | n/a        |                            |       |   | n/a |   |   |   | 64.8 | % |   |   | 19.84 |   |   |
| Texas State Buildings(8)  Texas                 |       | 1997/1998  |       | n/a                    |       |                            | n/a        |                            |       |   | n/a |   |   |   | 77.1 | % |   |   | 9.06 |   |   |
|                                            |       | Subtotal   |       | n/a                    |       |                            | n/a        |                            |       |   | n/a |   |   |   | 86.0 | % |   |   | 17.59 |   |   |
|                                            |       | Total      |       | 2,159,679              |       |                            | 90.5       | %                               |       |   | $ | 20.61 |   |   |   | 88.3 | % |   |   | $ | 19.78 |   |   |
|                                                 |            |            |            |                        |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(Footnotesfor table on previous page.)

(1)          Includes office spacebut excludes storage, telecommunications and garage space.

(2)          Includes approximately37,000 square feet (1.7% of total rentable area) that has been leased but isnot yet occupied and approximately 20,000 square feet (0.9% of total rentablearea) that is leased but has been vacated.

(3)          Annualized cash basisrevenue divided by leased area.

(4)          Includes approximately73,000 square feet (2.7% of total rentable area) that has been leased but isnot yet occupied and approximately 28,000 square feet (1.0% of total rentablearea) that is leased but has been vacated.

(5)          This building was soldin January 2006.

(6)          This building was soldin December 2005.

(7)          AmeriVest sold its 20%interest in the property in September 2005.

(8)          On March 2, 2005,the Company completed a Deed-in-Lieu Agreement to return these properties tothe lender.

Thefollowing tables show the geographic distribution of our properties by squarefootage at December 31, 2005:

| ** **    | ** ** | **Held-for-Sale Properties  Included in Regions** | ** ** | **Held-for-Sale Properties  Excluded from Regions** | ** ** |
|---------------|------------|------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **    | ** ** | **Square Feet**                                             | ** ** | **% of Total**                                           | ** ** | **Square Feet** | ** ** | **% of Total** | ** ** |
| Phoenix       |       |                                                             | 832,315    |                                                               |       |   | 38.5 | % |   |   | 522,544 |   |   |   | 24.2 | % |   |
| Dallas        |       |                                                             | 774,321    |                                                               |       |   | 35.9 | % |   |   | 774,321 |   |   |   | 35.9 | % |   |
| Denver        |       |                                                             | 438,063    |                                                               |       |   | 20.3 | % |   |   | 438,063 |   |   |   | 20.3 | % |   |
| Indianapolis  |       |                                                             | 114,980    |                                                               |       |   | 5.3 | % |   |   | — |   |   |   | — |   |   |
| Held-for-Sale |       |                                                             | —     |                                                               |       |   | — |   |   |   | 424,751 |   |   |   | 19.6 | % |   |
| Total         |       |                                                             | 2,159,679  |                                                               |       |   | 100.0 | % |   |   | 2,159,679 |   |   |   | 100.0 | % |   |

 

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Thefollowing table categorizes the area leased of our properties, includingheld-for-sale, by our tenant’s industry at December 31, 2005:

| **Industry**                                      | ** ** | ** ** | ** ** | **Percentage  of Area** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------------------------|------------|
| Real estate                                       |       |       | 11.5       | %                            |       |
| Consulting and  business services                 |       |       | 9.8        | %                            |       |
| Health care                                       |       |       | 9.7        | %                            |       |
| Financial  services—mortgage                 |       |       | 9.2        | %                            |       |
| Financial  services—advisement and brokerage |       |       | 7.6        | %                            |       |
| Financial  services—insurance                |       |       | 6.8        | %                            |       |
| Legal                                             |       |       | 6.1        | %                            |       |
| Energy                                            |       |       | 6.1        | %                            |       |
| Computer systems  and software                    |       |       | 5.9        | %                            |       |
| Wholesale trade  and manufacturing                |       |       | 5.3        | %                            |       |
| Travel,  entertainment and food services          |       |       | 4.4        | %                            |       |
| Telecommunications                                |       |       | 3.9        | %                            |       |
| Financial  services—banks                    |       |       | 2.3        | %                            |       |
| Accounting                                        |       |       | 2.2        | %                            |       |
| Other(1)                                          |       |       | 9.2        | %                            |       |

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(1)          Includesany industry that is less than 2% of total area.

**Consolidated Lease Expirations**

Thefollowing schedule details the tenant lease expirations for our properties at December 31,2005:(1)

| **Year** | ** ** | ** ** | ** ** | **Number of  Expiring Leases** | ** ** | **Expiring  Square Footage** | ** ** | **Expiring Annual  Revenue(2)** | ** ** | **Percentage of Total  Annual Revenue** | ** ** |
|----------|------------|------------|------------|------------------------------------------|------------|-----------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------|------------|
| 2006     |       |       | 91         |                                     |       |                              | 238,975    |                                 |       |                                                   | $          | 4,891,155 |   |   |   | 15.6 | % |   |
| 2007     |       |       | 71         |                                     |       |                              | 262,165    |                                 |       |                                                   | 5,325,820  |   |   |   | 17.0 | % |   |
| 2008     |       |       | 84         |                                     |       |                              | 262,931    |                                 |       |                                                   | 5,086,843  |   |   |   | 16.2 | % |   |
| 2009     |       |       | 47         |                                     |       |                              | 278,793    |                                 |       |                                                   | 6,242,796  |   |   |   | 20.0 | % |   |
| 2010     |       |       | 41         |                                     |       |                              | 322,942    |                                 |       |                                                   | 6,564,416  |   |   |   | 20.9 | % |   |
| 2011     |       |       | 21         |                                     |       |                              | 111,440    |                                 |       |                                                   | 2,205,774  |   |   |   | 7.0 | % |   |
| 2012     |       |       | 4          |                                     |       |                              | 18,988     |                                 |       |                                                   | 377,892    |   |   |   | 1.2 | % |   |
| 2013     |       |       | —     |                                     |       |                              | —     |                                 |       |                                                   | —     |   |   |   | — |   |   |
| 2014     |       |       | 3          |                                     |       |                              | 34,201     |                                 |       |                                                   | 487,774    |   |   |   | 1.6 | % |   |
| 2015     |       |       | 4          |                                     |       |                              | 10,073     |                                 |       |                                                   | 170,592    |   |   |   | 0.5 | % |   |
| Total    |       |       | 366        |                                     |       |                              | 1,540,508  |                                 |       |                                                   | $          | 31,353,062 |   |   |   | 100.0 | % |   |

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(1)          Excludes assetsclassified as held-for-sale at December 31, 2005.

(2)          Representsthe annual base rent and excludes any adjustments for straight-line rent orexpense recoveries.

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**Portfolioby Lease Size, including held-for-sale properties:**

| **Lease Size**             | ** ** | ** ** | ** ** | **Occupied Area** | ** ** | **% of Occupied  Area** | ** ** | **Number of  Leases** | ** ** | **% of Total  Leases** | ** ** |
|---------------------------------|------------|------------|------------|------------------------|------------|-----------------------------------|------------|----------------------------|------------|----------------------------------|------------|
| 2,500 square feet  and under    |       |       | 326,551    |                   |       |                              | 17.1       | %                          |       |                             | 245        |   |   |   | 53.9 | % |   |
| 2,501 to 5,000  square feet     |       |       | 359,194    |                   |       |                              | 18.8       | %                          |       |                             | 103        |   |   |   | 22.7 | % |   |
| 5,001 to 10,000  square feet    |       |       | 460,994    |                   |       |                              | 24.2       | %                          |       |                             | 67         |   |   |   | 14.8 | % |   |
| 10,001 to 25,000  square feet   |       |       | 514,405    |                   |       |                              | 27.0       | %                          |       |                             | 33         |   |   |   | 7.3 | % |   |
| 25,001 to 50,000  square feet   |       |       | 130,781    |                   |       |                              | 6.9        | %                          |       |                             | 4          |   |   |   | 0.9 | % |   |
| 50,000 square  feet and greater |       |       | 115,373    |                   |       |                              | 6.0        | %                          |       |                             | 2          |   |   |   | 0.4 | % |   |
|                            |       |       | 1,907,298  |                   |       |                              | 100.0      | %                          |       |                             | 454        |   |   |   | 100.0 | % |   |

 

**Description of Specific Properties**

At December 31, 2005,Financial Plaza was the only property whose book value was greater than orequal to 10% of our consolidated assets. Financial Plaza was sold on January 23,2006. A description of this property is set forth below.

*Financial Plaza*

In September 2003, we acquired the FinancialPlaza office building in Mesa, Arizona. The property is comprised of a 16-storyoffice building, a 2-story retail building and a 5-story parkinggarage containing approximately 311,000 square feet on 6.07 acres of land. Theparking garage contains approximately 1,000 spaces. Financial Plaza was builtin 1986.

Financial Plaza is a high-rise office asset in theSoutheast Valley submarket, offering panoramic views of the Phoenixmetropolitan area from its higher floors, high quality interior finishes andextensive exterior landscaping. The property has access to the Phoenix highwaysystem via the nearby Superstition Freeway and to the many amenities of the FiestaMall, located across the street. Competition for Financial Plaza comesprincipally from a wide range of smaller properties of lesser quality locatedthroughout the Southeast Valley, which compete on price, as well as twocomparable Class A properties, which at December 31, 2005 were wellleased at similar rates to Financial Plaza.

At December 31, 2005, Financial Plaza was leasedto 53 tenants at base rental rates ranging from $13.83 to $28.00 per squarefoot. The average effective annual rent per square foot at December 31,2005 was $23.59. The occupancy rate for Financial Plaza was approximately 91%,83%, and 81% at December 31, 2005, 2004 and 2003, respectively. At December 31,2005, there were no tenants that occupied 10% or more of the rentable area.

28

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Thefollowing schedule details the tenant lease expirations for Financial Plaza at December 31,2005:

| **Year** | ** ** | ** ** | ** ** | **Number of  Expiring Leases** | ** ** | **Expiring  Square Footage** | ** ** | **Expiring Annual  Revenue (1)** | ** ** | **Percentage of Total  Annual Revenue** | ** ** |
|----------|------------|------------|------------|------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------|------------|
| 2006     |       |       | 11         |                                     |       |                              | 30,597     |                                       |       |                                                   | 747,618    |   |   |   | 12.1 | % |   |
| 2007     |       |       | 15         |                                     |       |                              | 92,658     |                                       |       |                                                   | 2,142,827  |   |   |   | 34.7 | % |   |
| 2008     |       |       | 7          |                                     |       |                              | 29,739     |                                       |       |                                                   | 676,275    |   |   |   | 10.9 | % |   |
| 2009     |       |       | 10         |                                     |       |                              | 42,875     |                                       |       |                                                   | 996,667    |   |   |   | 16.1 | % |   |
| 2010     |       |       | 6          |                                     |       |                              | 38,027     |                                       |       |                                                   | 758,739    |   |   |   | 12.3 | % |   |
| 2011     |       |       | 1          |                                     |       |                              | 1,973      |                                       |       |                                                   | 46,365     |   |   |   | 0.7 | % |   |
| 2012     |       |       | 2          |                                     |       |                              | 27,589     |                                       |       |                                                   | 628,022    |   |   |   | 10.1 | % |   |
| 2013     |       |       | —     |                                     |       |                              | —     |                                       |       |                                                   | —     |   |   |   | — |   |   |
| 2014     |       |       | —     |                                     |       |                              | —     |                                       |       |                                                   | —     |   |   |   | — |   |   |
| 2015     |       |       | 1          |                                     |       |                              | 14,379     |                                       |       |                                                   | 191,220    |   |   |   | 3.1 | % |   |
| Total    |       |       | 53         |                                     |       |                              | 277,837    |                                       |       |                                                   | $          | 6,187,733 |   |   |   | 100.0 | % |   |
|          |            |            |            |                                          |            |                                   |            |                                            |            |                                                        |            |  |  |  |  |  |  |  |  |  |

----

(1)          Represents the annualbase rent and excludes any adjustments for straight-line rent or expenserecoveries.

For 2005, the real estate taxes for Financial Plazawere approximately $770,000 as determined by the Maricopa County Treasurer.

Financial Plaza had a federal tax basis of $40.6million at December 31, 2005. For federal income tax purposes,depreciation is computed using the straight-line method over a useful life of39 years, for a depreciation rate of 2.56% per year. For financialreporting purposes, depreciation is determined and computed in accordance withgenerally accepted accounting principles.

The Company sold thisproperty in January 2006 for $55.0 million and recognized a gain ofapproximately $16.0 million. See “Mortgage Loans, Notes Payable and Lines ofCredit” below for information regarding the financing of this property.

**Property Improvements**

We have budgetedapproximately $7 million for capital improvements, including tenantimprovements, at our properties during 2006. This amount is in addition toamounts that will be expended for routine maintenance and repairs. This amountis to be funded from cash balances, working capital and additional borrowing. Sinceadoption of the Plan, we are focusing our efforts on conservation of cash andmay not spend the entire budgeted amount.

29

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**MortgageLoans, Notes Payable and Lines of Credit**

TheCompany has financed its properties with mortgage loans and other debtinstruments, including the lines of credit, that were available to it. Thefollowing is a summary of the Company’s outstanding mortgage loans and notespayable (including the Unsecured Credit Facility), classified by interest type(fixed or variable) and in order of maturity, at December 31, 2005 and2004:

| ** **                                                | ** ** | ** **                                                              | ** ** | ** **                                                       | ** ** | **December 31, 2005** | ** **  | **December 31, 2004** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| **Lender**                                                | ** ** | ** **                                                              | ** ** | **Mortgaged Property at  December 31, 2005** | ** ** | **Maturity  Date**              | ** **  | **Principal  Balance**          | ** ** | **Interest  Rate(1)** | ** ** | **Principal  Balance** | ** ** | **Interest  Rate(1)** | ** ** |
| ***Fixed  Rate***                                         |       |                                                                    |       |                                                             |       |                            |        |                            |       |   |   |   |   |   |   |   |   |
| GEMSA                                                     |       | Hampton Court                                                      |       | 11/1/2007                                                        |       | $                               | 7,900,000   |                            |       | 5.48 | % |   | $ | 7,900,000 |   |   | 5.48 | % |   |
| Greenwich Capital Financial Products                      |       | Parkway Centre II  Centerra  Southwest Gas Building |       | 10/1/2008                                                        |       | 37,306,859                      |        |                            | 5.13       | % |   | 38,115,018 |   |   | 5.13 | % |   |
| Metropolitan Life Insurance Company                       |       | Parkway Centre III                                                 |       | 9/10/2009                                                        |       | 14,813,833                      |        |                            | 4.47       | % |   | 15,154,645 |   |   | 4.47 | % |   |
| Southern Farm Bureau Life Insurance  Company              |       | Scottsdale Norte                                                        |       | 4/1/2011                                                         |       | 6,507,070                       |        |                            | 7.90       | % |   | 6,568,596 |   |   | 7.90 | % |   |
| J.P. Morgan Chase                                         |       | Hackberry View—1st                                            |       | 9/1/2012                                                         |       | 11,287,282                      |        |                            | 6.57       | % |   | 11,424,345 |   |   | 6.57 | % |   |
| J.P. Morgan Chase                                         |       | Hackberry View—2nd(2)                                         |       | 9/1/2012                                                         |       | 937,796                         |        |                            | 8.00       | % |   | 967,654 |   |   | 8.00 | % |   |
| Teachers Insurance and Annuity Association  of America    |       | Sheridan Center  Arrowhead Fountains  Kellogg Building   |       | 1/1/2013                                                         |       | 28,360,682                      |        |                            | 7.40       | % |   | 28,852,678 |   |   | 7.40 | % |   |
| Allstate Life Insurance Company                           |       | Camelback—1st                                                      |       | 9/5/2014                                                         |       | 15,631,631                      |        |                            | 5.82       | % |   | 15,928,449 |   |   | 5.82 | % |   |
| Allstate Life Insurance Company                           |       | Camelback—2nd                                                      |       | 9/5/2014                                                         |       | 4,884,884                       |        |                            | 5.82       | % |   | 4,977,640 |   |   | 5.82 | % |   |
| Subtotal                                                  |       |                                                                    |       |                                                             |       | 127,630,037                     |        |                            | 5.98       | % |   | 129,889,025 |   |   | 5.98 | % |   |
| ***Variable  Rate***                                      |       |                                                                    |       |                                                             |       |                            |        |                            |       |   |   |   |   |   |   |   |   |
| KeyBank National Association—Secured Credit Facility |       | Greenhill Park                                                          |       | n/a                                                              |       | —                          |        |                            | —     |   |   | 17,500,000 |   |   | 4.96 | % |   |
| KeyBank National Association—Unsecured  Facility     |       | Unsecured                                                               |       | 4/1/2006                                                         | (3)        | 29,897,129                      |        |                            | 6.91       | % |   | 24,857,063 |   |   | 5.63 | % |   |
| Subtotal                                                  |       |                                                                    |       |                                                             |       | 29,897,129                      |        |                            | 6.91       | % |   | 42,357,063 |   |   | 5.35 | % |   |
| ***Disposed  Of Properties***                             |       |                                                                    |       |                                                             |       |                            |        |                            |       |   |   |   |   |   |   |   |   |
| Teachers Insurance and Annuity Association  of America    |       | AmeriVest Plaza at  Inverness                                 |       | (4                                                               | )          | —                          |        |                            | —     |   |   | 14,412,347 |   |   | 7.90 | % |   |
| KeyBank National Association—Secured Credit Facility |       | Chateau Plaza                                                           |       | (4                                                               | )          | —                          |        |                            | —     |   |   | 15,400,000 |   |   | 4.96 | % |   |
| Transatlantic Capital Company, LLC(5)                     |       | Texas State Buildings                                         |       | n/a                                                              |       | —                          |        |                            | —     |   |   | 5,579,891 |   |   | 7.66 | % |   |
| Subtotal—disposed of properties                      |       |                                                                    |       |                                                             |       | —                          |        |                            | —     |   |   | 35,392,238 |   |   | 6.58 | % |   |
| ***Other  Notes Payable***                                |       |                                                                    |       |                                                             |       |                            |        |                            |       |   |   |   |   |   |   |   |   |
| Lease Capital Corporation                                 |       | Phone system                                                            |       | 10/31/2007                                                       |       | 43,747                          |        |                            | 11.11      | % |   | 64,124 |   |   | 11.11 | % |   |
| Subtotal, excluding held for sale  properties             |       |                                                                    |       |                                                             |       | 157,570,913                     |        |                            | 6.16       | % |   | 207,702,450 |   |   | 5.96 | % |   |
| ***Held-for-Sale  Portfolio(6)***                         |       |                                                                    |       |                                                             |       |                            |        |                            |       |   |   |   |   |   |   |   |   |
| Allstate Life Insurance Company                           |       | Financial Plaza                                                         |       | 10/5/2010                                                        |       | 23,650,188                      |        |                            | 5.25       | % |   | 24,173,324 |   |   | 5.25 | % |   |
| Security Life of Denver Insurance Company                 |       | Keystone Office Park—1st                                 |       | 5/1/2022                                                         |       | 4,119,506                       |        |                            | 8.00       | % |   | 4,236,333 |   |   | 8.00 | % |   |
| Security Life of Denver Insurance Company                 |       | Keystone Office Park—2nd                                 |       | 5/1/2022                                                         |       | 462,967                         |        |                            | 8.63       | % |   | 474,284 |   |   | 8.63 | % |   |
| Subtotal, held-for-sale properties                        |       |                                                                    |       |                                                             |       | 28,232,661                      |        |                            | 5.71       | % |   | 28,883,941 |   |   | 5.71 |   |   |
| Total                                                     |       |                                                                    |       |                                                             |       | $                               | 185,803,574 |                            |       | 6.09 | % |   | $ | 236,586,391 |   |   | 5.92 | % |   |
|                                                           |            |                                                                         |            |                                                                  |            |                                 |             |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)             Interest only, does not include amortization ofdeferred financing costs or any fees.

30

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(2)             The amount recorded reflects a net present valuecalculation based on a fair market value rate of 8%. The actual loan balanceassumed was $697,847 at an interest rate of 15%.

(3)             The Unsecured Facility was paid off in January 2006.

(4)             The Company sold this property in December 2005.

(5)             On March 2, 2005, the Company completed aDeed-in-Lieu Agreement to return these properties to the lender.

(6)             The Company sold this property in January 2006.

**Insurance**

We believe that each ofour properties is adequately covered by insurance under a blanket policy.

**Policiesand Objectives With Respect to Certain Activities**

The following is adiscussion of our policies with respect to investment, financing and otheractivities. Our Board of Directors has determined the policies with respect tothese activities and, although our Board of Directors currently does notcontemplate any changes to these policies, our Board may change these policieswithout a vote or other approval of stockholders.

**Acquisition,Development and Investment Policies**

Historically, ourbusiness and growth strategies were designed to maximize total return tostockholders over the medium- and long-term with a niche property typeand geographic focus. Our policies contemplated the possibility of:

·       directownership of real estate properties, including ownership through wholly-ownedsubsidiaries, focusing on office properties with average tenant sizes ofbetween 2,000 and 4,000 square feet;

·       indirectparticipation in those types of properties through investments in corporations,business trusts, general partnerships, limited partnerships, joint ventures andother legal entities; and

·       developmentand acquisition of unimproved property or the acquisition and conversion ofexisting structures.

At the present time, allof our existing investments in real estate properties are held through directownership. Historically, we intended to hold our properties for the long term.However, since adoption of the Plan, we are preparing for an orderly sale ofour remaining properties over the next 6 - 24 months. Our long-term viewwas to focus on multi-tenant office buildings in select cities anddispose of non-core assets and property types when economically andoperationally feasible.

**Financing Policies**

Should the Plan not be approved nor a corporate saletransaction be completed, we may seek to make additional investments inexisting properties and may incur indebtedness to make those investments or tomeet the distribution requirements imposed by the REIT provisions of theInternal Revenue Code of 1986, as amended, to the extent that cash flow fromour operations, investments and working capital is insufficient. Additionalindebtedness incurred by us may be secured by part or all of our real estateproperties. Our Board of Directors has placed no limitations on the number oramount of secured indebtedness or mortgages that may be placed on any one ofour properties, however, our new $10 million credit facility that was signed January 23,2006  limits our total liabilities to 65%of gross assets, as calculated in accordance with the loan agreement.

Secured indebtednessincurred by us may be in the form of purchase money obligations to the sellersof properties, or publicly or privately placed debt instruments or financingfrom banks, institutional investors or other lenders. This indebtedness may berecourse to all or any part of our assets, or may be 

31

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limitedto the particular property to which the indebtedness relates. The proceeds fromany borrowings by us may be used for, among other things, refinancing existingindebtedness, financing development and acquisition of properties, financingrenovation or redevelopment of properties, the payment of dividends, andworking capital. As noted above, the amendments to our lines of creditdescribed above preclude any further indebtedness without the consent of ourlender for any purpose, including the payment of dividends.

**ITEM 3. LEGAL PROCEEDINGS**

We and our subsidiariesare not presently subject to any material litigation nor, to our knowledge, hasany material litigation been threatened. We are a party to routine litigationand administrative proceedings arising in the ordinary course of business, mostof which are expected to be covered by liability insurance and none of which,individually or in the aggregate, are expected to have a material effect on us.

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

Not applicable.

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**PART II**

**ITEM 5.**                MARKETFOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASE OF EQUITYSECURITIES

Our common stock hastraded on the American Stock Exchange under the symbol “AMV” since January 27,2000.

Thetable below presents the range of high and low sale prices for our common stockduring each of the quarters indicated, as reported by the American StockExchange, and the cash dividends per share paid with for the periods indicated:

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** | **Dividend  Per Share** | ** ** |
|----------------|------------|----------|------------|---------|------------|------------------------------|------------|
| 2004:          |       |     |       |    |       |                         |       |   |   |
| First Quarter  |       | $        | 7.64       |    | $          | 6.40                         |       |   | $ | 0.13 |   |   |
| Second Quarter |       | $        | 6.93       |    | $          | 5.48                         |       |   | $ | 0.13 |   |   |
| Third Quarter  |       | $        | 6.89       |    | $          | 5.84                         |       |   | $ | 0.13 |   |   |
| Fourth Quarter |       | $        | 7.30       |    | $          | 6.20                         |       |   | $ | 0.13 |   |   |
| 2005:          |       |     |       |    |       |                         |       |   |   |
| First Quarter  |       | $        | 6.65       |    | $          | 5.00                         |       |   | $ | 0.00 |   |   |
| Second Quarter |       | $        | 5.54       |    | $          | 3.85                         |       |   | $ | 0.00 |   |   |
| Third Quarter  |       | $        | 4.87       |    | $          | 3.55                         |       |   | $ | 0.00 |   |   |
| Fourth Quarter |       | $        | 4.29       |    | $          | 3.22                         |       |   | $ | 0.00 |   |   |

 

On December 31, 2005,there were approximately 5,360 stockholders of AmeriVest, consisting ofapproximately 246 holders of record. The information concerning beneficialowners is based on information provided by brokers and depositories who holdshares in their names on behalf of others. On March 1, 2006, the closingsale price for our common stock was $4.54 per share, as reported by theAmerican Stock Exchange.

**Dividend Policy**

On March 9, 2005, theCompany’s Board of Directors suspended the payment of the common dividend forthe first quarter of 2005, and subsequently continued the suspension throughall of 2005. As of March 15, 2006, the Board has not reinstated thequarterly common dividend. Until thesuspension of the dividend in March 2005, the Company had paid a dividendeach quarter since its initial public offering in November 1996. ForFederal income tax purposes, distributions may consist of ordinary income,capital gains, on-taxable return of capital, or a combination thereof. Distributionsthat exceed our current and accumulated earnings and profits constitute areturn of capital rather than ordinary income and reduce the stockholder’sbasis in the Company’s common stock. For tax purposes, our 2004 and 2003distributions represented an approximate 88% and 64% return of capital,respectively, with the remainder being ordinary income.

**RecentSales of Unregistered Securities**

During 2005 we issuedshares of common stock that were not registered under the Securities Act of1933 in the following transactions:

We issued 1,500 shares ofcommon stock upon exercise of previously issued warrants. The issuance of theseshares of common stock was made pursuant to an exemption from registration inaccordance with Section 4(2) of the Securities Act based on arepresentation to us from the entity receiving the shares that such entity wasa sophisticated investor who was knowledgeable about our operations andfinancial condition and was able to evaluate the risks and merits of receipt ofthe shares.

**Purchaseof Equity Securities**

There were no purchasesmade by or on behalf of the Company or any affiliate purchases (as defined in Rule 10b-18(a)(3) underthe Securities Exchange Act of 1934, as amended) of our common stock during thethree months ended December 31, 2005.

33

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**ITEM 6. SELECTED FINANCIAL DATA**

The following table provides selected financial datarelating to our historical financial condition and results of operations as ofand for each of the years ended December 31, 2001 to 2005 (For all periodspresented, the “Operations Summary” reflects the adjustment for discontinuedoperations and “Financial Position” reflects the adjustment for the propertiesthat were classified as held-for-sale at December 31, 2005). The data isqualified in its entirety by, and should be read in conjunction with, “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and the financial statements and related notes that have beenincluded or incorporated by reference in this Form 10-K.

| ** **                                                                   | ** ** | **Years Ended December 31,** | ** **  |
|------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2005**                                    | ** **  | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Operations Summary:**                                                      | ** ** | ** **                                  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental revenue(1)                                                            |       | $                                           | 34,869,604  |   | $ | 28,052,920 |   | $ | 16,537,813 |   | $ | 8,245,227 |   | $ | 3,849,956 |   |
| Property  operating expense—                                            |       |                                        |        |   |   |   |   |   |   |   |   |
| Operating expenses                                                           |       | 9,417,061                                   |        | 8,276,494 |   | 4,449,529 |   | 2,033,894 |   | 1,175,483 |   |
| Real estate taxes                                                            |       | 4,728,154                                   |        | 3,528,564 |   | 1,954,294 |   | 703,521 |   | 213,867 |   |
| General and administrative fees                                              |       | 4,720,958                                   |        | 4,694,029 |   | 3,527,747 |   | 1,746,545 |   | 677,845 |   |
| Interest expense                                                             |       | 11,996,147                                  |        | 8,163,031 |   | 4,748,782 |   | 1,905,083 |   | 1,298,776 |   |
| Depreciation and amortization                                                |       | 12,763,733                                  |        | 9,013,058 |   | 4,067,704 |   | 1,983,488 |   | 1,170,919 |   |
| Impairment of investment in real estate                                      |       | 4,889,082                                   |        | — |   | — |   | — |   | — |   |
| Loss from continuing operations                                              |       | (14,354,022                                 | )           | (5,622,256 | ) | (2,210,243 | ) | (995,684 | ) | (686,934 | ) |
| Loss before discontinued operations                                          |       | (14,239,927                                 | )           | (5,535,240 | ) | (2,136,773 | ) | (831,165 | ) | (551,859 | ) |
| Gain on sale of real estate                                                  |       | —                                      |        | — |   | — |   | — |   | 1,156,445 |   |
| Discontinued operations                                                      |       | 3,541,614                                   |        | (367,712 | ) | 156,353 |   | 673,891 |   | 883,907 |   |
| Net earnings/(loss)                                                          |       | (10,698,313                                 | )           | (5,902,952 | ) | (1,980,420 | ) | (157,274 | ) | 1,488,493 |   |
| **Per  Share Data:**                                                         |       |                                        |        |   |   |   |   |   |   |   |   |
| Earnings/(loss) per common share—basic                                  |       | $                                           | (0.44       | ) | $ | (0.26 | ) | $ | (0.13 | ) | $ | (0.02 | ) | $ | 0.32 |   |
| Earnings/(loss) per common share—diluted                                |       | $                                           | (0.44       | ) | $ | (0.26 | ) | $ | (0.13 | ) | $ | (0.02 | ) | $ | 0.31 |   |
| Common share cash dividends paid                                             |       | —                                      |        | $ | 0.52 |   | $ | 0.52 |   | $ | 0.52 |   | $ | 0.52 |   |
| Weighted average shares outstanding—basic                               |       | 24,062,330                                  |        | 22,348,811 |   | 14,686,369 |   | 9,341,608 |   | 4,680,719 |   |
| Weighted average shares outstanding—diluted                             |       | 24,062,330                                  |        | 22,348,811 |   | 14,686,369 |   | 9,341,608 |   | 4,801,307 |   |
| **Financial  Position:**                                                     |       |                                        |        |   |   |   |   |   |   |   |   |
| Net investment in real estate(2)                                             |       | $                                           | 269,603,168 |   | $ | 330,813,749 |   | $ | 223,892,596 |   | $ | 144,985,328 |   | $ | 80,841,027 |   |
| Total assets                                                                 |       | 283,909,790                                 |        | 347,953,689 |   | 240,500,462 |   | 157,183,587 |   | 88,002,488 |   |
| Secured mortgage loans and notes payable, excluding  discontinued operations |       | 127,673,784                                 |        | 182,845,387 |   | 114,890,458 |   | 101,162,354 |   | 53,374,284 |   |
| Unsecured line of credit                                                     |       | 29,897,129                                  |        | 24,857,063 |   | 15,149,725 |   | — |   | — |   |
| Secured mortgage loans and notes payable—held-for-sale                  |       | 28,232,661                                  |        | 28,883,941 |   | 29,490,227 |   | 4,931,878 |   | 5,034,140 |   |
| Total liabilities                                                            |       | 200,492,742                                 |        | 252,903,717 |   | 170,396,055 |   | 113,287,787 |   | 63,005,503 |   |
| Total stockholders’ equity                                              |       | 83,417,048                                  |        | 93,469,915 |   | 70,104,407 |   | 43,895,800 |   | 24,996,985 |   |
| **Other  Data:**                                                             | ** ** | ** **                                  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash flows provided  by (used in):                                       |       |                                        |        |   |   |   |   |   |   |   |   |
| Operating activities                                                         |       | $                                           | 8,579,288   |   | $ | 11,869,797 |   | $ | 10,650,918 |   | $ | 5,427,045 |   | $ | 3,263,765 |   |
| Investing activities                                                         |       | 37,017,335                                  |        | (94,453,601 | ) | (56,062,593 | ) | (50,312,422 | ) | (24,671,608 | ) |
| Financing  activities                                                        |       | (46,467,863                                 | )           | 82,965,879 |   | 44,570,694 |   | 46,084,588 |   | 21,480,222 |   |

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(1)             Rental revenues inclusive of discontinued operationsfor 2005, 2004, 2003, 2002 and 2001 were $49.2 million, $45.3 million,$29.9 million, $16.4 million, and $10.9 million, respectively.

(2)             Net investment in real estate excluding assets deemedheld-for-sale or sold at December 31, 2005, 2004, 2003, 2002 and 2001 was$222.7 million, $233.1 million, $126.7 million, $85.2 millionand $42.9 million, respectively.

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**ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

The following discussionand analysis of the financial condition and results of operations of AmeriVestas of and for the years ended December 31, 2005, 2004 and 2003 should beread in conjunction with our consolidated financial statements and notes toconsolidated financial statements contained in the Annual Report on Form 10-K.

**Executive Summary**

We are a RealEstate Investment Trust (“REIT”) investing in, operating and leasing commercialoffice buildings primarily to small and medium size tenants. At December 31,2005, we owned 14 properties, which included an aggregate of approximately2,160,000 square feet located in metropolitan Denver, Dallas, Phoenix andIndianapolis. In January 2006, we sold two properties in Phoenix andIndianapolis, reducing our total ownership to 12 properties with approximately1,730,000 square feet in Denver, Dallas and Phoenix. We generate revenueprimarily through the rental of office space at our properties. Key factorsthat affect our business and financial results are as the follows:

·       thecurrent economic environment in metropolitan Denver, Dallas and Phoenix;

·       theoccupancy rates at our properties;

·       therental rates on our properties;

·       tenantimprovement and leasing costs incurred to obtain or retain tenants; and

·       theextent of early lease termination and any lease termination fees.

On February 9, 2006, our Board of Directorsadopted the plan of liquidation and dissolution of our Company. We intend topresent this Plan to stockholders for their approval at the 2006 annual meeting.Management and the Board of Directors estimate that, if stockholders approvethe Plan, total liquidating distributions to common stockholders will be withinthe range of $4.20 to $4.80 per share and will be paid within 6 to 24 monthsafter adoption of the Plan, as our assets are sold and we wind up ouroperations and dissolve the Company. This estimated distribution range is basedon numerous assumptions, notably including the sales price of assets for whichno definitive sale agreements or letters of intent are currently in place. Althoughmanagement and the Board of Directors believe our assumptions are reasonableand have solicited and received input from various outside investment and realestate brokers, the assumptions may prove to be inaccurate and the ultimateamount of liquidating distributions to stockholders may be reduced or delayed.

If, prior to stockholder approval of the Plan, theCompany receives a binding offer for a corporate transaction that will, in theview of the Board of Directors, provide a superior value to stockholders thanthe value of the estimated net distributions under the Plan from the sale ofthe assets, taking into account all factors that could affect valuation,including timing and certainty of close, real estate and investment marketrisks, transaction, operating, leasing and loan prepayment costs and otherfactors, the Plan could be abandoned in favor of such a transaction.

If a binding offer for a corporate transaction is notreceived and the Plan is submitted to, but not approved by, our stockholders,our Board of Directors will meet to consider the best remaining alternativecourse of action for the Company. In that event, we cannot currently predictwhat that course of action would be, since it would depend upon facts andcircumstances at that time.

Throughout this report, wedescribe our historical business strategy. Since adoption of the Plan in February 2006,we have departed from our historical strategy and are working towardscompleting an orderly sale of the Company or liquidation of our assets. UnderMaryland law, the sale of all or 

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substantiallyall of our assets requires stockholder approval. However, if the Company is notsold or the stockholders do not approve the Plan, we may decide to continue makingstrategic dispositions, within the limits of the law. We have no current intentto engage in acquisitions in the foreseeable future.

**Results of Operations**

*Comparison of theYear Ended December 31, 2005 to the Year Ended December 31, 2004*

Weincreased our revenues and expenses during 2005 due to the inclusion of theoperations of our 2004 acquisitions for a full year. For a discussion regardingthe acquired, sold, and held-for-sale properties, see “Item 1, SignificantTransactions—2005 Transactions” and “Item 1, Significant Transactions—2004Transactions.” The following represent our operating results for 2005 and 2004:

| ** **                              | ** ** | **2005**    | ** **  | **2004**   | ** ** | **Change** | ** ** |
|-----------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|
| Real Estate  Operating Revenue:         |       |        |        |       |       |       |       |
| Rental revenue                          |       | $           | 34,869,604  |       | $          | 28,052,920 |       | $ | 6,816,684 |   |
| Real Estate Operating  Expenses:        |       |        |        |       |       |       |       |
| Property operating expenses—       |       |        |        |       |       |       |       |
| Operating expenses                      |       | 9,417,061   |        | 8,276,494  |       | 1,140,567  |       |
| Real estate taxes                       |       | 4,728,154   |        | 3,528,564  |       | 1,199,590  |       |
| General and administrative expenses     |       | 4,720,958   |        | 4,370,403  |       | 350,555    |       |
| Interest expense                        |       | 11,996,147  |        | 8,163,031  |       | 3,833,116  |       |
| Depreciation and amortization expense   |       | 12,763,733  |        | 9,013,058  |       | 3,750,675  |       |
| Strategic alternatives expenses         |       | 708,491     |        | —     |       | 708,491    |       |
| Other expenses                          |       | —      |        | 323,626    |       | (323,626   | )          |
| Impairment of investment of real estate |       | 4,889,082   |        | —     |       | 4,889,082  |       |
| Total operating expense                 |       | 49,223,626  |        | 33,675,176 |       | 15,548,450 |       |
| Loss from  continuing operations        |       | (14,354,022 | )           | (5,622,256 | )          | (8,731,766 | )          |
| Other Income:                           |       |        |        |       |       |       |       |
| Interest income                         |       | 114,095     |        | 87,016     |       | 27,079     |       |
| Total other income                      |       | 114,095     |        | 87,016     |       | 27,079     |       |
| Loss before  discontinued operations    |       | (14,239,927 | )           | (5,535,240 | )          | (8,704,687 | )          |
| Discontinued  operations                |       | 3,541,614   |        | (367,712   | )          | 3,909,326  |       |
| Net loss                                |       | $           | (10,698,313 | )          | $          | (5,902,952 | )          | $ | (4,795,361 | ) |

 

*Rental revenue—*Rentalrevenue increased by approximately $6.8 million, or 24.3%, in 2005 ascompared to 2004 primarily due to the inclusion of the operating results fromthe 2004 acquisitions (Camelback Lakes, Hackberry View, Parkway Centre IIIand Hampton Court) for the entire period of 2005 versus a partial year in 2004,which resulted in a $6.6 million increase. Additional increases ofapproximately $150,000 were recognized in properties held for the entire twelvemonths ended December 31, 2005 and 2004. The occupancy for the 2004acquisitions declined slightly from 98.0% at December 31, 2004 to 96.5% atDecember 31, 2005, while the average rental rate increased from $21.11 to$22.00 for the same periods, respectively. The total portfolio occupancy,excluding properties classified as held-for-sale, was 91.2% at December 31,2005 as compared to 90.8% at December 31, 2004. The average rental ratewas $20.26 at December 31, 2005 and $19.97 at December 31, 2004.

At December 31, 2005, the Company hasapproximately 37,000 square feet of leases that were signed and were scheduledto commence during 2006 (includes held-for-sale properties).  The rental revenue from these commencementswill be partially offset by the negative impact of the expected roll-down inrental rates in 2006 on expiring leases.

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*Property operating expenses*—Property operating expenses, whichincludes operating expenses and real estate taxes, increased by approximately$2.3 million, or 19.8%, in 2005 as compared to 2004.  This increase is comprised of a $1.1 millionincrease in operating expenses and a $1.2 million increase in real estate taxes.The inclusion of the 2004 acquisitions for a full year resulted in a $1.6million increase to total operating expenses. This increase was partiallyoffset by an approximately $504,000 decrease from our properties that were fully operational during the entiretwelve months of 2005 and 2004, which was primarily due to a $470,000 decreasein ground lease expense due to the acquisition of the Greenhill Park land in October 2004.Real estate taxes, which are the largest component of property operatingexpenses, increased approximately $1.2 million in 2005 as compared to 2004, dueto the inclusion of the 2004 acquisitions for the entire year. The Company has focused, and will continueto focus, on the ongoing management of controllable operating expenses,including aggressively challenging increased real estate tax assessments.

*General and administrative expenses*—General and administrative expensesincreased approximately $351,000, or 8.0%, in 2005 as compared to 2004. Thisincrease was primarily due to an increase in audit and consulting fess ofapproximately $200,000 and special severance and directors fees of $450,000,offset by reduced legal fees of approximately $100,000 and other costreductions of approximately $200,000. The Company anticipates that general andadministrative expense will be lower in 2006 due to the decrease in employeeheadcount and other expense reductions.

*Interest expense*—Interest expense increasedapproximately $3.8 million, or 47.0%, in 2005 as compared to 2004. Theincrease is primarily due to the borrowings the Company incurred for 2004acquisitions and capital and tenant improvements and working capital during2005 and 2004. The remainder of the increase is due to the acquisition of theland underlying the Greenhill Park building, which was previously subject to aground lease, and higher interest rates on our variable rate debt during 2005. Proceedsfrom asset sales were utilized to pay down debt, which should significantlylower our interest expense during 2006.

*Depreciation and amortization*—Depreciation and amortizationincreased approximately $3.8 million, or 41.6%, in 2005 as compared to2004. The 2004 acquisitions represent approximately $2.8 million of theincrease, and the remaining increase is due to additional capital improvements,tenant improvements and leasing commissions on properties that were held theentire twelve months of December 31, 2005 and 2004. Due to asset salesduring 2005 and January 2006, we expect depreciation expense to decreasein 2006.

*Strategic alternatives expenses*—The$708,000 expense recognized during 2005 was for costs incurred in connectionwith the Company’s strategic alternative review. The costs were primarily legaland investment banking fees, as well as costs associated with the virtual dataroom.

*Other expense—*The$324,000 increase in other expense is due to costs, such as non-refundableearnest money deposits and legal costs, which were previously capitalized inconnection with anticipated acquisitions. These pursuits were terminated duringthe fourth quarter of 2004 and all capitalized costs associated with theseacquisitions were expensed. There were no such costs recognized during 2005.

*Impairment of investment in realestate—*In aggregate, the Company recorded $9.2 million inimpairments during the twelve months ended December 31, 2005, of whichapproximately $6.5 million was recorded in the fourth quarter. Approximately$2.7 million of this impairment was for properties that were sold during 2005and $1.6 million was for a property that was deemed as held-for-sale at December 31,2005 (see “Discontinued Operations” below). The remaining $4.9 million ofimpairment was for Sheridan Center, a property whose expected undiscounted cashflows did not support the previously recorded basis in the long-lived assetbased on a probability-weighted cash flow utilized as a result of the Company’sannounced Plan. The impairment charges recorded reduced the total net bookvalue to the properties’ estimated fair value.

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*Discontinued operations—*Theresults of operations for properties sold during the period or designated asheld-for-sale at the end of the period are required to be classified asdiscontinued operations. At December 31, 2005, the Company had classifiedKeystone and Financial Plaza as held-for-sale under the provisions of SFAS No. 144.Accordingly, we have classified the operating earnings and impairment fromthese properties within discontinued operations for the years ended December 31,2005 and 2004. In December 2005, the Company completed the disposition ofAmeriVest Plaza at Inverness and Chateau Plaza, both of which were previouslyclassified as held-for-sale. In addition, the Company sold its 20% equityinterest in its joint venture (Panorama Falls) and completed a Deed-in-LieuAgreement to return its 13 non-core Texas State Buildings to the lender duringthe twelve months ended December 31, 2005. During the twelve months ended December 31,2004, the Company sold its Texas Bank Buildings. The results of operations forthese properties are also included as discontinued operations for 2004.

During the twelve months ended December 31, 2005,the Company recorded approximately $4.3 million for impairment losses relatedto properties included in discontinued operations. This $4.3 million iscomprised of approximately $420,000 for Panorama Falls, $2.3 million forAmeriVest Plaza at Inverness, and $1.6 million for Keystone. The Companyrecognized a loss of approximately $117,000 for Panorama Falls, which was soldin September 30, 2005, and a gain on AmeriVest Plaza at Inverness ofapproximately $199,000, when it was sold in December 2005. The remaininggain of $8.7 million recognized during the twelve months ended December 31,2005 relates to Chateau Plaza, which was sold in December 2005. TheKeystone disposition closed in January 2006.

During the twelve months ended December 31, 2004,we recorded a $1.2 million impairment related to certain of the TexasState Buildings located in Lubbock, El Paso, Temple, Bellville, Columbus,Hempstead, Mission, Arlington, Marshall, and Amarillo, Texas (the Companypreviously recognized impairments on the remaining two buildings in Clint andParis, Texas—see below). Impairment charges recorded on the Texas StateBuilding portfolio reduced the total net book value to the properties’ totalestimated fair value of $5.2 million, excluding certain depositsmaintained by the lender. The Company completed the Deed-in-Lieu transaction inMarch 2005.

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Thedecrease in rental revenues for the twelve months ended December 31, 2005as compared to the same period of 2004 is primarily due to the results of theTexas State Buildings and decreased average occupancy. The decrease inoperating expenses and real estate taxes for the twelve months ended December 31,2005 as compared to the same period of 2004 is primarily due to the Texas StateBuildings. The operating results of the disposed properties and the relatedgain/loss are also classified as discontinued for the twelve months ended December 31,2005 and 2004. The following is a summary of net earnings from discontinuedoperations:

| ** **                                           | ** ** | **Twelve Months Ended December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                                 | ** ** | **2004** | ** ** |
| Rental revenue                                       |       | $                                                        | 14,308,917 |   | $ | 17,294,308 |   |
| Property operating expenses—                    |       |                                                     |       |   |   |
| Operating expenses                                   |       | 4,429,839                                                |       | 5,290,475 |   |
| Real estate taxes                                    |       | 2,029,037                                                |       | 2,317,344 |   |
| Interest expense                                     |       | 3,976,740                                                |       | 4,304,704 |   |
| Deferred  financing costs written-off at disposition |       | 353,975                                                  |       | — |   |
| Depreciation and  amortization expense               |       | 4,599,656                                                |       | 5,401,943 |   |
| Impairment of  real estate                           |       | 4,320,826                                                |       | 1,160,000 |   |
| Total expenses                                       |       | 19,710,073                                               |       | 18,474,466 |   |
| Minority interest                                    |       | 285,369                                                  |       | 256,246 |   |
| Equity in loss of  affiliate                         |       | —                                                   |       | (18,076 | ) |
| Gain on  disposition                                 |       | 8,657,401                                                |       | 574,276 |   |
| Net  earnings/(loss) from discontinued operations    |       | $                                                        | 3,541,614  |   | $ | (367,712 | ) |

 

*Comparison of theYear Ended December 31, 2004 to the Year Ended December 31, 2003*

Weincreased our revenues and expenses significantly by adding approximately578,000 square feet, or 21%, to our portfolio through the acquisition of fourproperties during 2004, combined with the inclusion of the operations of our2003 acquisitions for a full year. For a discussion regarding the acquiredproperties, see “Item 1, Significant Transactions—2004 Transactions”  and “Item 1, Significant Transactions—2003Transactions.” The following represent our operating results for 2004 and 2003:

| ** **                             | ** ** | **2004**   | ** ** | **2003**   | ** ** | **Change** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Real Estate Operating  Revenue:        |       |       |       |       |       |       |       |
| Rental revenue                         |       | $          | 28,052,920 |       | $          | 16,537,813 |       | $ | 11,515,107 |   |
| Real Estate Operating  Expenses:       |       |       |       |       |       |       |       |
| Property operating  expenses—     |       |       |       |       |       |       |       |
| Operating expenses                     |       | 8,276,494  |       | 4,449,529  |       | 3,826,965  |       |
| Real estate taxes                      |       | 3,528,564  |       | 1,954,294  |       | 1,574,270  |       |
| General and  administrative expenses   |       | 4,370,403  |       | 3,526,097  |       | 844,306    |       |
| Interest expense                       |       | 8,163,031  |       | 4,748,782  |       | 3,414,249  |       |
| Depreciation and  amortization expense |       | 9,013,058  |       | 4,067,704  |       | 4,945,354  |       |
| Other expenses                         |       | 323,626    |       | 1,650      |       | 321,976    |       |
| Total operating expense                |       | 33,675,176 |       | 18,748,056 |       | 14,927,120 |       |
| Loss from continuing  operations       |       | (5,622,256 | )          | (2,210,243 | )          | (3,412,013 | )          |
| Other Income:                          |       |       |       |       |       |       |       |
| Interest income                        |       | 87,016     |       | 73,470     |       | 13,546     |       |
| Total other income                     |       | 87,016     |       | 73,470     |       | 13,546     |       |
| Loss before discontinued  operations   |       | (5,535,240 | )          | (2,136,773 | )          | (3,398,467 | )          |
| Discontinued operations                |       | (367,712   | )          | 156,353    |       | (524,065   | )          |
| Net loss                               |       | $          | (5,902,952 | )          | $          | (1,980,420 | )          | $ | (3,922,532 | ) |

 

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*Rental revenue*—Rental revenue increased byapproximately $11.5 million, or 69.6% in 2004 as compared to 2003.Approximately $6.8 million of the increase is due to the inclusion of theoperating results from the 2004 acquisitions (Camelback Lakes, Hackberry View,Parkway Centre III and Hampton Court) and approximately $4.4 millionis due to the inclusion of the 2003 acquisitions (Southwest Gas Building,Greenhill Park and Scottsdale Norte) for a full year in 2004 versus a partialyear in 2003.

The total portfolio occupancy was 88.3% atDecember 31, 2004 as compared to 84.2% at December 31, 2003. Thisincrease is primarily due to the 2004 acquisitions, which were 98% occupied atDecember 31, 2004, and accounted for 2.6% of the increase in occupancy.

*Property operating expenses—*Propertyoperating expenses (operating expenses and, real estate taxes) increased byapproximately $5.4 million, or 84.3%, in 2004 as compared to 2003. The$3.8 million increase in operating expenses is primarily due to the inclusionof the 2004 acquisitions, which represent $1.5 million of the increase, and2003 acquisitions, which represent $2.2 million of the increase. Included inthe $2.2 million increase is $470,000 of ground lease expense on GreenhillPark. Real estate taxes, which are the largest component of property operatingexpenses, increased $1.6 million in 2004 as compared to 2003. This increase isattributable to the 2004 and 2003 acquisitions. Based on our experience, uponacquisition local municipalities often reassess a property at the purchaseprice and real estate taxes increase accordingly.

*General and administrative expenses—*Generaland administrative expenses increased approximately $844,000, or 23.9%, in 2004as compared to 2003. Approximately $500,000 of the increase is related toaudit, legal and consulting fees primarily incurred by the Company’s efforts tocomply with the Sarbanes-Oxley Act of 2002. The remainder of the increaseis principally due to the addition of corporate personnel hired during thelatter half of 2003 and in 2004 to support the growth of the Company. Theseincreases are partially offset by approximately $170,000 in severance incurredduring 2003, which did not occur in 2004.

*Interest expense—*Interest expense increased approximately$3.4 million, or 71.9%, in 2004 as compared to 2003. The increase isprimarily due to the borrowings the Company incurred for acquisitions during2004 and late-2003 and the increase in capital and tenant improvementsduring 2004 as compared to 2003 for which the Company borrowed on the UnsecuredFacility. The increase in interest expense is also attributable to higherinterest rates on the Company’s lines of credit during 2004. During 2004, theCompany increased the capacity of the Unsecured Facility from$30.0 million to $40.0 million and replaced the facility fee with aone-time commitment fee that was amortized into interest expense over the lifeof the loan agreement.

*Depreciation andamortization—*Depreciation andamortization increased approximately $4.9 million, or 121.6%, in 2004 ascompared to 2003. The increase in depreciation was a result of our acquisitionsduring 2004 and 2003. The Company’s adoption of Statement of FinancialAccounting Standards (SFAS) No. 141, “Business Combinations”, which, among other things, requires an allocationof the purchase price of a property to an intangible asset representing thevalue associated with the in-place leases, has had and will continue to have asignificant impact on the Company’s depreciation and amortization expense asadditional properties are acquired. The intangible assets are amortized overthe remaining life of the in-place leases which generally range from 24 to55 months versus over the life of the building which has a depreciablelife of 40 years.

*Other expense—*The $322,000 increase in other expense is due tocosts, such as non-refundable earnest money deposits and legal costs, whichwere previously capitalized in connection with anticipated acquisitions. Thesepursuits were terminated during the fourth quarter of 2004 and all capitalizedcosts associated with these acquisitions were expensed.

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*Discontinuedoperations—*The results ofoperations for properties sold during the period or designated as held-for-saleat the end of the period are required to be classified as discontinuedoperations. At December 31, 2005, the Company had two propertiesclassified as held-for-sale under the provisions of SFAS No. 144. Accordingly,we have classified the operating earnings from these properties withindiscontinued operations for the years ended December 31, 2004 and 2003. InDecember 2005, the Company completed the disposition of two assets thatwere previously classified as held-for-sale. In addition, the Company sold its20% equity interest in its joint venture (Panorama Falls) and completed aDeed-in-Lieu Agreement to return its 13 non-core Texas State Buildings to thelender during the twelve months ended December 31, 2005. During the twelvemonths ended December 31, 2004, the Company sold its Texas Bank Buildingsand recognized a gain of approximately $574,000.

During the twelve months ended December 31, 2004,the Company recognized a $1.2 million impairment for certain of the Texas StateBuildings located in Lubbock, El Paso, Temple, Bellville, Columbus,Hempstead, Mission, Arlington, Marshall, and Amarillo, Texas (the Companypreviously recognized impairments on the remaining two buildings in Clint andParis, Texas—see below). Impairment charges recorded on the Texas StateBuilding portfolio reduced the total net book value to the properties’ totalestimated fair value of $5.2 million, excluding certain depositsmaintained by the lender. The Company calculated the estimated fair value usingprobability-weighted forecasted cash flows. These buildings were sold in March 2005.

During the twelve months ended December 31,2003, the Company recorded a $335,000 impairment charge for a 12,979square foot building in Clint, Texas and a $1.1 million impairment charge for a33,312 square foot building in Paris, Texas. Both properties had beenpreviously leased to agencies of the State of Texas. The Company arrived at theestimated fair values using a combination of the property tax assessmentvalues, values estimated by the our property tax consulting firms and localreal estate brokers.

The increase in rental revenues and property operatingexpenses for the twelve months ended December 31, 2004 as compared to thesame period of 2003 is primarily due to the results of Financial Plaza, whichwas acquired in September 2003. The operating results of the disposedproperties and the related gain/loss are also classified as discontinued forthe twelve months ended December 31, 2004 and 2003. The following is asummary of net earnings from discontinued operations:

| ** **                                        | ** ** | **Twelve Months  Ended December 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| Rental revenue                                    |       | $                                                    | 17,294,308 |   | $ | 13,327,857 |   |
| Property operating expenses—                 |       |                                                 |       |   |   |
| Operating expenses                                |       | 5,290,475                                            |       | 3,808,676 |   |
| Real estate taxes                                 |       | 2,317,344                                            |       | 1,766,972 |   |
| Interest expense                                  |       | 4,304,704                                            |       | 3,118,752 |   |
| Depreciation and  amortization expense            |       | 5,401,943                                            |       | 2,956,219 |   |
| Impairment of  real estate                        |       | 1,160,000                                            |       | 1,465,932 |   |
| Total expenses                                    |       | 18,474,466                                           |       | 13,116,551 |   |
| Minority interest                                 |       | 256,246                                              |       | — |   |
| Equity in loss of  affiliate                      |       | (18,076                                              | )          | (54,953 | ) |
| Gain on  disposition                              |       | 574,276                                              |       | — |   |
| Net earnings/(loss)  from discontinued operations |       | $                                                    | (367,712   | ) | $ | 156,353 |   |

 

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**Liquidity and Capital Resources**

Our net cash provided by operating activities isprimarily dependent upon the occupancy level of our properties, the rentalrates on our leases, the collectibility of rent from our tenants, and the levelof operating and other expenses. Our net cash provided by operating activitieshas been a significant source of liquidity to help fund debt service, capitalimprovements, tenant improvements and leasing costs for operating properties.Due to the Board’s adoption of the Plan, the Company does not intend to acquireany properties during 2006.

A material adverse change in our net cash provided byoperating activities may affect our ability to fund the items listed above andmay affect the financial performance covenants under our new $10 million creditfacility that was signed January 23, 2006. If we fail to meet ourfinancial performance covenants and to reach a satisfactory resolution with ourlenders, our credit facility could become unavailable to us or the interestcharged on the credit facility could increase. Any of these circumstances couldadversely affect our ability to fund working capital and unanticipated cashneeds and development costs.

Due to strategic assetssales that were completed during 2005 and January 2006, the Company’shistoric cash flows may not be representative of future cash flows.

*OperatingActivities*

Net cash flows provided byoperations decreased $3.3 million, or 27.7%, in 2005 as compared to 2004. Thedecrease is primarily due to changes in assets and liabilities primarily due tothe timing of payments for real estate taxes and other accounts payable,partially offset by the positive operating results associated with theacquisitions made during 2004.

Net cash flows provided byoperations increased $1.2 million, or 11.4%, in 2004 as compared to 2003. Thisincrease is primarily due to the inclusion of the operations from propertyacquisitions, partially offset by changes in assets and liabilities. See “Resultsof Operations” for a more complete discussion of factors impacting ouroperating performance.

*InvestingActivities*

Net cash flows from investing activities increased$131.5 million, or 139.2%, in 2005 as compared to 2004. This increase isprimarily due to (i)  asset sales during 2005, which provided net proceedsof approximately $48.2 million; (ii) the 2004 acquisitions, whereas nosuch transactions occurred during 2005, and (iii) a decrease ofapproximately $5.2 million for capital expenditures and tenant improvementsduring 2005.

Net cash flows used ininvesting activities increased $38.4 million, or 68.5%, in 2004 ascompared to 2003. The increase is primarily due to the properties that wereacquired during the period and the related capital improvement, tenantimprovement and leasing commission costs incurred by the Company relating tothe 2004 and 2003 acquisitions. The increase was partially offset by netproceeds from the sale of the Texas Bank Buildings of approximately$4.0 million during 2004.

*FinancingActivities*

Net cash flow from financingactivities decreased $129.4 million, or 156%, in 2005 as compared to 2004. Thisdecrease is primarily due to $110.3 million of net additions to mortgage loansdue to acquisitions in 2004 and the net proceeds of $39.9 million from the 2004common stock offering, which were used to pay down the Company’s Secured andUnsecured Credit Facilities. The remainder of the change is primarily composedof changes in escrow deposits and dividend payments.

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Net cash flows provided byfinancing activities increased $38.4 million, or 86.1%, in 2004 ascompared to 2003. The increase is primarily due to an increase in netborrowings to finance our property acquisitions and proceeds from common stockofferings, which were partially used to pay down the Company’s Secured andUnsecured Credit Facilities. The remainder of the change is primarily composedof scheduled principal payments on mortgage loans, dividend payments andpayments into escrow accounts as required by certain lenders.

*Future Sources ofCapital*

Thefollowing table summarizes future minimum base rent to be received undernon-cancelable tenant leases at December 31, 2005 for the Company’sproperties over the next five years (excludes the Financial Plaza and KeystoneOffice Park, which were sold in January 2006. See “Item 1, SignificantTransactions—2006 Transactions”):

| ** **    | ** ** | **2006** | ** ** | **2007** | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **Total**  | ** ** |
|---------------|------------|----------|------------|----------|------------|------------|------------|----------|------------|----------|------------|------------|------------|
| Minimum Rents |       | $        | 29,104,000 |     | $          | 24,405,000 |       | $        | 19,618,000 |     | $          | 13,660,000 |       | $ | 7,399,000 |   | $ | 94,186,000 |   |
|               |            |          |            |          |            |            |            |          |            |          |            |            |            |  |  |  |  |  |  |

 

In January 2004, the Company filed a shelfregistration statement under which the Company could potentially raise up to$200 million through the issuance of common stock or preferred stock. At December 31,2005, there was approximately $157 million available in shelf registeredsecurities. Due to the announced Plan, the Company does not anticipate issuingany common or preferred stock. However, depending on the outcome of theshareholder vote, the Company could potentially issue shares in the future. Theproceeds from those issuances, if any, could be used to acquire and improve newand existing properties, repay borrowings under our lines of credit or otherloans and for working capital and general corporate purposes.

At December 31, 2005, the Company had $29.9million outstanding on its Unsecured Credit Facility. This facility was paid infull in January 2006 with proceeds from the disposition of certain of ourproperties.

On January 23, 2006,the Company completed a loan agreement with its primary bank group which amendsits unsecured revolving credit agreement and reinstates a revolving creditfacility of up to $10 million to be used for working capital and other limitedcorporate purposes. The revolver is secured by the Company’s Greenhill Parkproperty and matures December 28, 2006. The amendment also modifiescertain covenant requirements and collateral provisions and required theCompany to extend the employment agreement with its Chief Executive Officerthrough the maturity of the loan. There were no borrowings outstanding in thisfacility on March 15, 2006.

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*Future Uses ofCapital, Contractual Commitments and Off-Balance Sheet Arrangements*

Thefollowing table summarizes the Company’s contractual commitments related to ourdebt outstanding at December 31, 2005:

| ** **                                                          | ** ** | **2006**   | ** ** | **2007**  | ** ** | **2008 and 2009** | ** ** | **2010 and  thereafter** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------------------------|------------|-------------------------------|------------|------------|------------|
| Principal  payments on secured mortgage loans and notes payable     |       | $          | 2,391,401  |      | $          | 10,433,756                  |       | $                             | 52,438,543 |       | $          | 62,410,084 |   | $ | 127,673,784 |   |
| Interest payments  on secured mortgage loans and notes payable      |       | 7,666,988  |       | 8,058,070 |       | 12,765,566                  |       | 30,180,557                    |       | 58,671,181 |       |
| Principal  payments on secured mortgage loans—held for sale(1) |       | 692,133    |       | 733,566   |       | 1,601,914                   |       | 25,205,048                    |       | 28,232,661 |       |
| Interest payments  on secured mortgage loans—held-for-sale(1)  |       | 1,592,916  |       | 2,132,482 |       | 4,225,849                   |       | 3,141,213                     |       | 11,092,460 |       |
| Unsecured Credit  Facility(2)                                       |       | 29,897,129 |       | —    |       | —                      |       | —                        |       | 29,897,129 |       |
| Interest payments  on Unsecured Credit Facility(2)                  |       | 144,657    |       | —    |       | —                      |       | —                        |       | 144,657    |       |
| Total                                                               |       | $          | 42,385,224 |      | $          | 21,357,874                  |       | $                             | 71,031,872 |       | $          | 120,936,902 |   | $ | 255,711,872 |   |

----

(1)          Theproperties classified as “held-for-sale” were both sold in January 2006and debt was repaid at disposition.

(2)          TheUnsecured Credit Facility was entirely repaid in January 2006 withdisposition proceeds.

*Debt Covenants*

Certain of its mortgagelenders require the Company to comply with certain debt covenants as describedin the specific loan documents, including the loan-to-value ratio, the interestcoverage ratio, the fixed charge coverage ratio and the dividend payout ratio.The Secured Credit Facility was paid off with disposition proceeds from ChateauPlaza, which closed on December 12, 2005. Dispositions proceeds fromChateau Plaza, AmeriVest Plaza at Inverness, Financial Plaza and KeystoneOffice Park were used to pay off the Unsecured Credit Facility, which was paidin full on January 24, 2006. Due to the timing of the pay-offs of theUnsecured and Secured Credit Facilities, KeyBank did not require the Company tosubmit debt compliance certification at December 31, 2005.

*Inflation*

Management believes thatinflation should not have a material adverse effect on our operations. Ouroffice leases require the tenants to pay increases in operating expenses shouldany inflationary pressures materialize.

**New AccountingPrinciples**

In December 2004, theFinancial Accounting Standards Board (“FASB”) SFAS No. 123R, *“Share-Based Payment”.*This Statement is a revision of SFAS No. 123, *“Accounting for Stock-Based Compensation”,* andsupersedes APB No. 25, *“Accounting for StockIssued to Employees”.*The Statement requires companies to recognizein the income statement the grant-date fair value of stock options and otherequity based compensation issued to employees. This Statement is effective asof the beginning of 

44

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thefirst interim or annual period that commences after January 1, 2006. We donot believe that the adoption of SFAS 123R will have a material impact onour financial position, net earnings or cash flows.

In March 2005, theFASB issued Financial Interpretation No 47, “*Accountingfor Conditional Asset Retirement Obligations an interpretation of FASBStatement No. 143”* (FIN 47). FIN 47 resulted in FASB Statement No. 143(SFAS 143), *“Accounting for Asset Retirement Obligations,”*to be applied to more situations than many entities had previously applied itin practice. FIN 47 requires entities to recognize liabilities for conditionalasset retirement obligations if a reasonable estimate of fair value can bemade. Based on the premise that no tangible asset lasts forever, the obligationto perform the asset retirement activity is unconditional even thoughuncertainty exists about the timing and/or method of settlement. Accordingly, acompany should recognize an asset retirement liability for a conditional assetretirement obligation with the offset to the asset itself in the period inwhich the obligation is incurred if the fair value of the liability can bereasonably estimated. The impact of FIN 47 is most discernable to the companyrelated to asbestos exposure at one of our real estate assets. FIN 47 becameeffective no later than the end of the fiscal years ending after December 15,2005 and was adopted by the company for the year ended December 31, 2005.The adoption of FIN 47 did not have a material impact on our financial positionor cash flows.

In May 2005, the FASBissued SFAS No. 154, *“Accounting Changes andError Corrections,”* (SFAS No. 154), as part of an effort to conformto international accounting standards. SFAS No. 154 requires that allvoluntary changes in accounting principles are retrospectively applied to priorfinancial statements as if that principle had always been used, unless it isimpracticable to do so. When it is impracticable to calculate the effects onall prior periods, SFAS No. 154 requires that the new principle be appliedto the earliest period practicable. This statement is effective as of the firstfiscal year beginning after December 15, 2005. We do not believe anyvoluntary changes in accounting principles, relating to the adoption of SFAS No. 154,would have a material effect on our financial position or results ofoperations.

**CriticalAccounting Policies**

The discussion andanalysis of the Company’s financial condition and results of operations arebased upon its consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements require management to makeestimates and judgments that affect the reported amounts of assets andliabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities at the date of the financial statements. Actual results maydiffer from these estimates under different assumptions or conditions.

Critical accountingpolicies are defined as those that are reflective of significant judgments anduncertainties, which would potentially result in materially different resultsunder different assumptions and conditions. Set forth below is a summary of theaccounting policies management believes are critical to the preparation of theconsolidated financial statements. The summary should be read in conjunctionwith the more complete discussion of the Company’s accounting policies includedin Note 2 to the consolidated financial statements in this Annual Reporton Form 10-K.

*Investment in Real Estate*

Upon acquisition, thepurchase price of a property is allocated to land, building and improvementsand other intangible assets and associated liabilities as required by SFAS No. 141“Business Combinations.” The allocation to land is based on an estimate of itsfair value based on all available information including appraisals. Theallocation to other intangible assets represents the value associated with thein-place leases, including leasing commission, legal and other related costs.Also required by SFAS No. 141, is the creation of an intangible asset orliability resulting from in-place leases being above or below the market rentalrates on the date of acquisition. This asset or liability is amortized over thelife of the related in-place leases as an adjustment to revenue.

45

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Investmentin real estate is stated at cost, unless adjusted for impairment. Depreciationand amortization are computed on a straight-line basis over the estimateduseful lives as follows:

| **Description**                                                                   | ** ** | ** **                                              | ** ** | **Estimated Useful Lives** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------|
| Land                                                                              |       | Not depreciated                                         |
| Buildings and  improvements                                                       |       | 20 to 40 years                                          |
| Furniture, fixtures and  equipment                                                |       | 5 to 7 years                                            |
| Tenant improvements, tenant leasing commissions and  other intangible assets |       | Lesser of term of related lease or useful life of asset |

 

Maintenance and repairs are expensed as incurred andimprovements are capitalized. The cost of assets sold or retired and therelated accumulated depreciation and/or amortization are removed from theaccounts and the resulting gain or loss is reflected in operations in theperiod in which such sale or retirement occurs. Allocating the purchase priceof a property to the different components of investment in real estate,determining whether expenditures meet the criteria for capitalization andassigning depreciable lives is considered to be critical because it requiresmanagement to exercise significant judgment.

The Company capitalizesincremental internal project costs, primarily payroll and payroll relatedcosts, associated with development, renovation, rehabilitation and tenantimprovements if such costs are incremental and identifiable to a specificactivity. Capitalized costs are included in the investment basis of the realestate assets and are depreciated over their estimated useful lives.

*Valuation of Real EstateAssets*

Long-lived assets to be held and used are carried atcost, unless adjusted for impairment, and evaluated for impairment when eventsor changes in circumstances indicate such an evaluation is warranted. We alsoevaluate assets for potential impairment when we deem them to be held for sale.Valuation of real estate is considered a “critical accounting estimate” becausethe evaluation of impairment and the determination of fair values involve anumber of management assumptions relating to future economic events that couldmaterially affect the determination of the ultimate value, and therefore, thecarrying amounts of our real estate. Furthermore, decisions regarding when aproperty should be classified as held for sale under SFAS No. 144, *“Accounting for Impairment or Disposal of Long-LivedAssets,”*requires significant management judgment. There are manyphases to the disposition process ranging from the initial market research tobeing under contract with non-refundable earnest money. Deciding whenmanagement is committed to selling an asset is therefore highly subjective.

When determining if there is an indication ofimpairment, we estimate the asset’s rental revenues less operating expensesover the anticipated holding period on an undiscounted cash flow basis andcompare this amount to its carrying value. Estimating the expected rentalrevenues less operating expenses and holding period requires significantmanagement judgment. If it is determined that there is an indication ofimpairment for assets to be held and used, or if an asset is deemed to be heldfor sale, we then determine the fair value of the asset.

The real estate industryuses capitalization rates as the primary measure of fair value. Specifically,annual rental revenues less operating expenses for a property is divided by anestimated capitalization rate to determine the fair value of the property.Determining the appropriate capitalization rate requires significant judgmentand is typically based on many factors including the prevailing rate for themarket or submarket, as well as the quality and location of the properties.Further, capitalization rates can fluctuate up or down due to a variety offactors in the overall economy or within local markets. If the actual 

46

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capitalizationrate for a property is significantly different from our estimated rate, theimpairment evaluation for an individual asset could be materially affected.

*Revenue Recognition*

Certain leases provide fortenant occupancy during periods for which no rent is due or where minimum rentpayments increase during the term of the lease. Rental revenue is recorded forthe full term of each lease on a straight-line basis. Accordingly, the Companyrecords a receivable from tenants for rents that it expects to collect over theremaining lease term as deferred rents receivable. When the Company acquires aproperty, the term of the existing leases is considered to commence as of theacquisition date for the purposes of this calculation. Revenue recognition isconsidered to be critical because the evaluation of the realizability of suchdeferred rents receivable involves management’s assumptions relating to suchtenant’s viability.

*Income Taxes*

The Company operates in amanner intended to enable it to continue to qualify as a REIT under Sections 856-860of the Internal Revenue Code of 1986, as amended. Under those sections, a REITwhich distributes at least 90% of its REIT taxable income as a dividend to its stockholderseach year and which meets certain other conditions will not be taxed on thatportion of its taxable income which is distributed to its stockholders. TheCompany intends to distribute to our stockholders 90% of our taxable income.Therefore, no provision for Federal income taxes is required. If the Companyfails to distribute the required amount of income to our stockholders, or failsto meet other REIT requirements, we may fail to qualify as a REIT andsubstantial adverse tax consequences may result.

*Contractual Commitments*

At December 31, 2005,the Company had contractual commitments of approximately $1.9 million,$150,000, and $416,000 for tenant improvements, capital expenditures, andleasing commissions, respectively. The Company anticipates that a majority ofthese commitments will be relieved during the first six months of 2006.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk exposure is to changes ininterest rates as a result of our secured and unsecured lines of credit. At December 31,2005, we had $185.8 million of mortgage loans and notes payable, orapproximately 62% of total market capitalization based on the common shareprice at December 31, 2005. Our interest rate risk objective is to limitthe impact of interest rate fluctuations on earnings and cash flows and tolower our overall borrowing costs. To achieve this objective, we manage ourexposure to fluctuations in market interest rates for our borrowings throughthe use of fixed rate debt instruments to the extent that reasonably favorablerates are obtainable with such arrangement. At December 31, 2005,approximately 84% of our outstanding debt was subject to fixed rates with aweighted average interest rate of 5.9%. We regularly review interest rateexposure on our outstanding borrowings in an effort to minimize the risk ofinterest rate fluctuations.

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Thetable below provides information about our liabilities that are sensitive tochanges in interest rates as of December 31, 2005. As the tableincorporates only those exposures that existed as of December 31, 2005, itdoes not consider those exposures or positions which could arise after thatdate (in thousands).

| ** **                                | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total  Balance** | ** ** | **Estimated  Fair  Value(1)** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|--------------------|------------|-------------------------------|------------|
| **Interest  rate sensitive liabilities:** |       |     |       |     |       |     |       |     |       |     |       |           |       |               |       |                          |       |   |   |   |   |
| Unsecured line of credit                  |       | $        | 29,897     |     | $          | —   |       | $        | —     |     | $          | —         |       | $                  | —     |                          |       | $ | — |   |   | $ | 29,897 |   |   | $ | 29,897 |   |   |
| Average nominal interest rate(2)          |       | 6.91     | %          | —   |       | —   |       | —   |       | —   |       |           | —     |               |       | —                        |       |   | — |   |   |
| Mortgages payable:                        |       |     |       |     |       |     |       |     |       |     |       |           |       |               |       |                          |       |   |   |   |   |
| Fixed rate debt                           |       | $        | 3,084      |     | $          | 11,167   |       | $        | 38,058     |     | $          | 15,983         |       | $                  | 22,993     |                          |       | $ | 64,622 |   |   | $ | 155,907 |   |   | $ | 151,837 |   |   |
| Average nominal  interest rate(2)         |       | 5.89     | %          | 5.60     | %          | 5.20     | %          | 4.75     | %          | 5.38     | %          |           | 6.91       | %                  |       | —                        |       |   | — |   |   |

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(1)           The estimated fair value for each of the liabilitieslisted was calculated by discounting the actual principal payment stream atprevailing interest rates (obtained from third-party financialinstitutions) on currently available on debt instruments with similar terms andfeatures.

(2)           Reflects the weighted-averagenominal interest rate on the liabilities outstanding during each period, givingeffect to principal payments and final maturities during each period, in any.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

Our Balance Sheets as of December 31,2005 and 2004, and our Statements of Operations, Shareholder’s Equity and CashFlows for each of the years in the three-year period ended December 31,2005 and Schedule III—Real Estate and Accumulated Depreciation, togetherwith the reports of KPMG LLP, independent registered public accounting firm,are included under Item 15 of this Form 10-K and are incorporatedherein by reference. Selected quarterly financial data is presented inNote 11 of our audited financial statements in this Form 10-K.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

**ITEM 9A. CONTROLS AND PROCEDURES**

An evaluation was carriedout under the supervision and with the participation of management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof our disclosure controls and procedures (as defined in Rule 13a-14(c) underthe Securities Exchange Act of 1934). Based on their evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures were, to the best of their knowledge,effective as of December 31, 2005, to ensure that information required tobe disclosed in reports that are filed or submitted under the Securities ExchangeAct are recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms.Subsequent to December 31, 2005, there were no significant changes in thecompany’s disclosure controls or in other factors that could significantlyaffect these controls, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

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***Management’s Report on Internal Control Over FinancialReporting***

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934, as amended). Our management assessed theeffectiveness of our internal control over financial reporting as of December 31,2005. In making this assessment, we used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control-Integrated Framework. We have concluded that, as of December 31,2005, our internal control over financial reporting was effective based onthese criteria. Our independent registered public accounting firm, KPMG LLP,has issued an audit report on our assessment of our internal control overfinancial reporting, which is included herein.

Our management, includingour Chief Executive Officer and Chief Financial Officer, does not expect thatour disclosure controls and procedures or our internal controls will preventall error and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because oftheir inherent limitations in all control systems, no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud,if any, within AmeriVest have been detected.

**ITEM 9B. OTHER INFORMATION**

None.

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**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required byItem 10 is incorporated by reference to the description under the sectionentitled “Directors and Executive Officers” of our definitive proxy statementfor the 2006 annual meeting of our stockholders.

**ITEM 11.**         EXECUTIVECOMPENSATION

Information required byItem 11 is incorporated by reference to the description under the sectionentitled “Executive Compensation” of our definitive proxy statement for the2006 annual meeting of our stockholders.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Information required byItem 12 is incorporated by reference to the description under the sectionentitled “Executive Compensation - Equity Compensation Plan Information” “BeneficialOwners of Securities” of our definitive proxy statement for the 2006 annualmeeting of our stockholders.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

Information required byItem 13 is incorporated by reference to the description under the sectionentitled “Transactions Between AmeriVest and Related Parties” of our definitiveproxy statement for the 2006 annual meeting of our stockholders.

**ITEM 14.**         PRINCIPALACCOUNTING FEES AND SERVICES

Information required by Item 14 is incorporatedby reference to the description under the section entitled “IndependentRegistered Public Accounting Firm” of our definitive proxy statement for the2006 annual meeting of our stockholders.

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**PART IV**

**ITEM 15.** EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE

The followingdocuments are filed as part of this report:

(a)           Financial Statementsand Schedule:

1.                 FinancialStatements

See Index to Financial Statements and Schedule on page 52of this report, which is incorporated by reference.

2.                 FinancialStatement Schedule:

See Schedule III on page S-1 of thisreport, which is incorporated herein by reference.

All other scheduleshave been omitted since the required information is presented in the financialstatements and the related notes or is not applicable.

3.                 Exhibits

See Index to Exhibits on page 54 of this report,which is incorporated herein by reference.

(b)          Exhibits:

The exhibits required by Item 601 of RegistrationS-K are listed in the Index to Exhibits on page 38 of this Form 10-K,which is incorporated herein by reference.

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**AMERIVESTPROPERTIES INCORPORATEDINDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

| Reports of Independent  Registered Public Accounting Firm                                                       |   | F-1  |
|-----------------------------------------------------------------------------------------------------------------|--------|------|
| Consolidated Balance Sheets as of December 31,  2005 and 2004                                              |   | F-3  |
| Consolidated Statements of Operations for the years  ended December 31, 2005, 2004 and 2003                |   | F-4  |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2005, 2004 and 2003 |   | F-5  |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2005, 2004 and  2003               |   | F-6  |
| Notes to  Consolidated Financial Statements                                                                     |   | F-7  |
| Report of Independent  Registered Public Accounting Firm on Financial Statement Schedule                        |   | F-25 |
| Schedule III—Real Estate and Accumulated Depreciation  as of December 31, 2005                        |   | S-1  |
| Signatures                                                                                                      |   | 53   |
| Index to Exhibits                                                                                               |   | 54   |

 

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**Report of Independent Registered Public AccountingFirm**

**TheBoard of Directors and Stockholders**

AmeriVest Properties Inc.:

We have audited the accompanying consolidated balancesheets of AmeriVest Properties Inc. and subsidiaries as of December 31,2005 and 2004, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the years in the three-year period ended December 31,2005. These consolidated financial statements are the responsibility ofAmeriVest Properties Inc. and subsidiaries management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

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

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of AmeriVest Properties Inc. and subsidiaries as of December 31,2005 and 2004, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2005, inconformity with U.S. generally accepted accounting principles.

As more fully discussed in note 1 to the consolidatedfinancial statements, on February 9, 2006 AmeriVest Properties Inc. andsubsidiaries announced that the Board of Directors approved a plan ofliquidation for AmeriVest Properties Inc. and subsidiaries. Such plan issubject to approval by AmeriVest Properties, Inc. and subsidiaries stockholders.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of AmeriVest Properties Inc. andsubsidiaries internal control over financial reporting as of December 31,2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated March 16, 2006, expressed an unqualifiedopinion on management’s assessment of, and the effective operation of, internalcontrol over financial reporting.

**KPMG LLP**

**Denver,Colorado**

**March 16, 2006**

F-1

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**Report of IndependentRegistered Public Accounting Firm**

**The Boardof Directors and Stockholders**

AmeriVest Properties Inc.:

We have audited management's assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting appearing under Item 9A, that AmeriVest Properties Inc. and subsidiariesmaintained effective internal control over financial reporting as of December31, 2005, based on criteria established in “Internal Control—IntegratedFramework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). AmeriVest Properties Inc. and subsidiaries management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management'sassessment and an opinion on the effectiveness of AmeriVest Properties Inc. andsubsidiaries internal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement's assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company's internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  A company's internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financialstatements.  

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that AmeriVestProperties Inc. and subsidiaries maintained effective internal control overfinancial reporting as of December 31, 2005, is fairly stated, in all materialrespects, based on criteria established in Internal Control—IntegratedFramework issued by the COSO. Also, in our opinion, AmeriVest Properties Inc.and subsidiaries maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2005, based on criteriaestablished in Internal Control—Integrated Framework issued by the COSO.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of AmeriVest Properties Inc. and subsidiaries as ofDecember 31, 2005 and 2004, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of the years in thethree-year period ended December 31, 2005, and our report dated March 16, 2006expressed an unqualified opinion on those consolidated financial statements.

**KPMGLLP**

**Denver,Colorado**

**March16, 2006**

F-2

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**AMERIVESTPROPERTIES INCORPORATEDConsolidated Balance Sheets**

| ** **                                                                                                | ** ** | **2005**    | ** **  | **2004**    | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **ASSETS**                                                                                                |       |        |        |        |       |
| Investment in real estate                                                                                 |       |        |        |        |       |
| Land                                                                                                      |       | $           | 48,059,765  |        | $          | 53,267,688 |   |
| Buildings and improvements                                                                                |       | 166,431,824 |        | 217,453,719 |       |
| Furniture, fixtures and  equipment                                                                        |       | 1,304,879   |        | 1,277,308   |       |
| Tenant improvements                                                                                       |       | 14,245,047  |        | 12,622,620  |       |
| Tenant leasing  commissions                                                                               |       | 3,479,965   |        | 2,562,645   |       |
| Intangible assets                                                                                         |       | 13,371,477  |        | 16,801,808  |       |
| Real estate assets—held  for sale (net of $7.8 million and $5.2 million of accumulated depreciation) |       | 46,930,658  |        | 47,971,383  |       |
| Less: accumulated  depreciation and amortization                                                          |       | (24,220,447 | )           | (21,143,422 | )          |
| Net investment in real  estate                                                                            |       | 269,603,168 |        | 330,813,749 |       |
| Cash and cash  equivalents                                                                                |       | 988,420     |        | 1,859,660   |       |
| Escrow deposits                                                                                           |       | 4,920,968   |        | 7,161,651   |       |
| Accounts receivable                                                                                       |       | 1,310,627   |        | 671,251     |       |
| Deferred rents  receivable                                                                                |       | 4,511,512   |        | 3,430,609   |       |
| Deferred financing  costs, net                                                                            |       | 1,421,375   |        | 2,927,696   |       |
| Prepaid expenses and  other assets                                                                        |       | 923,928     |        | 524,072     |       |
| Other  assets—held-for-sale                                                                          |       | 229,792     |        | 565,001     |       |
| Total assets                                                                                              |       | $           | 283,909,790 |        | $          | 347,953,689 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                            |       |        |        |        |       |
| Liabilities:                                                                                              |       |        |        |        |       |
| Secured mortgage loans  and notes payable                                                                 |       | $           | 127,673,784 |        | $          | 182,845,387 |   |
| Unsecured line of credit                                                                                  |       | 29,897,129  |        | 24,857,063  |       |
| Secured mortgage  loans—held for sale                                                                |       | 28,232,661  |        | 28,883,941  |       |
| Accounts payable and  accrued expenses                                                                    |       | 6,917,224   |        | 4,524,282   |       |
| Accrued real estate  taxes                                                                                |       | 4,195,875   |        | 4,486,712   |       |
| Prepaid rents, deferred  revenue and security deposits                                                    |       | 3,273,861   |        | 3,930,017   |       |
| Dividends payable                                                                                         |       | —      |        | 3,116,130   |       |
| Other  liabilities—held-for-sale                                                                     |       | 302,208     |        | 260,185     |       |
| Total liabilities                                                                                         |       | 200,492,742 |        | 252,903,717 |       |
| Minority interest                                                                                         |       | —      |        | 1,580,057   |       |
| Stockholders’ equity:                                                                                |       |        |        |        |       |
| Preferred stock, $0.001 par value                                                                         |       |        |        |        |       |
| Authorized: 5,000,000 shares                                                                              |       |        |        |        |       |
| Issued and outstanding:  none                                                                             |       | —      |        | —      |       |
| Common stock, $0.001 par value                                                                            |       |        |        |        |       |
| Authorized: 75,000,000 shares                                                                             |       |        |        |        |       |
| Issued and outstanding:  24,121,306 and 23,982,233 shares, respectively                                   |       | 24,121      |        | 23,982      |       |
| Capital in excess of par  value                                                                           |       | 133,231,147 |        | 132,585,840 |       |
| Distributions in excess  of accumulated earnings                                                          |       | (49,838,220 | )           | (39,139,907 | )          |
| Total stockholders’  equity                                                                          |       | 83,417,048  |        | 93,469,915  |       |
| Total liabilities and stockholders’ equity                                                           |       | $           | 283,909,790 |        | $          | 347,953,689 |   |

 

See accompanying notes to consolidated financial statements.

F-3

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**AMERIVESTPROPERTIES INCORPORATEDConsolidated Statements of Operations**

| ** **                                   | ** ** | **Year Ended December 31,** | ** **  |
|----------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                   | ** ** | **2005**                                   | ** **  | **2004** | ** ** | **2003** | ** ** |
| Real Estate Operating  Revenue:              | ** ** | ** **                                 | ** **  | ** ** |   |   |   |
| Rental revenues                              |       | $                                          | 34,869,604  |   | $ | 28,052,920 |   | $ | 16,537,813 |   |
| Real Estate  Operating Expenses:             |       |                                       |        |   |   |   |   |
| Property  operating expenses—           |       |                                       |        |   |   |   |   |
| Operating expenses                           |       | 9,417,061                                  |        | 8,276,494 |   | 4,449,529 |   |
| Real estate taxes                            |       | 4,728,154                                  |        | 3,528,564 |   | 1,954,294 |   |
| General and administrative expenses          |       | 4,720,958                                  |        | 4,370,403 |   | 3,526,097 |   |
| Interest expense                             |       | 11,996,147                                 |        | 8,163,031 |   | 4,748,782 |   |
| Depreciation and amortization expense        |       | 12,763,733                                 |        | 9,013,058 |   | 4,067,704 |   |
| Strategic alternative expenses               |       | 708,491                                    |        | — |   | — |   |
| Other expenses                               |       | —                                     |        | 323,626 |   | 1,650 |   |
| Impairment of investment in real estate      |       | 4,889,082                                  |        | — |   | — |   |
| Total operating expenses                     |       | 49,223,626                                 |        | 33,675,176 |   | 18,748,056 |   |
| Loss from continuing operations              |       | (14,354,022                                | )           | (5,622,256 | ) | (2,210,243 | ) |
| Other Income:                                |       |                                       |        |   |   |   |   |
| Interest income                              |       | 114,095                                    |        | 87,016 |   | 73,470 |   |
| Total other income                           |       | 114,095                                    |        | 87,016 |   | 73,470 |   |
| Loss before discontinued operations          |       | (14,239,927                                | )           | (5,535,240 | ) | (2,136,773 | ) |
| Discontinued operations                      |       | 3,541,614                                  |        | (367,712 | ) | 156,353 |   |
| Net loss                                     |       | $                                          | (10,698,313 | ) | $ | (5,902,952 | ) | $ | (1,980,420 | ) |
| Loss per  Share—Basic and Diluted:      | ** ** | ** **                                 | ** **  | ** ** |   |   |   |
| Net loss before discontinued operations      |       | $                                          | (0.59       | ) | $ | (0.25 | ) | $ | (0.14 | ) |
| Discontinued operations, net                 |       | 0.15                                       |        | (0.01 | ) | 0.01 |   |
| Net loss                                     |       | $                                          | (0.44       | ) | $ | (0.26 | ) | $ | (0.13 | ) |
| Weighted Average  Common Shares Outstanding: |       |                                       |        |   |   |   |   |
| Basic                                        |       | 24,062,330                                 |        | 22,348,811 |   | 14,686,369 |   |
| Diluted                                      |       | 24,062,330                                 |        | 22,348,811 |   | 14,686,369 |   |
| Dividends Paid  per Share                    |       | $                                          | 0.00        |   | $ | 0.52 |   | $ | 0.52 |   |

 

See accompanying notes to consolidated financial statements.

F-4

----

**AMERIVESTPROPERTIES INCORPORATEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYYears Ended December 31, 2005, 2004 and 2003**

| ** **                             | ** ** | **Common Stock** | ** ** | **Capital in  Excess of Par** | ** ** | **Distributions  in Excess of  Accumulated** | ** ** | ** **   | ** ** |
|----------------------------------------|------------|-----------------------|------------|----------------------------------------------|------------|--------------------------------------------------------|------------|--------------|------------|
| ** **                             | ** ** | **Shares**            | ** ** | **Amount**                                   | ** ** | **Value**                                              | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2002     |       | 11,060,260            |       | $                                            | 11,060     |                                                   | $          | 55,247,483   |       | $ | (11,362,743 | ) | $ | 43,895,800 |   |
| Issuance of  common stock:             |       |                  |       |                                         |       |                                                   |       |         |       |   |   |
| Public offering, net of offering costs |       | 5,750,000             |       | 5,750                                        |       | 33,261,703                                             |       | —       |       | 33,267,453 |   |
| Warrants exercised                     |       | 495,045               |       | 495                                          |       | 2,474,730                                              |       | —       |       | 2,475,225 |   |
| Stock options exercised                |       | 33,247                |       | 33                                           |       | 163,015                                                |       | —       |       | 163,048 |   |
| Dividend Re-Investment Plan (DRIP)     |       | 49,081                |       | 49                                           |       | 297,936                                                |       | —       |       | 297,985 |   |
| Equity-based compensation              |       | 13,676                |       | 14                                           |       | 261,504                                                |       | —       |       | 261,518 |   |
| Dividends  declared                    |       | —                |       | —                                       |       | —                                                 |       | (8,276,202   | )          | (8,276,202 | ) |
| Net loss                               |       | —                |       | —                                       |       | —                                                 |       | (1,980,420   | )          | (1,980,420 | ) |
| Balance at  December 31, 2003     |       | 17,401,309            |       | 17,401                                       |       | 91,706,371                                             |       | (21,619,365  | )          | 70,104,407 |   |
| Issuance of  common stock:             |       |                  |       |                                         |       |                                                   |       |         |       |   |   |
| Public offering, net of offering costs |       | 6,325,000             |       | 6,325                                        |       | 39,889,104                                             |       | —       |       | 39,895,429 |   |
| Warrants exercised                     |       | 101,062               |       | 101                                          |       | 103,949                                                |       | —       |       | 104,050 |   |
| Stock options exercised                |       | 92,753                |       | 93                                           |       | 477,106                                                |       | —       |       | 477,199 |   |
| DRIP                                   |       | 12,281                |       | 12                                           |       | 82,196                                                 |       | —       |       | 82,208 |   |
| Equity-based compensation              |       | 49,828                |       | 50                                           |       | 327,114                                                |       | —       |       | 327,164 |   |
| Dividends  declared                    |       | —                |       | —                                       |       | —                                                 |       | (11,617,590  | )          | (11,617,590 | ) |
| Net loss                               |       | —                |       | —                                       |       | —                                                 |       | (5,902,952   | )          | (5,902,952 | ) |
| Balance at  December 31, 2004     |       | 23,982,233            |       | $                                            | 23,982     |                                                   | $          | 132,585,840  |       | $ | (39,139,907 | ) | $ | 93,469,915 |   |
| Issuance of  common stock:             |       |                  |       |                                         |       |                                                   |       |         |       |   |   |
| Warrants exercised                     |       | 1,500                 |       | 2                                            |       | 7,499                                                  |       | —       |       | 7,501 |   |
| DRIP                                   |       | 6,609                 |       | 6                                            |       | 41,049                                                 |       | —       |       | 41,055 |   |
| Equity-based compensation              |       | 130,964               |       | 131                                          |       | 596,759                                                |       | —       |       | 596,890 |   |
| Net loss                               |       | —                |       | —                                       |       | —                                                 |       | (10,698,313  | )          | (10,698,313 | ) |
| Balance at  December 31, 2005     |       | 24,121,306            |       | $                                            | 24,121     |                                                   | $          | 133,231,147  |       | $ | (49,838,220 | ) | $ | 83,417,048 |   |

 

See accompanying notes to consolidated financial statements.

F-5

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**AMERIVESTPROPERTIES INCORPORATEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                            | ** ** | **Year Ended December 31,** | ** **  |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                            | ** ** | **2005**                                   | ** **  | **2004** | ** ** | **2003** | ** ** |
| Cash Flows from Operating  Activities:                                                |       |                                       |        |   |   |   |   |
| Net loss                                                                              |       | $                                          | (10,698,313 | ) | $ | (5,902,952 | ) | $ | (1,980,420 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities— |       |                                       |        |   |   |   |   |
| Depreciation and amortization expense                                                 |       | 17,363,389                                 |        | 14,522,578 |   | 7,023,923 |   |
| Impairment of investment in real estate                                               |       | 9,209,908                                  |        | 1,160,000 |   | 1,465,932 |   |
| Gain on sale of real estate, net                                                      |       | (8,657,401                                 | )           | (574,276 | ) | — |   |
| Amortization of deferred financing costs                                              |       | 1,477,823                                  |        | 753,097 |   | 515,318 |   |
| Write-off of unamortized deferred financing costs                                     |       | 353,975                                    |        | 150,518 |   | 29,843 |   |
| Equity in loss of unconsolidated affiliate                                            |       | —                                     |        | 18,076 |   | 54,953 |   |
| Minority interest                                                                     |       | (285,369                                   | )           | (256,246 | ) | — |   |
| Equity-based compensation                                                             |       | 596,890                                    |        | 327,164 |   | 261,518 |   |
| Changes  in assets and liabilities—                                              |       |                                       |        |   |   |   |   |
| Accounts receivable                                                                   |       | (271,519                                   | )           | (357,055 | ) | (9,686 | ) |
| Deferred rent receivable                                                              |       | (1,185,858                                 | )           | (2,155,256 | ) | (729,718 | ) |
| Prepaid expenses and other assets                                                     |       | (399,856                                   | )           | (170,808 | ) | 121,501 |   |
| Accounts payable and accrued expenses                                                 |       | 634,543                                    |        | 1,679,614 |   | 1,402,037 |   |
| Other accrued liabilities                                                             |       | 441,076                                    |        | 2,675,343 |   | 2,495,717 |   |
| Net cash flows provided by  operating activities                                      |       | 8,579,288                                  |        | 11,869,797 |   | 10,650,918 |   |
| Cash Flows from  Investing Activities:                                                |       |                                       |        |   |   |   |   |
| Acquisitions of real estate, net                                                      |       | —                                     |        | (82,562,817 | ) | (47,858,472 | ) |
| Capital expenditures                                                                  |       | (2,977,901                                 | )           | (5,337,601 | ) | (4,148,526 | ) |
| Tenant improvements                                                                   |       | (5,871,862                                 | )           | (8,629,344 | ) | (3,322,017 | ) |
| Leasing commissions                                                                   |       | (2,627,427                                 | )           | (1,956,139 | ) | (688,809 | ) |
| Proceeds from sale, net of closing costs                                              |       | 48,159,125                                 |        | 4,049,229 |   | — |   |
| Cash paid to complete deed-in-lieu transaction                                        |       | (114,600                                   | )           | — |   | — |   |
| Legal settlement proceeds                                                             |       | 450,000                                    |        | — |   | — |   |
| Other, net                                                                            |       | —                                     |        | (16,929 | ) | (44,769 | ) |
| Net cash flows provided by  /(used in) investing activities                           |       | 37,017,335                                 |        | (94,453,601 | ) | (56,062,593 | ) |
| Cash Flows from  Financing Activities:                                                |       |                                       |        |   |   |   |   |
| Additions to mortgage loans and lines of credit                                       |       | 9,203,232                                  |        | 119,514,225 |   | 110,899,725 |   |
| Payments of mortgage loans, lines of credit and notes  payable                        |       | (54,420,190                                | )           | (63,677,529 | ) | (88,985,672 | ) |
| Payment of deferred financing costs                                                   |       | (329,745                                   | )           | (674,194 | ) | (1,602,297 | ) |
| Net proceeds from common stock offering                                               |       | —                                     |        | 39,895,429 |   | 33,267,453 |   |
| Net proceeds from exercising of options and warrants                                  |       | 7,501                                      |        | 581,249 |   | 1,588,273 |   |
| Net change in escrow deposits                                                         |       | 2,146,413                                  |        | (1,948,225 | ) | (3,442,908 | ) |
| Dividends paid                                                                        |       | (3,075,074                                 | )           | (10,725,076 | ) | (7,153,880 | ) |
| Net cash flows provided  by/(used in) financing activities                            |       | (46,467,863                                | )           | 82,965,879 |   | 44,570,694 |   |
| Net Change in Cash and Cash Equivalents                                               |       | (871,240                                   | )           | 382,075 |   | (840,981 | ) |
| Cash and cash equivalents, beginning of year                                          |       | 1,859,660                                  |        | 1,477,585 |   | 2,318,566 |   |
| Cash and cash equivalents, end of year                                                |       | $                                          | 988,420     |   | $ | 1,859,660 |   | $ | 1,477,585 |   |
| Supplemental  Disclosure of Cash Flow Information:                                    |       |                                       |        |   |   |   |   |
| Cash paid for interest                                                                |       | $                                          | 14,949,284  |   | $ | 10,782,906 |   | $ | 6,841,482 |   |
| Supplemental  Disclosure of Non-Cash Investing and Financing Activities:              |       |                                       |        |   |   |   |   |
| Mortgage loans assumed                                                                |       | $                                          | —      |   | $ | 20,395,685 |   | $ | 31,380,000 |   |
| Basis of real estate involved in deed-in-lieu  transaction                            |       | $                                          | 5,160,022   |   | $ | — |   | $ | — |   |
| Debt extinguishment as part of deed-in-lieu  transaction                              |       | $                                          | 5,565,859   |   | $ | — |   | $ | — |   |
| Note receivable  related to disposition                                               |       | $                                          | 364,170     |   | $ | — |   | $ | — |   |

 

See accompanying notes to consolidated financial statements.

F-6

----

**AMERIVESTPROPERTIES INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002**

**NOTE 1—ORGANIZATION**

Wewere incorporated in the State of Maryland in 1999. We are a REIT investing in,operating and leasing commercial office buildings primarily to small and mediumsize tenants. At December 31, 2005, we owned and operated the followingproperties:

| **Property**            | ** ** | ** **       | ** ** | **Location** |
|-------------------------|------------|------------------|------------|--------------|
| Arrowhead Fountains     |       | Peoria, AZ       |
| Camelback Lakes         |       | Phoenix, Arizona |
| Centerra                |       | Denver, CO       |
| Financial Plaza(1)      |       | Mesa, AZ         |
| Greenhill Park          |       | Addison, TX      |
| Hackberry View          |       | Irving, Texas    |
| Hampton Court           |       | Dallas, TX       |
| Kellogg Building        |       | Littleton, CO    |
| Keystone Office Park(1) |       | Indianapolis, IN |
| Parkway Centre II       |       | Plano, TX        |
| Parkway Centre III      |       | Plano, TX        |
| Scottsdale Norte        |       | Scottsdale, AZ   |
| Sheridan Center         |       | Denver, CO       |
| Southwest Gas Building  |       | Phoenix, AZ      |

----

(1)          These properties weresold in January 2006.

On February 9, 2006,we announced that our Board of Directors approved a plan of liquidation for theCompany. The Plan is subject to approval by the Company’s stockholders holdinga majority of the Company’s outstanding shares of common stock. The Companyexpects to present the Plan for approval as soon as reasonably practicable,which could be at the Company’s2006 annual meeting. Under the Plan, the Company intends to sell its assets onan orderly basis, to pay or provide for its liabilities, and to distribute itsremaining cash to its stockholders. The Company currently estimates thatliquidating distributions will be paid over a period of between 6 months and 24months and that the stockholders could receive between $4.20 and $4.80 pershare in total distributions over the liquidation period. This estimateddistribution range is based on numerous assumptions, notably including theestimated sale prices of assets for which no definitive sale agreements orletters of intent are in place. Although the Company’s management believes itsassumptions are reasonable, the assumptions may prove to be inaccurate and theultimate amount of liquidating distributions to stockholders may be reduced ordelayed.

**NOTE2—SIGNIFICANT ACCOUNTING POLICIES**

*Basis ofPresentation*

The accounts of AmeriVestand our controlled subsidiaries are consolidated in the accompanying financialstatements. All significant inter-company accounts and transactions have beeneliminated in consolidation. At December 31, 2005, we did not have anyinvestments in joint ventures. Prior to the disposition of our joint venture onSeptember 30, 2005, we consolidated the property under FASB Interpretation46, “Consolidation of Variable Interest Entities, Revised” (FIN 46R), as wewere deemed to 

F-7

----

be theprimary beneficiary of the joint venture. Prior to the adoption of FIN46R, weused the equity method of accounting as we did not have the majority economicinterest in the joint venture. Certain prior period balances have beenreclassified to conform to current period presentation.

*Use of Estimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements. Actual results could differ from those estimates. Estimatesand assumptions are reviewed periodically and the effects of those revisionsare reflected in the period they are determined necessary.

*Investment in RealEstate*

In accordance with Statement of Financial AccountingStandards No. 141, “Business Combinations” (“Statement 141”), we allocatethe purchase price of real estate to land, building, tenant improvements and,if determined to be material, intangibles, such as the value of above, below andat-market leases, origination costs associated with the in-place leases, andthe value of tenant relationships, if any. We depreciate the amount allocatedto building and other intangible assets over their estimated useful lives. Thevalues of the above and below market leases are amortized and recorded aseither an increase (in the case of below market leases) or a decrease (in thecase of above market leases) to rental income over the remaining term of theassociated lease. The value associated with in-place leases and tenantrelationships is amortized over the expected term. If a tenant vacates itsspace prior to the contractual termination of the lease and no rental paymentsare being made on the lease, any unamortized balance of the related intangiblewill be written off. The tenant improvements and origination costs areamortized as an expense over the remaining life of the lease (or chargedagainst earnings if the lease is terminated prior to its contractual expirationdate).

In accordance withStatement 141 and its applicability to acquired in-place leases, we perform (orengage a third party to perform) the following procedures for properties weacquire:

·       Estimatethe value of the real estate “as if vacant” as of the acquisition date;

·       Allocatethe value among land, building improvements, building and equipment todetermine the associated asset life for each;

·       Computethe value of the difference between the “as if vacant” value and the purchaseprice, which will represent the total intangible assets;

·       Allocatethe value of the above and below market leases to the intangible assets afterdetermining the associated life of the above/below market leases;

·       Calculatethe value and associated life of the tenant relationships, if any, by takingthe direct identifiable benefits of the customer relationship and discountingthem to present value;

·       Estimatethe fair value of the in-place tenant improvements and leasing commissions andcalculate the associated asset life; and

·       Allocatethe remaining intangible value to the in-place leases and their associatedlives.

Rental properties are individually evaluated forimpairment when conditions exist which may indicate that it is probable thatthe sum of expected future cash flows (on an undiscounted basis) from a rentalproperty over the anticipated holding period is less than its historical netcost basis based on the probability of the potential property dispositions dueto the announced Plan. Upon determination that a 

F-8

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permanent impairment hasoccurred, rental properties are reduced to their fair value. For properties tobe disposed of, an impairment loss is recognized when the fair value of theproperty as determined through third-party valuations, less the estimated costto sell, is less than the carrying amount of the property measured at the timewe have a commitment to sell the property which is not subject to anysignificant contingencies. A property to be disposed of is reported at thelower of its carrying amount or its estimated fair value, less its cost to sell.Subsequent to the date that a property is held for disposition, depreciationexpense is not recorded.

Investmentin real estate is stated at the lower of cost or fair value. Depreciation andamortization are computed on a straight-line basis over the estimated usefullives as follows:

| Description                                                | ** ** | ** **                                               | ** ** | **Estimated Useful Lives** |
|------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------|
| Land                                                       |       | Not depreciated                                          |
| Buildings and  improvements                                |       | 20 to 40 years                                           |
| Furniture, fixtures and  equipment                         |       | 5 to 7 years                                             |
| Tenant improvements, tenant leasing commissions and  other |       |                                                     |
| intangible assets                                     |       | Lesser of term of related lease or useful life of  asset |

 

Maintenance and repairsare expensed as incurred and improvements are capitalized. The cost of assetssold or retired and the related accumulated depreciation and/or amortizationare removed from the accounts and the resulting gain or loss is reflected inoperations in the period in which such sale or retirement occurs.

*Other IntangibleAssets*

The intangible assets areamortized over the remaining life of the in-place leases which generally rangefrom 24 to 57 months. For the years ended December 31, 2005, 2004 and2003, the amortization expense related to the intangible assets was $6.0 million,$5.0 million and $1.7 million, respectively. The estimatedamortization expense for the next five years is: $5.2 million in 2006,$3.9 million in 2007, $1.2 million in 2008, $3,700 in 2003 and $0 in2010.

*Cash Equivalents*

Cash and cash equivalentsconsist of cash on hand and short-term, highly liquid investments. For purposesof reporting cash flows, the Company considers as cash equivalents all highlyliquid investments with a maturity of three months or less at the time ofpurchase.

*Escrow Deposits*

In accordance with theloan agreements for a majority of the Company’s loans, the lenders require theCompany to maintain reserves for real estate taxes, property insurance, capitalimprovements and/or tenant improvements.

*Allowance forDoubtful Accounts*

The Company periodicallyevaluates the collectibility of amounts due from tenants and maintains anallowance for estimated losses resulting from the inability of tenants to makerequired payments under the term of the lease agreement. Management exercises judgmentin establishing the allowance and considers payment history, personalguarantees and credit status in developing the estimate. The Company’sallowance for doubtful accounts included in accounts receivable at December 31,2005 and 2004 was $387,000 and $254,000, respectively.

F-9

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*Deferred Leasingand Financing Costs*

Deferred leasing andfinancing costs include commissions paid to third parties for new leases or therenewal of leases and fees paid to third parties to obtain long-term financing.The deferred leasing costs are recorded at cost and amortized over the terms ofthe respective leases. The deferred financing costs are amortized over the termof the respective debt instrument on a straight-line basis, which approximatesthe effective yield. The deferred leasing and deferred finance costs areincluded as a component of total operating expenses and interest expense in theaccompanying consolidated statements of operations.

*Fair Value*

At December 31,2005 and 2004, the fair value of cash and cash equivalents, escrow deposits,receivables and payables approximated their carrying value because of theshort-term nature of these instruments. The estimated fair value of the Company’sother financial instruments were estimated by discounting the future cash flowsof each instrument at current rates expected for similar debt instruments ofcomparable maturities and risk. Considerable judgment and a high degree ofsubjectively are involved in developing these estimates, and therefore, are notnecessarily indicative of the actual amounts that would be realized upondisposition. The following table summarized these financial instruments:

| ** **                                 | ** ** | **2005**     | ** **  | **2004**   | ** ** |
|--------------------------------------------|------------|--------------|-------------|------------|------------|
| ** **                                 | ** ** | **Carrying** | ** **  | **Fair**   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                 | ** ** | **Amount**   | ** **  | **Value**  | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Secured mortgage  loans and notes payable  |       | $            | 127,673,784 |       | $          | 123,641,263 |   | $ | 182,845,387 |   | $ | 185,944,273 |   |
| Unsecured line of  credit                  |       | 29,897,129   |        | 29,897,129 |       | 24,857,063 |   | 24,857,063 |   |
| Secured mortgage  loans—held for sale |       | 28,232,661   |        | 28,195,449 |       | 28,883,941 |   | 29,381,090 |   |
| Total debt                                 |       | $            | 185,803,574 |       | $          | 181,733,841 |   | $ | 236,586,391 |   | $ | 240,182,426 |   |

 

*Revenue Recognition*

Certain leases provide fortenant occupancy during periods for which no rent is due or where minimum rentpayments increase during the non-cancelable term of the lease. The Companyrecords rental revenue for the full term of each lease on a straight-linebasis, which includes the effects of rent steps and rent abatements.Accordingly, the Company records a receivable from tenants for rents that theCompany expects to collect over the remaining lease term as deferred rentsreceivable in the accompanying consolidated balance sheets. When the Companyacquires a property, the term of existing leases is considered to commence asof the acquisition date for the purposes of this calculation.

*Concentrations ofCredit Risk*

The Company leases office space to commercialbusinesses in its target markets. The terms of the leases generally requirebasic rent payments at the beginning of each month. Credit risk associated withthe lease agreements is limited to the amount of rents receivable from tenantsless any related security deposits.

Financial instruments,which potentially subject the Company to concentrations of credit risk, consistprincipally of cash and cash equivalents. The Company maintains cash accountsat four financial institutions. The Company periodically evaluates the creditworthiness of these financial institutions, and maintains cash accounts only inlarge high quality financial institutions, thereby minimizing exposure fordeposits in excess of federally insured amounts. On occasion, cash on depositmay exceed federally insured amounts.

F-10

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*DiscontinuedOperations*

For properties accounted for under SFAS No. 144, *“Accounting for Impairment or Disposal of Ling-Lived Assets,”*the results of operations for properties sold during the period or classifiedas held-for-sale at the end of the current period are required to be classifiedas discontinued operations. The property specific components included asdiscontinued operations include rental revenues, operating expenses, realestate taxes, interest expense, depreciation and amortization expense, and anyrelated impairment and gain/loss on disposition.

The Company did notclassify all properties as held-for-sale as of December 31, 2005 as thePlan, although approved by the Board, has not been ratified by thestockholders.

*Sales of Properties*

The Company accounts forthe sale of properties under the full accrual method as specified by SFAS No. 66,*“Accounting for Sales of Real Estate”.*Gains or losses on sale are recognized only after closing takes place, titlehas transferred, an adequate down payment has been received by the Company andthe collectibility of the receivable from the buyer, if applicable, isreasonably assured.

*Equity-Based Compensation*

The Company appliesAccounting Principles Board (APB) Opinion No. 25 and relatedinterpretations in accounting for its equity-based compensation. Accordingly,the Company does not recognize compensation cost for options granted toemployees whose exercise price is equal to or exceeds the fair value of theunderlying stock as of the grant date and which qualify for fixed plantreatment. During 2005, the Company granted 12,000 restricted shares toemployees and former employees of the Company. With respect to options grantedprior to 2005 the Company did not recognize any compensation expense associatedwith option grants in the accompanying statement of operations, as all optionsgranted had an exercise price equal to the market value of the underlying commonstock on the date of grant.

Equity-based compensationissued to non-employees is accounted for based on the fair value of the equityinstruments issued. The measurement date is considered to be the issuance date,or if there are performance vesting provisions, when earned.

TheCompany has adopted the disclosure-only provisions of Statement of FinancialAccounting Standards (SFAS) No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure, an amendment of FASB Statement No. 123.”Had compensation cost for the Company’s stock option plan been determined basedon the fair value at the grant date consistent with the provisions of SFAS No. 148,the Company’s net loss and loss per share for the years ended December 31,2005, 2004 and 2003 would have been changed to the pro forma amounts indicatedbelow:

| ** **                                                   | ** ** | **2005** | ** **  | **2004** | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------|------------|----------|-------------|----------|------------|------------|------------|
| Net loss—as  reported                                   |       | $        | (10,698,313 | )        | $          | (5,902,952 | )          | $ | (1,980,420 | ) |
| Plus: Recognized  equity-based compensation                  |       | 596,890  |        | 327,164  |       | 261,518    |       |
| Total  equity-based compensation expense based on fair value |       | (609,195 | )           | (458,208 | )          | (473,411   | )          |
| Net loss—pro  forma                                     |       | $        | (10,710,618 | )        | $          | (6,033,996 | )          | $ | (2,192,313 | ) |
| Loss per share (basic)—as reported                      |       | $        | (0.44       | )        | $          | (0.26      | )          | $ | (0.13 | ) |
| Loss per share (diluted)—as reported                    |       | $        | (0.44       | )        | $          | (0.26      | )          | $ | (0.13 | ) |
| Loss per share (basic)—pro forma                        |       | $        | (0.45       | )        | $          | (0.27      | )          | $ | (0.15 | ) |
| Loss per share  (diluted)—pro forma                     |       | $        | (0.45       | )        | $          | (0.27      | )          | $ | (0.15 | ) |

 

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Thefair value of each grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions:

| ** **            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend yield        |       | 0.0      | %          |     | 7.0        | %        |       | 7.9 | % |
| Volatility            |       | 11.9     | %          |     | 9.3        | %        |       | 27.0 | % |
| Discount rate         |       | 2.7      | %          |     | 2.7        | %        |       | 2.9 | % |
| Expected life (years) |       | 1.5      |       |     | 2.2        |     |       | 4.6 |   |

 

*Income Taxes*

We have made an electionto be taxed as a REIT under the Internal Revenue Code of 1986, as amended, aswe believe we qualify as a REIT and have made all required distributions of ourtaxable income. See Note 13 for more information on income taxes.

*Loss per Share*

There are no adjustmentsnecessary to the basic weighted average number of common shares outstanding toarrive at the diluted weighted average number of common shares outstanding asthe Company recognized a net loss for the years ended December 31, 2005,2004 and 2003 and the impact would be anti-dilutive.

*New AccountingPrinciples*

In December 2004, the Financial AccountingStandards Board (“FASB”) SFAS No. 123R, *“Share-BasedPayment”.*This Statement is a revision of SFAS No. 123, *“Accounting for Stock-Based Compensation”,* andsupersedes APB No. 25, *“Accounting for StockIssued to Employees”.*The Statement requires companies to recognizein the income statement the grant-date fair value of stock options and otherequity based compensation issued to employees. This Statement is effective asof the beginning of the first interim or annual period that commences afterJanuary 1, 2006. We do not believe that the adoption of SFAS 123Rwill have a material impact on our financial position, net earnings or cashflows.

In March 2005, the FASB issued FinancialInterpretation No 47, “*Accounting for ConditionalAsset Retirement Obligations an interpretation of FASB Statement No. 143”*(FIN 47). FIN 47 resulted in FASB Statement No. 143 (SFAS 143), *“Accounting for Asset Retirement Obligations,”* to be appliedto more situations than many entities had previously applied it in practice.FIN 47 requires entities to recognize liabilities for conditional assetretirement obligations if a reasonable estimate of fair value can be made.Based on the premise that no tangible asset lasts forever, the obligation toperform the asset retirement activity is unconditional even though uncertaintyexists about the timing and/or method of settlement. Accordingly, a companyshould recognize an asset retirement liability for a conditional assetretirement obligation with the offset to the asset itself in the period inwhich the obligation is incurred if the fair value of the liability can bereasonably estimated. The impact of FIN 47 is most discernable to the companyrelated to asbestos exposure at one of our real estate assets. FIN 47 becameeffective no later than the end of the fiscal years ending after December 15,2005 and was adopted by the company for the year ended December 31, 2005.The adoption of FIN 47 did not have a material impact on our financial positionor cash flows. 

In May 2005, the FASBissued SFAS No. 154, *“Accounting Changes andError Corrections,”* (SFAS No. 154), as part of an effort toconform to international accounting standards. SFAS No. 154 requires thatall voluntary changes in accounting principles are retrospectively applied toprior financial statements as if that principle had always been used, unless itis impracticable to do so. When it is impracticable to calculate the effects onall prior periods, SFAS No. 154 requires that the new principle be appliedto the earliest period practicable. This statement is effective as of the firstfiscal year beginning after 

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December 15,2005. We do not believe any voluntary changes in accounting principles,relating to the adoption of SFAS No. 154, would have a material effect onour financial position or results of operations.

**NOTE3—ACQUISITIONS, DISPOSITIONS and DEVELOPMENTS**

**2005 Transactions**

On December 15, 2005, the Company sold AmeriVestPlaza at Inverness, its 120,171 square foot office property located insoutheast Denver for approximately $15.5 million. The Company recognized a gainof approximately $199,000, subsequent to recording an impairment charge of $2.3million. Net proceeds of $14.6 million were used to pay the first mortgage of$14.2 million, which had a fixed interest rate of 7.9% and a maturity date of January 10,2006. The remaining $400,000 together with lender reserves released at the timeof sale of $380,000 were paid on the Unsecured Credit Facility.

On December 12, 2005, the Company sold ChateauPlaza, a 171,294 square foot office property located in Dallas, Texas, forapproximately $31.3 million. A gain of approximately $8.7 million was recordedin conjunction with the transaction. Net proceeds of $29 million were paid onthe Secured Credit Facility. The transaction also affected a $1.8 millionescrow release of the $3.1million collateral reserve held by the SecuredFacility lenders. Of this amount, $1.6 million was paid on the Secured CreditFacility, paying all outstanding amounts in full; the remaining $200,000 waspaid on the Unsecured Credit Facility.

On September 30, 2005, the Company sold its 20%joint venture interest in the Panorama Falls property in Englewood, Colorado toits joint venture partner. The Company was paid in full for the $4.4 millionmortgage it held on the property and received a $364,170 promissory note with asix-month term. The Company recognized a net loss of approximately $117,000. Priorto the sale, the Company recorded an impairment charge of approximately$420,000. The net proceeds from the transaction were used to pay approximately$2.2 million on the Secured Credit Facility and $2.2 million on the UnsecuredCredit Facility.

On March 3, 2005, theCompany completed a Deed-In-Lieu Agreement to return our 13 non-core TexasState Buildings to the lender. The properties, consisting of 222,542 squarefeet, were leased primarily to various agencies of the State of Texas and arelocated in Temple, Clint, El Paso, Hempstead, Lubbock, Marshall, Columbus,Paris, Mission, Arlington, Bellville and Amarillo Texas. The buildings secureda loan in the amount of $5.6 million, bearing interest at 7.66% through August 1,2028 and had a net book value of $5.2 million (excluding certain depositsmaintained by the lender), subsequent to an impairment charge of$1.2 million recognized during the fourth quarter of 2004. The Companyrecognized a loss of approximately $92,000 on the disposition.

**2004 Transactions**

On November 12, 2004, the Company acquired theHampton Court office building. Hampton Court is located in Dallas, Texas andcontains approximately 108,200 square feet. The purchase price for HamptonCourt was $16.3 million, which was funded with $8.4 million of cashand the assumption of a $7.9 million non-recourse five-year mortgage loan.

On October 25, 2004, the Company acquired the 5.2acres of land underlying its Greenhill Park office property in Addison, Texasfor $14.5 million in cash. The Greenhill Park building, purchased by theCompany in December 2003, was subject to a ground lease with 80 yearsremaining on the term. See “2003 Transactions” below for a discussion of thepurchase of the building.

On September 13, 2004, the Company acquired theParkway Centre III office building. Parkway Centre III is located in Plano,Texas and contains approximately 152,600 square feet. The purchase price of$23.4 million was funded with $5.5 million of cash and a$15.2 million non-recourse five-year mortgage. 

F-13

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The remaining$2.7 million of acquisition funds came from tax-deferred exchange proceedsfrom the disposition of our Texas Bank Buildings in March 2004.

On May 7, 2004, the Company acquired theHackberry View office property located in Irving, Texas. The purchase price was$16.8 million, which was paid with approximately $12.2 million fromthe assumption of the existing first and second mortgage loans and the balancein cash.

On March 16, 2004, the Company acquired theCamelback Lakes office building. Camelback Lakes is located in Phoenix, Arizonaand contains approximately 203,000 square feet on 12.04 acres of land. Thepurchase price for Camelback Lakes was $32.0 million, which was paid with$21.0 million from our Secured Facility and the balance from our UnsecuredFacility.

On March 16, 2004,the Company sold its Texas Bank Buildings for $4.1 million. The net cashproceeds of approximately $2.7 million were held in escrow and were usedto complete a tax deferred exchange under Section 1031 of the InternalRevenue Code on the Parkway Centre III acquisition on September 10, 2004.

**2003 Transactions**

On December 4, 2003, the Company acquired theGreenhill Park office building located in Addison, Texas. The purchase pricefor Greenhill Park was $10.5 million, which was paid with$5.3 million from the Secured Facility and the balance in cash from aportion of the proceeds from our 2003 public offering. See “2004 Transactions”above for a discussion of the purchase of the land.

On October 7, 2003, the Company acquired theScottsdale Norte office building located in Scottsdale, Arizona. The purchaseprice for Scottsdale Norte was $12.3 million, which was paid with$6.6 million from the assumption of the existing loan from Southern FarmBureau Life Insurance Company and the balance in cash from a portion of theproceeds from our 2003 public offering.

On September 10, 2003, the Company acquired theFinancial Plaza office building located in Mesa, Arizona. The purchase pricefor Financial Plaza was $39.0 million, which was paid with$24.8 million from the assumption of the existing loan from Allstate LifeInsurance Company and the balance in cash from a portion of the proceeds fromour 2003 public offering.

During 2003, the Company completed the construction ofa building adjacent to the existing Keystone Office Park in Indianapolis,Indiana for approximately $1.3 million. This building was constructed toaccommodate the expansion needs of some of the existing tenants as well asmarket demand. The building opened for occupancy in August 2003.

On February 6, 2003,the Company acquired the Southwest Gas office building located in Phoenix,Arizona. The purchase price for the Southwest Gas Building was$17.0 million, which was paid with $11.9 million from the SecuredFacility and the balance from a short-term loan, also from Fleet National Bank.This short-term loan was refinanced with the Unsecured Facility.

**NOTE 4—DISCONTINUED OPERATIONS**

In accordance with SFAS No. 144, *“Accounting for Impairment of Long-Lived Assets”*, theoperating results of properties sold during the period or designated asheld-for-sale and any related impairment and gain/loss on the disposition areincluded in discontinued operations for the years ended December 31, 2005,2004 and 2003. 

On September 1, 2005, the Company announced theintended sale of five properties: Panorama Falls, AmeriVest Plaza at Inverness, Financial Plaza, ChateauPlaza and Keystone Office Park. During the twelve months ended December 31,2005, the Company had completed the disposition of Panorama Falls, AmeriVestPlaza at Inverness and Chateau Plaza. The Company wrote-off unamortizeddeferred financing 

F-14

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costs in connection withthe dispositions of approximately $354,000, which are reflected in discontinuedoperations. In addition, the Company recognized a total impairment loss of $4.3million in connection with the disposition of these properties. This $4.3 million impairment is comprised ofapproximately $420,000 for Panorama Falls, $2.3 million for AmeriVest Plaza atInverness, and $1.6 million for Keystone. The Company recognized a loss ofapproximately $117,000 for Panorama Falls, which was sold in September 30,2005, and a gain on AmeriVest Plaza at Inverness of approximately $199,000,when it was sold in December 2005. The remaining gain of $8.7 millionrecognized during the twelve months ended December 31, 2005 relates toChateau Plaza, which was sold in December 2005. (see Note 14,Subsequent Events for additional information on the disposition activity).

On March 3, 2005, the Company completed aDeed-In-Lieu Agreement to return our 13 non-core Texas State Buildings to thelender. The Company wrote-off unamortized deferred financing costs inconnection with the disposition of approximately $216,000, which are reflectedin discontinued operations.  During thetwelve months ended December 31, 2004, we recorded a $1.2 million impairment related to certain of the TexasState Buildings (the Company previously recognized impairments on two buildings—seebelow). Impairment charges recorded on the Texas State Building portfolioreduced the total net book value to the properties’ total estimated fair valueof $5.2 million, excluding certain deposits maintained by the lender. TheCompany recognized a net loss of approximately $92,000 on the disposition. On March 16, 2004, the Company sold its TexasBank Buildings. 

During the twelve months ended December 31,2003, the Company recorded impairment charges on two of the Texas StateBuildings for an aggregate $1.5 million.

Thefollowing is a summary of the operating results of these properties included indiscontinued operations:

| ** **                                        | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Rental revenue                                    |       | $                                           | 14,308,917 |   | $ | 17,294,308 |   | $ | 13,327,857 |   |
| Property  operating expenses—                |       |                                        |       |   |   |   |   |
| Operating expenses                                |       | 4,429,839                                   |       | 5,290,475 |   | 3,808,676 |   |
| Real estate taxes                                 |       | 2,029,037                                   |       | 2,317,344 |   | 1,766,972 |   |
| Interest expense                                  |       | 4,330,715                                   |       | 4,304,704 |   | 3,118,752 |   |
| Depreciation and  amortization expense            |       | 4,599,656                                   |       | 5,401,943 |   | 2,956,219 |   |
| Impairment of  real estate                        |       | 4,320,826                                   |       | 1,160,000 |   | 1,465,932 |   |
|                                              |       | 19,710,073                                  |       | 18,474,466 |   | 13,116,551 |   |
| Minority interest                                 |       | 285,369                                     |       | 256,246 |   | — |   |
| Share in results  of affiliate                    |       | —                                      |       | (18,076 | ) | (54,953 | ) |
| Gain on sale                                      |       | 8,657,401                                   |       | 574,276 |   | — |   |
| Net earnings/(loss) from  discontinued operations |       | $                                           | 3,541,614  |   | $ | (367,712 | ) | $ | 156,353 |   |

 

F-15

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**NOTE5—MORTGAGE LOANS, NOTES PAYABLE, AND LINES OF CREDIT**

The Companyfinances its properties with mortgage loans and other debt instrumentsavailable, such as lines of credit. See above under Note 3, “Acquisitions,Dispositions and Developments” for property specific financing activity. Thefollowing is a summary of the Company’s outstanding mortgage loans, notespayable and lines of credit, classified by category and interest type (fixed orvariable) and in order of maturity, at December 31, 2005 and 2004:

| ** **                                                    | ** ** | ** **                                                              | ** ** | ** **                                                       | ** ** | **December 31, 2005** | ** **  | **December 31, 2004** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| **Lender**                                                    | ** ** | ** **                                                              | ** ** | **Mortgaged Property at  December 31, 2005** | ** ** | **Maturity  Date**              | ** **  | **Principal  Balance**          | ** ** | **Interest  Rate(1)** | ** ** | **Principal  Balance** | ** ** | **Interest  Rate(1)** | ** ** |
| ***Fixed Rate***                                              |       |                                                                    |       |                                                             |       |                            |        |                            |       |   |   |   |   |   |   |   |   |
| GEMSA                                                         |       | Hampton Court                                                      |       | 11/1/2007                                                        |       | $                               | 7,900,000   |                            |       | 5.48 | % |   | $ | 7,900,000 |   |   | 5.48 | % |   |
| Greenwich Capital Financial  Products                         |       | Parkway Centre II  Centerra  Southwest Gas Building |       | 10/1/2008                                                        |       | 37,306,859                      |        |                            | 5.13       | % |   | 38,115,018 |   |   | 5.13 | % |   |
| Metropolitan Life  Insurance Company                          |       | Parkway Centre III                                            |       | 9/10/2009                                                        |       | 14,813,833                      |        |                            | 4.47       | % |   | 15,154,645 |   |   | 4.47 | % |   |
| Southern Farm Bureau Life  Insurance  Company                 |       | Scottsdale Norte                                                   |       | 4/1/2011                                                         |       | 6,507,070                       |        |                            | 7.90       | % |   | 6,568,596 |   |   | 7.90 | % |   |
| J.P. Morgan Chase                                             |       | Hackberry View—1st                                            |       | 9/1/2012                                                         |       | 11,287,282                      |        |                            | 6.57       | % |   | 11,424,345 |   |   | 6.57 | % |   |
| J.P. Morgan Chase                                             |       | Hackberry View—2nd(2)                                         |       | 9/1/2012                                                         |       | 937,796                         |        |                            | 8.00       | % |   | 967,654 |   |   | 8.00 | % |   |
| Teachers Insurance and  Annuity Association  of America       |       | Sheridan Center  Arrowhead Fountains  Kellogg Building   |       | 1/1/2013                                                         |       | 28,360,682                      |        |                            | 7.40       | % |   | 28,852,678 |   |   | 7.40 | % |   |
| Allstate Life Insurance  Company                              |       | Camelback—1st                                                      |       | 9/5/2014                                                         |       | 15,631,631                      |        |                            | 5.82       | % |   | 15,928,449 |   |   | 5.82 | % |   |
| Allstate Life Insurance  Company                              |       | Camelback—2nd                                                      |       | 9/5/2014                                                         |       | 4,884,884                       |        |                            | 5.82       | % |   | 4,977,640 |   |   | 5.82 | % |   |
| Subtotal                                                      |       |                                                                    |       |                                                             |       | 127,630,037                     |        |                            | 5.98       | % |   | 129,889,025 |   |   | 5.98 | % |   |
| ***Variable Rate***                                           |       |                                                                    |       |                                                             |       |                            |        |                            |       |   |   |   |   |   |   |   |   |
| KeyBank National Association—Secured  Credit Facility    |       | Greenhill Park                                                          |       | n/a                                                              |       | —                          |        |                            | —     |   |   | 17,500,000 |   |   | 4.96 | % |   |
| KeyBank National  Association—Unsecured  Credit Facility |       | Unsecured                                                               |       | 4/1/2006                                                         | (3)        | 29,897,129                      |        |                            | 6.91       | % |   | 24,857,063 |   |   | 5.63 | % |   |
| Subtotal                                                      |       |                                                                    |       |                                                             |       | 29,897,129                      |        |                            | 6.91       | % |   | 42,357,063 |   |   | 5.35 | % |   |
| ***Disposed Of Properties***                                  |       |                                                                    |       |                                                             |       |                            |        |                            |       |   |   |   |   |   |   |   |   |
| Teachers Insurance and  Annuity Association  of America       |       | AmeriVest Plaza at  Inverness                                 |       | (4                                                               | )          | —                          |        |                            | —     |   |   | 14,412,347 |   |   | 7.90 | % |   |
| KeyBank National  Association—Secured Credit Facility    |       | Chateau Plaza                                                      |       | (4                                                               | )          | —                          |        |                            | —     |   |   | 15,400,000 |   |   | 4.96 | % |   |
| Transatlantic Capital  Company, LLC(5)                        |       | Texas State Buildings                                         |       | n/a                                                              |       | —                          |        |                            | —     |   |   | 5,579,891 |   |   | 7.66 | % |   |
| Subtotal—disposed of  properties                         |       |                                                                    |       |                                                             |       | —                          |        |                            | —     |   |   | 35,392,238 |   |   | 6.58 | % |   |
| ***Other Notes Payable***                                     |       |                                                                    |       |                                                             |       |                            |        |                            |       |   |   |   |   |   |   |   |   |
| Lease Capital Corporation                                     |       | Phone system                                                            |       | 10/31/2007                                                       |       | 43,747                          |        |                            | 11.11      | % |   | 64,124 |   |   | 11.11 | % |   |
| Subtotal, excluding held  for sale properties                 |       |                                                                    |       |                                                             |       | 157,570,913                     |        |                            | 6.16       | % |   | 207,702,450 |   |   | 5.96 | % |   |
| ***Held-for-Sale Portfolio(6)***                              |       |                                                                    |       |                                                             |       |                            |        |                            |       |   |   |   |   |   |   |   |   |
| Allstate Life Insurance  Company                              |       | Financial Plaza                                                    |       | 10/5/2010                                                        |       | 23,650,188                      |        |                            | 5.25       | % |   | 24,173,324 |   |   | 5.25 | % |   |
| Security Life of Denver  Insurance Company                    |       | Keystone Office Park—1st                                 |       | 5/1/2022                                                         |       | 4,119,506                       |        |                            | 8.00       | % |   | 4,236,333 |   |   | 8.00 | % |   |
| Security Life of Denver Insurance  Company                    |       | Keystone Office Park—2nd                                 |       | 5/1/2022                                                         |       | 462,967                         |        |                            | 8.63       | % |   | 474,284 |   |   | 8.63 | % |   |
| Subtotal, held-for-sale  properties                           |       |                                                                    |       |                                                             |       | 28,232,661                      |        |                            | 5.71       | % |   | 28,883,941 |   |   | 5.71 | % |   |
| Total                                                         |       |                                                                    |       |                                                             |       | $                               | 185,803,574 |                            |       | 6.09 | % |   | $ | 236,586,391 |   |   | 5.92 | % |   |
|                                                               |            |                                                                         |            |                                                                  |            |                                 |             |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)              Interest only, does not include amortization ofdeferred financing costs or any fees.

(2)              The amount recorded reflects a net present valuecalculation based on a fair market value rate of 8%. The actual loan balanceassumed was $697,847 at an interest rate of 15%.

(3)              The Unsecured Facility was paid off in January 2006.

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(4)              The Company sold this property in December 2005.

(5)              On March 2, 2005, the Company completed aDeed-in-Lieu Agreement to return these properties to the lender.

(6)              The Company sold this property in January 2006.

*Refinancings*

In August 2004, theCompany refinanced its Camelback Lakes property in Phoenix, Arizona. The$21.0 million of indebtedness consists of a $16.0 million mortgagewith Allstate Life Insurance Company and a $5.0 million mortgage withAllstate Life Insurance Company of New York. The proceeds were used to repaythe Secured Facility. This loan allowed the Company to fix the interest rate ona portion of variable rate debt.

*Lines of Credit*

In February 2003, the Company obtained a$5.1 million short-term loan from Fleet that was used for the acquisitionof the Southwest Gas Building. In August 2003, the Company refinanced thisloan with a $15.0 million unsecured revolving line of credit from Fleet,which was increased to $30.0 million in December 2003. In October 2004,KeyBank assumed the Company’s unsecured facility from Fleet (Unsecured Credit Facility).The amended facility had an interest rate of LIBOR plus 350 basis points or thePrime rate plus 275 basis points, whichever was greater. The Company paid aone-time commitment fee in October 2004 of $800,000. The fee wascapitalized and is being amortized into interest expense over the life of theloan agreement. In addition, in October 2004 the Company recognized$151,000 of expense related to the write-off of loan costs associated with theprevious unsecured facility with Fleet. During 2005, the Company paidapproximately $310,000 in capitalized loan costs for amendments to the Securedand Unsecured Credit Facilities. At December 31, 2005, the Company hadunamortized loan costs related to the Unsecured Credit Facility ofapproximately $111,000. The Unsecured Facility had an outstanding balance of$29.9 million at December 31, 2005.

Certain of its mortgagelenders require the Company to comply with certain debt covenants as describedin the specific loan documents, including the loan-to-value ratio, the interestcoverage ratio, the fixed charge coverage ratio and the dividend payout ratio.The Secured Credit Facility was paid off with disposition proceeds from ChateauPlaza, which closed on December 12, 2005. Dispositions proceeds fromChateau Plaza, AmeriVest Plaza at Inverness, Financial Plaza and KeystoneOffice Park were used to pay off the Unsecured Credit Facility, which was paidin full on January 24, 2006. Due to the timing of the pay-offs of theUnsecured and Secured Credit Facilities, KeyBank did not require the Company tosubmit debt compliance certification at December 31, 2005.

*Other Information*

Thefollowing table details the scheduled maturities of debt outstanding at December 31,2005:

| ** ** | ** ** | **Including Held-for-Sale  Properties** | ** ** | **Excluding Held-for-Sale  Properties** | ** ** |
|------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| 2006(1)    |       |                                         | $          | 32,980,663                                   |       |   |   | $ | 32,288,530 |   |   |
| 2007       |       |                                         | 11,167,322 |                                         |       |   | 10,433,756 |   |   |
| 2008       |       |                                         | 38,057,507 |                                         |       |   | 37,279,931 |   |   |
| 2009       |       |                                         | 15,982,950 |                                         |       |   | 15,158,612 |   |   |
| 2010       |       |                                         | 22,992,739 |                                         |       |   | 1,537,734 |   |   |
| Thereafter |       |                                         | 64,622,393 |                                         |       |   | 60,872,350 |   |   |
| Total      |       |                                         | $          | 185,803,574                                  |       |   |   | $ | 157,570,913 |   |   |

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(1)          See Note 14, “SubsequentEvents”, for debt repayments.

F-17

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Thechange in debt, including assets held for sale, during 2005 and 2004 consistedof the following:

| ** **                   | ** ** | **2005**    | ** **  | **2004**    | ** ** |
|------------------------------|------------|-------------|-------------|-------------|------------|
| Balance at  January 1   |       | $           | 236,586,391 |        | $          | 159,533,710 |   |
| Additions                    |       | 9,203,232   |        | 140,730,210 |       |
| Repayments                   |       | (56,867,678 | )           | (61,268,264 | )          |
| Scheduled principal payments |       | (3,118,371  | )           | (2,409,265  | )          |
| Balance at  December 31 |       | $           | 185,803,574 |        | $          | 236,586,391 |   |

 

Certain of its mortgage lenders require the Company toescrow funds to be used for the payment of future real estate taxes, propertyinsurance, tenant improvements, leasing commissions and other capitalexpenditures. At December 31, 2005 and 2004, these amounts totaled$4.9 million and $7.2 million, respectively, and are classified asescrow deposits on the accompanying consolidated balance sheets (excludesheld-for-sale properties).

**NOTE 6—STOCKHOLDERS’ EQUITY**

*Common Stock*

The Company’s Articles ofIncorporation authorize us to issue 75,000,000 shares of capital stock with apar value of $0.001 per share. Our Articles of Incorporation allow us to issueshares of common stock or preferred stock, as the Board may create andauthorize from time to time. The Board may classify or reclassify any unissuedshares from time to time by setting or changing the preferences, conversionrights, voting powers, restrictions, limitations as to distributions,qualifications of terms or conditions of redemption.

*DividendReinvestment and Share Purchase Plan*

Our Dividend Reinvestmentwas designed and implemented to increase ownership in the Company by privateinvestors. Under the plan, stockholders have the ability to automaticallyreinvest their cash dividends to purchase additional shares of common stock.

*OwnershipRestrictions and Significant Stockholders*

Our governing documents restrict beneficial ownershipof our outstanding shares of stock by a single person, or persons acting as agroup, to 9.9% of the common stock. For us to qualify as a REIT under theInternal Revenue Code of 1986, as amended, not more than 50% in value of ouroutstanding capital stock may be owned by five or fewer individuals at any timeduring the last half of our taxable year. The provision permits five persons toacquire up to a maximum of 9.9% each of the shares of common stock, or anaggregate of 49% of the outstanding shares of common stock.

Common stock owned by aperson or group of persons in excess of the 9.9% limit are subject toredemption. The provision does not apply where a majority of the Board, in itssole and absolute discretion, waives such limit after determining that oureligibility to qualify as a REIT for federal income tax purposes will not bejeopardized or the disqualification as a REIT is advantageous to stockholders.

*Distributions*

Distributions weredeclared and paid quarterly to holders of shares of common stock as of therecord dates of each declaration. For the years ended December 31, 2005,2004 and 2003, the per share distributions were $0.00, $0.52 and $0.52,respectively.

F-18

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*Stock Offerings*

During March 2004,the Company completed an offering of 6,325,000 shares of common stock,including 825,000 shares to cover over-allotments, at a price of $6.75 pershare. The Company received approximately $39.9 million, net ofunderwriting commissions and expenses. The proceeds were used to repay theoutstanding balance on the Unsecured Credit Facility and a portion of theoutstanding balance on the Secured Credit Facility.

**NOTE 7—FUTURE MINIMUM RENTS**

Thefollowing table summarizes future minimum base rent to be received undernon-cancelable tenant leases for the Company’s commercial properties expiringeach year, at December 31, 2005 (excludes Financial Plaza and KeystoneOffice Park, which were sold in January 2006. See “Note 14, SubsequentEvents”.):

| 2006  |   | $          | 29,104,000 |   |
|-------|--------|------------|------------|--------|
| 2007  |   | 24,405,000 |       |
| 2008  |   | 19,618,000 |       |
| 2009  |   | 13,660,000 |       |
| 2010  |   | 7,399,000  |       |
| Total |   | $          | 94,186,000 |   |

 

Some leases also provide for additional rent based onincreases in operating expenses. These increases are generally payable annuallyin the succeeding year. The table above does not include any expenserecoveries.

For the years ended December 31,2005 and 2004, there were no tenants who accounted for greater than 10% ofrevenues.

**NOTE8—IMPAIRMENT OF INVESTMENT IN REAL ESTATE**

In aggregate, the Company recorded a $9.2 millionimpairment during the twelve months ended December 31, 2005, of whichapproximately $6.5 million was recognized during the fourth quarter. Approximately$2.7 million of this impairment was for properties that were sold during2005 and $1.6 million was for a property that was deemed as held-for-saleat December 31, 2005. These impairment losses are included in discontinuedoperations. The remaining $4.9 million of impairment was for SheridanCenter, a property whose expected undiscounted cash flows did not support thepreviously recorded basis in the long-lived asset based on aprobability-weighted analysis utilized as a result of the Company’s announcedPlan. The impairment charges recorded reduced the total net book value to theproperties’ estimated fair value.

The $1.2 millionimpairment recorded during the twelve months ended December 31, 2004relates to certain of the Texas State Buildings. The Company had previouslyrecorded a $1.5 million impairment charge to the remaining two assets inClint and Paris, Texas in 2003. These impairment losses are included indiscontinued operations.

**NOTE 9—EQUITY-BASED COMPENSATION**

The Company provides for grants of incentive andnon-qualified stock options, stock appreciation rights, bonus stock, stockunits, performance shares, performance units, restricted stock and restrictedstock units to certain employees and officers of the Company.

F-19

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Restricted stock awards are granted at the marketprice on the date of grant and generally vest over a five year period. TheCompany recognizes the value of restricted stock as compensation expense basedon the Company’s closing stock price on the AMEX on the date of grant on astraight-line basis over the vesting period. The Company issued 12,000, 0 and116,000 units of restricted stock during 2005, 2004 and 2003, respectively. TheCompany recognized $596,890, $327,164 and $261,518 of compensation expense in2005, 2004 and 2003, respectively, for the portion of these shares that vestedduring each year. As of December 31, 2005, there were 6,000 unvestedrestricted shares outstanding.

Stock options are grantedat an exercise price equal to 100% of the market price of the Company’s stockon the date of grant, generally vest pro-rata over three to five years andexpire 10 years from the date of grant. As of December 31, 2005 therewere 98,000 options outstanding.

*401(k) Plan*

In 2002, the Companyestablished a 401(k) plan and a nonqualified savings plan, both of whichbecame effective on January 1, 2002. Through January 2006, the 401(k) planprovided for matching employer contributions of fifty cents for every dollarcontributed by the employee, up to 6% of the employees’ annual contribution.Effective February 1, 2006, the Company no longer matches anycontributions. Contributions by employees to the 401(k) plan are subjectto federal limitations of $14,000 during 2005. Through December 31, 2005,the matching employer contributions were made in common shares, which vestbetween years of service at 20% per year. In January 2006, the matchingcontribution was made in cash with the same vesting schedule.

*DeferredCompensation Plan*

In September 2004,the Board of Directors approved a deferred compensation plan, whereby Directorsand designated executives of the Company may defer all of a portion of the cashcompensation and/or grants of common stock. If a participant elects to havetheir fees deferred, the fees accrue in the form of phantom shares equal to thenumber of AmeriVest common shares that could have been purchased on the datethe fee was credited. Dividends are calculated on the phantom shares andadditional phantom shares are credited, if applicable. Payment of the deferredcompensation account may only be made after either the individual has beenterminated, or there has been a change in control of the Company. Payment willbe made in a single lump sum payment in shares of the Company’s stock in anamount equal to the number of phantom shares in the individual’s account, lessan applicable tax or other withholding. At December 31, 2005, 1,900 sharesof common stock had been deferred under the Deferred Compensation Plan.

*2003 Long-TermIncentive Plan*

Effective January 1, 2003, the Company adoptedthe 2003 Long-Term Incentive Plan (the LTIP) as a means to compensate employeesand directors with equity-based compensation. The LTIP provides for the grantof up to 500,000 shares of common stock in the form of non-qualified andincentive stock options, stock appreciation rights, bonus stock, stock units,performance shares, performance units, restricted stock and restricted stockunits.

During 2005, 2004 and 2003, the Company issued a totalof 26,156 shares, 14,182 shares and 8,250 shares of bonus stock to directorsand employees under the LTIP, respectively.

During 2003, 58,000 sharesof restricted common stock were granted to each of William T. Atkins, theformer Chief Executive Officer and Chairman, and Charles K. Knight, the currentChief Executive Officer, under the LTIP. At December 31, 2005, all of the restrictedshares had been issued.

F-20

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*1995 and 1998 StockOption Plans*

Pursuant to the Company’s 1995 and 1998 Stock OptionPlans (collectively, the 95-98 Option Plans), we may grant options topurchase an aggregate of 330,000 shares of our common stock to key employees,directors, and other persons who have or are contributing to the success of ourCompany. The options granted pursuant to the 95-98 Option Plans may beincentive options qualifying for beneficial tax treatment for the recipient,non-qualified options or non-qualified, non-discretionary options. Until 2004,directors who are not employees of the Company (Outside Directors)automatically receive options to purchase 12,000 shares pursuant to the 95-98Option Plans at the time of their election. None of these options wereexercisable at the time of grant. One-third of these options become exercisableon December 30th of each of the first three years immediatelyfollowing the date of grant. The exercise price for options granted to OutsideDirectors was the fair market value of the common stock on the date of grant,and all options granted to Outside Directors expire five years from the date ofgrant. Until 2004, on the date that all of an Outside Director’s options becomeexercisable, options to purchase an additional 12,000 shares, none of which areexercisable at that time, were granted to that Outside Director.

Thestatus of outstanding options granted pursuant to the Company’s Option Planswas as follows:

| ** **              | ** ** | ** **         | ** ** | ** **         | ** ** | **Weighted-** | ** ** | ** **          | ** ** | ** **        | ** ** |
|-------------------------|------------|--------------------|------------|--------------------|------------|---------------|------------|---------------------|------------|-------------------|------------|
| ** **              | ** ** | **Number of** | ** ** | **Number of** | ** ** | **Average**   | ** ** | **Weighted-**       | ** ** | **Range of** | ** ** |
| ** **              | ** ** | **Options**        | ** ** | **Options**        | ** ** | **Exercise**  | ** ** | **Average**         | ** ** | **Exercise**      | ** ** |
| ** **              | ** ** | **Outstanding**    | ** ** | **Exercisable**    | ** ** | **Price**     | ** ** | **Fair Value** | ** ** | **Prices**        | ** ** |
| December 31,  2002 |       |               | 158,000    |               |       |          | 112,000    |                |       |              | $          | 5.04 |   |   |   |   |   |   | $ | 3.97-6.22 |   |
| Granted at fair value   |       |               | 83,000     |               |       |          |       |                |       |              | $          | 6.60 |   |   |   | $ | 0.69 |   |   | $ | 6.16-710 |   |
| Exercised               |       |               | (33,247    | )                  |       |          |       |                |       |              | $          | 4.90 |   |   |   |   |   |   | $ | 3.97-6.16 |   |
| December 31, 2003  |       |               | 207,753    |               |       |          | 147,753    |                |       |              | $          | 5.24 |   |   |   |   |   |   | $ | 4.13-7.10 |   |
| Granted at fair value   |       |               | 12,000     |               |       |          |       |                |       |              | $          | 6.96 |   |   |   | $ | 0.74 |   |   | $ | 6.96 |   |
| Exercised               |       |               | (92,753    | )                  |       |          |       |                |       |              | $          | 5.14 |   |   |   |   |   |   | $ | 4.75-6.16 |   |
| December 31, 2004  |       |               | 127,000    |               |       |          | 83,000     |                |       |              | $          | 6.20 |   |   |   |   |   |   | $ | 4.13-7.10 |   |
| Forfeited               |       |               | (29,000    | )                  |       |          |       |                |       |              | $          | 5.71 |   |   |   |   |   |   | $ | 4.13-7.10 |   |
| December 31,  2005 |       |               | 98,000     |               |       |          | 86,000     |                |       |              | $          | 6.34 |   |   |   |   |   |   | $ | 4.75-7.10 |   |

 

The weighted average remaining contractual life ofoptions outstanding at December 31, 2004 was approximately 2 years.

At December 31, 2005and 2004, there were no options available for grant pursuant to the 95-98Option Plans. At December 31, 2003 options to purchase 12,000 shares wereavailable for grant pursuant to the 95-98 Option Plans.

**NOTE10—COMMITMENTS AND CONTINGENCIES**

*Ground Lease*

On October 25, 2004,the Company acquired the 5.2 acres of land underlying its Greenhill Park officeproperty in Addison, Texas for $14.5 million in cash drawn from theCompany’s line of credit. The Greenhill Park building, purchased by the Companyin December 2003, was subject to a ground lease with 80 yearsremaining on the term. The lease required the Company to make monthly rentalpayments based on the value of the land that was re-established every tenyears. During 2004, the Company incurred $470,000 in ground lease expense priorto the acquisition, which is included in “Operating expenses” on theConsolidated Statement of Operations.

F-21

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*Legal Claims*

We and our subsidiariesare not presently subject to any material litigation nor, to our knowledge, hasany material litigation been threatened. We are a party to routine litigationand administrative proceedings arising in the ordinary course of business, mostof which are expected to be covered by liability insurance and none of which,individually or in the aggregate, are expected to have a material effect on us.

**NOTE11—SELECTED QUARTERLY FINANCIAL DATA**

Selectedquarterly financial data for 2005 and 2004 is summarized below.

| ** **                                              | ** ** | **(Unaudited)**                  | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **Three Months Ended** | ** ** |
| ** **                                              | ** ** | **March 31**                | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **2005:**                                               |       |                             |       |   |   |   |   |   |   |
| Rental revenues                                         |       | $                                | 8,722,072  |   | $ | 8,621,527 |   | $ | 8,609,254 |   | $ | 8,916,751 |   |
| Total operating  expenses                               |       | 10,808,614                       |       | 11,329,989 |   | 10,723,508 |   | 16,361,515 |   |
| Loss from  continuing operations(1)                     |       | (2,086,542                       | )          | (2,708,462 | ) | (2,114,254 | ) | (7,444,764 | ) |
| Total other  income                                     |       | 10,739                           |       | 7,265 |   | 24,525 |   | 71,566 |   |
| Loss before  discontinued operations                    |       | (2,075,803                       | )          | (2,701,197 | ) | (2,089,729 | ) | (7,373,198 | ) |
| Discontinued  operations                                |       | (508,217                         | )          | (389,628 | ) | (3,340,714 | ) | 7,780,173 |   |
| Net  earnings/(loss)                                    |       | $                                | (2,584,020 | ) | $ | (3,090,825 | ) | $ | (5,430,443 | ) | $ | 406,975 |   |
| Net earnings/(loss) per share—basic and diluted(2) |       | $                                | (0.11      | ) | $ | (0.13 | ) | $ | (0.23 | ) | $ | 0.02 |   |
| **2004:**                                               |       |                             |       |   |   |   |   |   |   |
| Rental revenues                                         |       | $                                | 5,515,665  |   | $ | 7,095,527 |   | $ | 7,106,977 |   | $ | 8,334,751 |   |
| Total operating  expenses                               |       | 6,798,435                        |       | 7,874,740 |   | 8,716,289 |   | 10,285,712 |   |
| Loss from  continuing operations                        |       | (1,282,770                       | )          | (779,213 | ) | (1,609,312 | ) | (1,950,961 | ) |
| Total other income                                      |       | 15,363                           |       | 10,893 |   | 29,139 |   | 31,621 |   |
| Loss before  discontinued operations                    |       | (1,267,407                       | )          | (768,320 | ) | (1,580,173 | ) | (1,919,340 | ) |
| Discontinued  operations                                |       | 892,396                          |       | 220,732 |   | 278,279 |   | (1,759,119 | ) |
| Net loss                                                |       | $                                | (375,011   | ) | $ | (547,588 | ) | $ | (1,301,894 | ) | $ | (3,678,459 | ) |
| Net loss per  share—basic and diluted(2)           |       | $                                | (0.02      | ) | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.15 | ) |

----

(1)          Includesa $4.9 million impairment recorded during the quarter endedDecember 31, 2005.

(2)          Thesum of the quarterly net earnings/(loss) loss per share may not equal the fullyear results due to rounding.

**NOTE 12—INCOME TAXES**

Effective January 1, 1996, the Company elected tobe taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code(the Code), as amended. As a REIT, the Company generally would not be subjectto federal income taxation at the corporate level to the extent it distributesannually at least 100% of its REIT taxable income, as defined in the Code, toits stockholders and satisfies certain other requirements. Accordingly, no provisionhas been made for federal income taxes in the accompanying consolidatedfinancial statements. As of December 31, 2005, the Company has satisfiedthe requirements as defined in the Code.

Certain of the Company’s subsidiaries are subject tocertain state excise and franchise taxes. The provision for such state taxeshas been reflected in general and administrative expense in the 

F-22

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accompanying consolidatedstatements of operations and has not been separately stated due to itsinsignificance.

Thefollowing is a reconciliation of GAAP net loss to taxable income for the yearsended December 31, 2005, 2004, and 2003:

| ** **                                                          | ** ** | **2005**        | ** **  | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------|------------|-----------------|-------------|------------|------------|------------|------------|
| ** **                                                          | ** ** | **(estimated)** | ** **  | ** ** | ** ** | ** ** | ** ** |
| GAAP net loss                                                       |       | $               | (10,698,313 | )          | $          | (5,902,952 | )          | $ | (1,980,420 | ) |
| Book to tax differences:                                            |       |            |        |       |       |       |       |
| Depreciation and  amortization                                      |       | 10,326,706      |        | 6,393,469  |       | 3,019,724  |       |
| Gains and losses  from capital transactions                         |       | (8,450,421      | )           | 100,763    |       | —     |       |
| Straight-line  rent adjustment                                      |       | (1,218,803      | )           | (1,995,704 | )          | (729,718   | )          |
| Asset impairment                                                    |       | 9,209,908       |        | 1,160,000  |       | 1,465,932  |       |
| Compensation  expense                                               |       | —          |        | (149,347   | )          | (436,641   | )          |
| Other, net                                                          |       | 212,818         |        | 495,749    |       | 79,733     |       |
| Total book to tax  differences                                      |       | 9,467,607       |        | 6,004,930  |       | 3,399,030  |       |
| Adjusted taxable  income/(loss) subject to distribution requirement |       | $               | (618,105    | )          | $          | 101,978    |       | $ | 1,418,610 |   |

 

Thefollowing table summarizes the taxability of our dividends for the past threeyears:

| ** **        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------|------------|----------|------------|----------|------------|----------|------------|
| Ordinary income   |       | N/A      |       |     | 12         | %        |       |   | 36 | % |   |
| Return of capital |       | N/A      |       |     | 88         | %        |       |   | 64 | % |   |
|              |       | N/A      |       |     | 100        | %        |       |   | 100 | % |   |

 

**NOTE 13—RELATED PARTY TRANSACTIONS**

*ConsultingAgreement*

From January 1, 2004through July 22, 2005, Alexander S. Hewitt, Director and Vice Chairman,served as a consultant to the Company. His services included consulting withand advising officers of the Company on product development, property designand quality control, and providing assistance in maintaining relationships withstockholders, potential investors, financial advisors, customers and suppliersof the Company. The services as a consultant were coordinated with andaccomplished in conjunction with the officers of the Company. Mr. Hewittreceived $36,000 per year plus certain health insurance benefits for hisservices.

**NOTE 14—SUBSEQUENT EVENTS**

On January 23, 2006, the Company completed a loanagreement with its primary bank group which amends its unsecured revolvingcredit agreement and reinstates a revolving credit facility of up to $10 millionto be used for working capital and other limited corporate purposes. Therevolver is secured by the Company’s Greenhill Park property and matures December 28,2006. The amendment also modifies certain covenant requirements and collateralprovisions and requires the Company to extend the employment agreement with itsChief Executive Officer through the maturity of the loan. There were noborrowings outstanding in this facility on March 15, 2006.

On January 23, 2006, the Company sold FinancialPlaza for $55.0 million to a publicly traded REIT, recording an estimatednet gain on the sale of approximately $16 million in the first quarter of2006. The net cash proceeds of approximately $30 million were used torepay indebtedness under the Company’s unsecured credit facility.

F-23

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On January 24, 2006, the Company sold KeystoneOffice Park for approximately $9.4 million to a foreign institutionalinvestor. Subsequent to recording an impairment of $1.6 million during2005, the Company recognized a gain of approximately $250,000. Of the $8.6 millionin net proceeds received from the sale, the Company used approximately $4.6 millionto pay the outstanding mortgage balances and approximately $300,000 to repaythe remaining balance due on the Company’s Unsecured Credit Facility leavingthe Company with approximately $3.7 million in cash.

On January 25, 2006, the Company entered into anasset purchase agreement with William Atkins, Chairman of the Board, in whichwe agreed to sell to Mr. Atkins the key man life insurance policymaintained by the Company on behalf of Mr. Atkins during his tenure asChief Executive Office. The purchase price of $324,893 was equal to the currentcash value of the policy.

On February 9, 2006, we announced that our Boardof Directors approved a plan of liquidation for the Company. The Plan issubject to approval by the Company’s stockholders holding a majority of theCompany’s outstanding shares of common stock. The Company expects to presentthe Plan for approval as soon as reasonably practicable, which could be at the Company’s 2006 annual meeting. Under thePlan, the Company intends to sell its assets on an orderly basis, to pay orprovide for its liabilities, and to distribute its remaining cash to itsstockholders. The Company currently estimates that liquidating distributionswill be paid over a period of between 6 months and 24 months and that thestockholders could receive between $4.20 and $4.80 per share in totaldistributions over the liquidation period. This estimated distribution range isbased on numerous assumptions, notably including the estimated sale prices ofassets for which no definitive sale agreements or letters of intent are inplace. Although the Company’s management believes its assumptions arereasonable, the assumptions may prove to be inaccurate and the ultimate amountof liquidating distributions to stockholders may be reduced or delayed.

On February 9, 2006, we engaged Trammell Crow toassist us in selling all of our properties. Under the terms of an exclusive brokerage agreement with Trammell Crow,Trammell Crow Services Inc. will receive a fee of between 0.60% and 0.75% onthe sales price of each of our properties when they are sold, together withreimbursement of third-party marketing costs of up to $60,000 in theaggregate.  If the agreement isterminated prior to the commencement of marketing efforts, we will be requiredto pay Trammell Crow a break-up fee of $144,000.  Additionally, if the agreement with TrammellCrow Services Inc. is terminated prior to sale of any of our properties, wemust pay a fee to Trammell Crow of $35,000 per property that we withdraw fromthe marketing process.

On February 13, 2006, we entered into an amendment tothe our engagement letter with Bear Stearns, pursuant to which Bear Stearns hadbeen advising our Company with respect to strategic alternatives.  This amendment clarifies that a liquidationtransaction, whether by the sale of one or all of our properties, does fallinto the category of transactions under which Bear Stearns would be entitled toa 0.85% fee on the consideration received by our company in a propertysale.  Pursuant to the amendment, we paidBear Stearns a one time fee of $150,000 upon execution of the amendment andhave agreed to pay Bear Stearns a fee of 0.15% of the amount of any ourproperties that are sold to specific parties identified in the amendment.  The $150,000 fee was accrued at December 31,2005 and is included in “Strategic alternative expenses” on the ConsolidatedStatement of Operations.

F-24

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**Report ofIndependent Registered Public Accounting Firm**

The Board of Directors and Stockholders

AmeriVest Properties Inc.:

Under date of March 16, 2006, we reported on theconsolidated balance sheets of AmeriVest Properties Inc. and subsidiaries as ofDecember31, 2005 and 2004, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of the years in thethree-year period ended December 31, 2005. In connection with our audits of the aforementioned consolidatedfinancial statements, we also audited the related financial statement schedule,Schedule III—Real Estate and Accumulated Depreciation (Schedule III).  Schedule III is the responsibility of theAmeriVest Properties Inc. and subsidiaries management.  Our responsibility is to express an opinionon Schedule III based on our audits.

In our opinion, Schedule III—Real Estate andAccumulated Depreciation, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

On February 9, 2006, AmeriVest Properties Inc. andsubsidiaries announced that the board of directors approved a plan ofliquidation.  Such plan is subject toapproval by AmeriVest Properties Inc. and subsidiaries’ stockholders.
|  | **KPMG LLP** |
|--|--------------|

 

Denver, ColoradoMarch 16, 2006

F-25

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**AmeriVestProperties IncorporatedSchedule IIIReal Estate and Accumulated DepreciationDecember 31, 2005**

| ** **                    | ** ** | ** **        | ** ** | ** ** | ** **               | **Initial Cost to AmeriVest** | ** ** | **Costs  Capitalized** | ** ** | **Gross Amount at Which Carried  at Year End** | ** **         | ** **                          | ** ** | ** ** | ** **        | ** **                           | ** ** |
|-------------------------------|------------|-------------------|------------|------------|--------------------------|----------------------------------------------|------------|------------------------|------------|-------------------------------------------------------------------------|--------------------|-------------------------------------|------------|------------|-------------------|--------------------------------------|------------|
| **Properties**                | ** ** | ** **        | ** ** | **Market** | ** **               | **Encumbrances**                             | ** ** | **Land**               | ** ** | **Buildings and  Improvements**                                    | ** **         | **Subsequent to  Acquisition** | ** ** | **Land**   | ** **        | **Buildings and  Improvements** | ** ** | **Totals** | ** ** | **Accumulated  Depreciation** | ** ** | **Construction  Year** | ** ** | **Year  Acquired** | ** ** |
| Arrowhead  Fountains          |       | Peoria,  AZ       |       |       | 9,262,580                |                                         |       | 2,558,926              |       |                                                                    | 10,235,703         |                                |       |       | 1,682,031         |                                 |       | 2,558,926 |   |   | 11,917,734 |   |   | 14,476,660 |   |   | $ | 1,878,822 |   |   |   | 1998 |   |   |   | 2001 |   |   |
| Camelback Lakes               |       | Phoenix,  AZ      |       |       | 20,516,515               |                                         |       | 5,865,000              |       |                                                                    | 26,135,486         |                                |       |       | 1,461,114         |                                 |       | 5,866,953 |   |   | 27,594,647 |   |   | 33,461,600 |   |   | 2,873,212 |   |   |   | 1982 |   |   |   | 2004 |   |   |
| Centerra                      |       | Denver,  CO       |       |       | 12,053,846               |                                         |       | 776,400                |       |                                                                    | 17,720,141         |                                |       |       | 5,204,617         |                                 |       | 776,400 |   |   | 22,924,758 |   |   | 23,701,158 |   |   | 2,466,379 |   |   |   | 1982 |   |   |   | 2002 |   |   |
| Financial Plaza(1)            |       | Mesa,  AZ         |       |       | 23,650,188               |                                         |       | 2,920,000              |       |                                                                    | 36,115,300         |                                |       |       | 4,884,739         |                                 |       | 2,920,000 |   |   | 41,000,039 |   |   | 43,920,039 |   |   | 5,864,813 |   |   |   | 1986 |   |   |   | 2003 |   |   |
| Greenhill Park(2)             |       | Addison,  TX      |       |       | —                   |                                         |       | 14,537,390             |       |                                                                    | 10,500,370         |                                |       |       | 3,280,992         |                                 |       | 14,593,016 |   |   | 13,725,168 |   |   | 28,318,184 |   |   | 1,227,308 |   |   |   | 1986 |   |   |   | 2003 |   |   |
| Hackberry View of Las Colinas |       | Irving,  TX       |       |       | 12,225,078               |                                         |       | 1,848,666              |       |                                                                    | 15,113,028         |                                |       |       | 488,145           |                                 |       | 1,848,666 |   |   | 15,601,173 |   |   | 17,449,839 |   |   | 1,559,586 |   |   |   | 2000 |   |   |   | 2004 |   |   |
| Hampton Court                 |       | Dallas,  TX       |       |       | 7,900,000                |                                         |       | 2,785,000              |       |                                                                    | 13,512,567         |                                |       |       | 350,212           |                                 |       | 2,785,059 |   |   | 13,862,720 |   |   | 16,647,779 |   |   | 944,410 |   |   |   | 1985 |   |   |   | 2004 |   |   |
| Kellogg Building              |       | Littleton,  CO    |       |       | 9,453,561                |                                         |       | 2,717,161              |       |                                                                    | 10,845,749         |                                |       |       | 3,573,874         |                                 |       | 2,717,161 |   |   | 14,419,623 |   |   | 17,136,784 |   |   | 1,972,402 |   |   |   | 1983 |   |   |   | 2001 |   |   |
| Keystone Office Park(1)(3)    |       | Indianapolis,  IN |       |       | 4,582,473                |                                         |       | 2,151,093              |       |                                                                    | 6,130,747          |                                |       |       | 2,505,812         |                                 |       | 2,151,093 |   |   | 8,636,559 |   |   | 10,787,652 |   |   | 1,912,218 |   |   |   | 1984 - 1986 |   |   |   | 1999 |   |   |
| Parkway Centre II             |       | Plano,  TX        |       |       | 10,714,530               |                                         |       | 3,966,220              |       |                                                                    | 18,147,961         |                                |       |       | 1,200,354         |                                 |       | 3,966,220 |   |   | 19,348,315 |   |   | 23,314,535 |   |   | 1,915,995 |   |   |   | 1999 |   |   |   | 2002 |   |   |
| Parkway Centre III            |       | Plano,  TX        |       |       | 14,813,833               |                                         |       | 3,350,000              |       |                                                                    | 20,083,209         |                                |       |       | 1,024,761         |                                 |       | 3,350,000 |   |   | 21,107,970 |   |   | 24,457,970 |   |   | 2,126,531 |   |   |   | 2001 |   |   |   | 2004 |   |   |
| Scottsdale Norte              |       | Scottsdale,  AZ   |       |       | 6,507,070                |                                         |       | 3,800,000              |       |                                                                    | 8,499,226          |                                |       |       | (267,105          | )                                    |       | 3,800,000 |   |   | 8,232,121 |   |   | 12,032,121 |   |   | 752,866 |   |   |   | 1998 |   |   |   | 2003 |   |   |
| Sheridan Center(4)            |       | Denver,  CO       |       |       | 9,644,541                |                                         |       | 3,464,362              |       |                                                                    | 6,728,022          |                                |       |       | 6,440,823         |                                 |       | 3,432,377 |   |   | 13,200,830 |   |   | 16,633,207 |   |   | 4,633,208 |   |   |   | 1966 - 1977 |   |   |   | 2000 |   |   |
| Southwest Gas Building        |       | Phoenix,  AZ      |       |       | 14,538,483               |                                         |       | 2,350,000              |       |                                                                    | 14,689,577         |                                |       |       | 2,016,033         |                                 |       | 2,364,987 |   |   | 16,690,623 |   |   | 19,055,610 |   |   | 1,767,412 |   |   |   | 1988 |   |   |   | 2003 |   |   |
| Other                         |       |              |       |       | 43,747                   |                                         |       | —                 |       |                                                                    | —             |                                |       |       | —            |                                 |       | — |   |   | 207,511 |   |   | 207,511 |   |   | 102,319 |   |   |   |   |   |   |   |   |   |   |
| Total                         |       |              |       |       | $  155,906,445 |                                         |       | $ 53,090,218      |       |                                                                    | $ 214,457,086 |                                |       |       | $ 33,846,402 |                                 |       | $ 53,130,858 |   |   | $ 248,469,791 |   |   | $ 301,600,649 |   |   | $ 31,997,481 |   |   |   |   |   |   |   |   |   |   |
|                               |            |                   |            |            |                          |                                              |            |                        |            |                                                                         |                    |                                     |            |            |                   |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)              Property was sold in January 2006 and is deemed asheld-for-sale at December 31, 2005.

(2)              Property was subject to a ground lease at acquisitionin 2003. The Company purchased the land for $14.5 million in October 2004.

(3)              The Company recognized a $1.6 million impairment duringthe twelve months ended December 31, 2005.

(4)              The Company recognized a $4.9 million impairment duringthe twelve months ended December 31, 2005.

S-1

 

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**AmeriVest Properties IncorporatedSchedule IIIReal Estate and Accumulated DepreciationDecember 31, 2005**

**OperatingReal Estate and Accumulated Depreciation**

Thefollowing is a reconciliation of the carrying amount and related accumulateddepreciation of AmeriVest’s investment in real estate, at cost (in thousands):

| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| **Real Estate:**                        | ** ** | ** **                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Balance at  January 1(1)                |       | $                                          | 357,197    |   | $ | 236,701 |   | $ | 151,371 |   |
| Additions:                                   |       |                                       |       |   |   |   |   |
| Acquisitions                                 |       | —                                     |       | 103,287 |   | 78,820 |   |
| Additions to and improvements of real estate |       | 11,474                                     |       | 15,404 |   | 8,578 |   |
| Consolidation of Panorama Falls JV           |       | —                                     |       | 7,692 |   | — |   |
| Deductions:                                  |       |                                       |       |   |   |   |   |
| Dispositions                                 |       | (54,009                                    | )          | (3,867 | ) | — |   |
| Impairments                                  |       | (9,210                                     | )          | (1,160 | ) | (1,466 | ) |
| Write-offs of fully depreciated assets       |       | (3,851                                     | )          | (860 | ) | (602 | ) |
| Balance at  December 31,                |       | $                                          | 301,601    |   | $ | 357,197 |   | $ | 236,701 |   |
|                                              |            |                                            |            |  |  |  |  |  |  |  |  |  |

 

| **Accumulated Depreciation:**                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Balance at  January 1(1)                       |       | $          | 26,383     |       | $          | 12,806     |       | $          | 6,384      |   |
| Depreciation expense                                |       | 17,363     |       | 14,415     |       | 7,024      |       |
| Accumulated deprecation on real estate dispositions |       | (7,714     | )          | (700       | )          | —     |       |
| Write-offs of fully depreciated assets              |       | (3,851     | )          | (860       | )          | (602       | )          |
| Other                                               |       | (184       | )          | —     |       | —     |       |
| Consolidation of Panorama Falls JV                  |       | —     |       | 722        |       | —     |       |
| Balance at  December 31                        |       | $          | 31,997     |       | $          | 26,383     |       | $          | 12,806     |   |

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(1)          Includes assets held forsale.

S-2

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**SIGNATURES**

Inaccordance with Section 13 or 15(d) of the Exchange Act, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

|        | **AMERIVEST PROPERTIES INC.** |
|--------|------------------------------------|
|   | By:                           | /s/ CHARLES K. KNIGHT  |   |
|   |                               | Charles K. Knight*, Chief Executive Officer* |

 

Date: March 16, 2006

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

|                                 | **Signature** | ** **                                            | ** ** |                      | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|---------------------------------|---------------|-------------------------------------------------------|------------|----------------------|-----------|------------|------------|--|----------|------------|
| /s/ CHARLES K.  KNIGHT          |          | Chief Executive  Officer and Director                 |       | March 16,  2006 |
| Charles  K. Knight              |          |                                                  |       |                 |
| /s/ KATHRYN L.  HALE            |          | Chief Financial  Officer (Principal Financial Officer |       | March 16,  2006 |
| Kathryn  L. Hale                |          | and Principal Accounting Officer) and Secretary       |       |                 |
| /s/ WILLIAM T.  ATKINS          |          | Chairman of the  Board                                |       | March 16,  2006 |
| William  T. Atkins              |          |                                                  |       |                 |
| /s/ PATRICE  DERRINGTON         |          | Director                                              |       | March 16,  2006 |
| Patrice  Derrington             |          |                                                  |       |                 |
| /s/ HARRY P.  GELLES            |          | Director                                              |       | March 16,  2006 |
| Harry  P. Gelles                |          |                                                  |       |                 |
| /s/ ALEXANDER  S. HEWITT        |          | Director                                              |       | March 16,  2006 |
| Alexander  S. Hewitt            |          |                                                  |       |                 |
| /s/ ROBERT W.  HOLMAN, JR. |          | Director                                              |       | March 16,  2006 |
| Robert  W. Holman, Jr.     |          |                                                  |       |                 |
| /s/ JOHN A.  LABATE             |          | Director                                              |       | March 16,  2006 |
| John  A. Labate                 |          |                                                  |       |                 |
| /s/ JERRY J.  TEPPER            |          | Director                                              |       | March 16,  2006 |
| Jerry J. Tepper                 |          |                                                  |       |                 |

 

 

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**EXHIBIT INDEX**

| Number | ** ** | **Description** |
|--------|------------|-----------------|
| 2      |       |            | Form of Agreement and Plan of Merger of  AmeriVest and AMVP Inc. (to reincorporate in Maryland). Incorporated by  reference to Exhibit A of AmeriVest’s Definitive Proxy Statement  concerning AmeriVest’s June 29, 1999 Annual Meeting of Stockholders  filed with the SEC on May 27, 1999. |
| 3.     | 1.A        |            | Articles of Amendment  and Restatement of Articles of Incorporation. Incorporated by reference to  Exhibit 3.1 of AmeriVest’s Registration Statement on Form SB-2/A  filed with the SEC on May 29, 2003 (Registration No. 333-105183). |
| 3.     | 1.B        |            | Articles of Amendment to  the Amended and Restated Articles of Incorporation. Incorporated by reference  to Exhibit 3.1B of AmeriVest’s Quarterly Report on Form 10-Q  filed with the SEC on August 9, 2004. |
| 3.     | 2.A        |            | Amended and Restated  Bylaws as amended and restated as of April 16, 2002. Incorporated by  reference to Exhibit 3.2 of AmeriVest’s Registration Statement on  Form SB-2 filed with the SEC on April 19, 2003 (Registration  No. 333-86676). |
| 3.     | 2.B        |            | First Amendment to  Amended and Restated Bylaws dated May 20, 2003. Incorporated by  reference to Exhibit 3.2B of AmeriVest’s Registration Statement on  Form SB-2/A filed with the SEC on May 29, 2003 (Registration  No. 333-105183). |
| 3.     | 3.B        |            | Second Amendment to  Amended and Restated Bylaws dated September 10, 2004. Incorporated by  reference to Exhibit 99.1 of AmeriVest’s Current Report on Form 8-K  filed with the SEC on September 15, 2004. |
| 4.     | 1          |            | Specimen Common Stock  Certificate. Incorporated by reference to Exhibit 4.1(a) of  AmeriVest’s Registration Statement on Form SB-2 filed with the SEC  on June 21, 1996 (Registration No. 333-5114-D). |
| 10.    | 1.A        |            | 1995 Stock Option Plan.  Incorporated by reference to Exhibit 10.9 of AmeriVest’s Annual Report  on Form 10-KSB for the year ended December 31, 1997 filed  with the SEC on March 30, 1998. |
| 10.    | 1.B        |            | 1998 Stock Option Plan.  Incorporated by reference to AmeriVest’s Definitive Proxy Statement  concerning AmeriVest’s May 21, 1998 Annual Meeting of Stockholders filed  with the SEC on March 30, 1998. |
| 10.    | 1.C        |            | AmeriVest Properties  Inc. 2003 Long-Term Incentive Plan. Incorporated by reference to  Exhibit 10.22 of AmeriVest’s Registration Statement on Form SB-2/A  filed with the SEC on May 29, 2003 (Registration No. 333-105183). |
| 10.    | 2          |            | Dividend Reinvestment  Plan. Incorporated by reference to AmeriVest’s Registration Statement on  Form S-3 filed with the SEC on August 21, 2000 (Registration  No. 333-44210). |
| 10.    | 3          |            | AmeriVest Properties  Inc. Deferred Compensation Plan for Directors and Executives, effective  September 14, 2004. Incorporated by reference to Exhibit 10.17 of  AmeriVest’s Annual Report on Form 10-K filed with the SEC on  March 16, 2005. |
| 10.    | 4.A        |            | Revolving Credit  Agreement among AmeriVest Properties Inc. and Fleet National Bank, as  administrative agent, and the lenders party thereto, dated November 12,  2002. Incorporated by reference to Exhibit 10.1 of AmeriVest’s Current  Report on Form 8-K filed with the SEC on December 30, 2002. |

54

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| 10. | 4.B |   | Revolving Credit Note by AmeriVest Properties Inc.  to Fleet National Bank, as agent, dated November 12, 2002. Incorporated  by reference to Exhibit 10.2 of AmeriVest’s Current Report on  Form 8-K filed with the SEC on December 30, 2002.                                                                                                                                                                                                     |
|-----|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10. | 4.C |   | First Amendment to  Revolving Credit Agreement between AmeriVest Properties Inc. and Fleet  National Bank, as administrative agent, and the lenders party thereto, dated  February 6, 2003. Incorporated by reference to Exhibit 10.1 of  AmeriVest’s Current Report on Form 8-K filed with the SEC on  February 21, 2003.                                                                                                                        |
| 10. | 4.D |   | Second Amendment to Revolving Credit Agreement  between AmeriVest Properties Inc. and Fleet National Bank, as administrative  agent, and the lenders party thereto, dated March 16, 2004. Incorporated  by reference to Exhibit 10.1 of AmeriVest’s Quarterly Report on  Form 10-Q filed with the SEC on May 10, 2004.                                                                                                                            |
| 10. | 4.E |   | Third Amendment to  Revolving Credit Agreement between AmeriVest Properties Inc. and Fleet  National Bank, as administrative agent, and the lenders party thereto, dated  March 15, 2005. Incorporated by reference to Exhibit 10.12F of  AmeriVest’s Annual Report on Form 10-K filed with the SEC on  March 16, 2005.                                                                                                                           |
| 10. | 4.F |   | Fourth Amendment to  Revolving Credit Agreement between AmeriVest Properties Inc., AmeriVest  Chateau Inc., AmeriVest Greenhill Inc., and KeyBank National Association,  U.S. Bank National Association, and KeyBank National Association, as  administrative agent, and the lenders party thereto, dated June 6, 2005.  Incorporated by reference to Exhibit 10.1 of AmeriVest’s Current Report  on Form 8-K filed with the SEC on June 8, 2005. |
| 10. | 4.G |   | Letter Agreement  regarding AmeriVest’s Secured Revolving Loan between AmeriVest and KeyBank  National Association, dated August 31, 2005. Incorporated by reference  to Exhibit 99.5 of AmeriVest’s Current Report on Form 8-K  filed with the SEC on September 6, 2005.                                                                                                                                                                    |
| 10. | 4.H |   | Fifth Amendment to  Revolving Credit Agreement between AmeriVest Properties Inc., AmeriVest  Chateau Inc., AmeriVest Greenhill Inc., and KeyBank National Association, as  agent, and the lenders party thereto, dated September 14, 2005.  Incorporated by reference to Exhibit 10.1 of AmeriVest’s Current Report  on Form 8-K filed with the SEC on September 19, 2005.                                                                        |
| 10. | 4.I |   | First Amended and  Restated Collateral Account Agreement between AmeriVest Chateau Inc.,  AmeriVest Greenhill Inc., and KeyBank National Association, dated  September 14, 2005. Incorporated by reference to Exhibit 10.3 of  AmeriVest’s Current Report on Form 8-K filed with the SEC on  September 19, 2005.                                                                                                                                  |
| 10. | 4.J |   | Letter from AmeriVest to  KeyBank National Association, dated September 14, 2005. Incorporated by  reference to Exhibit 10.5 of AmeriVest’s Current Report on Form 8-K  filed with the SEC on September 19, 2005.                                                                                                                                                                                                                                 |
| 10. | 4.K |   | Second Amended and  Restated Revolving Credit Agreement among AmeriVest Properties Inc., KeyBank  National Association, as administrative agent, and KeyBank Capital Markets,  as sole lead arranger and book manager, and the lenders party hereto, dated  January 23, 2006. Incorporated by reference to Exhibit 10.4 of  AmeriVest’s Current Report on Form 8-K filed with the SEC on  January 27, 2006.                                       |

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| 10. | 5.A |   | Unsecured Revolving Credit Agreement among AmeriVest  Properties Inc. and Fleet National Bank, as administrative agent, and the  lenders party thereto, dated December 15, 2003. Incorporated by  reference to Exhibit 12.A of AmeriVest’s Annual Report on Form 10-KSB  filed with the SEC on March 18, 2004.                                                                                                                            |
|-----|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10. | 5.B |   | Revolving Credit Note by  AmeriVest Properties Inc. to Fleet National Bank, as agent, dated December 15,  2003. Incorporated by reference to Exhibit 12.B of AmeriVest’s Annual  Report on Form 10-KSB filed with the SEC on March 18, 2004.                                                                                                                                                                                              |
| 10. | 5.C |   | First Amendment to  Unsecured Revolving Credit Agreement between AmeriVest Properties Inc. and  Fleet National Bank, as administrative agent, and the lenders party thereto,  dated March 16, 2004. Incorporated by reference to Exhibit 10.2 of  AmeriVest’s Quarterly Report on Form 10-Q filed with the SEC on  May 10, 2004.                                                                                                          |
| 10. | 5.D |   | First Amended and  Restated Unsecured Revolving Credit Agreement by and among AmeriVest  Properties Inc., KeyBank National Association, as Administrative Agent, and  others, as of October 20, 2004. Incorporated by reference to  Exhibit 10.1 of AmeriVest’s Current Report on Form 8-K filed  with the SEC on October 26, 2004.                                                                                                       |
| 10. | 5.E |   | First Amendment to Amended and Restated Unsecured  Revolving Credit Agreement by and among AmeriVest Properties Inc., KeyBank  National Association, as Administrative Agent, and others, as of  March 15, 2005. Incorporated by reference to Exhibit 10.12E of  AmeriVest’s Annual Report on Form 10-K filed with the SEC on  March 16, 2005.                                                                                            |
| 10. | 5.F |   | Letter Agreement  regarding AmeriVest’s Unsecured Revolving Loan between AmeriVest and KeyBank  National Association, dated August 31, 2005. Incorporated by reference  to Exhibit 99.4 of AmeriVest’s Current Report on Form 8-K  filed with the SEC on September 6, 2005.                                                                                                                                                          |
| 10. | 5.G |   | Second Amendment to the  Amended and Restated Unsecured Revolving Credit Agreement among AmeriVest  Properties Inc., KeyBank National Association, as lender, and KeyBank  National Association, as agent, dated September 14, 2005. Incorporated  by reference to Exhibit 10.2 of AmeriVest’s Current Report on  Form 8-K filed with the SEC on September 19, 2005.                                                                      |
| 10. | 5.H |   | Second Collateral  Account Agreement between AmeriVest Chateau Inc., AmeriVest Greenhill Inc.,  and KeyBank National Association, as Agent, dated September 14, 2005.  Incorporated by reference to Exhibit 10.4 of AmeriVest’s Current Report  on Form 8-K filed with the SEC on September 19, 2005.                                                                                                                                     |
| 10. | 6.A |   | Cross-Collateralization  and Cross-Default Agreement among AmeriVest Properties Inc., AmeriVest  Sheridan Center Inc., AmeriVest Kellogg Inc. and AmeriVest Arrowhead Inc. and  Teachers Insurance and Annuity Association of America dated December 23,  2002. Incorporated by reference to Exhibit 10.21A of AmeriVest’s Annual  Report on Form 10-KSB for the year ended December 31, 2002  filed with the SEC on March 31, 2003. |
| 10. | 6.B |   | Promissory Note by  AmeriVest Arrowhead Inc. to Teachers Insurance and Annuity Association of  America dated December 23, 2002. Incorporated by reference to  Exhibit 10.21B of AmeriVest’s Annual Report on Form 10-KSB  for the year ended December 31, 2002 filed with the SEC on  March 31, 2003.                                                                                                                                |

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| 10. | 6.C |   | Promissory Note by AmeriVest Kellogg Inc. to  Teachers Insurance and Annuity Association of America dated December 23,  2002. Incorporated by reference to Exhibit 10.21C of AmeriVest’s Annual  Report on Form 10-KSB for the year ended December 31, 2002  filed with the SEC on March 31, 2003.                                                                                |
|-----|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10. | 6.D |   | Promissory Note by  AmeriVest Sheridan Center Inc. to Teachers Insurance and Annuity Association  of America dated December 23, 2002. Incorporated by reference to  Exhibit 10.21D of AmeriVest’s Annual Report on Form 10-KSB  for the year ended December 31, 2002 filed with the SEC on  March 31, 2003.                                                                       |
| 10. | 7.A |   | Deed of Trust between  AmeriVest Mesa Inc. and Allstate Life Insurance Company dated  September 8, 2003. Incorporated by reference to Exhibit 10.1 of  AmeriVest’s Current Report on Form 8-K filed with the SEC on  November 7, 2003.                                                                                                                                                 |
| 10. | 7.B |   | Mortgage Note by  AmeriVest Mesa Inc. to Allstate Life Insurance Company dated  September 8, 2003. Incorporated by reference to Exhibit 10.2 of  AmeriVest’s Current Report on Form 8-K filed with the SEC on  November 7, 2003.                                                                                                                                                       |
| 10. | 8.A |   | Loan Agreement between  AmeriVest Centerra Inc., AmeriVest Parkway Inc., and AmeriVest Black Canyon  Inc. and Greenwich Capital Financial Products Inc. dated September 19,  2003. Incorporated by reference to Exhibit 9.A of AmeriVest’s Annual  Report on Form 10-KSB filed with the SEC on March 18, 2004.                                                                         |
| 10. | 8.B |   | Promissory Note by  AmeriVest Centerra Inc., AmeriVest Parkway Inc., and AmeriVest Black Canyon  Inc. to Greenwich Capital Financial Products Inc. dated September 19, 2003.  Incorporated by reference to Exhibit 9.B of AmeriVest’s Annual Report on  Form 10-KSB filed with the SEC on March 18, 2004.                                                                              |
| 10. | 9.A |   | Contract of Sale between LSF Presidio Investment I,  LLC and AmeriVest Camelback Inc. dated January 15, 2004. (Camelback  Lakes) Incorporated by reference to Exhibit 2.1 of AmeriVest’s Current  Report on Form 8-K filed with the SEC on March 24, 2004.                                                                                                                             |
| 10. | 9.B |   | Mortgage note in the  principal amount of $16,000,000 between AmeriVest Camelback Incorporated and  Allstate Life Insurance Company of New York dated August 19, 2004.  Incorporated by reference to Exhibit 10.1 of AmeriVest’s Quarterly  Report on Form 10-Q filed with the SEC on November 5, 2004.                                                                                |
| 10. | 9.C |   | Mortgage note in the  principal amount of $5,000,000 between AmeriVest Camelback Incorporated and  Allstate Life Insurance Company of New York dated August 19, 2004.  Incorporated by reference to Exhibit 10.2 of AmeriVest’s Quarterly  Report on Form 10-Q filed with the SEC on November 5, 2004.                                                                                 |
| 10. | 9.D |   | Deed of Trust,  Assignment of Leases, Rents and Contracts, Security Agreement and Fixture  Filing between AmeriVest Camelback Incorporated, Chicago Title Insurance  Company and Allstate Life Insurance Company of New York, dated  August 19, 2004. Incorporated by reference to Exhibit 10.3 of  AmeriVest’s Quarterly Report on Form 10-Q filed with the SEC on  November 5, 2004. |
| 10. | 10  |   | Agreement of Purchase  and Sale, dated December 16, 2005, between AmeriVest Properties Inc. and  Crescent Real Estate Equities Limited Partnership. (Financial Plaza)  Incorporated by reference to Exhibit 10.1 of AmeriVest’s Current Report  on Form 8-K filed with the SEC on December 22, 2005.                                                                                   |

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| 10. | 11   |   | Asset Purchase Agreement by and between AmeriVest  and William T. Atkins, dated January 25, 2006. Incorporated by reference  to Exhibit 10.4 of AmeriVest’s Current Report on Form 8-K  filed with the SEC on January 27, 2006.                                                              |
|-----|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10. | 12.A |   | Change in Control  Agreement between AmeriVest Properties Inc. and Charles K. Knight, dated  December 7, 2004. Incorporated by reference to Exhibit 10.4 of  AmeriVest’s Current Report on Form 8-K filed with the SEC on  December 10, 2004.                                                |
| 10. | 12.B |   | Amended Change in  Control and Employment Agreement between AmeriVest Properties Inc. and  Charles K. Knight, dated August 31, 2005. Incorporated by reference to  Exhibit 99.1 of AmeriVest’s Current Report on Form 8-K filed  with the SEC on September 6, 2005.                          |
| 10. | 12.C |   | Amendment No. 1 to  Amended Change in Control and Executive Employment Agreement by and between  AmeriVest and Charles K. Knight, dated January 23, 2006. Incorporated by  reference to Exhibit 10.1 of AmeriVest’s Current Report on Form 8-K  filed with the SEC on January 27, 2006. |
| 10. | 12.D |   | Change in Control  Agreement between AmeriVest Properties Inc. and Kathryn L. Hale, dated  December 7, 2004. Incorporated by reference to Exhibit 10.3 of  AmeriVest’s Current Report on Form 8-K filed with the SEC on  December 10, 2004.                                                  |
| 10. | 12.E |   | Amended Change in  Control and Employment Agreement between AmeriVest Properties Inc. and  Kathryn L. Hale, dated August 31, 2005. Incorporated by reference to  Exhibit 99.2 of AmeriVest’s Current Report on Form 8-K filed  with the SEC on September 6, 2005.                            |
| 10. | 12.F |   | Amended Change in  Control and Term Employment Agreement, dated December 16, 2005, between  AmeriVest Properties Inc. and Kathryn L. Hale. Incorporated by reference to  Exhibit 10.2 of AmeriVest’s Current Report on Form 8-K filed  with the SEC on December 22, 2005.                    |
| 10. | 12.G |   | Change in Control  Agreement between AmeriVest Properties Inc. and John B. Greenman, dated  December 7, 2004. Incorporated by reference to Exhibit 10.2 of  AmeriVest’s Current Report on Form 8-K filed with the SEC on  December 10, 2004.                                                 |
| 10. | 12.H |   | Amended Change of  Control and Term Employment Agreement between AmeriVest and John B. Greenman,  dated August 31, 2005. Incorporated by reference to Exhibit 99.2 of  AmeriVest’s Current Report on Form 8-K filed with the SEC on  September 6, 2005.                                      |
| 10. | 12.I |   | Amendment No. 1 to Amended Change in Control  and Term Employment Agreement by and between AmeriVest and John B. Greenman,  dated January 23, 2006. Incorporated by reference to Exhibit 10.2  of AmeriVest’s Current Report on Form 8-K filed with the SEC on  January 27, 2006.       |
| 10. | 12.J |   | Addendum No. 1 to  Amended Change in Control and Term Employment Agreement by and between  AmeriVest and John B. Greenman, dated January 25, 2006. Incorporated by  reference to Exhibit 10.3 of AmeriVest’s Current Report on Form 8-K  filed with the SEC on January 27, 2006.        |
| 10. | 12.K |   | Change in Control  Agreement between AmeriVest Properties Inc. and William T. Atkins, dated  December 7, 2004. Incorporated by reference to Exhibit 10.1 of  AmeriVest’s Current Report on Form 8-K filed with the SEC on  December 10, 2004.                                                |
| 10. | 12.L |   | Severance Agreement  between AmeriVest Properties Inc. and William T. Atkins dated April 28,  2005. Incorporated by reference to Exhibit 99.1 of AmeriVest’s Current  Report on Form 8-K filed with the SEC on April 28, 2005.                                                               |

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| 10. | 12.M   |   | Consulting Agreement  made and entered into as of December 31, 2003 between AmeriVest  Properties Inc. and Alexander S. Hewitt. Incorporated by reference to  Exhibit 10.3 of AmeriVest’s Quarterly Report on Form 10-Q  filed with the SEC on May 10, 2004. |
|-----|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10. | 12.N   |   | Letter Agreement between  AmeriVest Properties Inc. and Alexander S. Hewitt dated April 28, 2005.  Incorporated by reference to Exhibit 99.2 of AmeriVest’s Current Report  on Form 8-K filed with the SEC on April 28, 2005.                                |
| 12. | 1      |   | Computation of Ratio of  Earnings to Combined Fixed Charges and Preferred Share Dividends.                                                                                                                                                                                            |
| 21  |   |   | Subsidiaries of  AmeriVest Properties Inc.                                                                                                                                                                                                                                            |
| 23  |   |   | Consent of KPMG LLP,  independent registered public accounting firm.                                                                                                                                                                                                                  |
| 31. | 1      |   | Section 302  Certifications of Chief Executive Officer.                                                                                                                                                                                                                          |
| 31. | 2      |   | Section 302  Certifications of Chief Financial Officer.                                                                                                                                                                                                                          |
| 32. | 1      |   | Section 906  Certifications of Chief Executive Officer.                                                                                                                                                                                                                          |
| 32. | 2      |   | Section 906  Certifications of Chief Financial Officer.                                                                                                                                                                                                                          |

 

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