Form 10-K

PGRT ESH, INC.

[s] David Lichtenstein

David Lichtenstein
Chairman

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


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

For the fiscal year ended December 31, 2008


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

For the transition period from to

Commission file number: 1-13589

PRIME GROUP REALTY TRUST

(Exact name of registrant as specified in its charter)


Maryland (State or other jurisdiction of incorporation or organization)		36-4173047 (I.R.S. Employer Identification No.)

77 West Wacker Drive, Suite 3900, Chicago, Illinois (Address of principal executive offices)		60601 (Zip Code)

(312) 917-1300
(Registrant’s telephone number, including area code)

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


Title of each class		Name of each exchange on which registered

Series B — Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

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

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

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


Large Accelerated Filer o		Accelerated Filer o		Non-Accelerated Filer þ		Smaller Reporting Company o

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

The aggregate market value of the registrant’s common shares held by non-affiliates as of June 30, 2008 was $0 as the common shares were de-listed from the New York Stock Exchange as a result of our acquisition by an affiliate of The Lightstone Group, LLC.

The number of the registrant’s common shares outstanding was 236,483 as of March 16, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Forward-Looking Statements

Forward-Looking Statements contained in this Annual Report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect management’s current view with respect to future events and financial performance. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those anticipated, and include but are not limited to, the effects of future events on our financial performance; risks associated with our high level of indebtedness and our ability to refinance our indebtedness as it becomes due; the risk that we or our subsidiaries will not be able to satisfy scheduled debt service obligations or will not remain in compliance with existing loan covenants; the effects of future events, including tenant bankruptcies and defaults; risks associated with conflicts of interest that exist with certain members of our board of trustees (“Board”) as a result of such members’ affiliation with our sole common shareholder; the risks related to the office and, to a lesser extent, industrial markets in which our properties compete, including the adverse impact of external factors such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences; the risk of potential increase in market interest rates from current rates; and risks associated with real estate ownership, such as the potential adverse impact of changes, in the local, economic climate on the revenues and the value of our properties as well as our tenants and vendors operations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of December 31, 2008.

Among the matters about which we have made assumptions are the following:

•

future economic and market conditions which may impact the demand for office and industrial space either at current or increased levels;

•

the extent of any tenant bankruptcies or defaults that may occur;

•

our ability or inability to renew existing tenant leases and lease up vacant space;

•

prevailing interest rates;

•

the effect of inflation and other factors on operating expenses and real estate taxes;

•

our ability to minimize various expenses as a percentage of our revenues; and

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the availability of financing and capital.

In addition, historical results and percentage relationships set forth in this Annual Report on Form 10-K are not necessarily indicative of future operations.

PART I

ITEM 1. BUSINESS

Background and General

We are a fully-integrated, self-administered and self-managed real estate investment trust (“REIT”) which owns, manages, leases, develops and redevelops office and industrial real estate, primarily in the Chicago metropolitan area. Our portfolio of properties consists of 9 office properties, containing an aggregate of 3.5 million net rentable square feet (see the “Properties” section for detailed information concerning the individual properties). As of December 31, 2008, we had joint venture interests in one office property located in Phoenix, Arizona containing an aggregate of 0.1 million net rentable square feet and a membership interest in an unconsolidated entity which owns extended-stay hotel properties. We lease and manage 3.5 million square feet comprising all of our wholly-owned properties and one joint venture property. We are also the managing agent for the 1.5 million square foot Citadel Center office building located at 131 South Dearborn Street in Chicago, Illinois, in which we previously owned a joint venture interest which was sold in November 2006. In addition, as of December 31, 2008, we were also the managing and leasing agent for the approximately 959,000 square foot property known as The United Building located at 77 West Wacker Drive in Chicago, Illinois.

Our joint venture interest and our membership interest are accounted for as investments in unconsolidated joint ventures under the equity method of accounting. These consisted of a 23.1% common interest in a joint venture which owns a 101,006 square foot office building located in Phoenix, Arizona and a membership interest in an unconsolidated entity which owns 552 extended-stay hotel properties in operation in 43 U.S. states consisting of approximately 59,000 rooms and three hotels in operation in Canada consisting of 500 rooms.

We were organized in Maryland on July 21, 1997 as a REIT under the Internal Revenue Code of 1986, as amended (“the Code”), for federal income tax purposes. On November 17, 1997, we completed our initial public offering and contributed the net proceeds to Prime Group Realty, L.P. (our “Operating Partnership”) in exchange for common and preferred partnership interests.

Prior to our acquisition (the “Acquisition”) by an affiliate of The Lightstone Group, LLC (“Lightstone”), we were the sole general partner of the Operating Partnership and owned all of the preferred units and 88.5% of the common units of the Operating Partnership then issued. Each preferred unit and common unit entitled us to receive distributions from our Operating Partnership. Dividends declared or paid to holders of common shares and preferred shares were based upon such distributions we received with respect to our common units and preferred units.

On June 28, 2005, our common shareholders approved the Acquisition by Lightstone and on July 1, 2005, the Acquisition was completed. The Acquisition closed pursuant to the terms of the previously announced agreement and plan of merger dated as of February 17, 2005, among certain affiliates of Lightstone, the Operating Partnership and us. As a result of the Acquisition, each of our common shares and limited partnership units of the Operating Partnership were cancelled and converted into the right to receive cash in the amount of $7.25 per common share/limited partnership unit, without interest. In connection with the Acquisition, all outstanding options with an exercise price equal to or greater than the sales price of $7.25 per share/unit were cancelled and each outstanding option for a common share with an exercise price less than the sales price was entitled to be exchanged for cash in an amount equal to the difference between $7.25 and the exercise price. Our Series B Cumulative Redeemable Preferred Shares (the “Series B Shares”) remain outstanding after the completion of the Acquisition and continue to be publicly traded on the New York Stock Exchange (“NYSE”).

As a result of the Acquisition, Prime Office Company LLC (“Prime Office”), a subsidiary of Lightstone, owns 100.0%, or 236,483, of our outstanding common shares and 99.1%, or 26,488,389, of the outstanding common units in the Operating Partnership. Prime Group Realty Trust (the “Company” or “PGRT”) owns 0.9%, or 236,483, of the outstanding common units and all of the 4.0 million outstanding preferred units in the Operating Partnership.

Each preferred and common unit of the Operating Partnership entitles the owners to receive distributions from the Operating Partnership. Dividends declared or paid to holders of our common shares and preferred shares are based upon the distributions received by us with respect to the common units and preferred units we own in the Operating Partnership.

We conduct substantially all of our business through the Operating Partnership and its subsidiaries. Certain services requested by our tenants, certain management and consulting contracts and certain build-to-suit construction activities are conducted through Prime Group Realty Services, Inc., a Maryland corporation and a wholly-owned subsidiary of the Operating Partnership, and its affiliates (collectively, the “Services Company”). Our executive offices are located at 77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601, and our telephone number is (312) 917-1300.

Tax Status

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a REIT, we will not be subject to federal income tax at the corporate level on our income as long as we distribute 90.0% of our taxable income (excluding any net capital gain) each year to our shareholders. Since our inception, we believe that we have complied with the tax rules and regulations to maintain our REIT status. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Even if we qualify as a REIT, we are subject to certain state and local taxes on our income and property. In addition, our Services Company’s income is subject to state and federal income taxation.

Business Strategy

Our business strategy is to operate our portfolio of properties to create the optimum level of service and value to our tenants, to retain our existing tenant base as their leases expire, to search for and identify prospective tenants for space in our properties which is unoccupied or is subject to expiring leases and to create maximum portfolio value for our shareholders.

Ongoing Operations. Our primary business is to focus on the operation, leasing and management of our existing real estate properties.

We strive to enhance our property-level net operating income and cash flow by:

•

engaging in pro-active leasing programs and effective property management;

•

managing operating expenses through the use of in-house management expertise;

•

maintaining and developing long-term relationships with a diverse tenant group;

•

attracting and retaining motivated employees by providing financial and other incentives; and

•

emphasizing value-added capital improvements to maintain and enhance our properties’ competitive advantages in their submarkets.

Liquidity and Capital Requirements. We require cash to pay our operating expenses, make capital expenditures, fund tenant improvements, pay leasing and redevelopment costs, pay distributions/dividends and service our debt and other short-term and long-term liabilities. Cash on hand and net cash provided from operations represent our primary sources of liquidity to fund these expenditures. In assessing our liquidity, key components include our net income, adjusted for non-cash and non-operating items, and current assets and liabilities, in particular accounts receivable, accounts payable and accrued expenses. For the longer term, our debt and long-term liabilities are also considered key to assessing our liquidity.

In order to qualify as a REIT for federal income tax purposes, we must distribute 90.0% of our taxable income (excluding capital gains) annually. See Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for more information regarding dividends on our common shares and on our Series B Shares.

For a discussion of recent transactions which may affect our liquidity and capital resources, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Recent Developments.

Our anticipated cash flows from operations combined with cash on hand (including restricted cash escrows) are expected to be sufficient to fund our anticipated short-term capital needs over the next twelve months. In 2009, we anticipate the need to fund significant capital expenditures to retenant and/or redevelop space that has been previously vacated, or is anticipated to be vacated, or renew leases which are expiring during the year. In order to fund these and our other short-term and long-term capital needs, we expect to utilize available funds from cash on hand, cash generated from our operations and existing or future escrows with lenders. In addition, we may enter into capital transactions, which could include asset sales, refinancings and modifications or extensions of existing loans. There can be no assurances that any capital transactions will occur or, if they do occur, that they will yield adequate proceeds to fund our long-term capital needs or will be on terms favorable to us.

The financial covenants contained in some of our loan agreements and guarantee agreements with our lenders include minimum ratios for debt service coverage and other financial covenants. As of December 31, 2008, we are in compliance with the requirements of all of our financial covenants. On October 20, 2008, we received a notice of default from the special servicer of the non-recourse mortgage note on our 800 Jorie Boulevard property. Due to the property generating negative cash flows, debt service payments were discontinued as of September 1, 2008. We are currently in the process of renegotiating the terms of the loan with the special servicer and the lender. A default on the Jorie Boulevard loan does not cause a default on any of the Company’s other loans.

Acquisition, Disposition and Development Activity. We may pursue selective property acquisitions and/or dispositions and expend funds to redevelop our existing properties as we determine appropriate.

Recent Developments

Dispositions. During the period from January 1, 2008 through December 31, 2008, we sold the following operating properties:


		Net				Mortgage
		Rentable		Sales Price		Debt		Month
Property	Location	Square Feet		(in millions)		(in millions)		Sold

The United Building (1)	Chicago, IL		959,258	$	50.0	$	18.8	January
330 N. Wabash Avenue(2)	Chicago, IL		375,000	$	46.0	$	31.5	March
1051 N. Kirk Road(3)	Batavia, IL		120,004	$	4.1	$	4.0	May


(1)		On January 7, 2008, we completed the sale of our 50.0% common joint venture interest in The United Building located at 77 West Wacker Drive in Chicago, Illinois to our joint venture partner. The sale price was $50.0 million, subject to customary pro-rations and adjustments. We recognized a gain of $29.4 million and we used $18.8 million of the net proceeds to retire the outstanding balance on two Citicorp USA, Inc. (“Citicorp”) mezzanine loans.


(2)		On March 18, 2008, one of our subsidiaries, 330 N. Wabash Avenue, L.L.C. (“330 LLC”), completed the sale of Floors 2 through 13 of our 330 N. Wabash Avenue property to Modern Magic Hotel, LLC for the purchase price of $46.0 million, subject to customary prorations and adjustments as provided in the purchase and sale agreement. We recognized a book gain on the sale of approximately $9.8 million.

(3)		On May 2, 2008, we closed on the sale of our 1051 North Kirk Road property. The net proceeds from the sale of $4.1 million were used to retire the outstanding debt on the property. We recognized a book gain of $0.5 million in the second quarter of 2008.

Indebtedness. During 2008, we completed the following transactions with respect to our indebtedness:

Loan

Principal

Amount

Interest

Transaction

Maturity

Collateral

Type of Loan

(in millions)

Rate

Date

New Indebtedness

330 N. Wabash Avenue

First Mortgage

88.0

6.0%

3/08

4/13

330 N. Wabash Avenue

Mezzanine

50.0

7.95%

3/08

3/13

4343 Commerce Court

First Mortgage

11.6

LIBOR + 2.0%

6/08

6/13

Indebtedness Retirement

PGRT Equity II, L.L.C.

Mezzanine

11.0

LIBOR + 4.3%

1/08

PGRT Equity, L.L.C

Mezzanine

7.8

LIBOR + 4.3%

1/08

330 N. Wabash Avenue

First Mortgage

130.2

LIBOR + 1.4%

3/08

330 N. Wabash Avenue

Mezzanine

64.8

LIBOR + 5.7%

3/08

4343 Commerce Court/ 1051 N. Kirk Road

First Mortgage

14.6

7.2%

6/08

5/08

Principal Payments

PGRT ESH

Non-recourse

38.5

Various

6/09

Amortization

Various

1.8

Various

On March 18, 2008, we refinanced the previously existing loan on our 330 N. Wabash Avenue property with two loans on the remaining portion of the property not sold consisting of (a) a loan in the principal amount of $88.0 million (“Loan A”) from ING USA Annuity and Life Insurance Company (the “Loan A Lender”) and (b) a loan in the principal amount of $100.0 million (“Loan B”) from General Electric Capital Corporation (the “Loan B Lender”). Loan A matures on April 1, 2038. On April 1 of each year (starting with April 1, 2011), the Loan A Lender has an option to call Loan A and 330 LLC may negate the Loan A Lender’s call options, if exercised, for 2011 and 2012 upon the satisfaction of certain conditions. Loan A bears interest at a fixed rate of 6.00% per year for the first three years and at a rate of LIBOR plus a market-based spread not to exceed 4.5% for years four and five. The initial advance of Loan B consisted of $50.0 million, and we have the right to draw the remaining $50.0 million for future leasing and redevelopment costs relating to the property, subject to compliance with the conditions for future draws contained in the Loan B documents. As of December 31, 2008, we have not drawn against this $50.0 million. Loan B matures on March 31, 2013. The initial advance of Loan B bears interest at a fixed rate of 7.95% per year. Subsequent advances will bear interest at a rate equal to the 30-day LIBOR plus 4.62% (See Note 4 — Mortgage Notes Payable — to our consolidated financial statements for further information).

On June 4, 2008, we refinanced our 4343 Commerce Court property with a first mortgage loan in the principal amount of $11.6 million from Leaders Bank, with $0.9 million available for future fundings related to leasing costs. The proceeds of the loan were primarily utilized to repay the existing first mortgage loan encumbering the property in the principal amount of $10.2 million. The new loan bears interest at the variable rate of the London Interbank Offered Rate (“LIBOR”) plus 2.0%. The interest rate cannot exceed 6.5% or be less than 4.5%. This loan has a 5-year term and requires monthly amortization payments based on a thirty-year amortization schedule.

Total interest paid on mortgage notes payable was $33.6 million for the year ended December 31, 2008, $38.6 million for the year ended December 31, 2007 and $44.0 million for the year ended December 31, 2006, respectively. No capitalization of interest occurred in the years ended December 31, 2008, 2007 and 2006.

Shareholders and Board of Trustees Developments. On July 16, 2008, we held our Annual Meeting of Shareholders, at which all of our existing Board Members were re-elected for additional one-year terms. Our Board consists of (i) Messrs. David Lichtenstein, the Chairman and Principal of Lightstone, Jeffrey Patterson, our President and Chief Executive Officer, Peyton Owen, Jr. the President and Chief Operating Officer of Lightstone, and Bruno de Vinck, a Senior Vice President of Lightstone, each of whom were re-elected as non-independent trustees, and (ii) Messrs. George R. Whittemore, John M. Sabin, and Shawn R. Tominus, each of whom were re-elected as independent trustees. Mr. Whittemore is the Chairman of our audit committee and Messrs. Whittemore and Sabin were each named as “financial experts” of our audit committee.

Competition

We compete with many other owners and developers of office and industrial real estate, some of which may have greater financial and marketing resources or expertise. In addition, the amount of available space in competitive properties in any particular market or submarket in which our properties are located could have a material adverse effect on both our ability to lease space and on the rents charged at our properties.

Services Company

We provide certain services requested by tenants through our Services Company. As a taxable REIT subsidiary, our Services Company can provide services to tenants of our properties, even if these services are not considered services customarily furnished in connection with the rental of real estate property, without causing the rental income from the properties to be treated as other than rents from real property by the Internal Revenue Service under the Code.

Government Regulations

Environmental Matters. Phase I or similar environmental assessments have been performed by independent environmental consultants on all of our properties. Phase I assessments are intended to discover information regarding, and to evaluate the environmental condition of, the surveyed property and surrounding properties. Phase I assessments generally include a historical review, a public records review, an investigation of the surveyed site and surrounding properties and the preparation and issuance of a written report, but do not include soil sampling or subsurface investigations.

During the due diligence process in connection with the sale of certain industrial properties in October 2004, additional environmental contamination, beyond that previously identified by our environmental consultants, was discovered by the purchaser of our Chicago Enterprise Center, East Chicago Enterprise Center and Hammond Enterprise Center facilities. As a result, we agreed to establish a $1.25 million environmental escrow at the closing, in addition to a $3.2 million reserve for the previously identified environmental contamination, for use in remediation of the additional environmental contamination. In connection with the sale, the purchaser of these properties agreed to assume the responsibility for the environmental remediation of the property and any costs which may be incurred in excess of the amounts we placed in escrow at the closing. Any excess funds remaining in the $1.25 million escrow after the remediation of the additional environmental contamination will be returned to us. This escrow is included in our restricted cash with a corresponding liability included in other liabilities. At December 31, 2008, this escrow had a balance of $0.9 million.

In November 2001, at the request of the Department of the Army of the United States of America (the “DOA”), we granted the DOA a right of entry for environmental assessment and response in connection with our property known as the Atrium located at 280 Shuman Boulevard in Naperville, Illinois. The DOA informed us that the property was located north of a former Nike missile base and that the DOA was investigating whether certain regional contamination of the groundwater by trichloethene (“TCE”) emanated from the base and whether the DOA would be required to restore the environmental integrity of the region under the Defense Environmental Restoration Program for Formerly Used Defense Sites. In December 2001, the results from the tests of the groundwater from the site indicated elevated levels of TCE. It is currently our understanding based on information provided by the DOA and an analysis prepared by its environmental consultants that (i) the source of the TCE contamination did not result from the past or current activities on the Atrium property, and (ii) the TCE contamination is a regional problem that is not confined to the Atrium. Our environmental consultants have advised us that the United States Environmental Protection Agency (the “EPA”) has issued a Statement of Policy towards owners of property containing contaminated aquifers. According to this policy, it is the EPA’s position that where hazardous substances have come to be located on a property solely as a result of subsurface migration in an aquifer from an offsite source, the EPA will not take enforcement actions against the owner of the property. The groundwater underneath this property is relatively deep, and the property obtains its potable water supply from the City of Naperville and not from a groundwater well. Accordingly, we do not anticipate any material liability because of this TCE contamination.

Our 330 N. Wabash Avenue office property currently contains asbestos in the form of spray-on insulation located on the decking and beams of the building. We have been informed by our environmental consultants that the asbestos in 330 N. Wabash Avenue is being properly maintained and no remediation of the asbestos is necessary. However, we have in the past and we may in the future voluntarily decide to remove or otherwise remediate some or all of this asbestos in connection with the releasing and/or redevelopment of this property. Financial Accounting Standards Board (“FASB”) Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations,” (“FIN No. 47”), clarifies the accounting for conditional asset retirement obligations as used in Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”. A conditional asset retirement obligation is an unconditional legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Therefore, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation under SFAS No. 143 if the fair value of the liability can be reasonably estimated. A conditional asset retirement obligation for the removal of asbestos at our 330 N. Wabash Avenue property was estimated to be $4.5 million as of December 31, 2007. During 2008 this obligation was increased as follows: $5.7 million for abatement work to be performed on floors 2-13 as part of a sale of those floors for the development of a hotel; $6.5 million due to the increased probability of abatement on the remaining floors as certain lease expirations moved closer; and $0.5 million in accretion. This was partially offset by payments of $9.4 million. We recorded an asset of $8.7 million and a liability of $7.8 million related to asbestos abatement as of December 31, 2008.

We believe that our other properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances. We have not been notified by any governmental authority, and are not otherwise aware of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of our other properties. None of the environmental assessments of our properties have revealed any environmental liability that we believe would have a material adverse effect on our financial condition or results of operations taken as a whole, nor are we aware of any such material environmental liability. Nonetheless, it is possible that our assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of our properties will not be affected by tenants, by the condition of land or operations in the vicinity of our properties (such as the presence of underground storage tanks) or by third parties unrelated to us. If compliance with the various laws and regulations, now existing or hereafter adopted, exceeds our budgets for such items, our financial condition could be further adversely affected.

Costs of Compliance with Americans with Disabilities Act of 1990 (the “ADA”). Under the ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requirements could require removal of access barriers, and noncompliance could result in the imposition of fines by the federal government or an award of damages to private litigants. We believe that our properties are substantially in compliance with these requirements, however, we may incur additional costs to fully comply with the ADA. Although we believe that such costs will not have a material adverse effect on our financial position, if required changes involve a greater amount of expenditures than we currently anticipate, our capital and operating resources could be adversely affected.

Other Regulations. Our properties are also subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We believe that our properties are currently in material compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require us to make significant unanticipated expenditures and could have an adverse effect on our net income and our capital and operating resources.

Insurance

In the regular course of our business, we maintain commercial general liability and all-risk property insurance with respect to our properties provided by reputable companies with commercially reasonable deductibles, limits and policy specifications customarily covered for similar properties. Our management believes that such insurance adequately covers our properties.

On April 1, 2008, we obtained new property insurance policies in combination with Lightstone’s overall insurance program for it and its affiliates consisting of (i) a primary property policy in the amount of $10.0 million covering risk of physical damage to the properties in our portfolio and (ii) several layers of excess property insurance in an aggregate amount of $540.0 million covering physical property damages to our properties in excess of our primary policy (the “excess policies”). Our primary policy and excess policies include insurance for acts of terrorism as a covered loss. We are at risk for financial loss, which could be material, relating to losses in excess of our policy limits. In addition, we are at risk under our insurance policies for losses of any amount relating to occurrences which are not covered by our insurance policies, such as occurrences excluded under the standard coverage exclusions such as acts of war, military action, nuclear hazards, governmental action, illegal acts of the insured and pollution, which in the event of such losses could be material.

Our primary policy and excess policies include coverage for flood and earthquake losses. In certain instances our policy sub-limits for these losses may be less than the value of specific properties. Our properties are not located in geographical areas typically subject to flood or earthquake losses. However, we may be at risk of financial losses resulting from losses that exceed these policy sub-limits.

We maintain liability insurance including but not limited to commercial general liability, auto liability, garage liability and commercial umbrella insurance (the “liability policies”) in amounts and limits that are similar to other property owners in geographic areas similar to that of our properties. Our liability policies include coverage for acts of terrorism as a covered loss. Additionally, we maintain workers compensation in compliance with statutory limits and requirements as well as employers liability insurance. These policies contain standard exclusions that are typical of liability insurance policies. We may be at financial risk for losses that exceed our limits of liability or which may be excluded from the insurance policies, which could be material.

In connection with the ownership of our properties, certain events may occur that would require us to expend funds for environmental remediation of some of our properties and adjacent properties. Certain environmental exposures are excluded from coverage under our insurance policies. Effective April 30, 2003, we obtained a pollution legal liability policy having a limit of $10.0 million, which we have renewed on an annual basis since then and which includes coverage for liability, third party property damage and remediation costs as a result of pollution conditions. Pre-existing pollution conditions are excluded from the policy and certain property locations may be excluded in the future by our insurers based on their ongoing due diligence as policies are renewed or replaced. Costs not covered under our pollution legal liability policy could be material, which could adversely affect our financial condition. We are unable to predict changes in future environmental laws and the financial impact we may incur as result of these changes.

Employees

As of December 31, 2008, we had 99 full-time employees. We believe that our relations with our employees are satisfactory.

Available Information

We make available, free of charge, on our Internet website, www.pgrt.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the reports are electronically filed with the United States Securities and Exchange Commission. Copies of our governance guidelines, code of ethics and the charter of our audit committee is also available, free of charge, on our Internet website, and are available in print to any shareholder who requests it from our investor relations representative c/o Prime Group Realty Trust, Investor Relations, 77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601.

ITEM 1A. RISK FACTORS

Investment in us presents risks. If any of the risk events described below actually occurs, our business, financial condition or results of operations could be adversely affected. Some statements in the following risk factors discussion, constitute “forward-looking statements.” Please refer to the section above entitled “Forward-Looking Statements.”

Our properties depend upon the Chicago metropolitan area economy and its demand for office space.

With the exception of our joint venture interest in a building in Phoenix, Arizona, all of our properties are located in the Chicago metropolitan area, which exposes us to greater economic risks than if we owned properties in several geographic regions. Moreover, because our portfolio of properties consists primarily of office buildings, a decrease in the demand for office space may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. We are susceptible to adverse developments in the Chicago metropolitan area, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, increased telecommuting, terrorist targeting of high-rise structures, infrastructure quality, increases in real estate and other taxes, costs of complying with government regulations or increased regulation and other factors. We are also subject to adverse developments in the national and Chicago regional office space markets, such as oversupply of or reduced demand for office space. Any adverse economic or real estate developments in the Chicago metropolitan area, or any decrease in demand for office space, including those resulting from Chicago’s or Illinois’ regulatory environment, business climate or fiscal problems, could adversely impact our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations.

Our debt level reduces cash available for operations, capital expenditures and dividends to holders of our Series B Shares and our common shareholder, and may expose us to the risk of default under our debt obligations.

As of December 31, 2008, the fair market value of our total consolidated indebtedness was approximately $447.9 million and the carrying value (i.e., face value) was $446.2 million. Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties, fund necessary capital expenditures or to pay the distributions necessary to maintain our REIT qualification. Our relatively high level of debt and the limitations imposed on us by our loan agreements could have significant adverse consequences to us, including the following:

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our cash flow may be insufficient to meet our required principal and interest payments;

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

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we may be unable to refinance our existing or future indebtedness at maturity or the refinancing terms may be less favorable than the terms of our existing indebtedness;

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because a portion of our debt bears interest at variable rates, increases in interest rates could increase our interest expense;

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we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;

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

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we may violate restrictive covenants in our loan agreements, which would entitle the lenders to accelerate our debt obligations; and

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our default under any one of our mortgage loans with cross default provisions could result in a default on other indebtedness.

If any one of these events were to occur, our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations and to pay dividends to holders of Series B Shares and our common shareholder could be adversely affected. In addition, foreclosures could create taxable income without accompanying cash proceeds, a circumstance which could hinder our ability to meet the REIT distribution requirements imposed by the Code.

Recently, domestic and international financial markets have experienced unusual volatility and uncertainty. If this volatility and uncertainty persists, our ability to borrow additional funds as needed or on favorable terms and our ability to refinance our existing or future indebtedness at maturity will be significantly impacted. If we are unable to borrow additional funds or refinance indebtedness at maturity, the probability that one or more of the adverse consequences listed above may occur will be increased.

Our Operating Losses for the last several years have been significant and we project them to continue for the foreseeable future, which may over time significantly adversely impact our ability to continue operating our business.

We have over the last several years experienced significant operating losses and we project that our results of operations will continue to reflect operating losses in the foreseeable future. For example, our (loss) income from continuing operations was $(73.4) million in calendar year 2008, $(59.0) million in calendar year 2007 and $8.6 million in calendar year 2006. If these operating losses continue in the future, they may eventually over time significantly adversely impact our ability to continue operating our business and pay dividends to holders of our Series B Shares and our common shareholder. Among other things, continuing operating losses may result in us having insufficient funds to pay for required tenant improvement costs to attract new tenants and retain existing tenants, meet required principal and interest payments on our debt, and otherwise operate our business. Continuing operating losses may also force us to dispose of one or more of our properties, possibly on disadvantageous terms.

We may be unable to renew leases, lease vacant space or re-lease space as leases expire.

As of December 31, 2008, leases representing 7.6% of the annual rental revenue we receive for the properties in our portfolio, excluding joint venture properties, will expire in 2009. In addition, Jenner & Block, a tenant that represented approximately 16.0% of our annual total revenues, has indicated to us that they will not be renewing their lease when it expires in 2010. Above market rental rates at some of our properties may force us to renew or re-lease some expiring leases at lower rates. There can be no assurance that leases will be renewed or that our properties will be re-leased at net effective rental rates equal to or above their current net effective rental rates. If the rental rates for our properties decrease, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations and to pay dividends to holders of Series B Shares and our common shareholder would be adversely affected.

Our performance and value are subject to risks associated with real estate assets and with the real estate industry.

Our ability to pay dividends to holders of Series B Shares and our common shareholder depends on our ability to generate revenues in excess of (i) expenses, (ii) scheduled principal payments on debt and (iii) capital expenditure requirements. It also depends on our ability to obtain adequate financing and refinancing of our properties and to consummate certain capital transactions as necessary to generate any needed liquidity. Events and conditions generally applicable to owners and operators of real property that are beyond our control may decrease cash available for distribution and the value of our properties. These events include:

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

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inability to collect rent from tenants;

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vacancies or our inability to rent space on favorable terms;

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increased operating costs, including insurance premiums, utilities and real estate taxes, due to inflation and other factors which may not necessarily be offset by increased rents;

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costs of complying with changes in governmental regulations;

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the relative illiquidity of real estate investments; and

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changing submarket demographics.

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases, which would adversely affect our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations and to pay dividends to holders of Series B Shares and our common shareholder.

The current economic recession and weakness in the debt and capital markets may adversely affect our tenants’ ability to pay rent, our ability to lease space and our ability to obtain capital and refinance our existing debt as it becomes due.

The current economic recession and weakness in the debt and capital markets is adversely affecting many of our tenants and other parties we do business with, and could result in the inability of some of our tenants to pay their rent in a timely manner and other parties we do business with to perform certain obligations they may have to us. In addition, the well-publicized slowdown in the debt and capital markets could make it difficult for us to obtain needed capital and financing, including refinancing our existing debt as it matures.

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

There are a number of office real estate companies that compete with us in seeking prospective tenants. All of our properties are located in developed areas where there are generally other properties of the same type and quality. Competition from other office properties may affect our ability to attract and retain tenants and maintain or increase rental rates, particularly in light of the higher vacancy rates of many competing properties, which may result in lower-priced space being available in such properties. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, some of which are significantly above current market rates, we may lose potential tenants and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when their leases expire. As a result, our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations and pay dividends to holders of Series B Shares and our common shareholder may be adversely affected.

Covenants in our debt instruments could adversely affect our financial condition and restrict our range of operating activities.

The loan documents evidencing our loans contain certain covenants with our lenders, which include minimum ratios for debt service coverage and other financial covenants affecting us and certain of our properties. These covenants could limit our flexibility in conducting our operations and create the risk of a default on our indebtedness if we cannot continue to satisfy them. In addition, these covenants could limit our ability, without the prior consent of the appropriate lender, to further mortgage our properties. If we fail to comply with any of these covenants and are not able to get a waiver from the relevant lender, we will be in default under the relevant loan and any other loans, which may be cross-defaulted with such loan. If this occurs, the relevant lenders may foreclose on our properties that secure the loans, pursue us or our affiliates for any portion of the debt which is recourse and could adversely impact our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations and to pay dividends to holders of Series B Shares and our common shareholder.

There can be no assurance that we will be able to pay or maintain cash dividends to holders of Series B Shares or our common shareholder.

We are current on the payment of quarterly dividends on our Series B Shares through the end of calendar year 2008, and we currently do not pay regularly scheduled dividends on our common shares. However, there can be no assurances that we will remain current in the future with dividends on our Series B Shares. We have several times in the past suspended the declaration and payment of dividends on both our preferred shares and our common shares. For example, on June 14, 2006, our Board suspended the payment of dividends on our Series B Shares. Dividends on the Series B Shares were not declared again until September 2006 when the Board declared one quarterly dividend and were not brought current until the Board declared two quarterly dividends in December 2006. In addition, in January 2002, our Board suspended dividends on our common shares and in April 2002 dividends on the Series B Shares were suspended. This suspension of preferred dividends was not lifted and dividends on our Series B Shares were not brought current until the closing of our Acquisition by Lightstone in July 2005. Regular dividends on our common shares were never resumed, although several individual common dividends have been declared since the Acquisition.

Our management and Board review our cash position, debt levels and requirements for cash reserves each quarter prior to making any decision with respect to paying distributions/dividends. Any future dividends on our common shares and/or preferred shares will be made at the discretion of our Board and there can be no assurances that future dividends will be declared and paid. The declaration and payment of dividends will depend on the actual cash available for distribution, our financial condition, capital requirements, the completion of capital events, including refinancings and asset sales, the annual distribution requirements under the REIT provisions of the Code and such other factors as our Board deems relevant. Dividends/distributions on our common shares and common units in the Operating Partnership are not permitted unless all current and any accumulated dividends on our Series B Shares and the related preferred units in the Operating Partnership have been paid in full or declared and set aside for payment.

Only our Series B Shares are listed on the NYSE and, therefore, we are entitled to rely on exemptions from certain corporate governance requirements.

Only our Series B Shares are listed on the NYSE. Under the NYSE rules, a company which only lists preferred shares or debt is not required to comply with certain of the NYSE corporate governance requirements, including (1) the requirement that a majority of the board of directors of a listed company consist of independent directors, (2) the requirement that a listed company have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (3) the requirement that a listed company have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. We are currently utilizing these exemptions as they relate to our Board. As a result, we do not have a majority of independent trustees, nor do we have nominating and corporate governance and compensation committees. Accordingly, the holders of Series B Shares and our common shareholder may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.

The average daily trading volume of our Series B Shares is relatively small, thus making it difficult to buy or sell significant numbers of shares without affecting the market price.

Our common shares are not publicly traded, and our Series B Shares are traded on the NYSE. However, based on the recent historical average daily trading volume of our Series B Shares, the acquisition or sale of a significant number of our Series B Shares on the NYSE will in most cases affect the market price of the Series B Shares, thus making it difficult or impossible to buy or sell large numbers of shares at or near the market price in effect immediately prior to any such purchase or sale. In addition, because the purchase or sale of relatively small numbers of shares may significantly impact the price of the Series B Shares, significant fluctuations in trading volume and price variations may occur, which may be unrelated to our operating performance.

Our filing of financial statements and other reports with the SEC may cease and our Series B Shares may be delisted from the New York Stock Exchange

The Agreement and Plan of Merger we entered into in connection with our July 2005 acquisition by Lightstone contained a covenant that we would continue to file our quarterly and annual financial statements on Form 10-Q and Form 10-K and current reports on Form 8-K with the SEC for five years after the closing of the Acquisition. This five year period expires on June 30, 2010. Even after the expiration of the five year period, we will continue to be obligated to file the financial statements and reports with the SEC so long as any of our securities remain registered under the Securities Exchange Act of 1934, as amended (the “1934 Act”). However, there can be no assurances that after June 30, 2010 we will voluntarily maintain the registration of any of our securities under the 1934 Act. Further, although we have no current plans to delist our Series B Shares from trading on the New York Stock Exchange (“NYSE”), certain events in addition to our de-registration of the Series B Shares under the 1934 Act may occur which could result in the delisting of our Series B Shares or our Board may decide for various reasons to delist the Series B Shares from the NYSE. Delisting would have an adverse effect on the marketability of our Series B Shares and, as a result, the market price for our Series B Shares might decrease and/or become more volatile. If we were delisted from the NYSE, we could seek to move trading of our Series B Shares to the OTC Bulletin Board or other trading platform; however, there can be no assurances that we would take such action.

Lightstone controls us, and will continue to control us, as long as one or more of its affiliates own a majority of our common shares.

Lightstone, through its subsidiary, Prime Office, beneficially owns all of our outstanding common shares. Our Board currently consists of seven trustees, of which three qualify as “independent” under NYSE rules. As long as Lightstone beneficially owns a majority of our outstanding common shares, Lightstone will continue to be able to elect all of the members of our Board. As a result, Lightstone will control all matters affecting us, including (i) the composition of our Board and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers, (ii) any determinations with respect to mergers or other business combinations, (iii) our acquisition or disposition of assets, (iv) our corporate finance activities and (v) the payment of dividends on our common shares and Series B Shares.

Lightstone and its designees on our Board may have interests that conflict with our interests.

Lightstone and its designees on our Board may have interests that conflict with, or are different from, our own and/or holders of our Series B Shares. Conflicts of interest between Lightstone and us and/or holders of our Series B Shares may arise, and such conflicts of interest may not be resolved in a manner favorable to us and/or holders of Series B Shares, including potential competitive business activities, corporate opportunities, indemnity arrangements, registration rights, dividends on our common shares and Series B Shares and the exercise by Lightstone of its ability to control our management and affairs. Our organizational documents do not contain any provisions designed to facilitate resolution of actual or potential conflicts of interests, or to ensure that potential business opportunities that may become available to both Lightstone and us will be reserved for or made available to us. Pertinent provisions of law will govern any such matters if they arise.

We may sell or acquire additional assets which could adversely affect our operations and financial results.

We may sell or acquire real estate or acquire other real estate related companies when we believe a sale or acquisition is consistent with our business strategies. However, we may not be successful in completing a desired sale or acquisition in a timely manner or pursuant to terms that are favorable to us. Real estate investments may be, depending on market conditions, relatively difficult to buy and sell quickly. Consequently, we may have limited ability to vary our portfolio in response to changes in economic or other conditions. If we do complete an acquisition, we may not succeed in leasing any newly acquired properties at rental rates or upon other terms sufficient to cover the costs of acquisition and operations. Difficulties in integrating acquisitions may prove costly or time-consuming and could divert management’s attention from other important matters. We may also abandon acquisition or sale opportunities prior to completion and consequently fail to recover expenses already incurred and have thus devoted significant amounts of management time to a matter not consummated. Furthermore, future acquisitions may expose us to significant additional liabilities, some of which we may not be aware of at the time of acquisition. If and when we do complete a sale, (i) we may not succeed in selling it for a price or on other terms favorable to us, and (ii) we will forego any future income from such sold property.

The redevelopment of certain of our existing properties and any future development we may undertake could be costly and involve substantial risk.

As part of our operating strategy, (i) we may redevelop certain of our existing properties to upgrade the quality of an asset and/or change its use and (ii) we may acquire land for development or construct improvements on land we may own or control from time to time. Developing and redeveloping real estate contains numerous risks, which may adversely affect our ability to make dividends to holders of Series B Shares and our common shareholder. These risks include the risks that (i) financing and/or equity for development and redevelopment projects may not be available on favorable terms, (ii) long-term financing to refinance any short-term construction financing may not be available upon the completion of a project, (iii) the failure to complete construction of a project on schedule or within budget may increase debt service expenses and construction costs, and (iv) we may be unable to find interested users to acquire or lease space in a project after its completion, thus making it difficult or impossible for us to recoup our investment or refinance our indebtedness on the project. We may also abandon redevelopment or development projects prior to the commencement or completion or construction and (a) consequently fail to recover expenses already incurred and (b) have thus devoted significant amounts of management time to a project which was not completed.

We depend on significant tenants.

For the year ended December 31, 2008, the five largest tenants in our portfolio represented approximately 33.0% of the total revenue generated by our properties (including joint ventures), of which one tenant, Jenner & Block, represented approximately 16.0% of our total revenues. Our tenants may experience a downturn in their businesses, which may weaken their financial condition, result in their failure to make timely rental payments or result in their default under their leases. In the event of any tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs attempting to protect our investment.

The bankruptcy or insolvency of a major tenant also may adversely affect the income produced by our properties. If any tenant becomes a debtor in a case under the United States Bankruptcy Code, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might authorize the tenant to reject and terminate its lease with us. Our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owned under the lease. Our claim for unpaid rent would likely not be paid in full.

Our financial condition and results of operations could be materially adversely affected if any of our significant tenants were to become bankrupt or insolvent, or suffer a downturn in their business, or fail to renew their leases at all or renew on terms less favorable to us than their current terms. For example, Jenner & Block, the tenant referenced above, has indicated to us that they will not be renewing their lease when it expires in 2010.

Our current and future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on our joint venture partners’ financial condition and any disputes that may arise between us and our joint venture partners.

As of December 31, 2008, we owned one joint venture interest and a membership interest in an entity that owns extended-stay hotel properties, and in the future we may co-invest with, or sell interests in our existing properties to third parties through joint ventures. We may not be in a position to exercise sole decision-making authority regarding the properties owned through joint ventures. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions. Joint venture partners may have business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments also may have the potential risk of impasses on decisions, such as those relating to a sale, refinancing or lease, because neither we nor the joint venture partner would have full control over the joint venture. Any disputes that may arise between us and the joint venture partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or trustees from focusing their time and effort principally on our business. Consequently, actions by or disputes with joint venture partners might result in subjecting properties owned by the joint venture to incur additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party joint venture partners.

Tax indemnification obligations in the event that we sell a certain property could limit our operating flexibility.

We agreed to indemnify the limited partner of the limited partnership that owns a portion of the Continental Towers property, which is encumbered by a second mortgage note we hold, against specified adverse tax consequences that may result from the refinancing, sale, foreclosure or certain other actions that may be taken with respect to the property or the related mortgage note. If our tax indemnification obligations were to be triggered under this agreement, we would be required to reimburse the covered party for the effects of, or a portion of the effects of, the resulting tax consequences to this party.

Failure to qualify as a REIT would have significant adverse consequences to us.

We operate our business so as to qualify as a REIT under the Code. Although our management believes that we are organized and operate in such a manner, no assurance can be given that we will continue to be able to operate in a manner so as to qualify or remain so qualified. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT, and the statements in this report are not binding on the IRS or any court. If we lose our REIT status, we will face serious tax and other significant consequences that would substantially reduce the funds available for operations, capital improvements and dividends to holders of Series B Shares and our common shareholder for each of the years involved because:

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we would not be allowed a deduction for dividends to shareholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;

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we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

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unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

In addition, if we fail to qualify as a REIT, we will not be required to make dividends to holders of Series B Shares and our common shareholder, and all dividends to such shareholders will be subject to tax as regular corporate dividends to the extent of our current and accumulated earnings and profits. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to raise capital, and would adversely affect the value of our common shares.

Qualification as a REIT involves the satisfaction of numerous requirements established under highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury regulations under the Code is greater in the case of a REIT that, like us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. For example, in order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived from qualifying sources, such as “rents from real property.” Also, we must make distributions to shareholders aggregating annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains). In addition, no assurance can be given that new legislation, regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of such qualification.

Even if we qualify as and maintain our status as a REIT, we may be subject to certain federal, state and local taxes on our income and property. For example, if we were to generate net income from a “prohibited transaction,” such income will be subject to a 100.0% tax.

We are required to include in our annual reports a report of our management on our internal controls over our financial reporting under Section 404 of the Sarbanes Oxley Act of 2002. Any adverse results from future evaluations could result in a loss of investor confidence in our financial reports and have an adverse effect on the stock price of our Series B Shares and the value of our common shares.

We are required to comply with the Sarbanes-Oxley Act of 2002 and related rules and regulations of the Securities Exchange Commission, which include the requirement that our annual report include our management’s report on internal controls over financial reporting. To comply with these requirements the management report must contain an assessment of the effectiveness of our internal controls as of the end of each calendar year and we must disclose any material weakness in our internal controls over financial reporting that were identified by us. Management has assessed the effectiveness of our internal controls over financial reporting and has determined that as of December 31, 2008, and as of December 31, 2007 in connection with the previously disclosed restatement of our financial statements for calendar year 2007, that we had material weaknesses in our internal controls over financial reporting as of these dates (see Item 9A — Controls and Procedures for a more detailed

discussion of the foregoing). In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. While our management believes that our consolidated financial statements included in this report are fairly stated, in all material respects, in accordance with GAAP, the fact that we have determined we have had material weaknesses in our internal controls could cause investors and other third parties to be reluctant to rely on the information contained in our financial statements. If we are unable in the future to assert that our internal controls over financial reporting are effective, we could lose investor confidence in our financial reports, which could have an adverse effect on the value of our Series B Shares and common shares and our ability to continue to operate our businesses.

Other regulations could adversely affect our financial condition.

Our properties also are subject to various federal, state and local regulatory requirements, such as state and local fire and safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We believe that our properties are currently in material compliance with all such regulatory requirements. There can be no assurance, however, that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures and could have an adverse effect on our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations and pay dividends to holders of Series B Shares and our common shareholder.

Failure to hedge effectively against interest rate changes may adversely affect our results of operations.

We seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements that involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements, and that such arrangements may not be effective in reducing our exposure to interest rate changes. Failure to hedge effectively against interest rate changes may adversely affect our results of operations.

Potential losses may not be covered by insurance.

Our properties are covered by comprehensive liability, fire, flood, extended coverage, rental loss and all-risk insurance provided by various companies and with deductibles, limits and policy specifications customarily covered for similar properties. Certain types of losses, however, may be either uninsurable or not economically insurable, such as losses due to floods, riots or acts of war, or may be insured subject to specified limitations, such as large deductibles or co-payments. See Item 1 — Business — Insurance in this report for further discussion. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our investment in and the anticipated future cash flow from the affected property and may be obligated on any mortgage indebtedness, to the extent it is recourse indebtedness, or other obligations related to such property.

The construction of new developments adjacent to or near certain of our existing properties may adversely affect the leasing, operation and value of those properties.

New projects currently under construction may adversely affect our leasing efforts and the value of our properties, by among other things, blocking certain views from our properties and creating increased traffic and congestion. In addition, two large new office developments are currently underway in the vicinity of our 180 N. LaSalle and 330 N. Wabash Avenue properties. These projects will directly compete with our properties referred to above and could materially adversely affect (i) our ability to retain our existing tenants, and attract new tenants, and (ii) for those existing tenants that we are able to retain and new tenants that we are able to attract, the business terms on which such deals are completed. This could result in us leasing less space at lower rents and with higher costs at our properties than we could have otherwise, which could materially adversely affect our liquidity, revenue and financial results.

Book losses that have been recognized and that may be recognized in the future have eroded, and may in the future erode, our book value.

During fiscal year 2008, we recognized aggregate losses of $66.0 million (including $5.6 million provision for asset impairment) related to our investment in Extended Stay, Inc. (“ESH”). Although these losses are non-cash GAAP losses, they have contributed to the erosion of the book value of our ESH investment to zero as of December 31, 2008, compared to $40.3 million at December 31, 2007.

Consistent with our past practices and to the extent required by the accounting standards that apply to us, we may in the future take charges relating to other investments and assets which may also further reduce our book value. Although book value is reduced by non-cash charges such as depreciation and losses flowing through from ESH, reporting a low or negative book value could have adverse effects on us even if book value is not indicative of our actual value. These adverse effects may include our inability or a reduction in our ability (i) to finance or refinance our properties, (ii) lease space to tenants, (iii) consummate appropriate capital transactions, and (iv) continue to operate our business in the manner that we have in the past, and also may include a reduction in the market price of our Series B Shares. Our Board bases its decisions regarding dividends and other similar matters on the Company’s actual fair market net value and the solvency of the Company, among other things, and not on the book value of the Company.

One or more of our properties may face foreclosure by our lenders or we may voluntarily decide to convey one or more of our properties to a lender if a property’s cash flow is not enough to service its debt, operating expenses and capital requirements or if we cannot refinance a property upon debt maturity.

Many of our properties are encumbered by debt that is non-recourse to us (except for customary “non-recourse carve out” provisions relating to matters such as fraud, misallocation of funds and other customary exclusions). Should the cash flow from any of these properties cease to be sufficient to fund debt service, operating expenses and capital requirements relating to the property, or should we be unable to refinance a property’s debt upon the maturity of such debt, we may face foreclosure by our lenders on that property or we may decide to voluntarily convey the property to the relevant lenders in lieu of foreclosure. We may or may not decide to fund cash flow shortfalls at a property in such a circumstance. As a result of any loan defaults, our portfolio of properties may be reduced (resulting in a higher allocation of overhead to each of our remaining properties), our existing and potential future lenders and tenants may be less willing to consummate transactions with us based on such loan default by us, our shareholders will not be able to realize any value from any such properties and we may incur losses on our financial statements regarding any such properties. Our 800 Jorie Boulevard property in Oak Brook, Illinois, does not generate sufficient cash flow to pay debt service and we have ceased funding the debt service shortfalls on this property. We are currently in negotiations with the lender on the future of this property.

We may incur significant costs of complying with the Americans with Disabilities Act and similar laws.

Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. Compliance with the ADA requirements could require removal of access barriers, and non-compliance could result in imposition of fines by the federal government or an award of damages to private litigants. Although we believe that our properties are substantially in compliance with these requirements, we may incur additional costs to comply with the ADA, especially in connection with the redevelopment of any of our properties. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. If we incur substantial costs to comply with the ADA and any other legislation, our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations and to pay dividends to holders of Series B Shares and our common shareholder could be adversely affected.

Liabilities for environmental matters could adversely affect our financial condition.

Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, an owner or operator of real property may be held liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in such property. These laws often impose liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of such hazardous or toxic substances. The costs of investigation, removal or remediation of such substances may be substantial, and the presence of such substances may adversely affect the owner’s or operator’s ability to rent or sell such property or to borrow funds using such property as collateral and may expose such owner or operator to liability resulting from any release of or exposure to such substances. Persons who arrange for the disposal or treatment of hazardous or toxic substances at another location also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may also seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances. In connection with the ownership (direct or indirect), operation, management and development of real properties, we may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and therefore potentially liable for removal or remediation costs, as well as certain other related costs, including governmental penalties and injuries to persons and property. See Item 1 — Business — Government Regulations — Environmental Matters of this report for a more detailed discussion of environmental matters affecting us.

Future terrorist attacks in the United States could harm the demand for, and the values of, our properties.

Future terrorist attacks in the United States, such as the attacks that occurred on September 11, 2001, and other acts of terrorism or war could harm the demand for and the value of our properties. Terrorist attacks also could directly impact the value of our properties through damage, destruction, loss or increased security costs, and thereafter the availability of insurance for such acts may be limited or may cost more. To the extent that our tenants are impacted by any future attacks, their ability to continue to honor obligations under their existing leases with us could be adversely affected. In addition, certain tenants have termination rights in respect of certain casualties. If we receive casualty proceeds, we may not be able to reinvest such proceeds profitably or at all, and we may be forced to recognize taxable gain on the affected property.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

General

Our portfolio of properties consists of 9 office properties, containing an aggregate of 3.5 million net rentable square feet located in the Chicago metropolitan area. This includes Continental Towers, on which we own a second mortgage note that constitutes a significant financial interest in this property. We therefore consolidate its operations. As of December 31, 2008, we also owned a 23.1% common interest in a joint venture, which owns a 101,006 square foot office building located in Phoenix, Arizona and a membership interest in an unconsolidated entity which owns 552 extended-stay hotel properties in operation in 43 U.S. states consisting of approximately 59,000 rooms and three hotels in operation in Canada consisting of 500 rooms. We lease and manage 3.5 million square feet comprising all of our wholly-owned properties. In addition, we also manage the 1,504,364 square foot Citadel Center office building located at 131 South Dearborn Street in Chicago, Illinois, which we previously owned a joint venture interest in and was sold in November 2006. In addition, as of December 31, 2008, we were also the managing and leasing agent for the approximately 959,000 square foot property known as The United Building located at 77 West Wacker Drive in Chicago, Illinois.

Our management team has developed or redeveloped a significant number of office properties, including the development and construction of The United Building and Citadel Center building and the redevelopment of the 180 North LaSalle Street building, all located in downtown Chicago, as well as the redevelopment of our Continental Towers property in Rolling Meadows, Illinois. In the course of such activities, we have acquired experience across a broad range of sophisticated development and redevelopment projects.

We do not currently anticipate commencing any new development projects in the near future, although we do anticipate undertaking the redevelopment of, improvements to, and/or expansion of, certain properties we currently own and/or may acquire in the future, including the ongoing redevelopment of our 330 N. Wabash Avenue property in Chicago.

Our office properties are leased to tenants either (i) on a net basis with tenants obligated to pay their proportionate share of real estate taxes, insurance, utilities and operating expenses (ii) on a gross basis with the landlord responsible for the payment of all such expenses, or (iii) on a gross basis, with the landlord responsible for the payment of these expenses up to the amount incurred during the tenants’ first year of occupancy (“Base Year”), or a negotiated amount approximating the tenants’ pro rata share of these expenses (“Expense Stop”). In the latter cases, the tenants pay their pro rata share of increases in expenses above the Base Year or Expense Stop.

Properties

The following table sets forth certain information relating to each of our properties. Through the Operating Partnership and other subsidiaries, we own 100.0% fee-simple title in all of the office properties, except for Continental Towers and the unconsolidated joint venture properties identified below.


			Net		Percentage
		Year Built/	Rentable		Occupied as
	Location	Renovated	Square Feet		of 12/31/08
Wholly-Owned Properties:
330 N. Wabash Avenue (1)	Chicago, IL	1971		1,141,760		82.3	%
Continental Towers (2)	Rolling Meadows, IL	1977 thru
		1981/2001		910,796		72.2	%
180 North LaSalle Street (3)	Chicago, IL	1982/1999		770,191		85.6	%
800-810 Jorie Boulevard	Oak Brook, IL	1961/1992		193,688		31.0	%
4343 Commerce Court	Lisle, IL	1989		167,756		73.7	%
740-770 Pasquinelli Drive	Westmont, IL	1986		110,299		87.4	%
280 Shuman Blvd.	Naperville, IL	1979		69,077		92.7	%
Enterprise Center II	Westchester, IL	1999		62,580		100.0	%
7100 Madison Avenue	Willowbrook, IL	1999		50,157		100.0	%

Portfolio total				3,476,304		78.1	%


Unconsolidated Joint Venture Properties:
Thistle Landing (4)	Phoenix, AZ	1999		101,006		56.4	%


(1)		The land underlying a portion of this property, related to the parking garage, is leased for a term expiring on April 30, 2019 with options to extend the term for an additional forty years. On March 18, 2008, we sold floors 2 through 13 of this office property to a third party that intends to construct a luxury hotel on these floors.

(2)		We hold two mortgage notes receivable on this office property and have consolidated the underlying property operations because we derive significant economic benefits from the property’s operations.

(3)		Property held for sale as of December 31, 2008.

(4)		We own a 23.1% common ownership interest in a joint venture that owns this office property. On August 29, 2005, we were notified by our joint venture partner of the execution of a sale agreement for three of the four buildings at Thistle Landing. The sale took place in early November 2005 and we received a distribution relating to our interest of $3.9 million on November 7, 2005, which was recorded as a reduction of our investment in the unconsolidated joint venture. As a result of the sale, the net rentable square feet owned by the joint venture was reduced to 101,006 square feet from 383,509 square feet. In addition, we have no impairment on our investment because the fair value of our investment is greater than the carrying value.

ITEM 3. LEGAL PROCEEDINGS

Except as described below, neither we nor any of our properties are presently subject to any material litigation or legal proceeding, nor, to our knowledge, is any material litigation or legal proceeding threatened against us, other than routine litigation arising in the ordinary course of business, some of which is expected to be covered by liability insurance and all of which collectively is not expected to have a material adverse effect on our consolidated financial statements.

On December 22, 2005, we terminated a purchase and sale agreement with a third party purchaser (the “Purchaser”) under contract to purchase our membership interest in Plumcor Thistle, LLC (the “Plumcor/Thistle JV”) because the Purchaser had failed to obtain our joint venture partner’s consent to the transaction by the December 15, 2005 deadline contained in the agreement. The Purchaser subsequently sent us a letter disputing our right to terminate the agreement, to which we replied with a letter reaffirming our right to terminate the agreement. On January 31, 2006, the Purchaser filed a lawsuit in the Circuit Court of Cook County, Illinois claiming that our termination of the purchase and sale agreement was not justified. The Purchaser is requesting the Court to either grant it specific performance and order us to convey our joint venture interest in Plumcor Thistle or damages in the amount of $5.0 million. This matter could prove costly and time consuming to defend and there can be no assurances about the eventual outcome, but we believe we have legitimate defenses to this action and the ultimate outcome will not have a material adverse affect on our consolidated financial condition or results of operations.

In May 2007, we terminated the employment of Nancy Fendley, our former Executive Vice President of Leasing. Ms. Fendley has disputed such termination and, on May 29, 2007, filed a lawsuit against us in the Circuit Court of Cook County, Illinois alleging a breach of her employment agreement and seeking approximately $9.0 million in damages. We believe we have valid defenses to her claims and intend to vigorously contest the lawsuit. Although there can be no assurances about the eventual outcome, we believe the ultimate outcome will not have a material adverse affect on our consolidated financial condition or results of operations.

In addition, and as discussed in Note 19 — Subsequent Events, to our consolidated financial statements included in this report, our subsidiary that owns the 180 N. LaSalle Street property, 180 N. LaSalle II, L.L.C. (“180 LLC”), entered into a purchase agreement, which it later terminated because of the failure of the purchaser to timely close, for the proposed sale of our 180 N. LaSalle Street property. On February 13, 2009, the purchaser under the agreement, YPI LaSalle Owner, LLC, filed a lawsuit against 180 LLC in the Circuit Court of Cook County, Illinois, Chancery Division, claiming that the purchase agreement should be rescinded due to the doctrine of impossibility and impracticability and that 180 LLC should the return the $6.0 million in earnest money to purchaser. In the lawsuit, the purchaser alleges that it was impossible for it to obtain financing and that therefore it should be excused from closing, even though the purchase agreement contains no financing contingency. We believe that this lawsuit is without merit and that we will prevail in it.

We are a defendant in various other legal actions arising in the normal course of business. In accordance with SFAS No. 5 “Accounting for Contingencies,” we record a provision for a liability when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Although the outcome of any litigation is uncertain, we believe that such legal actions will not have a material adverse affect on our consolidated financial condition or results of operations.

PART II


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

Our common shares traded on the NYSE under the symbol “PGE” from November 12, 1997 through July 1, 2005, the effective date of the Acquisition. We are the sole general partner of the Operating Partnership and own all of the preferred units. We own 0.9%, or 236,483, of the outstanding common units and all of the 4.0 million outstanding preferred units in the Operating Partnership. Each preferred unit and common unit entitled us to receive distributions from our Operating Partnership. Dividends declared or paid to holders of common shares and preferred shares are based upon the distributions we receive with respect to our common units and preferred units. Our Series B Shares remain outstanding after the completion of the Acquisition and continue to be publicly traded on the NYSE.

On July 24, 2008, Park Avenue Funding, LLC, an affiliate of Lightstone, transferred 5,512,241 common units in the Operating Partnership to Prime Office. Subsequent to the transfer, Prime Office currently owns 99.1% of the outstanding common units in the Operating Partnership and PGRT currently owns 0.9% of the outstanding common units in the Operating Partnership.

The following table sets forth the common share dividends we paid for the years ended December 31, 2007 and December 31, 2008:


	Cash
	Dividends
	Paid (per share)

Fiscal Year 2007
First quarter		—
Second quarter		—
Third quarter		—
Fourth quarter		—

Fiscal Year 2008
First quarter		0.112255
Second quarter		0.561275
Third quarter		—
Fourth quarter		—

On February 9, 2006, our Board declared (i) a quarterly dividend on our Series B Shares for the first quarter of 2006 of $0.5625 per share with a record date of March 31, 2006 and a payment date of April 28, 2006 and (ii) a common distribution to the holders of the 26,488,389 common units in the Operating Partnership and declared a dividend to the holder of our 236,483 common shares, in an amount of $2.8438 per unit/share having a record date of February 9, 2006 and a payment date of February 10, 2006. On June 14, 2006, our Board decided not to declare a quarterly dividend on the Series B Shares for the second quarter of 2006, based on the Board’s review of our then current capital resources and liquidity needs and the timing and uncertainty of certain previously anticipated capital events. On September 22, 2006, our Board declared a quarterly dividend on our Series B Shares for the second quarter 2006 of $0.5625 per share. The quarterly dividend had a record date of October 6, 2006 and a payment date of October 31, 2006. On December 14, 2006, based on the Board’s review of our current capital resources and liquidity needs and the completion of certain capital events, our Board decided to bring dividends on the Series B Shares current and declared for payment two quarterly dividends for the third and fourth quarters of 2006 on our Series B Shares of $0.5625 per share, per quarter, for a total dividend of $1.125 per share. The dividends had a record date of January 5, 2007 and a payment date of January 31, 2007.

On March 22, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the first quarter of 2007 dividend period. This quarterly dividend had a record date of April 9, 2007 and a payment date of April 30, 2007. On June 21, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the second quarter of 2007 dividend period. This quarterly dividend had a record date of July 6, 2007 and a payment date of July 31, 2007. On September 24, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the third quarter of 2007 dividend period. This quarterly dividend had a record date of October 8, 2007 and a payment date of October 31, 2007. On December 20, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2007 dividend period. The quarterly dividend had a record date of January 10, 2008 and a payment date of January 31, 2008. Under our Charter, these dividends are deemed to be quarterly dividends relating to the first, second, third and fourth quarter 2007 dividend periods, the earliest accrued but unpaid quarterly dividends on our preferred shares.

On February 12, 2008 our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the first quarter of 2008 dividend period. This quarterly dividend had a record date of March 31, 2008 and a payment date of April 30, 2008. In addition, the Board declared a distribution to the holders of the 26,488,389 common limited partnership interests in the Company’s operating partnership and the 236,483 common shares of the Company, in an amount of $0.112255 per unit/share and having a record date of February 12, 2008 and a payment date of February 13, 2008. On May 2, 2008 our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the second quarter of 2008 dividend period. The quarterly dividend had a record date of July 10, 2008 and a payment date of July 31, 2008. In addition, the Board declared a distribution to the holders of the 26,488,389 common limited partnership interests in the Company’s operating partnership and the 236,483 common shares of the Company, in an amount of $0.561275 per unit/share and having a record date of May 2, 2008 and a payment date of May 2, 2008. On October 9, 2008 our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the third quarter of 2008 dividend period. The quarterly dividend had a record date of October 20, 2008 and a payment date of October 31, 2008. On January 7, 2009, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2008 dividend period. The quarterly dividend had a record date of January 19, 2009 and a payment date of January 30, 2009.

Our management and Board review our cash position, the status of potential capital events, debt levels and requirements for cash reserves each quarter prior to making any decision with respect to paying distributions/dividends. Any future dividends on our common shares and dividends on our Series B Shares will be made at the discretion of our Board. These dividends will depend on the actual cash available for distribution, our financial condition, capital requirements, the completion of capital events, including refinancings and asset sales, the annual distribution requirements under the REIT provisions of the Code and such other factors as our Board deems relevant. Dividends/distributions on our common shares and common units are not permitted unless all current and any accumulated dividends on our Series B Shares and the related preferred units in the Operating Partnership have been paid in full or declared and set aside for payment.

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth our selected consolidated financial data and should be read in conjunction with our consolidated financial statements included elsewhere in this Form 10-K. The five-year financial summary set forth in this Item 6 has been revised to reflect the restatement.


									Predecessor
	Successor Company								Company
									Year ended
	Year ended December 31								December 31
	2008		2007		2006		2005		2004
	(dollars in thousands)								(dollars in thousands)
Balance Sheet Data
Real estate assets	$	397,968	$	422,820	$	410,025	$	471,892	$	619,059
Total assets		521,658		671,916		649,928		771,921		767,363
Mortgage notes and notes payable		447,871		567,910		453,695		452,965		427,445
Total liabilities		515,690		635,559		524,868		530,668		502,785
Minority interests		—		—		20,770		135,853		19,154
Shareholders’ equity		5,968		36,357		104,375		105,400		245,424


	Successor Company												Predecessor Company
										Six months			Six months
										ended			ended			Year ended
										December 31			June 30			December 31
	2008			2007			2006			2005			2005			2004
	(dollars in thousands,												(dollars in thousands, except
	except per share amount)												per share amount)

Statement of Operations Data (1)

Total revenue	$	64,840		$	73,174		$	79,972		$	39,448		$	38,041		$	78,222
Operating (loss) income		(793	)		(700	)		(367	)		(744	)		(5,740	)		11,271
(Loss) income from continuing operations		(73,364	)		(59,035	)		8,665			4,274			(9,590	)		(20,032	)
Net (loss) income		(73,336	)		(59,018	)		8,647			4,319			(19,571	)		(11,383	)
Net loss available to common shareholders		(82,336	)		(68,018	)		(353	)		(181	)		(24,071	)		(20,383	)

Basic and diluted earnings available to common shares per weighted-average common share (2)
Loss from continuing operations	$	(348.29	)	$	(287.69	)	$	(1.41	)	$	(0.96	)	$	(0.60	)	$	(1.23	)
Net loss available per weighted-average common share of beneficial interest — basic and diluted		(348.17	)		(287.62	)		(1.49	)		(0.76	)		(1.02	)		(0.86	)
Dividends paid per common share		0.67353			—			2.8438			1.1225			—			—
Dividends paid per preferred share		2.25			2.8125			1.6875			4.50			1.125			1.6875

Cash Flow and Operating Data
Cash flow provided by (used in):
Operating activities	$	1,763		$	7,301		$	638		$	1,236		$	(6,659	)	$	22,108
Investing activities		79,341			(135,867	)		70,603			(60,044	)		2,258			116,613
Financing activities		(103,578	)		106,348			(28,739	)		6,773			2,314			(99,598	)
Office Properties:
Square footage		3,476,304			3,800,567			3,865,828			3,772,482			4,636,918			4,632,633
Occupancy (%)		78.1			74.1			79.0			83.7			82.8			85.1
Industrial Properties:
Square footage		—			120,004			120,004			120,004			120,004			120,004
Occupancy (%)		—			100.0			100.0			100.0			100.0			100.0
Unconsolidated Joint Venture Properties:
Square footage		101,066			1,060,264			1,060,725			2,554,866			2,833,068			2,831,303
Occupancy (%)		56.4			83.7			76.4			77.6			80.9			79.7


(1)		Information for the years ended December 31, 2007, 2006, (including the six months ended December 31, 2005 and the six months ended June 30, 2005) and the year ended December 31, 2004 has been restated for the reclassification of the operations of properties, to reflect the impact of SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS No. 144”), from continuing operations to discontinued operations.

(2)		Net loss available per weighted-average common share of beneficial interest-basic equals net income divided by 236,483; 236,483; 236,483; 236,483; 23,658,579 and 23,671,412 common shares for the years ended December 31, 2008, December 31, 2007, December 31, 2006, for the six months ended December 31, 2005, for the six months ended June 30, 2005 and for the year ended December 31, 2004, respectively. Net loss available per weighted-average share of beneficial interest-diluted equals net income divided by 236,483; 236,483; 236,483; 236,483; 23,658,579 and 23,671,412 common shares for the years ended December 31, 2008, December 31, 2007, December 31, 2006, for the six months ended December 31, 2005, for the six months ended June 30, 2005 and for the year ended December 31, 2004, respectively. The change in number of weighted-average common shares is principally due to the Acquisition by Lightstone and common unitholders in our Operating Partnership exchanging common units for common shares and the issuance of new common units in our Operating Partnership in connection with property acquisitions.


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

Overview

The following discussion should be read in conjunction with our historical consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.

We are a fully-integrated, self-administered and self-managed REIT which owns, manages, leases, develops and redevelops office and industrial real estate, primarily in the Chicago metropolitan area. Our portfolio of properties consists of 9 office properties, containing an aggregate of 3.5 million net rentable square feet. As of December 31, 2008, we had a joint venture interest in an office property containing an aggregate of 0.1 million rentable square feet and a membership interest in an unconsolidated entity which owns 552 extended-stay hotel properties in operation in 43 U.S. states consisting of approximately 59,000 rooms and three hotels in operation in Canada consisting of 500 rooms. We lease and manage 3.5 million square feet comprising all of our wholly-owned properties and one joint venture property. In addition, we are also the managing agent for the 1.5 million square foot Citadel Center office building located at 131 South Dearborn Street in Chicago, Illinois, in which we previously owned a joint venture interest which was sold in November 2006. In addition, as of December 31, 2008, we were also the managing and leasing agent for the approximately 959,000 square foot property known as The United Building located at 77 West Wacker Drive in Chicago, Illinois.

All of our properties, except our joint venture property located in Phoenix, Arizona and excluding our membership interest in ESH, are located in the Chicago metropolitan area in prime business locations within established business communities and account for all of our rental revenue and tenant reimbursements revenue.

Our joint venture interest is accounted for as investments in unconsolidated joint ventures under the equity method of accounting, which consisted of a 23.1% common interest in a joint venture which owns a 101,006 square foot office building located in Phoenix, Arizona.

Our results reflect the general weakness in the office leasing market in the Chicago metropolitan area over the past several years. Because of this weakness in the leasing market, we have been challenged to retain existing tenants and locate new tenants for our vacant and non-renewing space at acceptable economic rental rates. In addition, the supply of downtown Chicago office space continues to grow, principally as a result of the construction of new office buildings. As these buildings continue to come on line in the next few years, the additional supply may add to the challenge.

Our management is addressing this challenge by increasing our marketing efforts both through working with the office brokerage community and in direct marketing campaigns to prospective users of office space in our market, as well as investing in targeted capital expenditures to improve our properties in order to enhance our position in our market.

Our income and cash flow is derived primarily from rental revenue (including tenant reimbursements) from our properties. We expect that any revenue growth over the next several years will come from revenue generated through increased occupancy rates in our portfolio. The following summarizes our portfolio occupancy at the end of each quarter of 2008 and the end of 2007, excluding properties sold in subsequent periods and our membership interest in the entity that owns extended-stay hotel properties:


	Portfolio Occupancy
	December 31			September 30			June 30			March 31			December 31
	2008			2008			2008			2008			2007

Portfolio Total		78.1	%		79.9	%		80.9	%		81.9	%		74.9	%


Unconsolidated Joint Venture Properties		56.4	%		56.4	%		56.4	%		56.4	%		83.7	%

2008 Business Summary

For 2008, our focus was on:

•		retiring, extending or refinancing debt;

•		completing certain capital transactions;

•		reducing operating costs; and

•		aggressively pursuing leasing transactions.

Below is a summary of several of the activities we undertook in 2008 in keeping with these objectives.

•		On January 7, 2008, we completed the sale of our 50.0% common joint venture interest in The United Building located at 77 West Wacker Drive in Chicago, Illinois to our joint venture partner. The sale price was $50.0 million, subject to customary pro-rations and adjustments. We recognized a gain of $29.4 million and we used $18.8 million of the net proceeds to retire the outstanding balance on two Citicorp mezzanine loans.

•		On March 18, 2008 we refinanced our 330 N. Wabash Avenue property and sold floors 2 through 13 to a hotel developer for the construction of a luxury hotel.

•		On May 2, 2008, we closed on the sale of our 1051 North Kirk Road property.

•		On June 4, 2008, we refinanced our 4343 Commerce Court property with a first mortgage loan of $11.6 million.

•		Through December 31, 2008, we commenced 23 new and expansion office leases totaling 102,314 square feet, and renewed or extended 47 office leases totaling 214,756 square feet.

Key Performance Indicators

We evaluate the performance of our operations based on the occupancy percentages and operating profit of each of our properties, including their rental revenue, tenant reimbursement revenue, property operations expense and administrative expenses, as well as tenant retention and the results of tenant satisfaction surveys. We also use other metrics such as gross rent, occupancy, percent of property operating expenses recovered and net effective rent in analyzing individual tenant lease agreements.

In addition to net income under Generally Accepted Accounting Principles (“GAAP”), prior to the Acquisition we used Funds From Operations (“FFO”) as a key performance indicator, which is a measurement tool common among real estate investment trusts for measuring profitability. We currently do not use FFO as management believes FFO is no longer a useful measurement of our profitability and performance indicator at this time.

We used the purchase method of accounting to record the assets and liabilities in connection with the Acquisition. Accordingly the financial statements as of and for the period ended subsequent to the Acquisition are not comparable in all material respects to our financial statements as of and for periods ended prior to the Acquisition.

Results of Operations

Comparison of the Year ended December 31, 2008 to the Year ended December 31, 2007

The table below represents selected operating information for our portfolio. Property revenues include rental revenues, tenant reimbursements and other property operating revenues. Property operating expenses include real estate taxes, utilities and other property operating expenses.


										%
	2008			2007			$ Change			Change
	(dollars in thousands)

Property revenues	$	63,677		$	69,815		$	(6,138	)		(8.8	)%
Services Company revenues		1,163			3,359			(2,196	)		(65.4	)

Total revenues		64,840			73,174			(8,334	)		(11.4	)

Property operating expenses		34,592			38,037			(3,445	)		(9.1	)
Depreciation and amortization		21,084			26,792			(5,708	)		(21.3	)
General and administrative		6,873			6,210			663			10.7
Services Company operations		1,484			2,835			(1,351	)		(47.7	)
Provision for asset impairment		1,600			—			1,600			—

Total expenses		65,633			73,874			(8,241	)		(11.2	)

Operating loss		(793	)		(700	)		(93	)		(13.3	)
Loss from investments in unconsolidated joint ventures		(60,343	)		(49,687	)		(10,656	)		(21.4	)
Provision for asset impairment from unconsolidated joint ventures		(5,633	)		—			(5,633	)		—
Interest and other income		1,271			2,764			(1,493	)		(54.0	)
Interest:
Expense		(30,085	)		(33,088	)		3,003			9.1
Amortization of deferred financing costs		(2,244	)		(907	)		(1,337	)		(147.4	)
Gain on sales of real estate and joint venture interests		39,194			—			39,194			—
Recovery of distributions and losses to minority partners in excess of basis		14,222			—			14,222			—
Distributions and losses to minority partners in excess of basis		(20,293	)		(14,222	)		(6,071	)		(42.7	)

Loss from continuing operations before minority interests		(64,704	)		(95,840	)		31,136			32.5
Minority interests		(8,660	)		36,805			(45,465	)		(123.5	)

Loss from continuing operations		(73,364	)		(59,035	)		(14,329	)		(24.3	)
Discontinued operations, net of minority interests		28			17			11			64.7

Net loss	$	(73,336	)	$	(59,018	)	$	(14,318	)		(24.3	)%

Property Revenues. The decrease of $6.1 million in property revenues was primarily due to decreased occupancy at our 800-810 Jorie Boulevard ($2.1 million), Continental Towers ($1.7 million) and 330 N. Wabash Avenue ($1.0 million) properties as a result of tenant leases expiring, and the recognition of additional rental revenue in 2007 as a result of accelerated amortization of the above and below-market lease values in connection with a lease amendment executed with a tenant at our Continental Towers property ($1.3 million).

Services Company Revenues. The decrease of $2.2 million in our Services Company revenues during 2008 was primarily due to leasing commission income in 2007 as a result of leasing activity at The United Building that did not occur in 2008.

Property Operating Expenses. The decrease of $3.4 million in property operating expenses was primarily due to adjustments for real estate taxes being less than previously projected ($1.6 million), the sale of Floors 2 through 13 at our 330 N. Wabash Avenue property in March 2008, which transferred those operating expenses to the purchaser ($1.4 million), the collection of a previously reserved receivable from a former tenant at our 800-810 Jorie Boulevard property ($1.0 million), and lower professional fees at our 300 N. Wabash Avenue property ($0.2 million). These decreases were partially offset by bad debt expense associated with a tenant at our 330 N. Wabash Avenue property ($0.7 million).

Depreciation and Amortization. The decrease of $5.7 million in depreciation and amortization was primarily due to the accelerated depreciation and amortization of tenant improvements and in-place lease values in connection with a lease amendment executed with a tenant at our Continental Towers property in 2007 (which resulted in an increase to depreciation and amortization in 2007 of $3.1 million and a decrease in depreciation and amortization in 2008 of $0.7 million), the downsizing and expiration of leases with two tenants at our 800-810 Jorie Boulevard property ($1.2 million) and the sale of Floors 2 through 13 at our 330 N. Wabash Avenue property in March 2008, which transferred the depreciable assets to the purchaser ($0.9 million). These decreases were partially offset by the accretion of accrued environmental remediation liabilities at our 330 N. Wabash Avenue property ($0.4 million).

General and Administrative. The increase of $0.7 million in general and administrative expenses was primarily due to: increased compensation and benefits ($0.2 million); increased audit fees due to the restatement of prior period financial statements ($0.2 million); and increased legal fees ($0.2 million).

Services Company Operations. The decrease of $1.4 million in Services Company operations was primarily due to a reduction in the provision for income taxes of $0.5 million due to decreased profitability in 2008 (see Services Company revenues discussion for further details). In addition, expenses decreased $0.9 million due to the January 2008 sale of our 50% joint venture interest in The United Building.

Provision for Asset Impairment. The $1.6 million charge in provision for asset impairment represents the write-down of our Jorie Boulevard property to its estimated fair value. We are currently in the process of renegotiating the terms of the loan with the special servicer and the lender.

Loss From Investments in Unconsolidated Joint Ventures. The increase of $10.7 million in loss from investments in unconsolidated joint ventures was primarily due to the non-cash allocation of losses from our investment in a membership interest in an entity that owns extended-stay hotel properties ($60.3 million). This was partially offset by losses of $49.6 million recognized in 2007 that did not occur in 2008 due to the sale of our joint venture interest in The United Building in January 2008.

Provision for Asset Impairment from Unconsolidated Joint Ventures. The $5.6 million change in provision for asset impairment represents the write-down of the remaining balance of our investment in the membership interest in BHAC Capital IV, L.L.C. (“BHAC”), an entity that owns 100% of Extended Stay, Inc. (“ESH”), as the investment was deemed to be other than temporary due to past and expected inability to sustain earnings at a level which would justify the carrying value.

Interest and Other Income. The decrease of $1.5 million in interest and other income was primarily due to a decrease in interest income related to our short-term investments and restricted escrow accounts. The decrease was a result of a reduction in average balances in these accounts, as well as, in average interest rates from 5.0% in 2007 to 2.4% in 2008.

Interest Expense. The decrease of $3.0 million in interest expense was primarily due to a $5.6 million reduction from the March 2008 refinancing of the debt associated with our 330 N. Wabash Avenue property and a $1.7 million savings realized through the January 2008 retirement of the two Citicorp mezzanine loans. These decreases were partially offset by a $3.5 million increased interest expense associated with the new terms of the non-recourse Citicorp loan associated with our investment in ESH.

Amortization of Deferred Financing Costs. The increase of $1.3 million in the amortization of deferred financing costs was primarily attributable to an increase in deferred finance charges related to the non-recourse loan associated with our investment in ESH.

Recovery of Distributions and Losses to Minority Partners in Excess of Basis. The increase of approximately $14.2 million in recovery of distributions and losses to minority partners in excess of basis relates to the recovery of losses previously recognized in 2007.

Gain on Sales of Real Estate and Joint Venture Interests. The increase of $39.2 million in gain on sales of real estate and joint venture interests was primarily due to the sale of our 50% joint venture interest in The United Building ($29.4 million) and the sale of Floors 2 through 13 of our 330 N. Wabash Avenue property ($9.8 million) during the first quarter of 2008.

Distributions and Losses to Minority Partners in Excess of Basis. The increase of $6.1 million in distributions and losses to minority partners in excess of basis represents current year losses resulting in a deficit position in the minority interest balance. Losses in excess of the minority interest basis have been charged to operations as a result of the minority interest holder having no contractual obligation to return such amounts, to fund operations or to restore any capital deficits.

Discontinued Operations. Discontinued operations include the results of operations of our 180 N. LaSalle Street property (held for sale at December 31, 2008), our 1051 North Kirk Road property (which was sold in May 2008), our former Narco River Business Center property, (which was sold in May 2007) and the residual effects related to properties sold in prior years.

Results of Operations

Comparison of the Year ended December 31, 2007 to the Year ended December 31, 2006


										%
	2007			2006			$ Change			Change
	(dollars in thousands)

Property revenues	$	69,815		$	77,166		$	(7,351	)		(9.5	)%
Services Company revenues		3,359			2,806			553			19.7

Total revenues		73,174			79,972			(6,798	)		(8.5	)

Property operating expenses		38,037			37,223			814			2.2
Depreciation and amortization		26,792			28,551			(1,759	)		(6.1	)
General and administrative		6,210			6,393			(183	)		(2.9	)
Services Company operations		2,835			3,972			(1,137	)		(28.6	)
Loss on tax indemnification		—			4,200			(4,200	)		(100.0	)

Total expenses		73,874			80,339			(6,465	)		(8.1	)

Operating loss		(700	)		(367	)		(333	)		(90.7	)
Loss from investments in unconsolidated joint ventures		(49,687	)		(9,145	)		(40,542	)		(443.3	)
Interest and other income		2,764			2,707			57			2.1
Interest:
Expense		(33,088	)		(38,607	)		5,519			14.3
Amortization of deferred financing costs		(907	)		(3,144	)		2,237			71.2
Gain on sales of real estate and joint venture interests		—			19,460			(19,460	)		(100.0	)
Distributions and losses to minority partners in excess of basis		(14,222	)		—			(14,222	)		—

Loss from continuing operations before minority interests		(95,840	)		(29,096	)		(66,744	)		(229.4	)
Minority interests		36,805			37,761			(956	)		(2.5	)

(Loss) income from continuing operations		(59,035	)		8,665			(67,700	)		(781.3	)
Discontinued operations, net of minority interests		17			(18	)		35			194.4

Net (loss) income	$	(59,018	)	$	8,647		$	(67,665	)		(782.5	)%

Property Revenues. The decrease of $7.4 million in property revenues was primarily attributable to the expiration of two leases at our 330 N. Wabash Avenue property in August 2006 and May 2007 ($8.1 million) and the expiration of a lease at our 800-810 Jorie Boulevard property in August 2007 ($0.5 million). The decrease was partially offset by the recognition of management fee income for an office and retail building located at 1407 Broadway Avenue in New York, New York, which is owned by an affiliate of Lightstone ($0.6 million), increased occupancy at our 180 N. LaSalle Street property ($0.5 million) and termination fees for a lease at our 330 N. Wabash Avenue property ($0.4 million).

Services Company Revenues. The increase of $0.6 million in our Services Company revenues during 2007 was primarily due to increased leasing commission income as a result of increased leasing activity at The United Building.

Property Operating Expenses. The increase of $0.8 million in property operating expenses was primarily attributable to an increase in utility rates for our properties ($1.1 million), bad debt expense associated with a tenant at our 800-810 Jorie Boulevard property ($0.9 million), architectural fees associated with our 330 N. Wabash Avenue property ($0.3 million), increased snow removal costs for our properties ($0.3 million) and increased repairs and maintenance at our 800-810 Jorie Boulevard property ($0.2 million). The increase was partially offset by adjustments to prior year real estate tax estimates ($1.3 million) and reduced real estate tax projections for our properties ($1.1 million).

Depreciation and Amortization. The decrease of $1.8 million in depreciation and amortization in 2007 was primarily attributable to the expiration of two leases at our 330 N. Wabash Avenue property in August 2006 and May 2007, at which time the tenant related assets became fully depreciated ($3.3 million) in 2007 and various other lease expirations at our properties resulting in decreased depreciation and amortization ($1.3 million). The decrease was partially offset by the accelerated depreciation and amortization of tenant improvements and in-place lease values due to the lease amendment executed with a tenant at our Continental Towers property ($2.7 million).

Services Company Operations. The decrease of $1.1 million in Services Company operations was primarily due to a decrease in salaries and benefits ($0.6 million) combined with a reduction in the provision for income taxes ($0.5 million) as a result of a reduction in management fee income from 2006.

Loss on Tax Indemnification. The decrease of $4.2 million in loss on tax indemnification was the result of a January 2006 tax indemnification payment for our Continental Towers property. The tax indemnification payment was made to obtain the release of the Company from further potential liability to one of the parties to a tax indemnification agreement relating to Continental Towers.

Loss From Investments in Unconsolidated Joint Ventures. The increase of $40.5 million in loss from investments in unconsolidated joint ventures was primarily due to the allocation of losses from our investment in a membership interest in an entity that owns extended-stay hotel properties ($47.8 million). This was partially offset by the sale of the Citadel Center property in November 2006 and liquidation of our 30.0% joint venture interest ($5.5 million) relating to that property and improved operating results from our equity investment in The United Building ($1.8 million) due to increased depreciation and amortization in 2006 related to the termination of a tenant lease.

Interest Expense. The decrease of $5.5 million in interest expense was primarily due to $12.7 million in interest expense recognized during 2006 for the IPC Investments Holding Canada Inc. loan (the “IPC Loan”) ($9.7 million) and a portion of the PGRT Equity LLC (“Prime Equity”) loan ($3.0 million) that were retired in the fourth quarter of 2006 in connection with the sale of Citadel Center. These decreases were partially offset by increases in our 2007 interest expense related to the Citicorp Loan associated with our investment in June 2007 in the entity that owns ESH ($5.6 million) and the November 2006 refinancing of the debt related to our Continental Towers properties ($1.1 million). In addition, the increase in the average LIBOR from 5.1% in 2006 to 5.3% in 2007 led to a $0.4 million increase in interest expense related to our variable rate debt collateralized by our 330 N. Wabash Avenue property. (See Note 4 — Mortgage Notes Payable — to our consolidated financial statements included in this report for further information).

Amortization of Deferred Financing Costs. The decrease of $2.2 million in the amortization of deferred financing costs was primarily attributable to the realization of all deferred financing costs at the time of debt retirement in 2006.

Gain on Sales of Real Estate and Joint Venture Interests. The decrease of $19.5 million in gain on sales of real estate and joint venture interests was primarily due to the gain of $18.8 million from the sale of our joint venture interest in the Citadel Center property in November 2006.

Distributions and Losses to Minority Partners in Excess of Basis. The increase of $14.2 million in distributions and losses to minority partners in excess of basis represents current year losses resulting in a deficit position in the minority interest balance. Losses in excess of the minority interest basis have been charged to operations as a result of the minority interest holder having no contractual obligation to return such amounts, to fund operations or to restore any capital deficits.

Discontinued Operations. Discontinued operations include the results of operations of our 1051 North Kirk Road property, which is classified as property held for sale on our consolidated balance sheets, our former Narco River Business Center property, which was sold in May 2007, and the residual effects related to properties sold in prior years.

Liquidity and Capital Resources

Recent Developments.

PGRT ESH. On December 31, 2008, our wholly-owned qualified REIT subsidiary PGRT ESH, Inc. (“PGRT ESH”), entered into a Second Amendment to Amended and Restated Loan Agreement modifying various terms of a loan (the “Citicorp Loan”) from Citicorp USA, Inc. (“Citicorp”) in the original principal amount of $120.0 million. The loan is non-recourse to PGRT ESH, the Company and its subsidiaries and is secured by, among other things, a pledge of PGRT ESH’s membership interest in BHAC, an entity that owns 100% of ESH. The loan is guaranteed by affiliates of our parent companies (the “Guarantors”).

Pursuant to the Second Amendment, the principal repayment schedule was revised as follows: (i) $41.0 million was due on or before January 30, 2009, (ii) $20.0 million was due on March 31, 2009, (iii) the balance of the loan was due on June 15, 2009 or earlier in the event of the occurrence of certain asset sales of the PGRT ESH or the Guarantors or its affiliates; and (iv) a $1.0 million fee is due upon the loan repayment or maturity. In addition, certain minimum payments are required which will be applied to the foregoing repayment schedule if certain asset sales of Guarantor’s and PGRT ESH’s affiliates are consummated or certain other events occur, all as more fully set forth in the amended loan documents.

As of January 30, 2009, PGRT ESH entered into a Third Amendment to Amended and Restated Loan Agreement modifying certain terms of the Citicorp Loan. Pursuant to the Third Amendment, the date for making the $41.0 million payment on the loan was extended from January 30, 2009 until March 2, 2009.

On March 4, 2009, PGRT ESH entered into a Fourth Amendment to Amended and Restated Loan Agreement modifying certain terms of the Citicorp Loan. Pursuant to the Fourth Amendment, the date for making the $41.0 million payment on the loan was further extended from March 2, 2009 until April 30, 2009. In addition, the remaining $1.0 million restructuring fee due at September 30, 2008 was included with the $1.0 million fee due upon maturity. The loan currently has an outstanding principal amount of $80.0 million.

It is currently anticipated that all or a portion of these foregoing required repayments will be funded by affiliates of the Guarantors, although there can be no assurances that this will be the case.

Dividends. On January 7, 2009, our Board declared and set apart for payment a quarterly dividend on our Series B Preferred Shares of $0.5625 per share for the fourth quarter of 2008 dividend period. The quarterly dividend had a record date of January 19, 2009 and a payment date of January 30, 2009.

180 N. LaSalle Street Sale. As previously disclosed in Current Reports on Form 8-K filed on September 9, 2008, October 21, 2008, November 25, 2008 and December 10, 2008, we entered into a purchase and sale agreement (as amended, the “Agreement”) with Younan Properties, Inc. and an affiliate (“Purchaser”) whereby Purchaser became obligated to purchase 180 North LaSalle Street, Chicago, Illinois (the “Property”), from the subsidiary of the Company (“Seller”) that owns the Property.

Pursuant to the terms of the Agreement, the Purchaser was obligated to close the transaction and purchase the Property from the Seller on February 18, 2009. The Purchaser failed to close by that deadline. On February 19, 2009, the Seller sent a letter to the Purchaser stating that the Purchaser is in default under the Agreement and that the Seller is terminating the Agreement. Because the Purchaser failed to close the transaction and purchase the Property prior to the February 18, 2009 deadline, the Seller believes it is entitled to retain as liquidated damages the $6.0 million of earnest money that the Purchaser previously deposited with the Seller. On February 13, 2009, the Purchaser filed a lawsuit against the Seller seeking to rescind the Agreement and obtain the return of the earnest money because the Purchaser claims it was impossible for it to obtain financing for the acquisition due to the current economic conditions. We believe the Purchaser’s lawsuit is without merit and anticipate that we will prevail in the litigation. Although there can be no assurances about the eventual outcome, we believe the ultimate outcome will not have a material adverse affect on our consolidated financial condition or results of operations.

Liquidity. We require cash to pay our operating expenses, make capital expenditures, fund tenant improvements and leasing costs, pay distributions/dividends and service our debt and other short-term and long-term liabilities. Cash on hand and net cash provided from operations represent our primary sources of liquidity to fund these expenditures. In assessing our liquidity, key components include our net income adjusted for non-cash and non-operating items, and current assets and liabilities, in particular accounts receivable, accounts payable and accrued expenses. For the longer term, our debt and long-term liabilities are also considered key to assessing our liquidity.

In order to qualify as a REIT for federal income tax purposes, we must distribute 90.0% of our taxable income (excluding capital gains) annually. At this time, we are current on the payment of dividends on our Series B Shares. There can be no assurances as to the timing and amounts of any future dividends on our Series B Shares and the fact that we are current on dividends on our Series B Shares at this time should not be construed to convey any degree of certainty with respect to future preferred dividend payments. Our management and Board review our cash position, the status of potential capital events, debt levels and requirements for cash reserves each quarter prior to making any decision with respect to paying distributions/dividends. Dividends on our common shares may not be made until all accrued dividends on our Series B Shares are declared and paid or set apart for payment. Future distributions/dividends will depend on the actual cash available for distribution, our financial condition, current and future capital requirements, the completion or status of any capital transactions, including refinancings and asset sales, the annual distribution requirements under the REIT provisions of the Code and such other factors as our Board deems relevant.

As a requirement of our lenders, we maintain escrow accounts and restricted cash balances for particular uses. At December 31, 2008, these accounts totaled $37.3 million. These escrows relate to $8.7 million in escrow for capital and tenant improvements, $7.4 million in escrow for real estate taxes and insurance, $5.3 million in escrow representing lease obligations, $6.8 million in escrow for depository accounts, $1.2 million in escrow related to environmental remediation and the remaining $7.9 million in escrow for various other purposes.

We believe that the operating plan we have developed for the future year will, if executed successfully, provide sufficient liquidity to finance the Company’s anticipated working capital, escrow and capital expenditure requirements for the next 12 months and maintain compliance with our debt covenants, other than the matters referenced above, for the next twelve months. In addition, we intend to continue our ongoing efforts to improve the Company’s cash flows and improve the Company’s working capital position by re-examining all aspects of the Company’s business for areas of improvement and focusing on minimizing the Company’s property operating expenses so that our operations are responsive to market conditions and we can remain competitive in the leasing of our properties. Our assumptions underlying our operating plan anticipate stabilized net operating income estimated on a consistent basis from the prior year and does not anticipate any catastrophic events such as major tenant defaulting on their leases with us or any material negative resolutions with regard to the contingencies we have disclosed in our financial statements. Should such events occur, we may not have sufficient cash on hand to satisfy such obligations or find replacement tenants in a time period sufficient to fund operations. Additionally, any inability on our part to comply with our financial covenants, obtain waivers for non-compliance or obtain alternative financing to replace the current agreements could have a material adverse effect on our financial position, results of operations and cash flows.

Given our current level of debt, limited availability of unencumbered collateral and our current financing arrangements, we may not be able to obtain additional debt financing, refinance or extend our existing financings or, if we are able to do the foregoing, negotiate terms that are fair and reasonable. While we have been able to extend our PGRT ESH loan from Citicorp, they have been short-term extensions. There can be no assurances that we will be able to obtain a longer-term extension on this non-recourse loan.

The following tables disclose our contractual obligations and commercial commitments as of December 31, 2008:


	Payments Due by Period
	(dollars in thousands)
					2010/		2012/		2014 and
Contractual Obligations(A)	Total		2009		2011		2013		Thereafter
Mortgage notes payable (B)	$	448,201	$	106,528	$	166,531	$	60,142	$	115,000
Interest expense on mortgage notes payable		102,533		29,318		33,788		19,472		19,955
Operating lease obligations		2,626		553		455		441		1,177
Tenant improvement allowances (C)		6,884		6,884		—		—		—
Liabilities for leases assumed and lease reimbursement obligations (D)		35,213		10,463		18,363		6,387		—

Total contractual cash obligations	$	595,457	$	153,746	$	219,137	$	86,442	$	136,132


(A)		We anticipate funding these obligations from operations, cash on hand, escrowed funds, proceeds of equity, debt or asset sale(s) transaction(s), and funds from affiliates as discussed above.

(B)		These totals represent the carrying value of our mortgage notes payable including a $2.0 million exit fee related to our PGRT ESH loan.

(C)		We have escrows of $3.4 million that may be utilized to fund these obligations.

(D)		These obligations would be offset by any receipts from subleasing of the related space. We currently have executed subleases that we estimate will provide subleasing receipts of $30.8 million consisting of base rent and the pro-rata share of operating expenses and real estate taxes. In addition, we have escrowed reserves totaling $5.3 million to fund a portion of this contractual amount at December 31, 2008.


				Amount of Commitment Expiration Per Period
	Total			(dollars in thousands)
	Amounts						2010-			2012-			2014 and
Other Commercial Commitments	Committed			2009			2011			2013			Thereafter
Tax indemnifications (A)	$	14,018		$		(A)	$		(A)	$		(A)	$	—
Environmental remediation (B)		7,839			612			6,900			43			284
Series B Shares (C)			(C)		2,250				(C)			(C)			(C)

Total commercial commitments	$	21,857		$	2,862		$	6,900		$	43		$	284


(A)		We estimate our maximum possible exposure on tax indemnifications to be $14.0 million if the remaining indemnity property had been sold as of December 31, 2008. See Note 15 — Commitments and Contingencies — Tax Indemnities to our consolidated financial statements included in this report for further information.


(B)		This represents a liability for asbestos abatement at our 330 N. Wabash Avenue property. See Note 15 — Commitments and Contingencies — Environmental to our consolidated financial statements included in this report for further information.

(C)		Dividends are cumulative and payable at a 9.0% annual rate each quarter that our Series B Shares remain outstanding. On February 12, 2008, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the first quarter of 2008 dividend period. This quarterly dividend had a record date of March 31, 2008 and a payment date of April 30, 2008. On May 2, 2008, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the second quarter of 2008 dividend period. This quarterly dividend had a record date of July 10, 2008 and a payment date of July 31, 2008. On October 9, 2008, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the third quarter of 2008 dividend period. This quarterly dividend had a record date of October 20, 2008 and a payment date of October 31, 2008. On January 7, 2009, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2008 dividend period. The quarterly dividend had a record date of January 19, 2009 and a payment date of January 30, 2009. Under our Charter, these dividends are deemed to be quarterly dividends relating to the first, second, third and fourth quarter 2008 dividend periods, the earliest accrued but unpaid quarterly dividends on our preferred shares.

		With respect to the payment of the dividends referred to above, there can be no assurance as to the timing and amounts of any future dividends, and the payment of dividends at this time should not be construed to convey any degree of certainty with respect to future dividend payments. Management and our Board review the Company’s cash position, the status of potential capital events, debt levels and the Company’s requirements for cash reserves each quarter prior to making any decision with respect to paying dividends.

		The holders of our Series B Shares have the right to elect two additional members to our Board if six consecutive quarterly dividends on our Series B Shares are not made. The term of any trustees elected by the Series B shareholders will expire whenever all arrears in dividends on the Series B Shares have been paid and current dividends declared and set apart for payment.

Tenant Concentration. The following represents our five largest tenants in 2008 based on gross revenue recognized during 2008:


	Gross
	Tenant		% Of Our Total			Lease
Tenant	Revenue		Revenue			Expiration
	(dollars in thousands)
Jenner & Block (1)	$	13,589		16.0	%	April 2010
Accenture		5,385		6.3		July 2015
Fifth Third Holdings, LLC		3,285		3.9		March 2012
Aon Consulting, Inc.		3,215		3.8		December 2009
Komatsu America Corp.		2,586		3.0		July 2021

	$	28,060		33.0	%


(1)		We have been informed that this tenant will not be renewing their lease upon expiration.

If one or more of the tenants listed above at properties we still own were to experience financial difficulties and cease paying rent or fail to renew their lease at the expiration of its term, our cash flow and earnings would likely be negatively impacted in the near term and possibly the long term. The extent and length of this would be impacted by several factors, including:

•

the nature of the financial difficulties;

•

our ability to obtain control of the space for re-leasing;

•

market conditions;

•

the length of time it would require for us to re-lease the tenant’s space; and

•

whether the tenant’s rent was above or below market.

Property Sales. On January 7, 2008, we completed the sale of our 50.0% common joint venture interest in The United Building located at 77 West Wacker Drive in Chicago, Illinois to our joint venture partner. The sale price was $50.0 million, subject to customary pro-rations and adjustments. We recognized a gain of $29.4 million and we used $18.8 million of the net proceeds to retire the outstanding balance on two Citicorp mezzanine loans.

On March 18, 2008, one of our subsidiaries, 330 N. Wabash Avenue, L.L.C. (“330 LLC”), completed the sale of Floors 2 through 13 of our 330 N. Wabash Avenue property to Modern Magic Hotel, LLC (the “Hotel Buyer”) for the purchase price of $46.0 million, subject to customary prorations and adjustments as provided in the purchase and sale agreement. The Hotel Buyer has an option to purchase the 14th Floor of our 330 N. Wabash Avenue property for $5.0 million (subject to escalation by the Consumer Price Index and certain other adjustments), in such case the proceeds would be used to partially prepay the mortgage loan encumbering the property. We recognized a book gain on the sale of approximately $9.8 million. The net proceeds from the Hotel sale, together with the proceeds from the loans referred to in Note 4 — Mortgage Note Payable to our consolidated financial statements included in this report, and a payment of $31.5 million from the Operating Partnership, were used to repay the prior debt on our 330 N. Wabash Avenue property and fund all of the escrows and cash deposit referred to in Note 4 to our consolidated financial statements.

On May 2, 2008, we closed on the sale of our 1051 North Kirk Road property. The net proceeds from the sale of $4.1 million were used to retire the outstanding debt on the property. We recognized a book gain of $0.5 million in the second quarter of 2008.

As of December 31, 2008, we were under contract to sell our 180 N. LaSalle property to a third party who was obligated to close on the sale of the property in February 2009. The purchaser failed to timely close on its acquisition of the property from us, and we terminated the purchase and sale agreement in February 2009 because of the purchaser’s default. We currently continue to market the property for sale at this time.

Preferred Shares. Our Series B Shares rank senior to our common shares as to the payment of dividends. Our Series B Shares may be redeemed at our option at a redemption price of $25.00 per share plus accrued and unpaid dividends. The redemption price is payable solely out of the proceeds from our sale of other capital shares of beneficial interest.

On February 9, 2006, our Board declared (i) a quarterly dividend on our Series B Shares for the first quarter of 2006 of $0.5625 per share with a record date of March 31, 2006 and a payment date of April 28, 2006 and (ii) a common distribution to the holders of the 26,488,389 common limited partnership interests in the Operating Partnership and declared a dividend to the holder of our 236,483 common shares, in an amount of $2.8438 per unit/share having a record date of February 9, 2006 and a payment date of February 10, 2006. On June 14, 2006, our Board decided not to declare a quarterly dividend on the Series B Shares for the second quarter of 2006, based on the Board’s review of our current capital resources and liquidity needs and the timing and uncertainty of certain previously anticipated capital events. On September 22, 2006, our Board declared a quarterly dividend on our Series B Shares for the second quarter 2006 of $0.5625 per share. The quarterly dividend had a record date of October 6, 2006 and a payment date of October 31, 2006. On December 14, 2006, based on the Board’s review of our current capital resources and liquidity needs and the completion of certain capital events, our Board decided to bring dividends on the Series B Shares current and declared for payment two quarterly dividends for the third and fourth quarters of 2006 on our Series B Shares of $0.5625 per share, per quarter, for a total dividend of $1.125 per share. The dividends had a record date of January 5, 2007 and a payment date of January 31, 2007.

On March 22, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the first quarter of 2007 dividend period. This quarterly dividend had a record date of April 9, 2007 and a payment date of April 30, 2007. On June 21, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the second quarter of 2007 dividend period. This quarterly dividend had a record date of July 6, 2007 and a payment date of July 31, 2007. On September 24, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the third quarter of 2007 dividend period. This quarterly dividend had a record date of October 8, 2007 and a payment date of October 31, 2007. On December 20, 2007 our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2007 dividend period. The quarterly dividend had a record date of January 10, 2008 and a payment date of January 31, 2008. Under our Charter, these dividends are deemed to be quarterly dividends relating to the first, second, third and fourth quarter 2007 dividend periods, the earliest accrued but unpaid quarterly dividends on our preferred shares.

On February 12, 2008 our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the first quarter of 2008 dividend period. This quarterly dividend had a record date of March 31, 2008 and a payment date of April 30, 2008. In addition, the Board declared a distribution to the holders of the 26,488,389 common limited partnership interests in the Company’s operating partnership and the 236,483 common shares of the Company, in an amount of $0.112255 per unit/share and having a record date of February 12, 2008 and a payment date of February 13, 2008. On May 2, 2008 our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the second quarter of 2008 dividend period. The quarterly dividend had a record date of July 10, 2008 and a payment date of July 31, 2008. In addition, the Board declared a distribution to the holders of the 26,488,389 common limited partnership interests in the Company’s operating partnership and the 236,483 common shares of the Company, in an amount of $0.561275 per unit/share and having a record date of May 2, 2008 and a payment date of May 2, 2008. On October 9, 2008 our Board declared and set apart for payment a quarterly dividend on our Series B Preferred Shares of $0.5625 per share for the third quarter of 2008 dividend period. The quarterly dividend had a record date of October 20, 2008 and a payment date of October 31, 2008. On January 7, 2009, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2008 dividend period. The quarterly dividend had a record date of January 19, 2009 and a payment date of January 30, 2009.

Dividends paid in the amount of $2.25 per share in 2008 on our Series B Shares have been determined to be a return of capital. There can be no assurances as to the timing and amounts of any future dividends on our Series B Shares and the payment of preferred dividends at this time should not be construed to convey any degree of certainty with respect to future preferred dividend payments. The holders of Series B Shares have the right to elect two additional members to our Board if six consecutive quarterly dividends on our Series B Shares are outstanding. The term of any trustees elected by the holders of the Series B Shares will expire whenever the total dividend arrearage on our Series B Shares has been paid and current dividends have been declared and set apart for payment.

Tax Indemnity Agreements. On December 12, 1997, we purchased and amended the mortgage note encumbering the property known as Continental Towers located in Rolling Meadows, Illinois. As part of this transaction (the “Continental Transaction”), we entered into a Tax Indemnity Agreement pursuant to which we agreed to indemnify the two limited partners of the limited partnership which then owned the property, Mr. Casati and Mr. Heise, for, among other things, the federal and applicable state income tax liabilities that result from the income or gain which they recognize upon refinancing, sale, foreclosure or other action taken by us with respect to the property or the mortgage note.

On January 10, 2006, we and Casati and Heise, amended the foregoing Tax Indemnity Agreement to among other things, terminate the Tax Indemnity Agreement as it related to Mr. Casati; which had the effect of reducing the Operating Partnership’s estimated maximum liability in the event of the consummation of a taxable transaction relating to Continental Towers, calculated at current tax rates, from approximately $53.2 million to $14.0 million.

In connection with the foregoing amendment, we made a payment to Mr. Casati of $4.2 million and Mr. Casati released us from all obligations under the Amended Tax Indemnity Agreement relating to Mr. Casati. This payment was recorded as loss on tax indemnification in our consolidated financial statements. The tax indemnity obligation referred to above to Mr. Heise is the sole remaining tax indemnity agreement relating to the Company.

The terms of these agreements are discussed in Note 15 — Commitments and Contingencies to our consolidated financial statements included in this report.

Indebtedness. Our aggregate indebtedness had a fair market value of $447.9 million and a carrying value (i.e., face value of debt) of $446.2 million at December 31, 2008. This indebtedness had a weighted average maturity of 3.6 years and bore interest at a weighted average interest rate of 7.5% per annum. At December 31, 2008, $355.0 million, or 79.3% of such indebtedness, bore interest at fixed rates, and $92.9 million, or 20.7% of such indebtedness, bore interest at variable rates. None of our variable rate debt is subject to interest rate cap agreements.

Debt Activity. We paid $1.8 million of principal payments during 2008. This amount is exclusive of payments made on behalf of the Company by Lightstone on the PGRT ESH loan.

Capital Improvements. In order to secure new and renewal leases, our properties require an infusion of capital for tenant improvements and leasing commissions. For the years ended December 31, 2008, 2007 and 2006, our tenant improvements and leasing commissions averaged $40.78, $38.88 and $27.60, respectively, per square foot of newly-leased office space totaling 102,314, 405,680 and 260,598 square feet, respectively, and $14.93, $11.58 and $9.13, respectively, per square foot of office leases renewed by existing tenants totaling 214,756, 236,752 and 155,110 square feet, respectively. For 2008, we incurred $12.4 million of capital improvement expenditures, excluding discontinued operations, and we expect to incur approximately $3.7 million for 2009.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As of December 31, 2008, we are not involved in any unconsolidated SPE transactions and do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on us.

Historical Cash Flows


	Year ended December 31
	2008			2007			$ Change			% Change
	(dollars in thousands)

Net cash provided by operating activities	$	1,763		$	7,301		$	(5,538	)		(75.9	)%
Net cash provided by (used in) investing activities	$	79,341		$	(135,867	)	$	215,208			158.4	%
Net cash (used in) provided by financing activities	$	(103,578	)	$	106,348		$	(209,926	)		(197.4	)%

Cash Flows from Operating Activities. Net cash provided by operating activities was $1.8 million for the year ended December 31, 2008, compared to $7.3 million for the year ended December 31, 2007 — a decrease of $5.5 million. This change was primarily due to: a $6.6 million reduction of tenant receipts due to lower occupancy at our 330 N. Wabash Avenue, Continental Towers and 800-810 Jorie Boulevard properties; a $6.2 million preferential return received in 2007 from our investment in the unconsolidated entity that owns ESH that was suspended in 2008; a $3.1 million increase in rents received in advance in 2007; a $2.2 million decrease in Services Company revenues; a $1.5 million decrease in interest income due to lower interest rates and cash balances; and a $1.1 million refund of real estate taxes received in 2007 associated with a former property. The decrease was partially offset by the $6.0 million earnest money received related to the sale of our 180 N. LaSalle Street property; a $4.0 million decrease in interest payments primarily due to the refinancing and retirement of mortgage notes payable; a $1.5 million decrease in real estate taxes paid; a $1.4 million reduction in property operating expenses due to the sale of Floors 2 through 13 at our 330 N. Wabash Avenue property in March 2008; a $1.3 million decrease in Services Company operations in 2008; the collection of a $1.0 million previously reserved receivable from a former tenant at our 800-810 Jorie Boulevard property in 2008; and a $0.9 million lease termination fee received in 2008 from a tenant at our 180 N. LaSalle Street property.

Cash Flows from Investing Activities. Net cash provided by (used in) investing activities was $79.3 million for the year ended December 31, 2008 compared to $(135.9) million for the year ended December 31, 2007 — an increase of $215.2 million. In 2007, we invested $120.0 million in a membership interest in the unconsolidated entity that owns ESH. In 2008, we received $101.1 million in proceeds from the sale of real estate and joint venture interests ($51.1 million received from the sale of our joint venture interest in The United Building, $45.9 million from the partial sale of our 330 N. Wabash Avenue property and $4.1 million from the sale of our former 1051 N. Kirk Road property). This increase was partially offset by proceeds of $4.7 million related to the sale of our Narco River property received during 2007. Also, an additional $5.1 million was spent on real estate and equipment in 2008 compared to 2007.

Cash Flows from Financing Activities. Net cash (used in) provided by financing activities was $(103.6) million for the year ended December 31, 2008 compared to $106.3 million for the year ended December 31, 2007 — a decrease of $209.9 million. During 2008, (i) we retired the existing $195.0 million in loans collateralized by our 330 N. Wabash Avenue property and refinanced the property with a new $138.0 million loan, (ii) we retired a $14.5 million outstanding first mortgage loan cross-collateralized by two of our properties and replaced it with an $11.6 million first mortgage on our 4343 Commerce Court property, and (iii) retired the outstanding balance of $18.8 million on two Citicorp mezzanine loans. In June 2007, we received $120.0 million in loan proceeds on a non-recourse loan (related to our investment in ESH) from Citicorp and retired $38.5 million of this debt during 2008. Affiliates of Lightstone funded $49.9 million to pay down principal and interest on the Citicorp loan in 2008; no amounts were funded during 2007. We paid dividends and distributions to our common share/unit holder totaling $18.0 million in 2008; no amounts were funded during 2007. We also paid $9.0 million in dividends to our preferred shareholders in 2008 and $11.3 million in 2007. We paid $7.5 million and $0.7 million in financing costs during 2008 and 2007, respectively.


	Year ended December 31
	2007			2006			$ Change			% Change
	(dollars in thousands)

Net cash provided by operating activities	$	7,301		$	638		$	6,663			1,044.4	%
Net cash (used in) provided by investing activities	$	(135,867	)	$	70,603		$	(206,470	)		(292.4	)%
Net cash provided by (used in) financing activities	$	106,348		$	(28,739	)	$	135,087			470.0	%

Cash Flows from Operating Activities. Net cash provided by operating activities was $7.3 million for the year ended December 31, 2007 compared to $0.6 million for the year ended December 31, 2006 — an increase of $6.7 million. The increase was primarily due to a $6.2 million preferential return from our investment in the unconsolidated entity that owns ESH, a $1.1 million refund of real estate taxes in the first quarter of 2007 associated with a former property and a $0.6 million lease termination fee from a tenant at our 330 N. Wabash Avenue property in the second quarter of 2007. In addition, we experienced the following favorable changes: a payment in 2006 of $4.2 million related to an amended tax indemnity agreement related to our Continental Towers property that did not occur in 2007; a $1.1 million decrease in Services Company expenses due to reduced income taxes; a $1.0 million decrease in the payment of insurance premiums for our properties; a $0.6 million increase in Services Company revenue due to additional leasing commissions; and $0.6 million of management fees for an office and retail building located at 1407 Broadway Avenue in New York, New York, which is owned by an affiliate of Lightstone. The increase was partially offset by a $8.5 million reduction of rental and tenant reimbursements receipts due to lower occupancy, primarily at our 330 N. Wabash Avenue and Continental Towers properties.

Cash Flows from Investing Activities. Net cash (used in) provided by investing activities was $(135.9) million for the year ended December 31, 2007 compared to $70.6 million for the year ended December 31, 2006 — a decrease of $206.5 million. In 2007, we invested $120.0 million in a membership interest in the unconsolidated entity that owns ESH (see Note 11 — Investments in Unconsolidated Joint Ventures to our consolidated financial statements included in this report for further information). In addition, in 2006, $92.8 million was received from the sale of our joint venture interest in Citadel Center net of a $4.0 million distribution to IPC Prime Equity, LLC (“IPC Equity”). These decreases were partially offset by proceeds received in 2007 of $4.7 million related to the sale of our Narco River property. In addition, a net of $2.3 million became unrestricted and available for use from our restricted escrow accounts in 2007, whereas, a net of $4.1 million became restricted in 2006.

Cash Flows from Financing Activities. Net cash provided by (used in) financing activities was $106.3 million for the year ended December 31, 2007 compared to $(28.7) million for the year ended December 31, 2006 — an increase of $135.0 million. This increase was primarily the result of $120.0 million in loan proceeds received on a non-recourse loan from Citicorp in June 2007, as compared to loan proceeds of $113.0 million in 2006. We also received net proceeds of $37.9 million from the refinancing of our Continental Towers property in 2006 and used these proceeds to pay $39.2 million of principal on the $58.0 million Citicorp mezzanine loan that was funded in January 2006. In addition, dividends paid in 2006 were $82.8 million compared to $11.3 million in 2007.

Critical Accounting Policies

General. The previous discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments about the effects of matters or future events that are inherently uncertain, including but not limited to assumptions regarding our ability to continue conducting our operations in substantially the same manner as we historically have. These estimates and judgments may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including contingencies and litigation. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

To assist in understanding our results of operations and financial position, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our results and financial position, either because of the significance of the financial statement items to which they relate or because they require our management’s most difficult, subjective or complex judgments.

Consolidation. Our consolidated financial statements include our accounts, variable interest entities (“VIEs”) in which we are the primary beneficiary and other subsidiaries over which we have control. Our determination of the appropriate accounting method with respect to our variable interests is based on FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”). We consolidate any VIE of which we are the primary beneficiary and disclose significant variable interests in VIEs of which we are not the primary beneficiary. We determine if an entity is a VIE under FIN 46R based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support provided by any parties, including equity holders. We make judgments regarding the sufficiency of the equity at risk based first on qualitative analysis, then quantitative analysis if necessary. In a quantitative analysis, we incorporate various estimates, including estimated future cash flows, asset hold periods and discount rates, as well as estimates of the probabilities of various scenarios occurring. If the entity is a VIE, we then determine whether we will absorb the majority of expected losses and/or receive the majority of expected returns, and if so, consolidate the entity as the primary beneficiary. This determination of whether we will absorb the majority of expected losses and/or receive the majority of expected returns includes any impact of an “upside economic interest” in the form of a “promote” that we may have. A promote is a disproportionate interest built into the distribution structure of the entity based on the entity’s achievement of certain return hurdles. We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. If we made different judgments or utilized different estimates in these evaluations, it could result in differing conclusions as to whether or not an entity is a VIE and whether or not to consolidate such entity. We are not required to reconsider the entity’s VIE status if the entity incurs losses that exceed expectations, but are required to reconsider the status if the structure of the entity changes.

Our determination of the appropriate accounting method for all other investments in subsidiaries, including those that are not primary beneficiary interests in VIEs, is based on the amount of control or influence we have (considering our ownership interest) in the underlying entity. We consolidate those other subsidiaries over which we exercise control. Those other investments in subsidiaries where we have the ability to exercise significant influence (but not control) over operating and financial policies of such subsidiaries (including certain subsidiaries where we have less than 20% ownership) are accounted for using the equity method.

Tenant Reimbursements. Estimates are used to record cost reimbursements from tenants for real estate taxes and operating expenses. We recognize revenue based upon the amounts to be reimbursed from our tenants in the same period these reimbursable expenses are incurred. Differences between estimated recoveries and final amounts billed are recognized in the subsequent year. Leases are not uniform in dealing with such cost reimbursements and variations exist in computations between properties and tenants. Adjustments are also made throughout the year to these receivables and the related cost recovery income based upon our best estimate of the final amounts to be billed and collected. We analyze the balance of the estimated accounts receivable for real estate taxes and operating expenses for each of our properties by comparing actual recoveries versus actual expenses.

Accounts Receivable and Allowance for Doubtful Accounts. We monitor the liquidity and creditworthiness of our tenants on an ongoing basis. We maintain allowances for doubtful accounts using the specific identification method for estimated losses resulting from the inability of certain of our tenants to make payments required by the terms of their respective leases. If the financial condition of our tenants were to deteriorate, additional allowances may be required.

Assumed Lease Liabilities. As a result of the negotiation of certain leases, we assumed the liability for the tenants’ obligation or agreed to reimburse the tenants for their obligation under leases with their prior landlords. Our policy is to record the estimated net obligation we may be subject to as a liability.

The net obligation is derived by calculating our total contractual obligation and reducing the amount by existing subleases and an estimate of subleases we anticipate signing in the future based on the nature of the space, the property and market conditions. We periodically review these estimates for reasonableness based on changes in market conditions and executed subleases. Failure to achieve forecasted results could lead to a future increase in the liabilities associated with these transactions. The liability for leases assumed at December 31, 2008 as compared to 2007 reflects payments under these leases, in addition to an increase in the liability during 2007 of $0.5 million due to assumption changes.

Depreciation and Amortization. Depreciation expense for real estate assets is computed using the straight-line method over the estimated useful lives of the assets: forty years for the composite life of buildings and improvements and five to ten years for equipment and fixtures. Expenditures for leasehold improvements and construction allowances paid to tenants are capitalized and amortized over the initial term of each lease.

Impairment of Long-Lived Assets. In evaluating our assets for impairment in accordance with SFAS No. 144, we record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired. Under SFAS No. 144, assets that display indicators of possible impairment are reviewed to see if their net book value will be recovered from estimated cash flows over an anticipated hold period. If these cash flows, plus the proceeds from a sale at the end of the anticipated hold period, are less than the net book value of the related asset, our policy is to record an impairment reserve related to the asset in the amount of the difference between its net book value and our estimate of its fair market value, less costs of sale. For assets held for sale, impairment is measured as the difference between carrying value and fair value, less cost to dispose. Fair value is based on estimated cash flows discounted at a risk-adjusted rate of interest. Property held for development is also evaluated for impairment.

During 2008, we determined that a $1.6 million write-down to fair value was warranted for our Jorie Boulevard property. In evaluating our other long-lived assets used in operations for impairment at December 31, 2008, we assumed anticipated hold periods of three to five years for our operating properties. However, as discussed under “Liquidity and Capital Resources”, if we determine that a capital transaction is desired, our anticipated hold periods for certain assets would be shortened and impairment reserves could be required. These reserves could have significant impacts on our operating results.

Minority Interest in Consolidated Real Estate Partnerships. Interests held in consolidated real estate partnerships by limited partners other than the Company are reflected as minority interest in consolidated real estate partnerships. Minority interest in real estate partnerships represents the minority partners’ share of the underlying net assets of the Company’s consolidated real estate partnerships. When these consolidated real estate partnerships make cash distributions in excess of net income, the Company, as the majority partner, records a charge equal to the minority partners’ excess of distributions over net income when the partnership has deficit equity. This charge is classified in the consolidated statements of income as distributions and losses to minority partners in excess of basis. Losses are allocated to minority partners until such time as such losses exceed the minority interest basis, in which case the Company recognizes 100% of the losses in operating earnings. With regard to such consolidated real estate partnerships, approximately $20.3 million, $14.2 million and $0 in losses related to the minority interest ownership were charged to operations for the years ended December 31, 2008, 2007 and 2006, respectively. If future earnings materialize, the majority interest should be credited for all of those earnings up to the amount of those losses previously absorbed. For the year ended December 31, 2008, the Company recovered $14.2 million of such distributions and losses to minority partners in excess of basis primarily as the result of the $29.4 million gain on sale of our 50% common joint venture interest in The United Building during the first quarter of 2008.

Property Held for Sale. We evaluate held for sale classification of our owned real estate on a quarterly basis. Assets that are classified as held for sale are recorded at the lower of their carrying amount or fair value less cost to sell. Assets are generally classified as held for sale once we commit to a plan to sell the property and have initiated an active program to market them for sale. The results of operations of these real estate properties are reflected as discontinued operations in all periods reported.

On occasion, we will receive unsolicited offers from third parties to buy individual properties. Under these circumstances, we will classify the properties as held for sale when a sales contract is executed with no contingencies and the prospective buyer has funds at risk to ensure performance.

Impact of Recently Issued Accounting Standards

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 141(R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We have not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.

In February 2008, the FASB issued Staff Position No. FAS 157-2 which provides for a one-year deferral of the effective date of SFAS No. 157, “Fair Value Measurements,” for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We will apply the provisions of FAS 157 to non-financial assets and liabilities beginning on January 1, 2009.

Inflation

Substantially all of our office leases require tenants to pay, as additional rent, a portion of real estate taxes and operating expenses. In addition, many of our leases provide for fixed increases in base rent or indexed escalations (based on the Consumer Price Index or other measures). We believe that inflationary increases in expenses will be offset, in part, by the expense reimbursements and contractual rent increases described above.

As of December 31, 2008, approximately $92.9 million of our outstanding indebtedness was subject to interest at floating rates. Future indebtedness may also be subject to floating rate interest. Inflation, and its impact on floating interest rates, could affect the amount of interest payments due on such indebtedness. None of our floating rate debt is subject to interest rate cap agreements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following table provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For our mortgage notes payable, the table presents principal cash flows, including principal amortization, and related weighted-average interest rates by expected maturity dates as of December 31, 2008.


	Interest Rate Sensitivity
	Principal (Notional) Amount by Expected Maturity
	Average Interest Rate
	2009			2010			2011			2012			2013			Thereafter			Total
	(dollars in millions)
Liabilities
Mortgage notes payable (1):
Fixed rate amount — Carrying Value	$	22.6		$	12.3		$	153.4		$	—		$	50.0		$	115.0		$	353.3
Weighted-average interest rate — Carrying Value		12.9	%		8.3	%		5.8	%		—			8.0	%		5.9	%		—
Fixed rate amount — Fair Value	$	24.2		$	12.4		$	153.4		$	—		$	50.0		$	115.0		$	355.0
Weighted-average interest rate — Fair Value		12.9	%		8.4	%		5.8	%		—			8.0	%		5.9	%		—

Variable rate amount (2)	$	0.4		$	0.4		$	81.9		$	0.4		$	9.8		$	—		$	92.9
Weighted-average interest rate		4.5	%		4.5	%		11.3	%		4.5	%		4.55	%		—			—


(1)		Based upon the rates in effect at December 31, 2008, the weighted-average interest rates on our mortgage notes payable at December 31, 2008 was 7.5%. If interest rates on our variable rate debt increased by one percentage point, our annual interest incurred (excluding the effects of the interest rate protection agreements) would increase by $0.9 million.

(2)		On June 29, 2007, one of our subsidiaries, PGRT ESH, obtained a $120.0 million non-recourse loan from Citicorp. The loan had a maturity date of June 10, 2008 and was guaranteed by Lightstone Holdings and our Chairman of the Board, David Lichtenstein. On June 6, 2008 PGRT ESH entered into an amended agreement to extend the maturity date to June 10, 2009, leaving all of the guarantees in place. The loan has a remaining principal balance of $81.5 million, is interest only, and accrues interest at a variable rate of the London Interbank Offered Rate (“LIBOR”) plus 10.0%. See Note 4 — Mortgage Notes Payable to these consolidated financial statements included in this report for further details.

		On June 4, 2008, we refinanced our 4343 Commerce Court property with a first mortgage loan in the principal amount of $11.6 million from Lenders Bank, with $0.9 million available for future fundings related to leasing costs. The loan bears interest at the variable rate of LIBOR plus 2.0%. The interest rate shall never exceed 6.5% or never be less than 4.5%. This loan has a 5-year term and requires monthly amortization payments based on a thirty-year amortization schedule.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by Regulation S-X are included in this Report on Form 10-K commencing on page F-1.


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

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management has, under the supervision and with the participation of our Chief Executive Officer and our Executive Vice President —Capital Markets, the officer currently performing the function of our principal financial officer, evaluated the design and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of December 31, 2008. Based on that evaluation, our Chief Executive Officer and Executive Vice President —Capital Markets concluded that, as of December 31, 2008, due to the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were not effective.

(b) Management’s Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our system of internal control over financial reporting is designed to provide reasonable assurance to our management and our Board regarding the preparation and fair presentation of published financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Based on our assessment, we believe that, as of December 31, 2008, our system of internal control over financial reporting was not effective as a result of the following internal control deficiencies which we believe aggregate to a material weakness:

The Company did not maintain effective controls over its financial reporting and monthly close process and did not utilize sufficient technical expertise to allow it to identify the proper accounting treatment of certain transactions. The Company’s remediation plans for this material weakness are described below.

This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Plan for Remediation for Material Weakness

We disclosed a material weakness in internal control over financial reporting in Item 9A — Controls and Procedures in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2007. Pursuant to the plans for remediation implemented to address the material weakness in internal control over financial reporting, we will review and assess our internal controls, processes and procedures to timely and properly monitor, evaluate and record complex tax and accounting matters in accordance with US GAAP. In cases where complex accounting issues occur, we intend to consult with external financial reporting and accounting consultants to review and support our conclusions. In addition, the Company is implementing a coordinated review process including the Company’s financial and accounting management. It includes a formal and detailed review of the monthly financial statements and all significant accounting transactions. The status of these remediation plans will be monitored by management and reviewed by the Audit Committee periodically.

There have not been any changes in our internal control over financial reporting during our last fiscal quarter within the fiscal year to which this annual report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Trustees

The following table presents certain information as of March 20, 2009 concerning each of our trustees serving in such capacity:


		Principal	Year Term of		Served as a
		Occupation and	Office Will		Trustee
Name	Age	Positions Held	Expire		Since
David Lichtenstein	48	Chairman of the Board		2009		2005
Jeffrey A. Patterson	49	President and Chief Executive Officer, Trustee		2009		2005
Peyton Owen, Jr.	51	Trustee		2009		2007
John M. Sabin	54	Independent Trustee		2009		2005
Shawn R. Tominus	50	Independent Trustee		2009		2005
Bruno de Vinck	63	Trustee		2009		2005
George R. Whittemore	59	Independent Trustee		2009		2005

David Lichtenstein. Mr. Lichtenstein has served as our Chairman of the Board since July 2005. David Lichtenstein founded The Lightstone Group in 1988 and has led Lightstone’s growth into one of the largest privately-held real estate companies in the United States today. The Lightstone Group is now ranked among the 25 largest real estate companies in the industry with a diversified portfolio of approximately 18,000 residential units and approximately 30 million square feet of office, industrial and retail properties in 27 states, the District of Columbia and Puerto Rico. The Lightstone Group owns Prime Group Realty Trust, Prime Retail Inc. and Extended Stay Hotels, the largest, mid-price extended-stay hotel company in the United States, with 687 hotels and approximately 76,000 rooms located in 44 states and Canada. Headquartered in New York, The Lightstone Group has over 14,000 employees and maintains regional offices in Maryland, Illinois and New Jersey. Mr. Lichtenstein is a member of the International Council of Shopping Centers. Mr. Lichtenstein is the Chairman of the board of directors of Extended Stay Inc. and Prime Retail, Inc., all private companies, and is Chief Executive Officer, President and Chairman of the board of trustees of Lightstone Value Plus Real Estate Investment Trust, Inc., a public company.

Jeffrey A. Patterson. Mr. Patterson has served as our President and Chief Executive Officer since August 2004 and has served on our Board since February 2005. From October 2003 until August 2004, Mr. Patterson served as our President and Chief Investment Officer. From June 2000 to October 2003, Mr. Patterson served as our Co-President and Chief Investment Officer. From November 1997 to June 2000, Mr. Patterson served as our Executive Vice President and Chief Investment Officer. In his current capacity, Mr. Patterson oversees our strategic direction and performance, including acquisitions, dispositions, joint ventures and development oversight. Mr. Patterson is also responsible for the asset management, operations, leasing and marketing activities for our properties. From 1989 to November 1997, Mr. Patterson was Executive Vice President of The Prime Group, Inc., with primary responsibility for the acquisition, financing and redevelopment of office and mixed-use properties. Mr. Patterson was also in charge of the overall operations of The Prime Group, Inc.’s office properties, and has provided real estate advisory services for several major institutional investors. Prior to joining The Prime Group, Inc., Mr. Patterson served as Director of Development in Tishman Speyer Properties’ Chicago office and as a Senior Financial Analyst at Metropolitan Life Insurance Company’s Real Estate Investment Group. Mr. Patterson is a member of the Urban Land Institute and is an advisory board member of the Metropolitan Planning Council.

Peyton (Chip) Owen, Jr. Mr. Owen is a 23-year industry veteran who joined The Lightstone Group in 2007 as President and Chief Operating Officer after three years as chief operating officer of Equity Office Properties Trust, based in Chicago. Prior to Equity Office, Mr. Owen spent almost 20 years at Chicago’s Jones Lang LaSalle, most recently as chief operating officer, Americas Region. Mr. Owen holds a Bachelor of Science in mechanical engineering and a Master in Business Administration from the University of Virginia.

John M. Sabin. Mr. Sabin has served on our Board since July 2005. Mr. Sabin is currently the Chief Financial Officer and General Counsel of Phoenix Health Systems, Inc. He also serves on the boards of North American Scientific, Inc. since 2005 and Hersha Hospitality Trust since 2003, both public companies. From January 2000 to October 2004, Mr. Sabin was the Chief Financial Officer, General Counsel and Secretary of NovaScreen Biosciences Corporation, a private bioinformatics and contract research biotech company. Prior to joining NovaScreen, Mr. Sabin served as a finance executive with Hudson Hotels Corporation, Vistana, Inc., Choice Hotels International, Inc., Manor Care, Inc. and Marriott International, Inc. Mr. Sabin received Bachelor of Science degree in University Studies; a Masters of Accountancy and a Masters in Business Administration from Brigham Young University, and he also received a Juris Doctor from the J. Reuben Clark Law School at Brigham Young University. Mr. Sabin is a licensed CPA and is admitted to the bar in several states.

Shawn R. Tominus. Mr. Tominus has served on our Board since July 2005. Mr. Tominus is the founder and has served as the President of Metro Management, a real estate investment and management company, which specializes in the acquisition, financing, construction and redevelopment of residential, commercial and industrial properties, since 1994. Mr. Tominus is also a director of the Lightstone Value Plus Real Estate Investment Trust, Inc., a public company. Mr. Tominus is currently responsible at Metro Management for the ownership, management and development of assets in excess of $100,000,000. Mr. Tominus has over 25 years experience in real estate and also acts as a national consultant primarily focusing on market and feasibility analysis. Prior to Metro Management, Mr. Tominus held the position of Senior Vice President at Kamson Corporation, where he managed a portfolio of over 5,000 residential units as well as commercial and industrial properties.

Bruno de Vinck. Mr. de Vinck has served on our Board since July 2005. Mr. de Vinck is the Chief Operating Officer, Senior Vice President, Secretary and a director of the Lightstone Value Plus Real Estate Investment Trust, Inc., a public company, a director of the Park Avenue Bank, New York City, a private company and a director of Extended Stay Inc., a private company. Mr. de Vinck is also involved in the management and renovation of various multi-family, retail and industrial properties for The Lightstone Group and has served as its Senior Vice President since April 1994. Prior to that time, Mr. de Vinck was a Manager with numerous real estate management companies, and was the founding president and Chairman of the Ramsey Homestead Corp., a not-for-profit senior citizen residential health care facility. Mr. de Vinck is a past New Jersey chapter president for the Institute of Real Estate Management (IREM), as well as a past Director of the New Jersey Association of Realtors.

George R. Whittemore. Mr. Whittemore has served on our Board since July 2005. Mr. Whittemore currently serves as a director of the Lightstone Value Plus Real Estate Investment Trust, Inc., Village Bank & Trust in Richmond, Virginia, and Supertel Hospitality, Inc. in Norfolk, Nebraska, all public companies. Mr. Whittemore previously served as President and CEO of Supertel Hospitality Trust, Inc. from November 2001 until August 2004 and as Senior Vice President and director of both Anderson & Strudwick, Incorporated, a brokerage firm based in Richmond, Virginia, and Anderson & Strudwick Investment Corporation, from October 1996 until October 2001. Mr. Whittemore has also served as a director, President and Managing Officer of Pioneer Federal Savings Bank and its parent, Pioneer Financial Corporation from September 1982 until August 1994, when these institutions were acquired by a merger with Signet Banking Corporation (now Wachovia Corporation), and as President of Mills Value Adviser, Inc., a registered investment advisor. Mr. Whittemore is a graduate of the University of Richmond.

Executive Officers

The following table presents certain information as of March 20, 2009 concerning each of our executive officers and key employees serving in such capacities:


Name	Age		Position
David Lichtenstein		48	Chairman of the Board
Jeffrey A. Patterson		49	President and Chief Executive Officer, Trustee
James F. Hoffman		46	Senior Executive Vice President—General Counsel and Secretary
Steven R. Baron		60	Executive Vice President—Leasing
Paul G. Del Vecchio		44	Executive Vice President—Capital Markets
Victoria A. Cory		44	Senior Vice President—Loan Administration, Real Estate Tax and Due Diligence
Anita T. Pallardy		50	Senior Vice President—Leasing

David Lichtenstein. Mr. Lichtenstein has served as our Chairman of the Board since July 2005. David Lichtenstein founded The Lightstone Group in 1988 and has led Lightstone’s growth into one of the largest privately-held real estate companies in the United States today. The Lightstone Group is now ranked among the 25 largest real estate companies in the industry with a diversified portfolio of approximately 18,000 residential units and approximately 30 million square feet of office, industrial and retail properties in 27 states, the District of Columbia and Puerto Rico. The Lightstone Group owns Prime Group Realty Trust, Prime Retail Inc. and Extended Stay Hotels, the largest, mid-price extended-stay hotel company in the United States, with 687 hotels and approximately 76,000 rooms located in 44 states and Canada. Headquartered in New York, The Lightstone Group has over 14,000 employees and maintains regional offices in Maryland, Illinois and New Jersey. Mr. Lichtenstein is a member of the International Council of Shopping Centers. Mr. Lichtenstein is the Chairman of the board of directors of Extended Stay Inc., Prime Retail, Inc. and Park Avenue Bank, New York City, all private companies, and is Chief Executive Officer, President and Chairman of the board of trustees of Lightstone Value Plus Real Estate Investment Trust, Inc., a public company.

James F. Hoffman. Mr. Hoffman serves as our Senior Executive Vice President—General Counsel and Secretary. From October 2000 to February 2007, Mr. Hoffman served as our Executive Vice President—General Counsel and Secretary. Mr. Hoffman obtained his law degree in 1987 from Harvard Law School where he graduated Cum Laude and obtained his finance degree in 1984 from the University of Illinois where he graduated with Highest Honors. From March 1998 to October 2000, Mr. Hoffman served as our Senior Vice President—General Counsel and Secretary and before that as our Vice President and Associate General Counsel. Prior to working for us, Mr. Hoffman served as Assistant General Counsel of our predecessor company, The Prime Group, Inc., and was an associate with the law firm of Mayer, Brown & Platt (now Mayer Brown LLP).

Steven R. Baron. Mr. Baron serves as our Executive Vice President—CBD Office Leasing. Mr. Baron is involved in overseeing the leasing and performing asset management and development services in connection with the 1407 Broadway Avenue building in New York. Mr. Baron has previously served as the Executive Vice President in charge of our Industrial Group, responsible for overseeing the leasing and build to suit development and served as our Senior Vice President—Development and Leasing, where he was responsible for the oversight of our redevelopment of the 180 North LaSalle Street building in Chicago, Illinois. Previous to the 180 North LaSalle redevelopment project, Mr. Baron was the senior leasing executive responsible for the overall leasing activity of the Company’s Chicago central business district portfolio. Prior to joining Prime Group Realty Trust, Mr. Baron held senior leasing and/or development positions with The Prime Group, Inc., Metropolitan Structures, Inc., and Stein & Co. where he leased over 7 million square feet of CBD office space. Mr. Baron is a licensed real estate broker and has taught at DePaul University and Kellogg School of Management at Northwestern University, where he lectured on commercial real estate development, leasing and marketing.

Paul G. Del Vecchio. Mr. Del Vecchio serves as our Executive Vice President—Capital Markets. From April 2003 to February 2007, Mr. Del Vecchio served as our Senior Vice President—Capital Markets. From February 2000 to April 2003, Mr. Del Vecchio served as our Vice President—Capital Markets and from November 1998 to February 2000, Mr. Del Vecchio served as our Assistant Vice President—Capital Markets. Prior to joining us, Mr. Del Vecchio was an Assistant Vice President for Prime Capital Funding LLC from October 1997 to August 1998. Mr. Del Vecchio is a licensed real estate broker and a certified public accountant.

Victoria A. Cory. Ms. Cory serves as our Senior Vice President—Loan Administration, Real Estate Tax and Due Diligence. From April 2000 to February 2006, Ms. Cory served as our Vice President—Loan Administration, Real Estate Tax and Due Diligence. Prior to joining us, Ms. Cory was the Senior Vice President—Loan Administration for Prime Capital Funding LLC from January 1998 until March 2000.

Anita T. Pallardy. Ms. Pallardy serves as our Senior Vice President—Leasing, CBD, overseeing the leasing and marketing of our 180 North LaSalle Street and 330 North Wabash Avenue properties. From March 2001 to November 2006, Ms. Pallardy served as our Vice President—Leasing, CBD, and from May 1998 to February 2001 served as Portfolio Leasing Manager, CBD. Prior to joining us, Ms. Pallardy served as Vice President, Leasing for The John Buck Company, in Chicago, Illinois.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and trustees, and persons who own more than ten percent of a registered class of our equity securities, to file reports of the ownership and changes in the ownership (Forms 3, 4 and 5) with the SEC and the NYSE. Officers, trustees and beneficial owners of more than ten percent of our equity securities are required by SEC regulations to furnish us with copies of all such forms which they file.

Based solely on our review of the copies of Forms 3, 4 and 5 and the amendments thereto received by it for the year ended December 31, 2008, or written representations from certain reporting persons that no Forms 3, 4 or 5 were required to be filed by those persons, to our knowledge, no transactions were reported late during the year ended December 31, 2008.

Code of Ethics

We have adopted a code of ethics that applies to all employees, including but not limited to our President and Chief Executive Officer (our principal executive officer), Executive Vice President—Capital Markets (our principal financial officer) and Vice President—Corporate Accounting (our principal accounting officer), and other persons that may perform similar functions from time to time. Our code of ethics is published on our website at www.pgrt.com. In addition our code of ethics is available in print to any shareholder who requests it from our investor relations representative c/o Prime Group Realty Trust, Investor Relations Representative, 77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601. In the event that any future amendment to, or waiver from, a provision of our code of ethics would otherwise require disclosure under Item 5.05 of Form 8-K, we intend to satisfy that disclosure requirement by posting such amendment or waiver on our website.

Information Regarding Audit Committee

Our Board has established an audit committee. The charter of our audit committee is available on our website at www.pgrt.com. Since July 1, 2005 the audit committee has consisted of Messrs. Sabin, Tominus and Whittemore, each of whom is “independent” within the meaning of the NYSE listing standards. Mr. Whittemore was named chairman of the audit committee on July 1, 2005. The Board determined that Messrs. Whittemore and Sabin are qualified as audit committee financial experts as defined in Item 407(d) of Regulation S-K. For more information regarding Messrs. Whittemore and Sabin’s relevant professional experience, see “—Trustees”.

Information Regarding Compensation Committee (or equivalent)

Because only our Series B Shares are listed on the NYSE, we are not required to have a separate compensation committee of the Board under applicable NYSE listing requirements. Likewise, we are not required to have and do not operate under a compensation charter. We believe it is appropriate for us not to have a compensation committee or compensation charter because our common shares are not publicly traded and our common shares are wholly owned and we are controlled by an affiliate of Lightstone, a private company.

The members of our Board’s Executive Committee, consisting of Mr. Lichtenstein, our Chairman, Mr. Patterson, our President and Chief Executive Officer and Mr. Owen, a member of our Board, periodically review our compensation practices. Our compensation program consists of a base salary and opportunity to receive a cash bonus for our executive officers, and fees for our trustees. The Executive Committee reviewed in January and February 2009 the compensation of our executive officers and determined the cash bonuses for 2009 to be paid to our executive officers based on the performance of each executive officer and the Company during 2008. Fees for our trustees are unchanged for calendar years 2008 and 2009. Mr. Patterson’s base salary for 2008 was set pursuant to the terms of his employment agreement, which was previously approved by our Board.

Although we have in the past and may again in the future engage compensation consultants to review our compensation program, we did not engage a compensation consultant to assist us in determining compensation for calendar year 2008.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Our compensation philosophy is based on aligning management’s business objectives with those of our shareholders in order to provide compensation that will enable us to attract and retain talented executives, and link the interests of our executive officers to those of our shareholders. Accordingly, the employment agreement for Jeffrey A. Patterson, our President and Chief Executive Officer, provides that annual bonuses may be earned by him based on increases in the net operating income of our properties, subject to a minimum annual bonus of $500,000 per year in calendar years 2005 through 2007. In addition, Mr. Patterson has an option which allows him to acquire membership interests in Prime Office on similar terms as our existing shareholder’s other initial equity investors. Finally, a significant portion of the compensation of our leasing personnel is directly tied to the execution of leases at our properties. Annual salary increases and bonuses for our other officers and employees are determined based upon a review of their individual performance and the performance of their relevant departments during the year.

We believe that, through the foregoing employment agreements and arrangements, the financial interests of our President and Chief Executive Officer and key executives are as a whole aligned with the interests of our shareholders. Throughout 2008, we had employment agreements with certain of our senior executives. See “ — Employment Agreements” for more information regarding these employment agreements.

Mr. Patterson was named the Company’s President and Chief Executive Officer in August 2004, prior to the Acquisition. Mr. Patterson’s annual base salary was $449,657 for calendar year 2008 and pursuant to the terms of his employment agreement was increased by 3% to $463,710 for calendar year 2009. Mr. Patterson received an annual bonus of $250,000 for 2008.

In general, executive officers, including our President and Chief Executive Officer, are eligible for, and participate in, our compensation and benefits programs according to the same general terms as those available to all of our employees. For example, the health and welfare benefit programs are the same for all of our employees, including our executive officers, and executive officers participate in the same 401(k) Plan, according to the same terms, as all of our employees.

Each element of the compensation program is intended to target compensation levels at rates that take into account current market practices. Offering market-comparable pay opportunities is designed to allow us to maintain a stable, successful management team. Our market for compensation comparison purposes is comprised of a group of companies that own, manage, lease, develop and redevelop office and industrial real estate primarily in the Chicago metropolitan area. In evaluating this comparison group for compensation purposes, discretion is exercised and judgments made after considering relevant factors.

The key elements of our executive compensation program for executive officers are base salary and annual cash bonuses. Each of these is addressed separately below. In determining initial compensation for executive officers, the company’s management considers all elements of an executive officer’s total compensation package in comparison to current market practices, ability to participate in savings plans and other benefits. On at least an annual basis, members of our Board’s Executive Committee consider each executive officer’s overall compensation, and determine if such executive officer is entitled to receive a year-end cash bonus and if so, the amount of the cash bonus.

Base Salaries. Base salaries for executive officers are initially determined by evaluating the executive’s levels of responsibility, prior experience, breadth of knowledge, internal equity issues and external pay practices, with particular reference to the market in the Chicago metropolitan area. Increases to base salaries are driven by performance and market conditions, and evaluated based on sustained levels of contribution to the company by the relevant executive.

Annual Cash Bonuses. All of the Company’s employees are eligible to participate in the Company’s cash bonus program, with executive officer bonuses determined as described above. The cash bonus program allows us to communicate specific goals that are of primary importance during each year and motivates executives to achieve these goals.

Summary Compensation Table

The following table sets forth the compensation earned for the years ended December 31, 2008 and 2007 with respect to Mr. Patterson (our President and Chief Executive Officer), Mr. Del Vecchio (our Executive Vice President—Capital Markets and our principal financial officer) and the three other persons who were our most highly compensated executive officers during 2008 (the “Named Executive Officers”).


									All Other
							Option		Compen-
			Salary		Bonus		Awards		sation
Name and Principal Position	Year		($) (1)		($) (1)(2)		($)(3)		($) (4)		Total ($)

Jeffrey A. Patterson		2008		449,657		250,000		106,000		5,500		811,157
President and Chief		2007		437,091		542,913		106,000		5,500		1,091,504
Executive Officer

James F. Hoffman		2008		252,083		110,000		0		5,500		367,583
Senior Executive Vice President—		2007		242,500		227,087		0		5,500		475,087
General Counsel and Secretary

Steven R. Baron		2008		170,000		178,175		0		5,500		353,675
Executive Vice President—Leasing		2007		94,045		127,529		0		5,313		226,887

Anita T. Pallardy		2008		132,500		188,045		0		3,312		323,857
Senior Vice President—Leasing		2007		126,161		293,696		0		3,154		423,011

Paul G. Del Vecchio		2008		199,167		60,000		0		5,500		264,667
Executive Vice President—		2007		180,000		120,000		0		5,500		305,500
Capital Markets


(1)		Amounts shown include cash and non-cash compensation or bonuses, as applicable, as reported in the year in which the service was performed, even if such compensation or bonuses, as applicable, were paid or vested in a subsequent year.

(2)		Bonus amounts for 2008 include cash bonuses paid in the ordinary course in early 2009 for services performed in 2008. Further, Ms. Pallardy and Mr. Barons’ bonuses consisted of leasing bonuses received during the years indicated above.

(3)		Consisting of grants of options to acquire either directly or through equity interests in Prime Office a 3.5% ownership interest in the Operating Partnership and us on substantially the same economic terms as Prime Office’s other initial equity investors. The option award in the 2007 row expired on December 31, 2007 without being exercised and the option award in the 2008 row expired on December 31, 2008 without being exercised. In January 2009, Mr. Patterson and Prime Office entered into a new option agreement dated as of December 31, 2008, as more fully described in “Employment Agreements” below.

(4)		Includes employer matching to the Operating Partnership’s 401(k) Plan.

Employment Agreements

On June 1, 2005, Prime Office entered into employment agreements dated as of May 31, 2005 with Jeffrey A. Patterson, our President and Chief Executive Officer, and James F. Hoffman, our Senior Executive Vice President, General Counsel and Secretary. On July 1, 2005, in connection with the completion of the Acquisition, we and the Operating Partnership adopted and assumed the two employment agreements.

On December 31, 2008, we entered into amendments to the employment agreements dated as of May 31, 2005 with Jeffrey A. Patterson, our President and Chief Executive Officer, and James F. Hoffman, our Senior Executive Vice President, General Counsel and Secretary (the “Executives”). The amendments were entered into solely to make the necessary changes to the employment agreements in order to comply with the terms of the recently adopted Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). The transition period for Code Section 409A ended on December 31, 2008 and it was necessary for the two amendments to be finalized by the end of the transition period.

The amendments generally add additional Code imposed obligations on the part of the Executives such as adding required notice and cure periods benefiting the Company and limiting the events for which the Executives can terminate the agreements for “good reason”. The modifications include: (i) requiring that prior to terminating the employment agreements because of a default by the Company, the Executives must first provide written notice to the Company specifying in reasonable detail the nature of the defaults within 90 days after the initial existence of such defaults and that the Company shall have 30 days to cure such default, and (ii) eliminating the right of the Executives to unilaterally terminate the Agreement upon the occurrence of a change of control of the Company. The two amendments do not modify the terms of the Company’s previously disclosed retention and severance program, which is described below.

The employment agreements provided for initial base salaries of $412,000 and $226,600, respectively, and increasing each year thereafter by no less than three percent. Further, the employment agreements of both Messrs. Patterson and Hoffman provide for the opportunity for the executives to earn annual bonus compensation as set forth in the respective employment agreement. Mr. Patterson’s agreement provides for an annual bonus based on increases in the net operating income for our properties, subject to a minimum annual bonus of $500,000 for calendar years 2005, 2006 and 2007, and for discretionary bonuses thereafter. The employment agreements each have an initial thirty month term and automatically renew for successive one year terms, unless either party gives written notice of termination to the other party.

The employment agreements provide that if either agreement is terminated by (i) us “without cause” (as defined in the agreements), (ii) us in the event of the executive’s “disability” (as defined in the agreements), (iii) the respective executive within specified time periods following the occurrence of a “change of control” and (a) a resulting “diminution event” (as each term is defined in the agreements) or (b) a resulting relocation of the respective executive’s office to a location more than twenty-five miles from its current location, (iv) by the respective executive for “good reason” (as defined in the agreements) or (v) automatically upon the respective executive’s death, the applicable executive shall be entitled to a pro rata portion of any bonus compensation otherwise payable to executive for or with respect to the calendar year in which the termination occurs and a lump sum termination payment equal to the aggregate base compensation payable to the executive over the remainder of the employment term as in effect immediately prior to the effective date of the termination.

Assuming on December 31, 2008 Mr. Patterson’s employment with us was terminated pursuant to any of clause (i) through (v) above, the estimated value of Mr. Patterson’s severance pursuant to his employment agreement would be $713,710, which is the bonus compensation payable to Mr. Patterson with respect to the calendar year 2008 and the aggregate base compensation payable to Mr. Patterson through December 31, 2009. Assuming on December 31, 2008 Mr. Hoffman’s employment with us was terminated pursuant to any of clause (i) through (v) above, the estimated value of Mr. Hoffman’s severance pursuant to his employment agreement would be $369,645, which is based on and includes the bonus compensation payable to Mr. Hoffman with respect to the calendar year 2008 and the aggregate base compensation payable to Mr. Hoffman through December 31, 2009. There are no material conditions to receipt by the executives of these termination benefits. The amount and terms of these severance arrangements was determined by Prime Office, and included consideration of market practices for other similar officers of comparable companies.

The employment agreements also subject the executives to certain confidentiality obligations and non-solicitation restrictions, and in the case of Mr. Patterson certain non-competition restrictions, all as more fully set forth in the agreements. Mr. Patterson’s agreement also granted him an option for eighteen months after the closing date of the Acquisition to acquire membership interests in Prime Office equivalent to a 3.5% ownership interest in the Operating Partnership and us. Pursuant to a letter agreement dated March 15, 2007, between Mr. Patterson and Prime Office, Mr. Patterson and Prime Office agreed to extend the exercise period for the options to the earlier of the occurrence of a change of control involving the Company or December 31, 2007. This option expired on December 31, 2007. In January 2008, Mr. Patterson and Prime Office, entered into an Equity Option Agreement dated as of December 31, 2007, granting Mr. Patterson an option to acquire either directly or through equity ownership in Prime Office up to 3.5% of the equity interests in the Company and the Operating Partnership pursuant to the terms set forth in such agreement (the “Equity Interest”). This option expired on December 31, 2008. As of December 31, 2008, Mr. Patterson entered into a new Equity Option Agreement granting Mr. Patterson the right to acquire the Equity Interest. The purchase price for the Equity Interest is on substantially the same economic terms as the class, price and economic terms applicable to Prime Office’s other initial equity investors, taking into account both capital contributions and distributions since the date of the investors’ original investment. In addition, the purchase price for the Equity Interest shall be increased at the rate of seven percent (7%) per year, pro-rated on a per diem basis, from January 1, 2007, through the date of the closing of the purchase of the Equity Interest. The option expires on December 31, 2009, subject to earlier termination if not exercised prior to Mr. Patterson’s termination of employment under his employment agreement. The closing on the purchase of the Equity Interest may only be effective on the earlier of (i) immediately preceding a “change of control” as defined in Mr. Patterson’s employment agreement and (ii) December 31, 2009. The closing will still occur and the exercise of the option will be effective if Mr. Patterson’s employment is terminated in connection with or in anticipation of a “change of control” or otherwise after the exercise of the option but prior to the closing on the purchase of the Equity Interest.

In addition, as of June 12, 2008, we instituted a retention and severance program for corporate employees, including Mr. Patterson (our “CEO”), Mr. Hoffman (our “General Counsel”), Mr. Del Vecchio (our “EVP”), Mr. Baron (our “Leasing EVP”) and Ms. Pallardy (our “SVP”). The program provides for the payment of certain retention bonuses in the event of a “change of control” of the Company. A “change of control” is defined as a sale of more than 50% of the voting shares of the Company, a merger or other business combination of the Company (other than a transaction where voting control does not change), a change in any 12 month period of a majority of our Board of Trustees (unless elected by a majority of incumbent directors unless such election was the result of an election contest of the type contemplated by Regulation 14a-11), a sale or disposition of a substantial portion of the Company’s assets, or a transaction pursuant to which the Company is no longer subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended.

With respect to our CEO and General Counsel, the program provides for a payment to such executive only if he remains employed seven days after the effective date of the change of control, in which case he would each receive a payment equal to (i) the remaining base compensation he would be entitled to under his existing employment agreement with the Company for the remainder of its term, (ii) a pro-rata annual bonus through to the date of the change of control for the year in which the change of control occurs based on his most recent annual bonus (and a bonus for the prior calendar year if the change of control happens early in a calendar year prior to the payment of annual bonuses), and (iii) a discretionary bonus of at least $300,000 for our CEO and $100,000 for our General Counsel. This program is a retention program and does not amend or modify our CEO’s and General Counsel’s existing employment agreements.

With respect to our EVP, the program provides that the retention payment to him would be paid if he is employed at the time of the change of control, or if he is terminated within six months prior to the change of control in anticipation of the change of control. The payment due to our EVP under the program equals: (i) twelve months of his then current base salary, (ii) an amount equal to the annual bonus paid to him with respect to the 2007 calendar year, (iii) a pro-rata annual bonus as set forth in clause (ii) of the preceding paragraph, and (iv) a discretionary bonus of at least $100,000.

With respect to our Leasing EVP and SVP, the payment triggers are the same as for our EVP and the amount that would be due is equal to six months of his or her then current base salary.

In addition, for the Company’s corporate employees who receive an annual bonus, annual bonuses for the calendar year 2008 paid in February 2009 were approximately one-half of the amount for 2007 bonuses. The retention program referred to above was modified to provide that the remaining one-half would be paid if and when any payment became due under the retention program.

None of our other Named Executive Officers are entitled to termination benefits upon termination of their employment that are not generally available to our other employees.

Option Grants, Exercises and Holdings

Other than as described above, we did not grant any options to purchase our common shares to the Named Executive Officers during 2008 and the Named Executive Officers did not hold any options to purchase our common shares. There were no exercises of options or vesting of stock during 2008. See “ — Employment Agreements” for more information regarding Mr. Patterson’s option. As part of the terms of her employment agreement, Ms. Nancy J. Fendley, our prior Executive Vice President — Leasing, was granted an option to purchase a membership interest in Prime Office equivalent to a 1.0% ownership interest in the Operating Partnership and us. In May 2007, we terminated Ms. Fendley’s employment and her option. Ms. Fendley has disputed such termination and initiated a lawsuit relating to the termination of her option, which the Company believes to be without merit.

Compensation of Trustees

The following table sets forth the compensation earned for the year ended December 31, 2008 with respect to our trustees other than Mr. Patterson (who is also a Named Executive Officer) and whose compensation as a trustee is fully reflected in the Summary Compensation Table and other portions of this Form 10-K. In addition to trustees’ fees, our trustees receive reimbursement of all travel and lodging expenses related to their attendance at both Board and committee meetings. As of December 31, 2008, our trustees did not hold any options to purchase our common shares or hold any of our common shares.


	Fees
	Earned or
	Paid in
Name	Cash ($) (1)

David Lichtenstein	$	—
John M. Sabin		47,000
Peyton Owen, Jr.		32,000
Shawn R. Tominus		47,500
Bruno de Vinck		32,000
George R. Whittemore		52,500


(1)		We pay our trustees who are not our employees or affiliated with us a fee for their services as trustees. Such persons receive annual compensation of $26,000 plus a fee of $1,000 for attendance at each meeting of the Board and $500 for attendance at each committee meeting. Members of the audit committee receive an additional $10,000 per year (which is currently being paid to Messrs. Whittemore, Sabin and Tominus), plus an additional $5,000 per year for the chairman of the audit committee (Mr. Whittemore).

Compensation Committee Interlocks and Insider Participation

Our Chairman and the Executive Committee of our Board are charged with determining compensation for our President and Chief Executive Officer. Mr. Patterson is a member of our Board and our President and Chief Executive Officer. No executive officer of ours served as a (i) member of the compensation committee of another entity in which one of the executive officers of such entity served on our Board or (ii) director of another entity in which one of the executive officers of such entity served on our Board, during the year ended December 31, 2008.

Compensation Report

The members of the Board have reviewed and discussed with management the Company’s Compensation Discussion and Analysis presented in this annual report on Form 10-K. Members of management with whom members of the Board discussed the Compensation Discussion and Analysis include the President and Chief Executive Officer, the Senior Executive Vice President, General Counsel and Secretary, the Executive Vice President-Capital Markets and the Vice President-Corporate Accounting.

Based on its review and discussions noted above, the Board determined that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.

BOARD OF TRUSTEES

David Lichtenstein
Peyton Owen, Jr.
Jeffrey A. Patterson
John M. Sabin
Shawn R. Tominus
Bruno de Vinck
George R. Whittemore


ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Principal Security Holders Of The Company

As more fully described in “Item 1—Business—Background and General”, on July 1, 2005, in connection with the Acquisition, all of our common shares outstanding prior to the transaction were acquired by Prime Office whose principal business address is 326 Third Street, Lakewood, New Jersey 08701 and all options to acquire our common shares were cancelled. Prime Office is owned indirectly by David Lichtenstein, the Chairman of our Board.

The following table furnishes information, as of March 20, 2009, as to common units of our Operating Partnership, in each case which are beneficially owned by each trustee, each Named Executive Officer and trustees and executive officers as a group. Unless otherwise indicated in the footnotes to the tables, all of such interests are owned directly, and the indicated person or entity has sole voting and investment power.


	Number of Common Units of
	Prime Group
Name and Address of	Realty L.P. Beneficially		Percent of All Common Units
Beneficial Owner	Owned(1)		of Prime Group Realty, L.P.

David Lichtenstein (2)		26,724,872		100	%
Jeffrey A. Patterson (3)		—		—
James F. Hoffman		—		—
Steven R. Baron		—		—
Paul G. Del Vecchio		—		—
Anita T. Pallardy		—		—
Peyton Owen, Jr.		—		—
John M. Sabin		—		—
Shawn R. Tominus		—		—
Bruno de Vinck		—		—
George R. Whittemore		—		—
Our trustees and executive officers as a group ([11] persons)		26,724,872		100


(1)		The ownership of common units of our Operating Partnership presented in this table is derived from the transfer records maintained by the Operating Partnership based on information provided by the limited partners.

(2)		Mr. Lichtenstein controls (i) Prime Office which owns 99.1% of the common units of limited partner interest in the Operating Partnership and 100% of our common shares and (ii) PGRT currently owns 0.9% of the outstanding common units of limited partner interest in the Operating Partnership.

(3)		Mr. Patterson has been granted an option to purchase interests equivalent to a 3.5% ownership interest in the Operating Partnership and us.

		Except as described above and except for the dispute described above relating to a terminated option to acquire a 1.0% ownership interest in the Operating Partnership and us previously held by Ms. Fendley, none of our trustees or executive officers own any shares of any other class of our equity securities or equity securities of any of our parent or our subsidiaries.

Equity Compensation Plan Information

As of December 31, 2008, we do not have any equity securities that may be issued upon the exercise of options, warrants and rights under a share incentive plan because our share incentive plan was terminated as a part of the Acquisition on July 1, 2005. The Company has no other compensation plans pursuant to which equity securities may be issued.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with Related Persons

BHAC Capital IV, L.L.C. Effective June 10, 2008, PGRT ESH extended the maturity date of the Citicorp Loan in the original principal amount of $120 million, from June 10, 2008 until June 15, 2009. The loan is non-recourse to PGRT ESH and is secured by, among other things, a pledge of PGRT ESH’s membership interest in an entity that owns ESH. The loan is guaranteed by David Lichtenstein, the Chairman of our Board of Trustees, and Lightstone Holdings, LLC (“Guarantors”), both of which are affiliates of our parent companies. During 2008, the affiliates of the Guarantors paid $38.5 million on the Citicorp Loan.

Review, Approval or Ratification of Transaction with Related Persons

It is our policy that any material related party transactions involving us and any of our Board members or shareholder be approved by a majority of the disinterested independent members of the Board after their review and consideration of the fairness of the transaction. The material terms of transactions with related persons referred to above are reviewed and discussed by senior management with the Board and approved by the relevant disinterested independent members of the Board. The foregoing related party transactions were approved consistent with the requirements of this policy.

Director Independence

Since July 1, 2005 our board has included, and our audit committee has consisted of, Messrs. Sabin, Tominus and Whittemore, each of whom is “independent” within the meaning of the NYSE listing standards. Further, since July 1, 2005 and as a result of the Acquisition, only our Series B Shares are listed on a national securities exchange and therefore, pursuant to Section 303A Corporate Governance Rules of the NYSE, we are not required to maintain a compensation committee or a nominating committee with independent members. Since July 1, 2005, the functions of the nominating committee have been performed by our Board as a whole and the compensation committee by the Executive Committee of our Board.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit And Non-Audit Fees

Fees for professional services provided by our independent registered public accounting firm in each of the last two fiscal years, in each of the following categories were:


	Grant Thornton LLP				Ernst & Young LLP				Total
	2008		2007		2008		2007		2008		2007

Audit Fees	$	412,028	$	357,375	$	—	$	16,000	$	412,028	$	373,375
Audit-Related Fees		273,934		168,944		—		—		273,934		168,944
Tax Fees		232,840		230,370		108,904		119,499		341,744		349,869

	$	918,802	$	756,689	$	108,904	$	135,499	$	1,027,706	$	892,188

Neither Ernst & Young LLP our independent registered public accounting firm until October 2005, nor Grant Thornton LLP, our independent registered accounting firm from October 2005, provided any financial information systems design and implementation services during 2008 or 2007. Audit-related services generally include fees for 401(k) plan and individual property audits, due diligence, technical consulting and transaction structuring. Tax services generally relate to a review of tax returns prior to filing, tax consultation and transaction structuring.

The audit committee has adopted policies and procedures for pre-approving all non-audit work performed by our independent registered public accounting firm. Specifically, the audit committee has pre-approved the use of Grant Thornton LLP, and had pre-approved prior to October 5, 2005, Ernst & Young LLP, for detailed, specific types of services within the following categories of non-audit services: certain tax related services (including tax compliance matters, REIT compliance, federal state and local tax audits, private letter rulings, technical tax guidance and corporate acquisition, disposition and partnership tax matters); registration statements and related matters; debt covenant compliance letters; technical accounting guidance; internal control documentation; and SEC comment letters. Further, the audit committee has required management to report to it on an annual basis (or as more frequently as the audit committee may request) the specific engagements of our independent registered public accounting firm pursuant to the pre-approval policies and procedures. All engagements of either Grant Thornton LLP or Ernst & Young LLP related to the audit-related fees and tax fees disclosed in the table above for 2008 and 2007 were eligible to be approved pursuant to our pre-approval policies, though some engagements were specifically approved by the audit committee prior to the commencement of the engagement.

(3) Exhibits


Exhibit
Number		Description

	2.1	Purchase Agreement dated as of August 2, 2004 by and between CenterPoint Properties Trust and Prime Group Realty, L.P., as filed as exhibit 99.2 to our Current Report on Form 8-K (filed August 6, 2004, File No. 001-13589) and incorporated herein by reference.

	2.2	First Amendment to Purchase Agreement dated as of October 8, 2004 by and between Prime Group Realty, L.P. and CenterPoint Properties Trust, as filed as exhibit 99.3 to our Current Report on Form 8-K (filed October 15, 2004, File No. 001-13589) and incorporated herein by reference.

	2.3	Agreement and Plan of Merger dated as of February 17, 2005 by and among Prime Office Company, LLC, Prime Office Merger Sub LLC, Prime Office Merger Sub I, LLC, Prime Group Realty Trust and Prime Group Realty, L.P., as filed as exhibit 10.1 to our Current Report on Form 8-K (filed February 17, 2005, File No. 001-13589) and incorporated herein by reference.

	3.1	Articles of Amendment and Restatement of Declaration of Trust of Prime Group Realty Trust, as amended by Articles Supplementary to the Articles of Amendment and Restatement of Declaration of Trust and the First Amendment to Amended and Restated Declaration of Trust as filed as exhibit 3.1 to our Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.

	3.2	Amended and Restated Bylaws of Prime Group Realty Trust, as amended by the First Amendment to Amended and Restated Bylaws and the Second Amendment to Amended and Restated Bylaws as filed as exhibit 3.2 to our Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.

	3.3	Second Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. dated as of July 1, 2005, as filed as exhibit 3.9 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.

	10.1	Environmental Escrow Agreement dated as of October 8, 2004 by and among Prime Group Realty, L.P., CenterPoint Properties Trust and Chicago Title and Trust Company, as filed as exhibit 99.4 to our Current Report on Form 8-K (filed October 15, 2004, File No. 001-13589) and incorporated herein by reference.

	10.2	Escrow Agreement dated as of October 8, 2004 by and among CenterPoint Properties Trust and Prime Group Realty, L.P. and Chicago Title and Trust Company, as filed as exhibit 99.5 to our Current Report on Form 8-K (filed October 15, 2004, File No. 001-13589) and incorporated herein by reference.

	10.3	Settlement and Release dated as of May 18, 2005 by and among Prime/Mansur Investment Partners, LLC, Cumberland Blues Merger Sub, LLC, Cumberland Blues, LLC, The Prime Group, Inc. Prime Partners, LLC, Prime Group Realty Trust, and Prime Group Realty, L.P., as filed as exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.


Exhibit
Number			Description

	10.4		Thistle Interest Option Agreement dated as of May 18, 2005 by and between Phoenix Office, L.L.C. and Prime/Mansur Investment Partners, LLC, as filed as exhibit 10.8 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.

	10.5	*	Amended and Restated Employment Agreement dated as of May 31, 2005 by and between Prime Office Company, LLC and Jeffrey A. Patterson, as filed as exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and incorporated herein by reference.

	10.6	*	Employment Agreement dated as of May 31, 2005 by and between Prime Office Company, LLC and James F. Hoffman, as filed as exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, and incorporated herein by reference.

	10.7		Guarantee of Interest and Recourse Obligations dated as of December 30, 2005 between Prime Group Realty, L.P. and IPC Investments Holdings Canada, Inc., as filed as exhibit 10.5 to our Current Report on Form 8-K (filed January 11, 2006, File No. 001-13589) and incorporated herein by reference.

	10.8		Amended and Restated Tax Indemnity Agreement dated as of January 10, 2006 by and among Prime Group Realty, L.P., Roland E. Casati, Richard A. Heise, CTA General Partner, LLC and Continental Towers, L.L.C., as filed as exhibit 10.5 to our Current Report on Form 8-K (filed January 18, 2006, File No. 001-13589) and incorporated herein by reference.

	10.9		Assumption Agreement dated as of January 10, 2006 among Prime Group Realty, L.P. Chicago Title Land Trust Company, as trustee under Land Trust Numbers 40935 and 5602, Continental Towers Associates-I, L.P., Continental Towers, L.L.C., Richard A. Heise and Roland E. Casati, as filed as exhibit 10.7 to our Current Report on Form 8-K (filed January 18, 2006, File No. 001-13589) and incorporated herein by reference.

	10.10		Promissory Note dated as of November 21, 2006 from Continental Towers Associates III, LLC, and Continental Towers, L.L.C, jointly and severally, payable to the order of CWCapital LLC in the original principal amount of $115.0 million., as filed as exhibit 10.1 to our Current Report on Form 8-K (filed November 28, 2006, File No. 001-13589) and incorporated herein by reference.

	10.11		Mortgage, Security Agreement and Fixture Financing Statement dated as of November 21, 2006 by Continental Towers Associates III, LLC and Continental Towers, L.L.C., jointly and severally, in favor of CWCapital LLC., as filed as exhibit 10.2 to our Current Report on Form 8-K (filed November 28, 2006, File No. 001-13589) and incorporated herein by reference.

	10.12		Guaranty dated as of November 21, 2006 by Prime Group Realty, L.P. for the benefit of CWCapital LLC., as filed as exhibit 10.3 to our Current Report on Form 8-K (filed November 28, 2006, File No. 001-13589) and incorporated herein by reference.


Exhibit
Number		Description

	10.13	Subordination and Standstill Agreement dated as of November 21, 2006 by PGRT Equity LLC for the benefit of CWCapital LLC., as filed as exhibit 10.4 to our Current Report on Form 8-K (filed November 28, 2006, File No. 001-13589) and incorporated herein by reference.

	10.14	First Amendment to Amended and Restated Tax Indemnity Agreement dated as of November 21, 2006 by and among Prime Group Realty, L.P., Richard A. Heise, CTA General Partner, LLC and Continental Towers, L.L.C., as filed as exhibit 10.6 to our Current Report on Form 8-K (filed November 28, 2006, File No. 001-13589) and incorporated herein by reference.

	10.15	Amended and Restated Promissory Note dated as of November 21, 2006 from Continental Towers, L.L.C. and Continental Towers Associates III, LLC payable to the order of PGRT Equity, L.L.C., as filed as exhibit 10.7 to our Current Report on Form 8-K (filed November 28, 2006, File No. 001-13589) and incorporated herein by reference.

	10.16	Second Amended and Restated Loan Agreement dated as of November 21, 2006 by and between PGRT Equity, LLC, and Continental Towers Associates III, LLC and Continental Towers, L.L.C., as filed as exhibit 10.8 to our Current Report on Form 8-K (filed November 28, 2006, File No. 001-13589) and incorporated herein by reference.

	10.17	Amended and Restated Mortgage and Security Agreement dated as of November 21, 2006 by Continental Towers, L.L.C. and Continental Towers Associates III, LLC, in favor of and for the benefit of PGRT Equity, L.L.C., as filed as exhibit 10.9 to our Current Report on Form 8-K (filed November 28, 2006, File No. 001-13589) and incorporated herein by reference.

	10.18	Indemnification Agreement dated as of November 8, 2006 between Prime Group Realty, L.P. and 131 South Dearborn LLC as filed as exhibit 10.59 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.19	Reciprocal Easement Agreement dated as of December 29, 2006, by and between Continental Towers, L.L.C. and Continental Towers Associates III, LLC as filed as exhibit 10.62 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.20	Management Agreement dated as of December 29, 2006, by and between Continental Towers, L.L.C. and Prime Group Management, L.L.C. as filed as exhibit 10.63 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.21	Management Agreement dated as of December 29, 2006, by and between Continental Towers Associates III, LLC and Prime Group Management, L.L.C. as filed as exhibit 10.64 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.


Exhibit
Number		Description

	10.22	Amended and Restated Promissory Note dated as of December 29, 2006, from Continental Towers Associates III, LLC to Wells Fargo Bank, N.A., as trustee for the registered holders of Cobalt CMBS Commercial Mortgage Trust 2006-C1, Commercial Mortgage Pass-through Certificates, Series 2006-C1 as filed as exhibit 10.65 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.23	Amended and Restated Mortgage, Security Agreement and Fixture Financing Statement dated as of December 29, 2006, from Continental Towers Associates III, LLC to Wells Fargo Bank, N.A., as trustee for the registered holders of Cobalt CMBS Commercial Mortgage Trust 2006-C1, Commercial Mortgage Pass-through Certificates, Series 2006-C1, c/o CWCapital LLC as filed as exhibit 10.66 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.24	Amended and Restated Guaranty dated as of December 29, 2006, by Prime Group Realty, L.P. to Wells Fargo Bank, N.A., as trustee for the registered holders of Cobalt CMBS Commercial Mortgage Trust 2006-C1, Commercial Mortgage Pass-through Certificates, Series 2006-C1, regarding the loan to Continental Towers Associates III, LLC as filed as exhibit 10.67 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.25	Amended and Restated Environmental and Hazardous Substance Indemnification Agreement dated as of December 29, 2006, from Continental Towers Associates III, LLC to Wells Fargo Bank, N.A., as trustee for the registered holders of Cobalt CMBS Commercial Mortgage Trust 2006-C1, Commercial Mortgage Pass-through Certificates, Series 2006-C1 as filed as exhibit 10.68 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.26	Amended and Restated Promissory Note dated as of December 29, 2006, from Continental Towers, L.L.C. to Wells Fargo Bank, N.A., as trustee for the registered holders of Cobalt CMBS Commercial Mortgage Trust 2006-C1, Commercial Mortgage Pass-through Certificates, Series 2006-C1 as filed as exhibit 10.69 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.27	Amended and Restated Mortgage, Security Agreement and Fixture Financing Statement dated as of December 29, 2006, from Continental Towers, L.L.C. to Wells Fargo Bank, N.A., as trustee for the registered holders of Cobalt CMBS Commercial Mortgage Trust 2006-C1, Commercial Mortgage-Pass through Certificates, Series 2006-C1, c/o CWCapital LLC as filed as exhibit 10.70 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.28	Amended and Restated Guaranty dated as of December 29, 2006, by Prime Group Realty, L.P. to Wells Fargo Bank, N.A., as trustee for the registered holders of Cobalt CMBS Commercial Mortgage Trust 2006-C1, Commercial Mortgage Pass-through Certificates, Series 2006-C1, regarding the loan to Continental Towers, L.L.C as filed as exhibit 10.71 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.


Exhibit
Number		Description

	10.29	Amended and Restated Environmental and Hazardous Substance Indemnification Agreement dated as of December 29, 2006, from Continental Towers, L.L.C. to Wells Fargo Bank, N.A., as trustee for the registered holders of Cobalt CMBS Commercial Mortgage Trust 2006-C1, Commercial Mortgage Pass-through Certificates, Series 2006-C1 as filed as exhibit 10.72 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.30	Second Amended and Restated Promissory Note dated as of December 29, 2006, from Continental Towers Associates III, LLC to PGRT Equity, L.L.C. as filed as exhibit 10.73 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.31	Second Amended and Restated Environmental Indemnification Agreement dated as of December 29, 2006, from Continental Towers Associates III, LLC to PGRT Equity, L.L.C. as filed as exhibit 10.74 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.32	Third Amended and Restated Loan Agreement dated as of December 29, 2006, between Continental Towers Associates III, LLC and PGRT Equity, L.L.C. as filed as exhibit 10.75 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.33	Second Amended and Restated Mortgage and Security Agreement dated as of December 29, 2006, from Continental Towers, L.L.C. to PGRT Equity, L.L.C. as filed as exhibit 10.76 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.34	Second Amended and Restated Promissory Note dated as of December 29, 2006, from Continental Towers, L.L.C. to PGRT Equity, L.L.C. as filed as exhibit 10.77 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.35	Third Amended and Restated Loan Agreement dated as of December 29, 2006, by and between Continental Towers, L.L.C. and PGRT Equity, L.L.C. as filed as exhibit 10.78 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.36	Second Amended and Restated Mortgage and Security Agreement dated as of December 29, 2006, from Continental Towers Associates III, LLC to PGRT Equity, L.L.C. as filed as exhibit 10.79 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.37	Second Amended and Restated Environmental Indemnification Agreement dated as of December 29, 2006, from Continental Towers, L.L.C. to PGRT Equity, L.L.C. as filed as exhibit 10.80 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.


Exhibit
Number		Description

	10.38	Amended and Restated Subordination and Standstill Agreement dated as of December 29, 2006, by PGRT Equity LLC to Wells Fargo Bank, N.A., as trustee for the registered holders of Cobalt CMBS Commercial Mortgage Trust 2006-C1, Commercial Mortgage Pass-through Certificates, Series 2006-C1, regarding the loan to Continental Towers, L.L.C. as filed as exhibit 10.81 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.39	Amended and Restated Subordination and Standstill Agreement dated as of December 29, 2006, by PGRT Equity LLC to Wells Fargo Bank, N.A., as trustee for the registered holders of Cobalt CMBS Commercial Mortgage Trust 2006-C1, Commercial Mortgage Pass-through Certificates, Series 2006-C1, regarding the loan to Continental Towers Associates III, LLC as filed as exhibit 10.82 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.40	Purchase and Sale Agreement dated as of June 29, 2007, by and between Lightstone Holdings LLC and PGRT ESH, Inc. as filed as exhibit 2.1 to our Current Report on Form 8-K (filed July 6, 2007, File No. 001-13589) and incorporated herein by reference.

	10.41	Loan Agreement dated as of June 29, 2007, by and between PGRT ESH, Inc. and Citicorp USA, Inc. as filed as exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (filed August 13, 2007, File No. 001-13589) and incorporated herein by reference.

	10.42	Pledge Agreement dated as of June 29, 2007, by PGRT ESH, Inc. in favor of Citicorp USA, Inc. as filed as exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (filed August 13, 2007, File No. 001-13589) and incorporated herein by reference.

	10.43	Continuing Guaranty dated as of June 29, 2007, by David Lichtenstein in favor of Citicorp USA, Inc. as filed as exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (filed August 13, 2007, File No. 001-13589) and incorporated herein by reference.

	10.44	Promissory Note dated as of June 29, 2007, by PGRT ESH, Inc. to Citicorp USA, Inc. as filed as exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (filed August 13, 2007, File No. 001-13589) and incorporated herein by reference.

	10.45	Equity Purchase Agreement dated as of December 31, 2007, by and between Jeffrey A. Patterson, and Prime Office Company LLC as filed as Exhibit 10.81 on Form 10-K for the year ended December 31, 2007 (filed July 23, 2008, File No. 001-13589) and incorporated herein by reference.

	10.46	Promissory Note A, dated as of March 18, 2008, from 330 N. Wabash Avenue, L.L.C. (“330 N. Wabash”), payable to the order of ING USA Annuity and Life Insurance Company, in the original principal amount of $88.0 million, as filed as exhibit 10.1 to our Current Report on Form 8-K (filed March 24, 2008, File No. 001-13589) and incorporated herein by reference.


Exhibit
Number			Description

	10.47		Promissory Note B, dated as of March 18, 2008, from 330 N. Wabash, payable to the order of General Electric Capital Corporation, in the original principal amount of $100.0 million, as filed as exhibit 10.2 to our Current Report on Form 8-K (filed March 24, 2008, File No. 001-13589) and incorporated herein by reference.

	10.48		Loan Agreement (Loan B), dated as of March 18, 2008, among 330 N. Wabash, the lenders party thereto and General Electric Capital Corporation, as collateral agent (in such capacity, the “Agent”), as filed as exhibit 10.3 to our Current Report on Form 8-K (filed March 24, 2008, File No. 001-13589) and incorporated herein by reference.

	10.49		Mortgage, Assignment of Leases, Security Agreement and Fixture Filing, dated as of March 18, 2008, by 330 N. Wabash in favor of the Agent, as filed as exhibit 10.4 to our Current Report on Form 8-K (filed March 24, 2008, File No. 001-13589) and incorporated herein by reference.

	10.50		Leasehold Mortgage, Assignment of Leases, Security Agreement and Fixture Filing, dated as of March 18, 2008, by 330 N. Wabash in favor of the Agent, as filed as exhibit 10.5 to our Current Report on Form 8-K (filed March 24, 2008, File No. 001-13589) and incorporated herein by reference.

	10.51		Guaranty of Non-Recourse and Environmental Indemnity Obligations, dated as of March 18, 2008, by Prime Group Realty, L.P. (the “Operating Partnership”) in favor of the Agent, as filed as exhibit 10.6 to our Current Report on Form 8-K (filed March 24, 2008, File No. 001-13589) and incorporated herein by reference.

	10.52		Completion Guaranty, dated as of March 18, 2008, by the Operating Partnership in favor of the Agent, as filed as exhibit 10.7 to our Current Report on Form 8-K (filed March 24, 2008, File No. 001-13589) and incorporated herein by reference.

	10.53	*	Form of Letters regarding Retention Program, dated as of June 12, 2008 as filed as exhibit 10.1 to our Quarterly Report on Form 10-Q/A (filed March 27, 2008, File No. 001-13589) and incorporated herein by reference.

	10.54		Amended and Restated Loan Agreement dated as of June 6, 2008 by and between PGRT ESH, Inc. and Citicorp USA, Inc. 2008 as filed as exhibit 10.2 to our Quarterly Report on Form 10-Q/A (filed March 27, 2009, File No. 001-13589) and incorporated herein by reference.

	10.55		Amended and Restated Guaranty dated as of June 6, 2008, by David Lichtenstein in favor of Citicorp USA, Inc. 2008 as filed as exhibit 10.3 to our Quarterly Report on Form 10-Q/A (filed March 27, 2009, File No. 001-13589) and incorporated herein by reference.

	10.56		Amended and Restated Pledge Agreement dated as of June 6, 2008 by PGRT ESH, Inc. in favor of Citicorp USA, Inc. 2008 as filed as exhibit 10.4 to our Quarterly Report on Form 10-Q/A (filed March 27, 2009, File No. 001-13589) and incorporated herein by reference.


Exhibit
Number			Description

	10.57		Amended and Restated Promissory Note dated as of June 6, 2008 by PGRT ESH, Inc. to Citicorp USA, Inc. 2008 as filed as exhibit 10.5 to our Quarterly Report on Form 10-Q/A (filed March 27, 2009, File No. 001-13589) and incorporated herein by reference.

	10.58	*	Equity Purchase Agreement dated as of December 31, 2007, by and between Jeffrey A. Patterson, and Prime Office Company LLC as filed as exhibit 10.81 to our Annual Report of Form 10-K/A for the year ended December 31, 2007 (filed March 27, 2009, File No. 001-13589) and incorporated herein by reference.

	10.59		180 N. LaSalle Purchase and Sale Agreement dated as of August 12, 2008 between 180 N. LaSalle II, L.L.C. and Younan Properties, Inc. as filed as exhibit 10.1 to our Quarterly Report on Form 10-Q (filed March 27, 2009, File No. 001-13589) and incorporated herein by reference.

	10.60		First Amendment to Purchase and Sale Agreement dated as of August 29, 2008 between 180 N. LaSalle II, L.L.C. and Younan Properties, Inc. as filed as exhibit 10.2 to our Quarterly Report on Form 10-Q (filed March 27, 2009, File No. 001-13589) and incorporated herein by reference.

	10.61		Second Amendment to Purchase and Sale Agreement dated as of September 3, 2008 between 180 N. LaSalle II, L.L.C. and Younan Properties, Inc. as filed as exhibit 10.3 to our Quarterly Report on Form 10-Q (filed March 27, 2009, File No. 001-13589) and incorporated herein by reference.

	10.62		Third Amendment to Purchase and Sale Agreement dated as of September 30, 2008 between 180 N. LaSalle II, L.L.C and Younan Properties, Inc. as filed as exhibit 10.4 to our Quarterly Report on Form 10-Q (filed March 27, 2009, File No. 001-13589) and incorporated herein by reference.

	10.63		Fourth Amendment to Purchase and Sale Agreement dated as of October 15, 2008 between 180 N. LaSalle II, L.L.C and YPI 180 N. LaSalle Owner, LLC.

	10.64		First Amendment to Loan Agreement dated as of October 31, 2008 between PGRT ESH, Inc., Lightstone Holdings, LLC, David Lichtenstein and Citicorp USA, Inc.

	10.65		First Amendment to Amended and Restated Guaranty dated as of October 31, 2008 between David Lichtenstein and Citicorp USA, Inc.

	10.66		Fifth Amendment to Purchase and Sale Agreement dated as of November 20, 2008 between 180 N. LaSalle II, L.L.C and YPI 180 N. LaSalle Owner, LLC.

	10.67		Sixth Amendment to Purchase and Sale Agreement dated as of December 9, 2008 between 180 N. LaSalle II, L.L.C and YPI 180 N. LaSalle Owner, LLC.

	10.68		Second Amendment to Loan Agreement dated December 31, 2008 among PGRT ESH, Inc., Lightstone Holdings LLC, David Lichtenstein and Citicorp USA, Inc.


Exhibit
Number			Description

	10.69	*	Amendment to the Amended and Restated Employment Agreement dated as of December 31, 2008 by and between Prime Group Realty Trust, Prime Group Realty, L.P. and Jeffrey A. Patterson.

	10.70	*	First Amendment to the Employment Agreement dated as of December 31, 2008 by and between Prime Group Realty Trust, Prime Group Realty, L.P. and James F. Hoffman.

	10.71	*	Equity Purchase Agreement dated as of December 31, 2008, by and between Jeffrey A. Patterson, and Prime Office Company LLC.

	10.72		Letter Agreement dated December 31, 2008 among PGRT ESH, Inc., Lightstone Holdings LLC, David Lichtenstein and Citicorp USA, Inc.

	21.1		Subsidiaries of Registrant.

	31.1		Rule 13a-14(a) Certification of Jeffrey A. Patterson, President and Chief Executive Officer of Registrant.

	31.2		Rule 13a-14(a) Certification of Paul G. Del Vecchio, Executive Vice President —Capital Markets of Registrant.

	32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jeffrey A. Patterson, President and Chief Executive Officer of the Board of Registrant.

	32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Paul G. Del Vecchio, Executive Vice President —Capital Markets of Registrant.


*		Management contracts or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-K pursuant to Item 15(b) of the Report on Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2009.


PRIME GROUP REALTY TRUST
By:	/s/ Jeffrey A. Patterson
	Name:	Jeffrey A. Patterson
	Title:	President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this report has been signed by the following persons in the capacities and on the dates indicated.


Signature	Title	Date

/s/ Jeffrey A. Patterson	President, Chief Executive Officer and Trustee	March 30, 2009
Jeffrey A. Patterson	(Principal Executive Officer)

/s/ Paul G. Del Vecchio	Executive Vice President —Capital Markets	March 30, 2009
Paul G. Del Vecchio	(Principal Financial Officer)

/s/ Robert M. O’Connor	Vice President — Corporate Accounting	March 30, 2009
Robert M. O’Connor	(Principal Accounting Officer)

/s/ Bruno de Vinck	Trustee	March 30, 2009
Bruno de Vinck

/s/ David Lichtenstein	Chairman of the Board of Trustees	March 30, 2009
David Lichtenstein

/s/ Peyton (Chip) Owen, Jr.
Peyton (Chip) Owen, Jr.	Trustee	March 30, 2009

/s/ John M. Sabin	Trustee	March 30, 2009
John M. Sabin

/s/ Shawn R. Tominus
Shawn R. Tominus	Trustee	March 30, 2009

/s/ George R. Whittemore
George R. Whittemore	Trustee	March 30, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Trustees
Prime Group Realty Trust

We have audited the accompanying consolidated balance sheets of Prime Group Realty Trust and Subsidiaries (collectively, the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2008. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(1). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of BHAC Capital IV LLC (“BHAC”), a joint venture, the investment in which, as discussed in Note 11 to the financial statements, is accounted for by the equity method of accounting. The investment in BHAC was $0 and $65,985,000 as of December 31, 2008 and 2007, respectively, and the equity in its net loss was ($60,352,000) and ($47,848,000) for the years then ended. The financial statements of BHAC were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for BHAC, is based solely on the report of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Prime Group Realty Trust as of December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.


/s/ GRANT THORNTON LLP
Chicago, Illinois
March 31, 2009

F-2

PRIME GROUP REALTY TRUST

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share and per share amounts)


	December 31			December 31
	2008			2007
Assets
Real estate:
Land	$	66,758		$	74,554
Building and improvements		290,917			305,138
Tenant improvements		39,151			42,048
Furniture, fixtures and equipment		1,142			1,080

		397,968			422,820
Accumulated depreciation		(47,790	)		(41,655	)

		350,178			381,165
In–place lease value, net		5,357			9,116
Above–market lease value, net		4,522			8,148

		360,057			398,429
Property held for sale		83,763			92,219
Investments in unconsolidated entities		6			87,741
Cash and cash equivalents		15,419			37,893
Receivables, net of allowance for doubtful accounts of $843 and $1,074 at December 31, 2008 and 2007, respectively:
Tenant		1,375			342
Deferred rent		9,858			7,047
Other		1,032			1,194
Restricted cash escrows		33,788			36,612
Deferred costs, net		15,560			9,828
Other		800			611

Total assets	$	521,658		$	671,916


Liabilities and Shareholders’ Equity
Mortgage notes payable	$	385,699		$	501,727
Mortgage notes payable related to property held for sale		62,172			66,183
Liabilities related to property held for sale		14,135			11,111
Accrued interest payable		2,653			1,809
Accrued real estate taxes		13,266			15,029
Accrued tenant improvement allowances		6,674			9,779
Accrued environmental remediation liabilities		7,839			4,467
Accounts payable and accrued expenses		8,965			6,405
Liabilities for leases assumed		3,279			3,958
Below–market lease value, net		4,272			6,083
Dividends payable		—			2,250
Other		6,736			6,758

Total liabilities		515,690			635,559
Shareholders’ equity:
Preferred Shares, $0.01 par value; 30,000,000 shares authorized: Series B — Cumulative Redeemable Preferred Shares, 4,000,000 shares designated, issued and outstanding		40			40
Common Shares, $0.01 par value; 100,000,000 shares authorized; 236,483 shares issued and outstanding		2			2
Additional paid–in capital		159,946			109,039
Distributions in excess of earnings		(154,020	)		(72,724	)

Total shareholders’ equity		5,968			36,357

Total liabilities and shareholders’ equity	$	521,658		$	671,916

See accompanying notes.

F-3

PRIME GROUP REALTY TRUST

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share amounts)


	Year			Year			Year
	ended			ended			ended
	December 31			December 31			December 31
	2008			2007			2006
Revenue:
Rental	$	34,464		$	39,451		$	43,942
Tenant reimbursements		23,015			23,459			26,326
Other property revenues		6,198			6,905			6,898
Services Company revenue		1,163			3,359			2,806

Total revenue		64,840			73,174			79,972

Expenses:
Property operations		23,067			24,399			21,932
Real estate taxes		11,525			13,638			15,291
Depreciation and amortization		21,084			26,792			28,551
General and administrative		6,873			6,210			6,393
Services Company operations		1,484			2,835			3,972
Provision for asset impairment		1,600			—			—
Loss on tax indemnification		—			—			4,200

Total expenses		65,633			73,874			80,339

Operating loss		(793	)		(700	)		(367	)
Loss from investments in unconsolidated joint ventures		(60,343	)		(49,687	)		(9,145	)
Provision for asset impairment from unconsolidated joint ventures		(5,633	)		—			—
Interest and other income		1,271			2,764			2,707
Interest:
Expense		(30,085	)		(33,088	)		(38,607	)
Amortization of deferred financing costs		(2,244	)		(907	)		(3,144	)
Gain on sales of real estate and joint venture interests		39,194			—			19,460
Recovery of distributions and losses to minority partners in excess of basis		14,222			—			—
Distributions and losses to minority partners in excess of basis		(20,293	)		(14,222	)		—

Loss from continuing operations before minority interests		(64,704	)		(95,840	)		(29,096	)
Minority interests		(8,660	)		36,805			37,761

(Loss) income from continuing operations		(73,364	)		(59,035	)		8,665
Discontinued operations, net of minority interests of $(3,109), $(1,903) and $1,987 for the years ended December 31, 2008, 2007 and 2006, respectively		28			17			(18	)

Net (loss) income		(73,336	)		(59,018	)		8,647
Net income allocated to preferred shareholders		(9,000	)		(9,000	)		(9,000	)

Net loss available to common shareholders	$	(82,336	)	$	(68,018	)	$	(353	)


Basic and diluted earnings available to common shares per weighted—average common share:
Loss from continuing operations after minority interests and allocation to preferred shareholders	$	(348.29	)	$	(287.69	)	$	(1.41	)
Discontinued operations, net of minority interests		0.12			0.07			(0.08	)

Net loss available per weighted–average common share of beneficial interest — basic and diluted	$	(348.17	)	$	(287.62	)	$	(1.49	)

F-4

PRIME GROUP REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(dollars in thousands, except for share/unit and per share amounts)


							(Distributions
	Series B				Additional		in Excess of)
	Preferred		Common		Paid—In		Retained
	Shares		Shares		Capital		Deficit			Total
Balance at January 1, 2006	$	40	$	2	$	106,239	$	(881	)	$	105,400
Accretion of fair value of preferred stock		—		—		1,400		(1,400	)		—
Net income		—		—		—		8,647			8,647
Series B — preferred share dividends declared ($2.25 per share)		—		—		—		(9,000	)		(9,000	)
Common share dividends declared ($2.8438 per common share)		—		—		—		(672	)		(672	)

Balance at December 31, 2006	$	40	$	2	$	107,639	$	(3,306	)	$	104,375
Accretion of fair value of preferred stock		—		—		1,400		(1,400	)		—
Net loss		—		—		—		(59,018	)		(59,018	)
Series B — preferred share dividends declared ($2.25 per share)		—		—		—		(9,000	)		(9,000	)

Balance at December 31, 2007	$	40	$	2	$	109,039	$	(72,724	)	$	36,357
Accretion of fair value of preferred stock		—		—		1,050		(1,050	)		—
Net loss		—		—		—		(73,336	)		(73,336	)
Series B — preferred share dividends declared ($1.6875 per share)		—		—		—		(6,750	)		(6,750	)
Common share dividends declared ($0.67353 per common share)		—		—		—		(160	)		(160	)
Contributions from parent company		—		—		49,857		—			49,857

Balance at December 31, 2008	$	40	$	2	$	159,946	$	(154,020	)	$	5,968

See accompanying notes.

F-5

PRIME GROUP REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)


	Year			Year			Year
	ended			ended			ended
	December 31			December 31			December 31
	2008			2007			2006
Operating activities
Net (loss) income	$	(73,336	)	$	(59,018	)	$	8,647
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Accretion of mortgage notes payable		(1,106	)		(1,326	)		(1,373	)
Amortization of above/below–market lease value (included in rental revenue)		2,592			2,222			2,987
Amortization of in–place lease value		4,505			9,919			14,141
Provision for doubtful accounts		204			996			96
Gain on sales of real estate and joint venture interests (gain (loss) of $506, $2,220 and $(6) for the years ended December 31, 2008, 2007 and 2006, respectively, included in discontinued operations)		(39,700	)		(2,220	)		(19,460	)
Depreciation and amortization (including discontinued operations – See Note 9)		22,726			23,704			24,060
Distributions and losses to minority partners in excess of basis		20,293			14,222			—
Recovery of distributions and losses to minority partners in excess of basis		(14,222	)		—			—
Provision for asset impairment		1,600			—			—
Provision for asset impairment from unconsolidated joint ventures		5,633			—			—
Net equity in loss from investments in unconsolidated joint ventures		60,343			49,687			9,145
Minority interests (including discontinued operations)		11,769			(34,902	)		(39,749	)
Net changes in other operating assets and liabilities (including discontinued operations):
Accounts receivable		(4,155	)		(3,090	)		(3,478	)
Other assets		(180	)		684			1,173
Accrued interest payable		839			(67	)		377
Accrued real estate taxes		(601	)		(1,056	)		(983	)
Accounts payable and accrued expenses		(654	)		470			257
Other liabilities		5,213			909			555
Preferential return on investments in joint ventures		—			6,167			4,243

Net cash provided by operating activities		1,763			7,301			638
Investing activities
Capital expenditures for real estate and equipment		(23,976	)		(17,410	)		(14,478	)
Proceeds from sales of real estate		101,099			4,685			2,136
Change in restricted cash escrows		4,442			2,295			(4,062	)
Leasing costs (includes lease assumption costs and leasing commissions)		(2,224	)		(5,437	)		(5,799	)
Investments in unconsolidated entities		—			(120,000	)		—
Distributions from unconsolidated joint ventures		—			—			92,806

Net cash provided by (used in) investing activities		79,341			(135,867	)		70,603

F-6

PRIME GROUP REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)


	Year			Year			Year
	ended			ended			ended
	December 31			December 31			December 31
	2008			2007			2006
Financing activities
Financing costs		(7,502	)		(644	)		(3,092	)
Proceeds from mortgages and notes payable		149,600			120,000			228,000
Repayment of mortgages and notes payable		(231,274	)		(1,758	)		(170,897	)
Dividends paid to Series B — preferred shareholders		(9,000	)		(11,250	)		(6,750	)
Dividends paid to common shareholder		(160	)		—			(672	)
Contributions from parent company		12,598			—			—
Distributions paid to common unit holder		(17,840	)		—			(75,328	)

Net cash (used in) provided by financing activities		(103,578	)		106,348			(28,739	)

Net (decrease) increase in cash and cash equivalents		(22,474	)		(22,218	)		42,502
Cash and cash equivalents at beginning of period		37,893			60,111			17,609

Cash and cash equivalents at end of period	$	15,419		$	37,893		$	60,111


Supplemental cash flow information for net assets sold:

Real estate, net	$	33,400		$	5,513		$	—
Deferred rent receivable		335			—			—
Deferred costs, net		5			48			—
Mortgage notes payable assumed by buyer		—			(2,701	)		—
Accrued real estate taxes		(1,136	)		(369	)		—
Investment in unconsolidated joint ventures		21,759			—			—
Other liabilities and assets, net		7,036			(26	)		75,482

Net assets sold		61,399			2,465			75,482
Proceeds from sales of real estate		101,099			4,685			94,942

Gain on sales of real estate and joint venture interests(1)	$	39,700		$	2,220		$	19,460


Supplemental disclosures of cash flow information:

Cash paid during the year for:
Interest	$	33,600		$	38,600		$	44,000
Income Taxes		27			200			700

Supplemental schedule of non-cash investing and financing activities:

Accretion of fair value of preferred stock	$	1,050		$	1,400		$	1,400
Paydown of debt by parent company		37,259			—			—
Tenant improvement allowances		2,031			1,488			216
Environmental remediation costs		6,481			2,696			1,740
Write-off of fully amortized tenant improvement allowance		5,669			—			—
Write-off of fully amortized deferred financing fees		981			1,325			—


(1)		Gain on sales of real estate of $0.5 million and $2.2 million are included in discontinued operations for the years ended December 31, 2008 and December 31, 2007, respectively.

See accompanying notes.

F-7

Prime Group Realty Trust

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Formation and Organization of the Company

We are a fully-integrated, self-administered and self-managed real estate investment trust (“REIT”) which owns, manages, leases, develops and redevelops office and industrial real estate, primarily in the Chicago metropolitan area. Our portfolio of properties consists of 9 office properties, containing an aggregate of 3.5 million net rentable square feet. All of our properties are located in the Chicago metropolitan area in prime business locations within established business communities and account for all of our rental revenue and tenant reimbursements revenue. As of December 31, 2008, we have a joint venture interest in one office property, containing 0.1 million net rentable square feet located in Phoenix, Arizona and a membership interest in an unconsolidated entity which owns extended-stay hotel properties. We lease and manage 3.5 million square feet comprising all of our wholly-owned properties and one joint venture property. In addition, we also manage the 1.5 million square foot Citadel Center office building located at 131 South Dearborn Street in Chicago, Illinois, in which we previously owned a joint venture interest which was sold in November 2006. In addition, as of December 31, 2008, we were also the managing and leasing agent for the approximately 959,000 square foot property known as The United Building located at 77 West Wacker Drive in Chicago, Illinois.

Prior to our acquisition (the “Acquisition”) by an affiliate of The Lightstone Group, LLC (“Lightstone”), we were the sole general partner of the Operating Partnership and owned all of the preferred units and 88.5% of the common units of the Operating Partnership then issued. Each preferred unit and common unit entitled us to receive distributions from our Operating Partnership. Dividends declared or paid to holders of common shares and preferred shares were based upon the distributions we received with respect to our common units and preferred units.

On June 28, 2005, our common shareholders approved the Acquisition by Lightstone and on July 1, 2005, the Acquisition was completed. The Acquisition closed pursuant to the terms of the previously announced agreement and plan of merger dated as of February 17, 2005, among certain affiliates of Lightstone, the Operating Partnership and us. As a result of the Acquisition, each of our common shares and limited partnership units of the Operating Partnership were cancelled and converted into the right to receive cash in the amount of $7.25 per common share/unit, without interest. In connection with the Acquisition, all outstanding options with an exercise price equal to or greater than the sales price of $7.25 per common share/unit were cancelled and each outstanding option for a common share with an exercise price less than the sales price were entitled to be exchanged for cash in an amount equal to the difference between $7.25 and the exercise price. Our Series B Cumulative Redeemable Preferred Shares (the “Series B Shares”) remain outstanding after the completion of the Acquisition and continue to be publicly traded on the New York Stock Exchange (“NYSE”).

F-8

1. Summary of Significant Accounting Policies (continued)

As a result of the Acquisition, Prime Office Company LLC (“Prime Office”), a subsidiary of Lightstone, owns 100.0%, or 236,483, common shares and 99.1%, or 26,488,389, of the outstanding common units in the Operating Partnership. Prime Group Realty Trust (the “Company” or “PGRT”) owns 0.9%, or 236,483, of the outstanding common units and all of the 4.0 million outstanding preferred units in the Operating Partnership.

Basis of Presentation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Our consolidated financial statements include our Operating Partnership and the other entities in which we have control or from which we receive all economic benefits. In addition, in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46(R)”) the Company consolidates variable interest entities (“VIEs”) for which it is deemed to be the primary beneficiary and disclose significant variable interests in VIEs of which we are not the primary beneficiary. We have significant controlling financial interests in the Continental Towers office building located at 1701 Golf Road in Rolling Meadows, Illinois through our ownership of a second mortgage note secured by this property and we consolidate this property.

Investments in corporations and partnerships in which we do not have a controlling financial interest but do have significant influence or a majority interest are accounted for under the equity method of accounting. These entities are reflected on our consolidated financial statements as investments in unconsolidated entities.

Significant intercompany accounts and transactions have been eliminated in consolidation.

We have one primary reportable segment consisting principally of our ongoing ownership and operation of nine office properties located in the Chicago area and leased through operating leases to unrelated third parties. The majority of depreciation and interest expense reflected in the consolidated financial statements presented herein relate to our ownership of our properties.

F-9

1. Summary of Significant Accounting Policies (continued)

Liquidity and Capital Resources

As discussed more fully in Note 4 – Mortgage Notes Payable, our Chairman and an affiliate and indirect parent of the Company has guaranteed the payment of certain non-recourse debt obligations maturing in 2009, and our parent’s ownership interests in our Operating Partnership and us has been pledged as security for these obligations. In addition, we are in default with another non-recourse debt obligation with a third party lender which is secured by a first mortgage on our 800 Jorie Plaza property, and are currently in negotiations with such lender. In the event these loans are not repaid or refinanced, the Company could potentially lose the collateral securing these debt obligations, and the guarantors and our parent company referred to above would be subject to such other actions as such lender may be entitled to take in connection with the guaranties and the pledge referred to above.

Real Estate

Real estate assets, including acquired assets, are recorded at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the related assets, which are as follows:


Buildings		40 years weighted average composite life
Building improvements		10 to 30 years
Tenant improvements		Term of related leases
Furniture and equipment		3–10 years

Development costs, which include land acquisition costs, construction costs, fees and other costs incurred in developing new properties, are capitalized as incurred. Interest, financing costs, real estate taxes, other direct costs and indirect costs (including certain employee compensation costs and related general and administrative expenses) incurred during development periods are capitalized as a component of the building costs. Subsequent to the one-year period, these costs are fully expensed as incurred. Upon completion of construction, development costs are included in buildings and improvements and are depreciated over the useful lives of the respective properties on a straight-line basis.

F-10

1. Summary of Significant Accounting Policies (continued)

Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Significant renovations and improvements which improve and/or extend the useful life of the asset are capitalized and depreciated over their estimated useful life. In accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS No. 144”), we record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets during the expected hold period are less than the carrying amounts of those assets.

The estimated cash flows used for the impairment analysis and to determine estimated fair value are based on our plans for our respective assets and our views of market and economic conditions. The estimates consider matters such as current and historical rental rates, occupancies for the respective properties and comparable properties and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in our plans or views of market and economic conditions could result in the recognition of impairment losses, which, under the applicable accounting guidance, could be substantial. During 2008 the Company recorded the following asset impairments: a $1.6 million provision for an asset impairment at one of its operating properties and; a $5.6 million provision for asset impairment related to its investment in unconsolidated entities. (See Note 2 — Asset Impairments for more information).

Impairment losses are measured as the difference between carrying value and fair value of assets. For assets held for sale, impairment is measured as the difference between carrying value and fair value, less costs to dispose. Fair value is based on estimated cash flows discounted at a risk-adjusted rate of interest. Property held for future development and property under development are also evaluated for impairment. Impairment is determined for development costs associated with property held for future development and property under development based upon management’s assessment that these costs have no future value.

Sales of Real Estate

In accordance with SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”), we recognize gains on sale of real estate using the full accrual method upon sale, provided the sales price is reasonably assured, the risks and rewards of ownership are transferred to the buyer, and we are not obligated to perform significant activities after the sale. However, when we agree to assume responsibility for re-leasing sold properties for a period beyond the date of sale and where we use estimates to support our intent to mitigate our net liability, we defer recognition of the gain on sale of real estate until such time as we can more reasonably determine our actual liability with executed subleases.

In accordance with SFAS No. 144, net income and gain (loss) on sales of real estate for properties sold or properties held for sale are reflected in our Consolidated Balance Sheets and Statements of Operations as “discontinued operations” for all years presented.

Property Held for Sale

We evaluate held for sale classification of our owned real estate on a quarterly basis. Assets that are classified as held for sale are recorded at the lower of their carrying amount or fair value less cost to sell. Assets are classified as held for sale once we commit to a plan to sell the property and have initiated an active program to market them for sale. The results of operations of these real estate properties are reflected as discontinued operations in all periods reported.

F-11

1. Summary of Significant Accounting Policies (continued)

As of December 31, 2008, we have classified our 180 North LaSalle Street property, a 770,191 square foot office property located in Chicago, Illinois, as held for sale. In September 2008, we entered into a purchase and sale agreement for a sale price of $120.0 million; subject to certain pro-rations, credits and adjustments. (See Note 19 – Subsequent Events – 180 N. LaSalle Street Sale for further details).

Property held for sale at December 31, 2008 and December 31, 2007 represents our historical cost basis as adjusted for fair value for certain assets related to this property (dollars in thousands):


	December 31		December 31
	2008		2007
Real estate, net	$	63,274	$	68,469
In-place lease value net		5,088		6,174
Above-market lease value, net		7,379		8,380
Tenant receivables		13		60
Deferred rent receivables		3,214		2,902
Other receivables		11		10
Restricted cash escrows		3,466		5,084
Deferred costs, net		1,299		1,112
Other		19		28

Property held for sale	$	83,763	$	92,219

In addition, certain liabilities related to this property at December 31, 2008 and December 31, 2007 have also been reclassified (dollars in thousands):


	December 31		December 31
	2008		2007
Mortgage note payable	$	62,172	$	66,183
Accrued interest payable		292		297
Accrued real estate taxes		4,978		4,952
Accrued tenant improvement allowances		210		558
Accounts payable and accrued expense		444		2,230
Below-market lease value, net		1,178		1,359
Other liabilities		7,033		1,715

Mortgage note payable and liabilities related to property held for sale	$	76,307	$	77,294

Intangible Assets

The above-market lease values and below-market lease values are amortized as an adjustment to rental income over the remaining lease term while in-place lease values are amortized to expense over the remaining lease term.

Intangible assets consist of the following (excludes property held for sale):


	December 31, 2008
	Carrying			Accumulated			Carrying
Intangible Asset Category	Amount–Gross			Amortization			Amount–Net
	(dollars in thousands)
In–place lease value	$	23,726		$	(18,369	)	$	5,357
Above–market lease value		18,136			(13,614	)		4,522
Below–market lease value		(11,387	)		7,115			(4,272	)

	$	30,475		$	(24,868	)	$	5,607

F-12

1. Summary of Significant Accounting Policies (continued)


	December 31, 2007
	Carrying			Accumulated			Carrying
Intangible Asset Category	Amount–Gross			Amortization			Amount–Net
	(dollars in thousands)
In–place lease value	$	37,770		$	(28,654	)	$	9,116
Above–market lease value		22,122			(13,974	)		8,148
Below–market lease value		(16,456	)		10,373			(6,083	)

	$	43,436		$	(32,255	)	$	11,181

Actual amortization for the year ended December 31, 2008 and estimates for each of the next five fiscal years is as follows:


	In–			Above–	Below–
	Place		market		market
Year ending December 31	Lease Value		Lease Value		Lease Value
	(dollars in thousands)
2008	$	3,674	$	3,559	$	(1,811	)
2009		2,964		3,295		(1,475	)
2010		1,311		1,065		(944	)
2011		617		57		(718	)
2012		250		54		(345	)
2013		137		41		(234	)
Thereafter		78		10		(556	)

	$	9,031	$	8,081	$	(6,083	)

Cash Equivalents

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

Restricted Cash

Restricted cash consists primarily of cash held for real estate taxes, insurance and property reserves for maintenance and expansion or tenant improvements as required by certain leases and loan agreements.

Deferred Costs

Financing Costs. Costs incurred in connection with financings, refinancings or debt modifications are capitalized as deferred financing costs and are amortized using the straight-line method over the lives of the related loans, which approximates the effective interest method. Upon the early extinguishment of debt, remaining deferred financing costs associated with the extinguished debt are fully amortized to interest expense. These costs are reported as financing activities in our consolidated statements of cash flows.

Leasing Costs. Leasing commissions, lease assumption costs and other leasing costs directly attributable to tenant leases are capitalized as deferred leasing costs and are amortized on the straight-line method over the terms of the related lease agreements. These costs are reported as investing activities in our consolidated statements of cash flows.

F-13

1. Summary of Significant Accounting Policies (continued)

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects our estimate of the amounts of the recorded accounts receivable at the balance sheet date that will not be recovered from cash receipts in subsequent periods. Our policy is to record a periodic provision for doubtful accounts based on the age of the receivable. We also periodically review specific tenant balances and determine whether an additional allowance is necessary. In recording such a provision, we consider a tenant’s creditworthiness, ability to pay, probability of collection and consideration of the tenant. The allowance for doubtful accounts is reviewed periodically based upon our historical experience. As a result, we recorded a provision of $0.2 million, $1.0 million and $0.1 million for the years ended December 31, 2008, 2007, and 2006, respectively. In addition, we had write-offs of $0.4 million during 2008.

Leases Assumed

In connection with certain tenant leases, we have assumed the liability for the remaining terms of the tenants’ existing leases in their previous location. We have recorded a liability for the difference between the total remaining costs for leases assumed and the expected benefits from actual and estimated future subleasing of the assumed lease obligations. The related incentive to the lessee has been capitalized as a deferred cost and is being amortized as a reduction of rental revenue over the life of the respective lease. The deferred cost and related liability are adjusted prospectively for changes in the estimated benefits from subleases.

Revenue Recognition

Rental revenue is recorded on a straight-line basis which includes the effects of rent steps and rent abatements under the leases. We commence rental revenue recognition when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. In addition, in circumstances where we provide a tenant improvement allowance that is not used by the tenant, we recognize the unused allowance as a reduction of rental revenue on a straight-line basis over the term of the lease. Differences between rental revenue earned and amounts due per the respective lease agreements are credited or charged, as applicable, to deferred rent receivable. Rental payments received prior to their recognition as income are classified as rent received in advance and are included in other liabilities. Lease termination income (included in rental revenue) represents amounts received from tenants in connection with the early termination of their remaining lease obligation reduced by any outstanding tenant receivables (including deferred rent receivable). Unamortized tenant improvements, deferred lease commissions and leasing costs related to terminated leases are recorded as additional depreciation and amortization expense upon lease termination.

Real estate leasing commissions are recognized upon execution of appropriate lease and commission agreements and receipt of full or partial payment, and, when payable upon certain events such as tenant occupancy or rent commencement, upon occurrence of such events. All other commissions and fees, including management fees, are recognized at the time the related services have been performed by the Company, unless future contingencies exist.

F-14

1. Summary of Significant Accounting Policies (continued)

Minority Interest in Consolidated Real Estate Partnerships

Interests held in consolidated real estate partnerships by limited partners other than the Company are reflected as minority interest in consolidated real estate partnerships. Minority interest in real estate partnerships represents the minority partners’ share of the underlying net assets of the Company’s consolidated real estate partnerships. When these consolidated real estate partnerships make cash distributions in excess of net income, the Company, as the majority partner, records a charge equal to the minority partners’ excess of distributions over net income when the partnership has deficit equity. This charge is classified in the consolidated statements of income as distributions and losses to minority partners in excess of basis. Losses are allocated to minority partners until such time as such losses exceed the minority interest basis, in which case the Company recognizes 100% of the losses in operating earnings. Losses in excess of the minority interest basis have been charged to operations as a result of the minority interest holder having no contractual obligation to return such amounts, to fund operations or to restore any capital deficits. With regard to such consolidated real estate partnerships, approximately $20.3 million, $14.2 million and $0 in losses related to the minority interest ownership were charged to operations for the years ended December 31, 2008, 2007 and 2006, respectively. If future earnings are materialized, the majority interest ordinarily is credited for all of those earnings up to the amount of losses previously absorbed. For the year ended December 31, 2008, the Company recovered $14.2 million of such distributions and losses to minority partners in excess of basis primarily as the result of the $29.4 million gain on sale of our 50% common joint venture interest in The United Building during the first quarter of 2008.

Earnings Per Share

Basic earnings per share (“EPS”) is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the potentially dilutive effect, if any, which would occur if outstanding: (i) common share options were exercised; (ii) limited partner common units in the Operating Partnership were exchanged for common shares; (iii) common share grants were fully-vested and (iv) common share warrants were exercised.

Income Taxes

We have elected to be taxed as a REIT under the Code. As a REIT, we generally will not be subject to federal income tax to the extent that we distribute at least 90.0% of our REIT taxable income to our shareholders. REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates.

We account for income taxes payable by Prime Group Realty Services, Inc., a Maryland corporation and a wholly-owned subsidiary of the Operating Partnership and its affiliates (collectively, the “Services Company”), a taxable REIT subsidiary, in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS No. 109 requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. We evaluate quarterly the realizability of our deferred tax assets by assessing the valuation allowance and by adjusting the amount of the allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax asset. We have used tax planning strategies to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits.

The Services Company recorded a tax benefit of $200,000 during 2008. At December 31, 2008, the Services Company had a deferred tax asset of $197,000. During 2007, the Services Company recorded a tax provision of $300,000 and at December 31, 2007 had a current tax liability of $121,000 and a deferred tax asset of $24,000. The Services Company paid $27,000 in income taxes for the year ended December 31, 2008, $200,000 for the year ended December 31, 2007, and $700,000 for the year ended December 31, 2006.

F-15

1. Summary of Significant Accounting Policies (continued)

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN No. 48”) on January 1, 2007. FIN No. 48 defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Adoption of FIN No. 48 did not have a material effect on our results of operations or financial position.

We had no unrecognized tax benefits as of the January 1, 2007 adoption date or as of December 31, 2008. We expect no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of December 31, 2008. We have no interest or penalties relating to income taxes recognized in the statement of operations for the year ended December 31, 2008 or in the balance sheet as of December 31, 2008. During 2006, the Internal Revenue Service began an examination of the tax returns for our Operating Partnership for the years 2003 and 2004 as well as 180 N. LaSalle, L.L.C. for the year 2004. The IRS concluded the 2003 examination and we have been notified that no adjustments were proposed for the Operating Partnership for that tax year. We expect the remaining examinations to be concluded and settled during 2009. As of December 31, 2008, income tax returns of the Company and subsidiaries for the calendar years 2005 through 2008 remain subject to examination by the Internal Revenue Service and various state and local tax jurisdictions.

Fair Value Measurements

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS 157 required fair value measurements to be separately disclosed by level within the fair value hierarchy.

Fair value measurements for assets and liabilities where there exists limited or no observable market data are, therefore, based primarily upon estimates, and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, fair value cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including but not limited to estimates of future cash flows, could impact the calculation of current or future values. The adoption of SFAS 157 for assets and liabilities did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for fiscal years beginning after November 15, 2007. We have adopted the provisions of SFAS No. 157 and it did not have a material impact to our Company’s financial position or results of operations.

F-16

1. Summary of Significant Accounting Policies (continued)

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities–Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of an entity’s fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. We have elected not to adopt the provisions of SFAS No. 159.

2. Asset Impairments

We recorded the following provisions for asset impairments:


	Year ended
	December 31
	2008		2007		2006
Operating properties (1)	$	1,600	$	—	$	—
Investment in unconsolidated entities (2)		5,633		—		—

	$	7,233	$	—	$	—


(1)		During the third quarter of 2008, as a result of low occupancy, negative cash flows, a forecast for continuing losses and non-payment of current debt service, we determined that an asset impairment of $1.6 million related to the write-down of our Jorie Boulevard property to its estimated fair value was required. This asset impairment was measured as the difference between carrying value and fair value of this property. Fair value was based on estimated cash flows discounted at a risk-adjusted rate of interest.

(2)		During the second quarter of 2008 we recorded an asset impairment of $5.6 million related to the write-down of the remaining balance of our investment in the membership interest in BHAC as the investment was deemed to be other than temporary due to past and expected future inability to sustain earnings at a level which would justify the carrying value.

3. Deferred Costs

Deferred costs consist of the following (excluding properties held for sale):


	December 31
	2008			2007
	(dollars in thousands)
Financing costs	$	10,258		$	3,738
Leasing costs		11,758			10,171

		22,016			13,909
Less: Accumulated amortization		(6,456	)		(4,081	)

	$	15,560		$	9,828

F-17

4. Mortgage Notes Payable

Mortgage Notes Payable consisted of the following:


	December 31
	2008		2007
	(dollars in thousands)
Mortgage Notes Payable (1), (2):
Mortgage notes payable to various financial institutions, collateralized by various properties, interest at fixed rates ranging from 5.43% to 13.33% per annum, with principal and interest payable monthly through December 1, 2016. The weighted average rates at December 31, 2008 and 2007 were 6.71% and 6.26%, respectively	$	354,979	$	234,132
Mortgage notes payable to various financial institutions, collateralized by various properties, interest at variable rates ranging from the index rate of (2.50% at December 31, 2008) plus 200 basis points to the index rate of 1.31% plus 1,000 basis points per annum, with interest payable monthly through June 4, 2013. The weighted average rates at December 31, 2008 and 2007 were 10.47% and 8.29%, respectively		92,892		333,778

Total mortgage notes payable (3)	$	447,871	$	567,910


(1)		The mortgage notes payable are subject to various operating and financial covenants. In addition, we are required to periodically fund and maintain escrow accounts to make future real estate tax and insurance payments, as well as to fund certain tenant releasing costs and capital expenditures. These are included in restricted cash escrows.

(2)		All of our operating real estate assets have been pledged as collateral for our mortgage notes payable.

(3)		The fair value of our notes payable is estimated at $428.5 million and $565.3 million as of December 31, 2008 and 2007, respectively.

Prime Equity Loans. On January 11, 2006, our wholly-owned subsidiary, PGRT Equity LLC (“Prime Equity”) obtained a loan in the original principal amount of $58.0 million (the “Citicorp Loan”) from Citicorp USA Inc. (“Citicorp”), and our Operating Partnership transferred to Prime Equity, (i) its interest in the junior mortgage loan (the “Junior Loan”) encumbering Continental Towers, (ii) its 50.0% common membership interest in 77 West Wacker Drive, L.L.C., the owner of 77 West Wacker Drive, Chicago Illinois, (iii) its 100.0% membership interest in 280 Shuman Blvd, L.L.C. (“280 Owner”), the owner of the property known as the Atrium located at 280 Shuman Boulevard in Naperville, Illinois, (iv) its 100.0% membership interest in 800 Jorie Blvd. Mezzanine, L.L.C., the owner of a 49.0% membership interest in 800 Jorie Blvd, L.L.C. and the owner of 800-810 Jorie Blvd., Oak Brook, Illinois, and (v) its 100.0% membership interest in Prime Group Management, L.L.C. (“Prime Management”), the manager of Continental Towers.

As security for the Citicorp Loan, among other things, (a) the Operating Partnership pledged all of its interests in Prime Equity, (b) Prime Equity pledged all of its interests in the Junior Loan, the membership interests referred to in clause (ii), (iv) and (v) above and its right to receive distributions from all of the properties referred to in clauses (i) through (v) above and (c) 280 Owner granted a mortgage to Citicorp on the Atrium property.

F-18

4. Mortgage Notes Payable (continued)

As contemplated by the Citicorp Loan documents, we delivered to Citicorp the necessary consents from the senior mortgage lender on our 180 N. LaSalle Street property and, among other things, a pledge and assignment of all of the membership interests in 180 N. LaSalle II, L.L.C. (“180 LLC”), our subsidiary that owns the 180 N. LaSalle Street property (the “180 Pledge”). On September 27, 2006, in connection with the 180 Pledge, the amount of the Citicorp Loan was reduced to $47.0 million and a new loan in the amount of $11.0 million (the “New Citicorp Loan”) was made having the same material terms as the Citicorp Loan and secured by, among other things, the 180 Pledge and the other collateral referred to above. In connection with the closing of the New Citicorp Loan, Citicorp did not require any additional repayment of the Citicorp Loan, and the combined principal amount of the Citicorp Loan and New Citicorp Loan equaled the $58.0 million principal previously outstanding under the Citicorp Loan prior to the closing of the New Citicorp Loan.

Mr. David Lichtenstein, the principal of Lightstone, our indirect parent, guaranteed (i) the payment of 25.0% of the principal amount of the Citicorp Loan (reduced from 50% as of September 27, 2006) and New Citicorp Loan, (ii) the payment of all of the interest on the Citicorp Loan and New Citicorp Loan and (iii) the payment of all operating expenses for our Atrium, 77 West Wacker Drive, and 800-810 Jorie Boulevard properties and, as of September 27, 2006, our 180 N. LaSalle Street property. In addition, Mr. Lichtenstein’s guaranty covered the full amount of the Citicorp Loan and New Citicorp Loan in the event of any fraud or misrepresentation in connection with the loan or in the event of any voluntary bankruptcy, assignment for the benefit of creditors or other similar action relating to Prime Equity, us or certain other entities in connection with the Citicorp Loan and New Citicorp Loan.

The Citicorp Loan and the New Citicorp Loan matured on January 10, 2008 and payments of interest only were due monthly. They were pre-payable at any time. The loans bore interest as selected by Prime Equity at either the eurodollar rate (as defined in the loan documents) plus 4.3% per year or the Citicorp base rate (as defined in the loan documents) plus 1.5% per year. Simultaneously with the Citicorp Loan closing, Prime Equity acquired an interest rate cap that capped the eurodollar rate at 4.8%, resulting in a capped maximum interest rate of 9.1% per year. We paid $0.3 million from loan proceeds for the interest rate caps. We received proceeds of $0.3 million in 2007 and $0.1 million in 2006 related to this cap agreement. On November 21, 2006, $39.2 million of the Citicorp Loan was repaid leaving an outstanding balance of $18.8 million in aggregate on the Citicorp Loan and New Citicorp Loan. The remaining balance of $18.8 million was subsequently paid on January 7, 2008 utilizing proceeds from the sale of our joint venture interest in The United Building located at 77 West Wacker Drive to our joint venture partner.

The Citicorp Loan had an origination fee of 1.0% ($580,000) which was paid from proceeds at closing, and the Citicorp Loan and New Citicorp Loan had an exit fee of 1.0% (not to exceed $580,000), if either loan was paid in full within one year of the original closing date. Prime Equity was required to establish a $3.0 million leasing reserve account at the closing and is required to deposit an additional $250,000 per month into the leasing reserve accounts, to be used for tenant improvements costs and leasing commissions. In addition, Prime Equity was required to maintain a minimum cash balance during the term of the loans, including amounts in the leasing reserve accounts, of at least $6.0 million. As a result of the previously discussed loan pay down of $39.2 million, the monthly leasing reserve deposit was lowered to $200,000 and the minimum cash balance requirement was lowered to $4.0 million. The leasing reserve account and minimum cash balance as of December 31, 2007 was $6.7 million.

F-19

4. Mortgage Notes Payable (continued)

Prime Equity was also required to maintain a minimum 1.10 debt service coverage ratio as defined in the loan documents for the Citicorp Loan and New Citicorp Loan. In addition, after the first anniversary of the Citicorp Loan, Prime Equity was required to maintain a loan-to-value ratio for certain of the collateral pledged as security for the loan of 80.0% or less, as defined in the loan documents.

Continental Towers. On November 21, 2006, the owners of Continental Towers refinanced the property with a first mortgage loan (the “Senior Loan”) in the principal amount of $115.0 million from CWCapital LLC (“CWCapital”). Proceeds of the loan were utilized to (i) repay the existing first mortgage loan encumbering the Continental Towers property in the principal amount of $75.0 million and (ii) partially repay approximately $36.6 million of the Junior Loan encumbering the property. The Junior Loan is held by Prime Equity. After the partial repayment of the Junior Loan, approximately $128.6 million of principal and accrued interest remained outstanding under the Junior Loan on November 21, 2006. Prime Equity used the funds from the partial prepayment of the Junior Loan, and certain other funds, to make the $39.2 million repayment referred to above to Citicorp.

On December 29, 2006, the owners of Continental Towers divided the property into two separate ownership parcels and the Senior Loan and the Junior Loan were each divided into two cross-defaulted and cross-collateralized loans encumbering the two ownership parcels.

Although the Company does not own fee title to the Continental Towers property, we have a significant economic interest in the property through our ownership of two Junior Loans secured by the property, and we consolidate the property’s operations into our financial statements and account for it as an owned property. In addition, a subsidiary of Prime Equity manages the property.

The Senior Loan has a fixed interest rate of 5.864% per year and matures on December 1, 2016. The loan may not be prepaid except during the last three months of the loan term and the Senior Loan may be prepaid only upon the earlier of (a) 24 months following its securitization or (b) 36 months after closing, as stipulated in the loan agreement. Payments of interest only are due monthly and there is no required principal amortization. The Senior Loan is assumable subject to the lenders’ reasonable consent and the payment of a 0.50% transfer fee, as well as the satisfaction of certain other requirements as more fully set forth in the loan documents.

BHAC Capital IV, L.L.C. On June 29, 2007, through our wholly-owned qualified REIT subsidiary PGRT ESH, Inc. (“PGRT ESH”), we obtained a $120.0 million non-recourse loan (the “Citicorp Loan”) from Citicorp USA, Inc. (“Citicorp”). The loan is interest only and accrued interest at a variable rate of 4.0% above the London Interbank Offered Rate (“LIBOR”) or 1.50% above Citicorp’s base interest rate, as selected by PGRT ESH from time to time. The loan had a maturity date of June 10, 2008 and is guaranteed by an affiliate of Lightstone, Lightstone Holdings LLC (“Lightstone Holdings”), and our Chairman of the Board, Mr. David Lichtenstein.

Effective June 10, 2008, PGRT ESH extended the maturity date of the Citicorp Loan in the original principal amount of $120 million, from June 10, 2008 until June 15, 2009. The interest rate for the extension is at PGRT ESH’s election (a) one or three-month LIBOR plus 6% or (b) the lender’s base rate plus 4% per annum. The loan is non-recourse to PGRT ESH and is secured by, among other things, a pledge of PGRT ESH’s membership interest in BHAC Capital IV, L.L.C. (“BHAC”), an entity that owns 100% of Extended Stay, Inc. (“ESH”). The loan is guaranteed by David Lichtenstein, the Chairman of our Board of Trustees, and Lightstone Holdings (“Guarantors”), both of which are affiliates of our parent company. In addition, as of December 31, 2008, affiliates of Guarantors repaid $38.5 million of principal on the loan and paid $11.3 million in debt service and other fees on the loan.

F-20

4. Mortgage Notes Payable (continued)

The loan extension had a $3.0 million restructuring fee payable in three installments through September 30, 2008. The loan also has a $1.1 million exit fee. Future partial principal repayments of the loan were due as follows: (i) $5.0 million on July 31, 2008, (ii) $20.0 million on September 30, 2008, (iii) $20.0 million on December 31, 2008 and (iv) $20.0 million on March 31, 2009. Of the amount due on September 30, 2008 $10.0 million could be deferred at PGRT ESH’s election until December 31, 2008 provided that the interest rate on the loan will then increase by 2% per annum until such amount is paid.

On November 5, 2008, PGRT ESH entered into a First Amendment to Amended and Restated Loan Agreement dated as of October 31, 2008, modifying various terms of the Citicorp Loan. Pursuant to the First Amendment, the interest rate of the loan was increased to LIBOR plus 10%. The principal repayment schedule under the First Amendment was as follows: (i) $4.0 million was due on or before November 30, 2008, (ii) $41.0 million on December 31, 2008, (iii) $20.0 million on March 31, 2009, (iv) the balance of the loan was due on June 15, 2009 or earlier in the event of the occurrence of certain asset sales of the PGRT ESH or the Guarantors or its affiliates; and (v) a $1.0 million fee upon the loan repayment or maturity.

On December 31, 2008, PGRT ESH entered into a Second Amendment to Amended and Restated Loan Agreement modifying various terms of the Citicorp Loan. The principal repayment schedule under the Second Amendment was as follows: (i) $41.0 million was due on or before January 30, 2009, (ii) $20.0 million was due on March 31, 2009, (iii) the balance of the loan was due on June 15, 2009 or earlier in the event of the occurrence of certain asset sales of PGRT ESH or the Guarantors or its affiliates; and (iv) a $1.0 million fee is due upon the loan repayment or maturity. In addition, certain minimum payments were required which will be applied to the foregoing repayment schedule if certain asset sales of Guarantor’s and PGRT ESH’s affiliates are consummated or certain other events occur.

On January 30, 2009, PGRT ESH entered into a Third Amendment to Amended and Restated Loan Agreement modifying certain terms of the Citicorp Loan. Pursuant to the Third Amendment, the date for making the $41.0 million payment on the loan was extended from January 30, 2009 until March 2, 2009.

On March 4, 2009, PGRT ESH entered into a Fourth Amendment to Amended and Restated Loan Agreement modifying certain terms of the Citicorp Loan. Pursuant to the Fourth Amendment, the date for making the $41.0 million payment on the loan was further extended from March 2, 2009 until April 30, 2009. In addition, the remaining $1.0 million restructuring fee due at September 30, 2008 was included with the $1.0 million fee originally due upon maturity. The loan currently has an outstanding principal amount of $80.0 million.

F-21

4. Mortgage Notes Payable (continued)

330 N. Wabash Avenue Refinancing. On March 18, 2008, we refinanced the previously existing loan on our 330 N. Wabash Avenue property with two loans on the remaining portion of the property not sold (the “Office Property”) consisting of (a) a loan in the principal amount of $88.0 million (“Loan A”) from ING USA Annuity and Life Insurance Company (the “Loan A Lender”) and (b) a loan in the principal amount of $100.0 million (“Loan B” and, together with Loan A, the “Loans”) from General Electric Capital Corporation (the “Loan B Lender”). The initial advance of Loan B consisted of $50.0 million, and our subsidiary who is the borrower of the Loans, 330 N. Wabash Avenue, L.L.C. (“330 LLC”), has the right to draw the remaining $50.0 million for future leasing and redevelopment costs relating to the property, subject to compliance with the conditions for future draws contained in the Loan B documents. The Loans are secured by (i) a first mortgage on the Office Property, (ii) a leasehold mortgage on the adjacent 902-space parking garage (the “Parking Garage”) leased by 330 LLC pursuant to a long-term ground lease, and (iii) all rents related to the Office Property and Parking Garage. Loan B is further secured by a cash deposit or letter of credit in the amount of $2.75 million (which will be released after the third anniversary of the Loans if 330 LLC satisfies certain financial benchmarks).

Loan A matures on April 1, 2038. On April 1 of each year (starting with April 1, 2011), the Loan A Lender has an option to call Loan A, and 330 LLC may negate the Loan A Lender’s call options, if exercised, for 2011 and 2012 upon the satisfaction of certain conditions. Loan A bears interest at a fixed rate of 6.00% per year for the three years and at a rate of LIBOR plus a market-based spread not to exceed 4.5% for years four and five. If 330 LLC negates the Loan A Lender’s call options as described above, Loan A will bear interest at a rate equal to the 30-day London Interbank Offer Rate plus a market-based spread not to exceed 4.50% per year for the remainder of the term of Loan A. Loan A may be prepaid in whole during the first two years with a prepayment premium, and may be prepaid thereafter at par. Payments of interest are due monthly and the principal amount of Loan A amortizes at $1,000 per year for the first five years of the term of Loan A. For the remainder of its term, Loan A amortizes based on a 25 year amortization schedule with equal monthly installments of principal and interest. Loan A is assumable upon payment of a 1% assumption fee and the satisfaction of various conditions, including certain property related financial covenants.

Loan B matures on March 31, 2013. The initial advance of Loan B bears interest at a fixed rate of 7.95% per year. Subsequent advances will bear interest at a rate equal to the 30-day London Interbank Offer Rate plus 4.62%. Loan B may not be prepaid during the first year; thereafter, it is payable in whole subject to a yield maintenance payment. Payments of interest only are due monthly and there is no required principal amortization. Loan B is assumable upon payment of a 1% assumption fee and the satisfaction of various conditions, including certain property related financial covenants.

The Loans are non-recourse to 330 LLC except for certain recourse exceptions, including waste, fraud, misallocation of funds and other similar exceptions. The recourse exceptions have been guaranteed (the” “Non-Recourse Carve-Out Guaranty”) by our Operating Partnership. The Operating Partnership also entered into a completion guaranty relating to certain construction, demolition and asbestos abatement work at the Office Property for the benefit of the Loan B Lender (the “Completion Guaranty” and, together with the Non-Recourse Carve-Out Guaranty, the “Guaranties”). The Guaranties include a covenant that the Operating Partnership will maintain a minimum net worth of $15.0 million, calculated by adding back accumulated depreciation, and a minimum cash liquidity balance of $10.0 million.

F-22

4. Mortgage Notes Payable (continued)

330 LLC also entered into environmental indemnity agreements related to both the Office Property and the Parking Garage, which obligations were also guaranteed by the Operating Partnership. The Guaranties also include a guaranty that approximately $15.3 million will be deposited into the leasing escrow from property cash flow within approximately two years of closing. As of December 31, 2008, $5.2 million has been deposited in escrow.

The Loans required the establishment of various customary and negotiated leasing, tenant improvements, real estate tax, ground lease rent, capital improvements, debt service and insurance reserves, all as more fully set forth in the loan documents, and totaling $6.5 million at closing. Net cash flow from the Office Property and the Parking Garage will be deposited into the escrows to fund future leasing, capital improvements and other costs relating to the Office Property and the Parking Garage.

4343 Commerce Court Refinancing. On June 4, 2008, we refinanced our 4343 Commerce Court property with a first mortgage loan in the principal amount of $11.6 million from Leaders Bank, with $0.9 million available for future fundings related to leasing costs. The proceeds of the loan were primarily utilized to repay the existing first mortgage loan encumbering the property in the principal amount of $10.2 million. The new loan bears interest at the variable rate of the London Interbank Offered Rate (“LIBOR”) plus 2.0%. The interest rate is capped at 6.5% or may not be less than 4.5%. This loan has a 5-year term and requires monthly amortization payments based on a thirty-year amortization schedule. The Operating Partnership guaranteed this loan and the guaranty includes a covenant that the Operating Partnership will maintain a minimum tangible net worth of $10.0 million and a minimum cash liquidity balance of $2.0 million.

Amortization of Principal. We made payments totaling $1.8 million, $1.8 million and, $1.7 million for amortization of principal for loans on various properties, in 2008, 2007 and 2006, respectively.

The following represents our future minimum principal payments (excluding extension options) on our mortgage notes payable outstanding at December 31, 2008:


Year Ending December 31	Amount
	(dollars in thousands)
2009	$	104,528
2010		12,725
2011		153,806
2012		417
2013		59,725
Thereafter		115,000

	$	446,201

The total fair value of our mortgage notes payable, as adjusted in conjunction with the application of purchase accounting related to the Acquisition, is $447.9 million. Also, as a result of the Acquisition, we are amortizing the fair value adjustment for our debt over the remaining life of the debt, which is recorded in the accretion of mortgage note payable. For the year ended December 31, 2008, amortization totaled $1.1 million. The actual amount owed to lenders for mortgage notes payable at December 31, 2008 is $446.2 million.

F-23

5. Debt Covenants

The financial covenants contained in some of our loan agreements and guarantee agreements with our lenders include minimum ratios for debt service coverage and other financial covenants. As of December 31, 2008, we are in compliance with the requirements of all financial covenants. On October 20, 2008, we received a notice of default from the special servicer of the non-recourse mortgage note on our 800 Jorie Boulevard property. Due to the property generating negative cash flows, debt service payments were discontinued as of September 1, 2008. We are currently in the process of renegotiating the terms of the loan with the special servicer and the lender. A default on the Jorie Boulevard loan does not cause a default on any of the Company’s other loans.

Certain loans contain cross-default provisions whereby a default under the covenants related to one loan agreement would also result in a default under the provisions of one or more other loans. Failure to meet a covenant could result in a requirement for a principal paydown, accelerated maturity, increased interest rate, additional collateral or other changes in terms.

6. Leases

We have entered into lease agreements with tenants with lease terms ranging from month-to-month to twenty years at lease inception. The leases generally provide for tenants to share in operating expenses and real estate taxes, although some leases only provide for sharing amounts in excess of specified base amounts. Approximately 33.0%, 28.5% and 36.1% of rental revenue for the years ended December 31, 2008, 2007 and 2006, respectively, was received from five tenants. One tenant represented approximately 16.0% of our total revenues in 2008.

The total future minimum rentals to be received by us under noncancelable operating leases in effect at December 31, 2008, exclusive of tenant reimbursements and contingent rentals, are as follows:


Year Ending December 31	Amount
	(dollars in thousands)
2009	$	44,258
2010		34,498
2011		26,987
2012		23,040
2013		21,048
Thereafter		67,460

	$	217,291

As a part of lease agreements entered into with certain tenants, we assumed those tenants’ leases at their previous locations and subsequently executed subleases for certain of the assumed lease space. See Note 15 — Commitments and Contingencies — Lease Liabilities for a description of these obligations.

Future minimum rental payments (exclusive of tenant reimbursements) to be paid by us under leases assumed, net of subleases executed through December 31, 2008, are as follows:


	Gross		Executed		Net
Year Ending December 31	Amount		Subleases		Amount
	(dollars in thousands)
2009	$	5,971	$	4,987	$	984
2010		5,226		4,374		852
2011		5,357		4,565		792
2012		3,630		3,058		572
2013		—		—		—
Thereafter		—		—		—

	$	20,184	$	16,984	$	3,200

F-24

7. Minority Interests

We are the sole general partner of the Operating Partnership and own all of the 4.0 million outstanding preferred units of the Operating Partnership. We also own 0.9% of the common units of the Operating Partnership. Each preferred unit and common unit entitles us to receive distributions from our Operating Partnership. Dividends declared or paid to holders of common shares and preferred shares of the REIT are based upon the distributions we receive with respect to our common units and preferred units of the Operating Partnership.

As of December 31, 2008, subsidiaries of Lightstone owned 100.0% of our common shares, (236,483, common shares) and 99.1%, of the outstanding common units in the Operating Partnership (26,488,389 common units).

8. Preferred Shares

We are authorized to issue up to 30,000,000 of non-voting preferred shares of beneficial interest in one or more series. On June 5, 1998, we completed the sale of 4,000,000 Series B Shares with a $0.01 par value. Our Series B Shares are publicly traded on the NYSE.

Dividends on our Series B Shares are payable quarterly on or about the last day of January, April, July and October of each year, at the rate of 9.0% (equivalent to $2.25 per annum per Series B Share). Our Series B Shares rank senior to our common shares as to the payment of dividends and as to the dividend of assets upon liquidation. Our Series B Shares may be redeemed, at our option, at a redemption price of $25.00 per share plus accrued and unpaid dividends. The redemption price is payable solely out of the proceeds from the sale of other capital shares of beneficial interest of ours.

On January 7, 2009, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2008 dividend period. The quarterly dividend had a record date of January 19, 2009. These dividends were paid on January 30, 2009. Under our declaration of trust, these dividends are deemed to be the quarterly dividends related to the fourth quarter of 2008. Dividends paid in the amount of $2.25 per share in 2008 on our Series B Shares have been determined to be a return of capital. The holders of Series B Shares have the right to elect two additional members to our Board if six consecutive quarterly dividends on our Series B Shares are not made. The term of any trustee elected by the holders of Series B Shares will expire whenever the total dividend arrearage in our Series B Shares has been paid and current dividends declared and set apart for payment. Any future dividends in respect of our common shares may not be paid unless all accrued but unpaid preferred share dividends have been or are concurrently satisfied.

9. Discontinued Operations

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) requires, among other things, that the primary assets and liabilities and the results of operations of properties which have been sold subsequent to January 1, 2002, or are held for disposition subsequent to January 1, 2002, be classified as discontinued operations and segregated in the Consolidated Statements of Operations and Balance Sheets. Properties classified as real estate held for disposition generally represent properties that are under contract for sale and are expected to close within the next twelve months.

F-25

9. Discontinued Operations (continued)

In accordance with the requirements of SFAS No. 144, we have updated our historical financial statements for the years ended December 31, 2007 and 2006, to present the primary assets and liabilities and the net operating results of those properties sold or classified as held for disposition through December 31, 2008 as discontinued operations for all periods presented. The update does not have an impact on net income available to common stockholders. SFAS No. 144 only results in the reclassification of the operating results of all properties sold or classified as held for disposition through December 31, 2008, within the Consolidated Statements of Operations for the years ended December 31, 2007 and 2006, and the reclassification of the assets and liabilities within the Consolidated Balance Sheets for 2008 and 2007.

On May 16, 2007, we received notice from the tenant at our 1051 North Kirk Road property that they have elected to exercise the option in their lease to purchase the property. On May 2, 2008, we closed on the sale of this property. The net proceeds from the sale of $4.1 million were used to retire the outstanding debt on the property. We recognized a book gain of $0.5 million in the second quarter of 2008.

On May 22, 2007, we closed on the sale of our Narco River Business Center property located in Calumet City, Illinois, for a sale price of $7.4 million. We recognized a gain of $2.2 million and retired debt of $2.7 million related to this property.

In September 2008, we entered into a purchase and sale agreement for our 180 North LaSalle Street property for a sale price of $120.0 million (See Note 19 — Subsequent Events — 180 North LaSalle Street Sale for further details).

Below is a summary of the results of operations for our 180 North LaSalle Street property, our 1051 North Kirk Road property and our Narco River Business Center property.


	Year ended December 31
	2008			2007			2006

Rental revenue	$	11,239		$	10,308		$	10,228
Tenant reimbursements		8,892			8,530			8,595
Other property income		(4	)		1,140			151

Total revenue		20,127			19,978			18,974

Property operations		5,516			5,590			5,205
Real estate taxes		4,591			4,832			5,382
Depreciation and amortization		3,903			5,924			6,504
Interest expense		3,628			4,129			4,030

Total expenses		17,638			20,475			21,121

Interest and other income		142			197			142
Income (loss) before net gain on sales of real estate and minority interests		2,631			(300	)		(2,005	)
Net gain on sales of real estate		506			2,220			—
Minority interests		(3,109	)		(1,903	)		1,987

Discontinued operations	$	28		$	17		$	(18	)

F-26

10. Earnings Per Share

The following table sets forth the computation of our basic and diluted net income available per weighted-average common share of beneficial interest for the years ended December 31, 2008, 2007 and 2006:


	Year			Year			Year
	Ended			ended			ended
	December 31			December 31			December 31
	2008			2007			2006
	(dollars in thousands, except per share amounts)
Numerator:
Loss from continuing operations before minority interests	$	(64,704	)	$	(95,840	)	$	(29,096	)
Minority interests		(8,660	)		36,805			37,761
Net income allocated to preferred shareholders		(9,000	)		(9,000	)		(9,000	)

Loss before discontinued operations		(82,364	)		(68,035	)		(335	)
Discontinued operations, net of minority interests		28			17			(18	)

Numerator for earnings per share — loss available to common shares	$	(82,336	)	$	(68,018	)	$	(353	)


Denominator:
Denominator for basic earnings per share — weighted average common shares		236,483			236,483			236,483
Effect of dilutive securities:
Employee stock options		—			—			—
Employee stock grants		—			—			—

Denominator for diluted earnings per share — adjusted weighted average common shares and assumed conversions		236,483			236,483			236,483


BASIC AND DILUTED EARNINGS AVAILABLE TO COMMON SHARES PER WEIGHTED-AVERAGE COMMON SHARE:
Loss from continuing operations after minority interests and allocation to preferred shareholders	$	(348.29	)	$	(287.69	)	$	(1.41	)
Discontinued operations, net of minority interests		0.12			0.07			(0.08	)

Net loss available per weighted-average common share of beneficial interest — basic and diluted	$	(348.17	)	$	(287.62	)	$	(1.49	)

In connection with the Acquisition, all outstanding options with an exercise price greater than the sales price of $7.25 per share were cancelled and each outstanding option for a common share with an exercise price less than the sales price were entitled to be exchanged for cash in an amount equal to the difference between $7.25 and the exercise price. No new options have been granted by the Company.

F-27

11. Investments in Unconsolidated Joint Ventures

We have investments in one joint venture and a membership interest in an unconsolidated entity which owns extended-stay hotel properties which we account for under the equity method of accounting. The following is a summary of the investments and the amounts reflected in our consolidated financial statements related to these investments.

We have accounted for our investment in the membership interest that owns extended-stay hotel properties under the equity method of accounting effective in the fourth quarter of 2007. This change from the cost method of accounting is primarily due to the deteriorating real estate and financial market conditions resulting in a re-evaluation of the expected term and nature of the investment, which was initially considered to be temporary.

Extended Stay Hotels. On June 29, 2007, through our wholly-owned subsidiary, PGRT ESH, we purchased a $120.0 million membership interest in BHAC, an entity which owns 100.0% of ESH, from Lightstone Holdings, an affiliate of Lightstone. ESH and its affiliates own mid-priced extended-stay hotel properties in the United States and Canada. Because the transaction was with affiliates of Lightstone, the acquisition of the membership interest was approved unanimously by our independent trustees.

The membership interest purchase agreement (the “Purchase Agreement”) between PGRT ESH and Lightstone Holdings contained (i) representations and warranties by PGRT ESH and Lightstone Holdings, which are customary for this type of transaction and (ii) a covenant that Lightstone Holdings and David Lichtenstein, the principal of Lightstone Holdings and our Chairman of the Board, will indemnify PGRT ESH and us from any adverse tax consequences arising from PGRT ESH’s ownership of the membership interest in the owner of ESH.

The $120.0 million membership interest has a liquidation preference of $120.0 million, a 12.0% preferred dividend rate per annum, and is entitled to receive a 15.14% residual profits interest. Through December 31, 2007, PGRT ESH received distributions monthly at a 10% rate per annum, with the remaining 2% accruing pursuant to the terms of BHAC’s organizational documents. The membership interest generally has no voting rights, PGRT ESH’s consent is generally required to amend, alter or repeal any provision that materially or adversely affects the powers, rights, privileges or preferences of PGRT ESH’s membership interest.

The purchase price was financed by the Citicorp Loan, which loan is secured by a pledge of the BHAC membership interest and any proceeds from such interest. The Citicorp Loan is secured by pledges of additional collateral, including pledges by affiliates of Lightstone of their ownership interests in us and the Operating Partnership and pledges of other assets owned by affiliates of Lightstone LLC, but not by pledges of any of our assets or assets of our Operating Partnership or assets of the Operating Partnership’s subsidiaries, other than PGRT ESH’s membership interest in BHAC.

Our interest in BHAC at December 31, 2008 was valued at zero (included in Investments In Unconsolidated Entities). Our share of BHAC’s operations, assuming a hypothetical liquidation was a loss of $60.4 million and $47.8 million for the years ended December 31, 2008 and 2007, respectively. In addition, during 2008 a $5.6 million provision for asset impairment represents the write-down of the remaining balance of our investment in the membership interest in BHAC as the investment was deemed to other than temporary due to past and expected inability to sustain earnings at a level which would justify the carrying value. In January 2008, PGRT ESH was informed that BHAC was indefinitely suspending distributions on the membership units held by PGRT ESH. Since that time, the debt service and fees on the Citicorp Loan, which is non-recourse to PGRT ESH, was funded with the proceeds of a $49.9 million capital contribution by Prime Office to the Company and, in turn, to PGRT ESH. We received a distribution of $6.2 million in 2007 from this investment.

F-28

11. Investments in Unconsolidated Joint Ventures (continued)

The following tables represent the condensed balance sheet and income statement of BHAC on a historical basis:


	December 31			December 31
	2008			2007
	(dollars in thousands)
Real estate, at cost (net):	$	5,406,059		$	5,683,185
Other assets		1,024,647			2,155,795

Total assets	$	6,430,706		$	7,838,980


Mortgage notes and other loans payable	$	7,411,073		$	7,402,447
Other liabilities		100,600			147,947
Total members’ capital		(1,080,967	)		288,586

Total liabilities and members’ capital	$	6,430,706		$	7,838,980


				For the period
				June 29, 2007
				through
	December 31, 2008			December 31, 2007
	(dollars in thousands)
Total revenue	$	860,482		$	515,364
Total expenses		(2,236,266	)		(705,338	)

Net loss	$	(1,375,784	)	$	(189,974	)

The United Building. On January 7, 2008, we completed the sale of our 50.0% common joint venture interest in The United Building located at 77 West Wacker Drive in Chicago, Illinois to our joint venture partner. The sale price was $50.0 million, subject to customary pro-rations and adjustments. We recognized a gain of $29.4 million and we used $18.8 million of the net proceeds to retire the outstanding balance on two Citicorp mezzanine loans.

The following table summarizes our share of various items:


	Year
	ended
	December 31
	2008		2007			2006
	(dollars in thousands)
Operations (included in loss from investments in unconsolidated joint ventures)	$	—	$	(1,772	)	$	(3,622	)
Distributions received		—		—			—

F-29

11. Investments in Unconsolidated Joint Ventures (continued)

The following tables represent the condensed balance sheets and income statements of 77 West Wacker Drive, L.L.C. on a historical basis:


	December 31
	2008		2007
	(dollars in thousands)

Real estate, at cost (net):	$	—	$	254,685
Other assets		—		26,820

Total assets	$	—	$	281,505


Mortgage note payable	$	—	$	164,652
Other liabilities		—		24,896
Total members’ capital		—		91,957

Total liabilities and members’ capital	$	—	$	281,505


	Year ended December 31
	2008		2007		2006
	(dollars in thousands)

Total revenue	$	—	$	38,278	$	41,109
Total expenses		—		35,551		42,071

Net income (loss)	$	—	$	2,727	$	(962	)

Citadel Center. On November 8, 2006, Dearborn LLC, the owner of Citadel Center, completed the sale of Citadel Center to a subsidiary of CARI, LLC, an entity controlled by Robert Gans, a real estate investor based in New York, New York. A subsidiary of our Operating Partnership owned a thirty percent (30%) joint venture interest in Dearborn LLC.

The sales price for the entire Citadel Center property was $560.0 million, subject to customary pro-rations and adjustments. Two of the Company’s subsidiaries entered into a management and leasing agreement at closing providing that they will be the manager and leasing agents for Citadel Center through August 31, 2012, subject to the terms of the agreement and extension by agreement of the parties.

At the closing, the Operating Partnership indemnified the purchaser against any costs or expenses in connection with the Citadel Reimbursement Obligation (as described below). The Operating Partnership previously indemnified its joint venture partner in Dearborn LLC against the Citadel Reimbursement Obligation. The Citadel Reimbursement Obligation is the obligation of Dearborn LLC under its lease with Citadel Investment Group, LLC (“Citadel”) to reimburse Citadel for the financial obligations, consisting of base rent and the pro rata share of operating expenses and real estate taxes, under Citadel’s pre-existing lease for 161,488 square feet of space at the One North Wacker Drive office building in downtown Chicago, Illinois. We have executed subleases at One North Wacker Drive for all of the space to partially mitigate our obligation under the Citadel Reimbursement Obligation. The foregoing obligations are partially secured by a total of $7.1 million held in escrow at closing. The Citadel Reimbursement Obligation is described in more detail in Note 15 — Commitments and Contingencies.

F-30

11. Investments in Unconsolidated Joint Ventures (continued)

At the closing, the Operating Partnership received its annual distribution of income from Dearborn LLC of $4.2 million. The Operating Partnership share of the net proceeds from the sale was $92.4 million, and the Operating Partnership used approximately $57.1 million of the net proceeds to pay the mezzanine loan from IPC Lender. The Operating Partnership recorded a book gain of approximately $18.8 million from the transaction (included in gain on sales of real estate and joint venture interests).

The following table summarizes our share of various items:


	Year ended December 31
	2008		2007		2006
	(dollars in thousands)
Operations (included in loss from investments in unconsolidated joint ventures) (1)	$	—	$	—	$	(5,470	)


(1)		During the 2006 period, distributions to our partner exceeded the joint venture’s net income. As a result, income equal to the distribution was allocated to our partner and we recorded a loss in the amount of the difference between this allocation and the actual net income of the joint venture. The distribution was $9.9 million for the year ended December 31, 2006.

The following table represents the condensed income statements of Dearborn LLC on a historical basis.


	Year ended December 31
	2008		2007		2006
	(dollars in thousands)
Total revenue	$	—	$	—	$	51,778
Total expenses		—		—		47,339

Net income (loss)	$	—	$	—	$	4,439

Thistle Landing. We own a 23.1% common interest in Plumcor Thistle, LLC, (the “Plumcor/Thistle JV”) which owns a 101,006 square foot office building located in Phoenix, Arizona, that opened in late 1999. Our interest at December 31, 2008 and at December 31, 2007 was an equity investment of $6,000 and $0 (included in Investments in Unconsolidated Entities), respectively. Our share of the venture’s operations was a gain of $9,000, a loss of $67,000 and a loss of $53,000 for the years ended December 31, 2008, 2007 and 2006, respectively (included in Income (loss) from investments in unconsolidated joint ventures). We received no distribution in 2008, 2007 and 2006.

F-31

11. Investments in Unconsolidated Joint Ventures (continued)

On December 22, 2005, we terminated a purchase and sale agreement with a third party purchaser (the “Purchaser”) under contract to purchase our membership interest in Plumcor/Thistle JV because the Purchaser had failed to obtain our joint venture partner’s consent to the transaction by the December 15, 2005 deadline contained in the agreement. The Purchaser subsequently sent us a letter disputing our right to terminate the agreement, to which we replied with a letter reaffirming our right to terminate the agreement. On January 31, 2006, the Purchaser filed a lawsuit in the Circuit Court of Cook County, Illinois claiming that our termination of the purchase and sale agreement was not justified. The Purchaser is requesting the Court to either grant it specific performance and order us to convey our joint venture interest in Plumcor Thistle or damages in the amount of $5.0 million. We believe we have legitimate defenses to this action and the ultimate outcome will not have a material adverse affect on our consolidated financial condition or results of operations.

Our joint venture interests and the membership interest in the unconsolidated entity described above are considered to be a variable interest in the entity that owns the property, which we believe is a variable interest entity (“VIE”). However, based on our evaluations, we are not the primary beneficiary of the entity, and, therefore, we do not consolidate the VIEs. Our maximum exposure as a result of the VIEs is not material as a result of losses being limited to our capital balance.

12. Stock Based Compensation

Our 1997 Share Incentive Plan (the “Plan”) permitted the grant of share options, share appreciation rights, restricted shares, restricted units and performance units to our officers and other key employees and to officers and employees of subsidiaries, the Operating Partnership, the Services Company and other owned partnerships. The Plan also permitted the grant of share options to non-employee trustees.

As a result of the Acquisition, the Plan was terminated and all options were either executed or retired.

On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payments” (“SFAS No. 123R”). This Statement requires the Company to recognize the cost of its employee stock option awards in its consolidated statement of income based upon the grant date fair value. According to SFAS No. 123R, the total cost of the Company’s share-based awards is equal to their grant date fair value and is recognized on a straight-line basis over the service periods of the awards. The Company adopted the fair value recognition provisions of SFAS No. 123R using the modified prospective transition method.

We did not recognize any compensation expense in 2008, 2007 or 2006 under the modified prospective transition method.

F-32

13. Related Party Transactions

We previously owned a 50.0% common interest in 77 West Wacker Drive, L.L.C., an unconsolidated joint venture that owned the office property known as The United Building located at 77 West Wacker Drive in Chicago, Illinois, until its sale on January 7, 2008 to our joint venture partner. In connection with our management of The United Building, we were entitled to receive property management fees and lease commissions for services performed and reimbursement of costs we paid on behalf of 77 West Wacker Drive, L.L.C. Such amounts are summarized as follows:


	Year ended December 31
	2008		2007		2006
	(dollars in thousands)

Management fees (1)	$	—	$	913	$	1,151
Payroll and other operating costs		—		1,339		1,397
Leasing costs (1)		—		867		1,298


(1)		We earned a monthly management fee equal to 2.5% of gross rental income calculated on a cash basis and lease commissions for services performed. For financial reporting purposes, 50.0% of these amounts, representing our share of earnings from the joint venture, were offset by our equity in earnings from this joint venture.

We previously owned a 30.0% subordinated common ownership interest in the Dearborn LLC, an unconsolidated joint venture that owned the office property known as Citadel Center located at 131 South Dearborn Street in Chicago, Illinois until its sale on November 8, 2006. In connection with our management of the property, we were entitled to receive property management fees and lease commissions for services performed and reimbursement of costs we paid on behalf of Dearborn LLC. Such amounts are summarized as follows:


	Year ended December 31
	2008		2007		2006
	(dollars in thousands)

Management fees (1)	$	—	$	—	$	852
Payroll and other operating costs		—		—		700
Leasing costs (1)		—		—		36


(1)		We earned a monthly management fee equal to 2.0% of gross rental income calculated on a cash basis and lease commissions for services performed. For financial reporting purposes, these are offset by our equity in the loss from this joint venture.

On February 1, 2007, our Board approved of us, through one or more of our subsidiaries, entering into an asset and development agreement with an affiliate of Lightstone, which provides that one of our subsidiaries will perform certain asset management, development management and accounting services for an office and retail building located at 1407 Broadway Avenue in New York City, New York. The agreement is terminable by either party upon thirty-days notice and provides for us to receive an asset management fee of $500,000 per year and a development fee of 2.5% of any development costs, plus the reimbursement of out-of-pocket costs such as travel expenses.

F-33

13. Related Party Transactions (continued)

See the discussion under Note 11 — Investments in Unconsolidated Joint Ventures of our purchase of a membership interest in the unconsolidated entity that owns ESH.

In January 2008, PGRT ESH was informed that BHAC was indefinitely suspending distributions on the membership units held by PGRT ESH. Since that time, the debt service and fees on the Citicorp Loan, which is non-recourse to PGRT ESH, was funded with the proceeds of a $49.9 million capital contribution by Prime Office to the Company and, in turn, to PGRT ESH.

14. Fair Values of Financial Instruments

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Additionally, the Company, from time to time, may be required to record other assets at fair value on a nonrecurring basis.

Fair Value Hierarchy

As required under SFAS No. 157, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

These levels are:


		Level 1		Valuation is based upon quoted prices for identical instruments traded in active markets.

		Level 2		Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

		Level 3		Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.

The following is a description of valuation methodologies used for the Company’s assets and liabilities recorded at fair value.

Cash and Cash Equivalents and Restricted Cash Escrows, Receivables and Payables

The carrying amount of cash and cash equivalents, restricted cash escrows, tenant accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturity of these financial instruments. We believe all of these to be Level 1 Valuations.

F-34

14. Fair Values of Financial Instruments (continued)

We maintain our cash and cash equivalents and restricted cash escrows at various financial institutions. The combined account balances at each institution periodically exceed FDIC insurance coverage, and as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. We believe that the risk is not significant.

Mortgage and Notes Payable

The carrying amount of our variable rate borrowings approximates their fair value. The fair values of our fixed rate debt agreements are estimated using discounted cash flow analyses based upon index rates, market spreads and incremental borrowing rates for similar types of borrowing arrangements. Similar debt instruments are traded in active markets so we classify our mortgage and notes payable to be Level 2 Valuation.

15. Commitments and Contingencies

Legal. On December 22, 2005, we terminated a purchase and sale agreement with the Purchaser under contract to purchase our membership interest in Plumcor/Thistle JV because the Purchaser had failed to obtain our joint venture partner’s consent to the transaction by the December 15, 2005 deadline contained in the agreement. The Purchaser subsequently sent us a letter disputing our right to terminate the agreement, to which we replied with a letter reaffirming our right to terminate the agreement. On January 31, 2006, the Purchaser filed a lawsuit in the Circuit Court of Cook County, Illinois claiming that our termination of the purchase and sale agreement was not justified. The Purchaser is requesting the Court to either grant it specific performance and order us to convey our joint venture interest in Plumcor Thistle or damages in the amount of $5.0 million. We have currently filed a motion for summary judgment in the case and we are waiting for a ruling on this motion from the Court. This matter could prove costly and time consuming to defend and there can be no assurances about the eventual outcome, but we believe we have legitimate defenses to this action and the ultimate outcome will not have a material adverse affect on our consolidated financial condition or results of operations.

During 2006, the Internal Revenue Service (the “IRS”) began an examination of the income tax returns for our Operating Partnership for the years ended 2003 and 2004 and 180 N. LaSalle, L.L.C. for the year ended 2004. The IRS concluded its 2003 examination and we have been notified that no adjustments were proposed for the Operating Partnership for that tax year. We currently anticipate the remaining examinations to be concluded and settled in the next several months. As a result of its examination of the income tax return for 180 N. LaSalle, LLC for the year ended 2004, the IRS has issued a Notice of Proposed Adjustment. The proposed adjustment would not have a cash effect on us but would decrease the amount of short-term capital loss reported and carried forward on the tax return from the sale of its residual interest it held in a real estate mortgage investment conduit (“REMIC”). We have appealed the adjustment and believe that we have legitimate defenses that the basis in the REMIC, as reported on the tax return, was correct.

F-35

15. Commitments and Contingencies (contingencies)

In addition, and as discussed in Note 19 — Subsequent Events, in connection with the purchase and sale agreement that 180 LLC entered into (and later terminated because of the failure of the purchaser to timely close) for the proposed sale of our 180 N. LaSalle property, on February 13, 2009, the purchaser under the agreement, YPI LaSalle Owner, LLC, filed a lawsuit against 180 LLC in the Circuit Court of Cook County, Illinois, Chancery Division, claiming that the purchase agreement should be rescinded due to the doctrine of impossibility and impracticability and that 180 LLC should return the $6.0 million earnest money to purchaser. In the lawsuit, the purchaser alleges that it was impossible for it to obtain financing and that therefore it should be excused from closing, even though the purchase agreement contained no financing contingency. We believe that this lawsuit is without merit and that we will prevail in it. Although there can be no assurances about the eventual outcome, we believe the ultimate outcome will not have a material adverse affect on our consolidated financial condition or results of operations.

We are a defendant in various other legal actions arising in the normal course of business. In accordance with Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies,” we record a provision for a liability when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Although the outcome of any litigation is uncertain, we believe that such legal actions will not have a material adverse affect our consolidated financial position or results of operations.

Environmental. Phase I or similar environmental assessments have been performed by independent environmental consultants on all of our properties. Phase I assessments are intended to discover information regarding, and to evaluate the environmental condition of, the surveyed property and surrounding properties. Phase I assessments generally include a historical review, a public records review, an investigation of the surveyed site and surrounding properties and the preparation and issuance of a written report, but do not include soil sampling or subsurface investigations.

During the due diligence process in connection with the sale of certain industrial properties in October 2004, additional environmental contamination, beyond that previously identified by our environmental consultants, was discovered by the purchaser of our Chicago Enterprise Center, East Chicago Enterprise Center, and Hammond Enterprise Center facilities. As a result, we agreed to establish a $1.25 million environmental escrow at the closing, in addition to a $3.2 million reserve for use in remediation of the costs. In connection with the sale, the purchaser of these properties agreed to assume the responsibility for the environmental remediation of the property and any costs which may be incurred in excess of the amounts we placed in escrow at the closing. Any excess funds remaining in the $1.25 million escrow after the remediation of the additional environmental contamination will be returned to us. This escrow is included in our restricted cash with a corresponding liability included in other liabilities. At December 31, 2008, this escrow had a balance of $0.9 million.

F-36

15. Commitments and Contingencies (continued)

regional problem that is not confined to the Atrium. Our environmental consultants have advised us that the United States Environmental Protection Agency (the “EPA”) has issued a Statement of Policy towards owners of property containing contaminated aquifers. According to this policy, it is the EPA’s position that where hazardous substances have come to be located on a property solely as a result of subsurface migration in an aquifer from an offsite source, the EPA will not take enforcement actions against the owner of the property. The groundwater underneath this property is relatively deep, and the property obtains its potable water supply from the City of Naperville and not from a groundwater well. Accordingly, we do not anticipate any material liability because of this TCE contamination.

A conditional asset retirement obligation for the removal of asbestos at our 330 N. Wabash Avenue property was estimated to be $4.5 million as of December 31, 2007. During 2008, this obligation was increased as follows: (i) $5.7 million for abatement work to be performed on floors 2-13 as part of the Hotel sale (See Note 16 — Property Acquisitions, Placed in Service and Dispositions); (ii) $6.5 million due to the increased probability of abatement on the remaining floors as lease termination moved closer; and (iii) $0.5 million in accretion of the liability. This was partially offset by payments of $9.4 million.

We believe that our other properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances. We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of our other properties. None of the environmental assessments of our properties have revealed any environmental liability that we believe would have a material adverse effect on our financial condition or results of operations taken as a whole, nor are we aware of any such material environmental liability. Nonetheless, it is possible that our assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of our properties will not be affected by tenants, by the condition of land or operations in the vicinity of our properties (such as the presence of underground storage tanks) or by third parties unrelated to us. If compliance with the various laws and regulations, now existing or hereafter adopted, exceeds our budgets for such items, our financial condition could be further adversely affected.

F-37

15. Commitments and Contingencies (continued)

Tax Indemnities. On January 10, 2006, we and certain other parties, including Roland E. Casati (“Mr. Casati”) and Richard H. Heise (“Mr. Heise”), entered into an Amended and Restated Tax Indemnity Agreement (the “Amended Tax Indemnity Agreement”) in connection with certain modifications to the ownership structure of Continental Towers (the “Continental Transaction”), which among other things, reduced the estimated maximum liability of the Operating Partnership in the event of the consummation of a taxable transaction relating to Continental Towers, calculated at current tax rates, from approximately $53.2 million to $14.0 million.

In connection with the Continental Transaction, we made a payment to Mr. Casati of $4.2 million and Mr. Casati released the Operating Partnership from all of its obligations under the Amended Tax Indemnity Agreement relating to Mr. Casati. This payment was recorded as loss on tax indemnification in our 2006 consolidated financial statements. The Operating Partnership also transferred its interest in the Junior Loan encumbering Continental Towers to our wholly-owned subsidiary, PGRT Equity. In addition, the fee title ownership of Continental Towers was modified so that the property was owned as tenants in common by (i) Continental Towers, L.L.C. (“64.0% Owner”), as a co-owner having an undivided 64.0% interest in the property, and (ii) Continental Towers I, L.P. (“36.0% Owner”), as a co-owner having an undivided 36.0% interest in the property. Mr. Heise owned a 96.7% limited partnership interest in the 36.0% Owner. The remaining ownership interests in 36.0% Owner and all of the ownership interests in 64.0% Owner were owned by affiliates of Mr. Yochanan Danziger (the “CT Entities”).

In December 2006, the ownership of Continental Towers was further restructured so that the property was divided into two parcels, one parcel comprising 64% of the estimated value of Continental Towers owned through the CT Entities and the other parcel comprising 36% of the estimated value of Continental Towers owned through various entities with Mr. Heise having a 96.7% limited partnership interest and the CT Entities owning the remaining interests.

Because our interest in Continental Towers constitutes a significant financial interest in the property, we consolidate the operations of Continental Towers in our financial statements and account for it as an owned property. In addition, a subsidiary of Prime Equity continues to manage Continental Towers pursuant to a management agreement that has a term that expires on December 31, 2012 and cannot be terminated by the owners of Continental Towers prior to that date.

Under the Amended Tax Indemnity Agreement, the Operating Partnership continues, subject to certain exceptions and conditions contained therein, to indemnify Mr. Heise from federal and state income tax payable as a result of any taxable income or gain in his gross income which is caused by a sale, foreclosure or other disposition of Continental Towers or other action by the Operating Partnership or the CT Entities prior to January 5, 2013. The amount of the potential tax indemnity to Mr. Heise under the Amended Tax Indemnity Agreement, including a gross-up for taxes on any such payment, is estimated to be approximately $14.0 million using current tax rates, which is a reduction of approximately $39.2 million from the estimated maximum liability of $53.2 million to Messrs. Casati and Heise prior to the execution of the Amended Tax Indemnity Agreement.

Under the Amended Tax Indemnity Agreement and the partnership agreement of the 36.0% Owner, Mr. Heise has limited consent rights with respect to transactions relating to Continental Towers which could result in taxable income or gain to Mr. Heise. Mr. Heise’s consent rights relate to the following actions: (1) sale or disposition of Continental Towers or any portion thereof; (2) refinance or repayment of debt relating to the Continental Towers; (3) amendments to the Junior Loan or the junior lender’s rights thereunder; and (4) any other action which results in or creates the risk of a “Tax Event” with respect to Mr. Heise; provided, however, that Mr. Heise cannot withhold his consent to any proposed transaction if (i) we obtain a tax opinion from an independent law firm stating that the relevant transaction will not create a tax event; (ii) we obtain an opinion from an independent law firm stating that Mr. Heise has a “reasonable basis” for reporting the transaction without including any taxable income or gain and either (x) we have a net worth of at least $100.0 million or (y) we deposit security in the amount of the potential tax payment which would be due Mr. Heise, grossed-up for any taxes which would be payable by Mr. Heise relating to such payment; or (iii) if we cannot obtain the opinions specified in (i) or (ii) above, we pay the amount of the tax, on a grossed-up basis, to Mr. Heise. In the event that our net worth falls below $50.0 million, then Mr. Heise has the right to acquire the general partnership interest in the 36.0% Owner for a price of $1,000.

F-38

15. Commitments and Contingencies (continued)

The Operating Partnership can be released from its obligations under the Amended Tax Indemnity Agreement in the event of the transfer of Prime Equity’s interest in the Junior Loan to a third-party transferee provided that such transferee or an affiliate assumes our obligations under the Amended Tax Indemnity Agreement and has a net worth in accordance with generally accepted accounting principles (“GAAP”) of not less than $100.0 million.

Lease Liabilities. As a part of lease agreements entered into with certain tenants, we assumed these tenants’ leases at their previous locations and subsequently executed subleases for certain of the assumed lease space. One of these leases is a lease the Citadel Center joint venture has with Citadel.

We have agreed to reimburse the joint venture for its obligation to reimburse Citadel for the financial obligations, consisting of base rent and the pro rata share of operating expenses and real estate taxes, under Citadel’s pre-existing lease (the “Citadel Reimbursement Obligation”) for 161,488 square feet of space at the One North Wacker Drive office building in downtown Chicago, Illinois.

We have executed subleases at One North Wacker Drive for substantially all of the space to partially mitigate our obligation under the Citadel Reimbursement Obligation. As a requirement under one of the subleases for 27,826 square feet, we escrowed a total of $1.1 million with the owner of One North Wacker Drive as security for the payment of the difference between the rental amount payable under the Citadel lease and this sublease. This escrow is being returned to us pro-rata over the life of this sublease, of which $0.7 million has been received through December 31, 2008. The Citadel Reimbursement Obligation includes an estimated remaining nominal gross rental obligation of $35.1 million over the term of the lease. Although we have sold our investment in Citadel Center, we have retained 100.0% of this liability. Liabilities for leases assumed at December 31, 2008 and 2007 includes $3.2 million and $3.5 million, respectively, related to the Citadel Reimbursement Obligation, which is our estimate of the remaining gross rental obligation less estimated future sublease recoveries.

In connection with another sublease at One North Wacker Drive, we assumed two lease obligations, at two Chicago office buildings owned by third parties, with gross rental obligations of approximately $2.8 million. In July 2003, we paid a lease termination fee of $0.3 million on one of the two leases and subsequently made payments of $0.6 million and $0.5 million in 2006 and 2005, respectively, which retired our gross rental obligation on the remaining lease.

On November 26, 2001, we finalized a lease with a tenant for space in Continental Towers, our office buildings located in Rolling Meadows, Illinois. We have agreed to reimburse the tenant for a portion of the financial obligations consisting of base rent and the pro rata share of operating expenses and real estate taxes under the tenant’s lease for occupancy executed at an office building located in downtown Chicago, Illinois. As of December 31, 2008, this lease has a remaining estimated gross rental obligation of approximately $0.1 million. On February 14, 2003, we re-leased the space to the tenant for the remainder of the lease term of the pre-existing lease subject to the tenant’s option to terminate the lease effective as of any date after February 29, 2004, by providing us with six months prior written notice. We have approximately $0.1 million and $0.4 million in liabilities for leases assumed at December 31, 2008 and 2007, respectively, representing an estimate of our net liability related to this obligation which represents the differential between our remaining financial obligation under the pre-existing lease and the expected future rent from the tenant under the new lease.

F-39

16. Property Acquisitions, Placed in Service and Dispositions

The following properties were acquired, placed in service or sold in 2008, 2007 and 2006. The results of their operations are included or excluded in our consolidated statements of operations from their respective transaction dates.

Month

Property

Location

Sales Price

Sold

(dollars in thousands)

2008 Sales

Office:

The United Building (1)

Chicago, IL

50,000

January

330 N. Wabash Avenue (2)

Chicago, IL

46,000

March

1051 N. Kirk Road (3)

Batavia, IL

4,080

May

2007 Sales

Office:

Narco River Business Center (4)

Calumet City, IL

7,400

May

2006 Sales

Office:

Citadel Center (5)

Chicago, IL

560,000

November

Land:

Libertyville (6)

Libertyville, IL

2,400

April


(1)		On January 7, 2008, we completed the sale of our 50.0% common joint venture interest in The United Building located at 77 West Wacker Drive in Chicago, Illinois to our joint venture partner. The sale price was $50.0 million, subject to customary pro-rations and adjustments. We recognized a gain of $29.4 million and we used $18.8 million of the net proceeds to retire the outstanding balance on two Citicorp mezzanine loans.

(2)		On March 18, 2008, one of our subsidiaries, 330 LLC, completed the sale of Floors 2 through 13 of our 330 N. Wabash Avenue property for the purchase price of $46.0 million, subject to customary prorations and adjustments as provided in the purchase and sale agreement. We recognized a book gain on the sale of approximately $9.8 million.

(3)		On May 2, 2008, we closed on the sale of this property. The net proceeds from the sale of $4.1 million were used to retire the outstanding debt on the property. We recognized a book gain of $0.5 million in the second quarter of 2008.

(4)		On May 22, 2007, we closed on the sale of our Narco River Business Center property located in Calumet City, Illinois, for a sales price of $7.4 million. We recognized a gain of $2.2 million and retired debt of $2.7 million related to this property.

(5)		Dearborn LLC, the owner of Citadel Center and an entity in which we owned a joint venture interest, sold Citadel Center in November 2006. This property was sold by Dearborn LLC for a sales price for the entire property of $560.0 million. A subsidiary of our Operating Partnership owned a thirty percent (30%) joint venture interest in the Citadel Center property.

F-40

16. Property Acquisitions, Placed in Service and Dispositions (continued)


		At the closing, the Operating Partnership indemnified the purchaser against any costs or expenses in connection with the Citadel Reimbursement Obligation, as described in Note 15 — Commitments and Contingencies — Lease Liabilities. At the closing, the Operating Partnership received its annual distribution of income from the joint venture of $4.2 million. The Operating Partnership share of the net proceeds from the sale was $92.4 million, and the Operating Partnership used approximately $57.1 million of the net proceeds to pay down corporate level debt. The Operating Partnership recorded a gain of approximately $18.8 million from the transaction (included in gain on sales of real estate and joint venture interests).

		At the closing, the Operating Partnership received its annual distribution of income from the joint venture of $4.2 million. The Operating Partnership share of the net proceeds from the sale was $92.4 million, and the Operating Partnership used approximately $57.1 million of the net proceeds to pay down corporate level debt. The Operating Partnership recorded a gain of approximately $18.8 million from the transaction (included in gain on sales of real estate and joint venture interests).

(6)		We sold this property for a sales price of $2.4 million. This property was unencumbered. A gain of $0.6 million was recorded as gain on sales of real estate.

F-41

17. Interim Financial Information (unaudited)

The following is our consolidated quarterly summary of operations for 2008:


	Year ended December 31
				Fourth			Third			Second			First
	Total			Quarter			Quarter			Quarter			Quarter
	(dollars in thousands, except per share amounts)
Total revenue	$	64,840		$	15,146		$	15,967		$	16,457		$	17,270
Total expenses		65,633			16,657			15,333			16,159			17,484

Operating (loss) income		(793	)		(1,511	)		634			298			(214	)
Loss from investments in unconsolidated joint ventures		(60,343	)		1			1			9			(60,354	)
Provision for asset impairment from unconsolidated joint ventures		(5,633	)		—			—			(5,633	)		—
Interest and other income (expense)		1,271			651			(508	)		257			871
Interest:
Expense		(30,085	)		(7,889	)		(6,938	)		(6,856	)		(8,402	)
Amortization of deferred financing costs		(2,244	)		(835	)		(829	)		(341	)		(239	)
Gain on sales of real estate and joint venture interests		39,194			—			—			—			39,194
Recovery of distributions and losses to minority partners in excess of basis		14,222			—			—			—			14,222
Distributions and losses to minority partners in excess of basis		(20,293	)		(6,978	)		(5,853	)		(7,462	)		—

Loss from continuing operations before minority interests		(64,704	)		(16,561	)		(13,493	)		(19,728	)		(14,922	)
Minority interests		(8,660	)		8,437			7,269			6,670			(31,036	)

Loss from continuing operations		(73,364	)		(8,124	)		(6,224	)		(13,058	)		(45,958	)
Discontinued operations, net of minority interests in the amount of $(1,457) in the fourth quarter, $(1,418) in the third quarter, $(369) in the second quarter and $135 in the first quarter		28			13			13			2			—

Net loss		(73,336	)		(8,111	)		(6,211	)		(13,056	)		(45,958	)
Net income allocated to preferred shareholders		(9,000	)		(2,250	)		(2,250	)		(2,250	)		(2,250	)

Net loss available to common shareholders	$	(82,336	)	$	(10,361	)	$	(8,461	)	$	(15,306	)	$	(48,208	)


Basic and diluted earnings available to common shares per weighted average common share
Loss from continuing operations after minority interests and allocation to preferred shareholders	$	(348.29	)	$	(43.87	)	$	(35.83	)	$	(64.73	)	$	(203.86	)
Discontinued operations, net of minority interests		0.12			0.06			0.05			0.01			—

Net loss available per weighted-average common share of beneficial interest — basic and diluted	$	(348.17	)	$	(43.81	)	$	(35.78	)	$	(64.72	)	$	(203.86	)

Weighted average common shares — basic and diluted		236,483			236,483			236,483			236,483			236,483

Dividends paid per common share	$	0.67353		$	—		$	—		$	0.561275		$	0.112255

F-42

17. Interim Financial Information (unaudited)

The following is our consolidated quarterly summary of operations for 2007:


	Year ended December 31
				Fourth			Third			Second			First
	Total			Quarter(1)			Quarter			Quarter			Quarter
	(dollars in thousands, except per share amounts)
Total revenue	$	73,174		$	16,137		$	16,965		$	20,623		$	19,449
Total expenses		73,874			17,113			16,110			21,715			18,936

Operating (loss) income		(700	)		(976	)		855			(1,092	)		513
Loss from investments in unconsolidated joint ventures		(49,687	)		(48,274	)		(665	)		(224	)		(524	)
Interest and other income (expense)		2,764			729			804			947			284
Interest:
Expense		(33,088	)		(9,380	)		(9,887	)		(6,880	)		(6,941	)
Amortization of deferred financing costs		(907	)		(228	)		(229	)		(230	)		(220	)
Distributions and losses to minority partners in excess of basis		(14,222	)		(10,172	)		(4,050	)		—			—

Loss from continuing operations before minority interests		(95,840	)		(68,301	)		(13,172	)		(7,479	)		(6,888	)
Minority interests		36,805			9,906			8,198			9,644			9,057

(Loss) income from continuing operations		(59,035	)		(58,395	)		(4,974	)		2,165			2,169
Discontinued operations, net of minority interests in the amount of $241 in the fourth quarter, $8 in the third quarter, $(1,715) in the second quarter and $(437) in the first quarter		17			(2	)		—			15			4

Net (loss) income		(59,018	)		(58,397	)		(4,974	)		2,180			2,173
Net income allocated to preferred shareholders		(9,000	)		(2,250	)		(2,250	)		(2,250	)		(2,250	)

Net loss available to common shareholders	$	(68,018	)	$	(60,647	)	$	(7,224	)	$	(70	)	$	(77	)


Basic and diluted earnings available to common shares per weighted average common share Loss from continuing operations after minority interests and allocation to preferred shareholders	$	(287.69	)	$	(256.44	)	$	(30.55	)	$	(0.36	)	$	(0.34	)
Discontinued operations, net of minority interests		0.07			(0.01	)		—			0.06			0.02

Net loss available per weighted-average common share of beneficial interest — basic and diluted	$	(287.62	)	$	(256.45	)	$	(30.55	)	$	(0.30	)	$	(0.32	)

Weighted average common shares — basic and diluted		236,483			236,483			236,483			236,483			236,483

F-43

17. Interim Financial Information (unaudited) (continued)


(1)		We have accounted for our investment in the membership interest that owns extended-stay hotel properties under the equity method of accounting effective in the fourth quarter of 2007. This change from the cost method of accounting is primarily due to the deteriorating real estate and financial market conditions resulting in a re-evaluation of the expected term and nature of the investment.

As a result of a change in accounting methods for this investment from the cost method to the equity method the following fourth quarter adjustments were recorded to recognize:

Dividend income in the amount of $6.2 million previously recorded under the cost method as interest and other income was recorded as a reduction of Investments in Unconsolidated Entities.

We recognized a loss allocation, assuming a hypothetical liquidation at December 31, 2007, of approximately $47.8 million from this investment under the equity method of accounting as Loss From Investments in Unconsolidated Joint Ventures.

18. Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 141(R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We have not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.

19. Subsequent Events

Dividends. On January 7, 2009 our Board declared a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2008 dividend period. The quarterly dividend had a record date of January 19, 2009 and was paid on January 30, 2009.

F-44

19. Subsequent Events (continued)

Pursuant to the terms of the Agreement, the Purchaser was obligated to close the transaction and purchase the Property from the Seller on February 18, 2009. The Purchaser failed to close by that deadline. On February 19, 2009, the Seller sent a letter to the Purchaser stating that the Purchaser is in default under the Agreement and that the Seller is terminating the Agreement. Because the Purchaser failed to close the transaction and purchase the Property prior to the February 18, 2009 deadline, the Seller believes it is entitled to retain as liquidated damages the $6.0 million of earnest money that the Purchaser previously deposited with the Seller. On February 13, 2009, the Purchaser filed a lawsuit against the Seller seeking to rescind the Agreement and obtain the return of the earnest money because the Purchaser claims it was impossible for it to obtain financing for the acquisition due to the current economic conditions. We believe the Purchaser’s lawsuit is without merit and anticipate that we will prevail in the litigation. Although there can be no assurances about the eventual outcome, we believe the ultimate outcome will not have a material adverse effect on our consolidated financial condition or results of operations.

F-45

PRIME GROUP REALTY TRUST

SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION

AS OF DECEMBER 31, 2008
(dollars in thousands)


													Gross Amount Carried at
							Cost Capitalized						Close of Period						Accumulated
	Encumbrances(1)		Initial Cost(2)				Subsequent to Acquisition						12/31/08						Depreciation
					Buildings					Buildings					Building				at		Date of
	December 31				and					and					and				December 31		Original
	2008		Land		Improvements		Land			Improvements			Land		Improvements		Total		2008 (3)		Acquisition

280 Shuman Blvd.	$	—	$	2,092	$	3,642	$	12		$	606		$	2,104	$	4,248	$	6,352	$	867	Nov. 1997
Continental Towers		115,000		12,166		122,980		363			5,668			12,529		128,648		141,177		17,960	Dec. 1997
4343 Commerce Court		11,392		2,370		13,572		(8	)		1,512			2,362		15,084		17,446		2,338	Nov. 1997
800-810 Jorie Blvd.		22,467		6,265		20,187		(423	)		(827	)		5,842		19,360		25,202		3,393	Aug. 1999
330 N. Wabash Avenue		138,000		45,582		126,397		(8,012	)		15,900			37,570		142,297		179,867		19,603	Dec. 1999
Brush Hill Office Court		7,819		3,456		10,295		(24	)		956			3,432		11,251		14,683		1,880	Dec. 1999
Enterprise Center II		5,775		1,659		5,272		(6	)		888			1,653		6,160		7,813		784	Jan. 2000
7100 Madison Avenue		3,746		1,268		3,663		(2	)		(26	)		1,266		3,637		4,903		490	Apr. 2000
Other Corporate Assets		81,500		—		464		—			61			—		525		525		475

Total	$	385,699	$	74,858	$	306,472	$	(8,100	)	$	24,738		$	66,758	$	331,210	$	397,968	$	47,790

F-46

PRIME GROUP REALTY TRUST
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION (continued)
AS OF DECEMBER 31, 2008

(1)

See Note 4 — Mortgage Notes Payable for a description of our mortgage notes payable.

(2)

As a result of the Acquisition, we were required to revalue our balance sheet to reflect the fair market value of each of our assets and liabilities in accordance with SFAS No. 141.

(3)

Depreciation is calculated on the straight-line method over the estimated useful lives of assets, which are as follows:


Buildings		40 years weighted average composite life
Building improvements		10 to 30 years
Tenant improvements		Term of related leases
Furniture and equipment		3–10 years

The aggregate gross cost of the properties included above, for federal income tax purposes, approximated $477.0 million as of December 31, 2008. The net tax basis of our investment in unconsolidated real estate joint ventures for federal income tax purposes was $115.9 million at December 31, 2008.

The following table reconciles our historical cost for the years ended December 31, 2008, 2007, and 2006:


	Year ended December 31
	2008			2007			2006
	(dollars in thousands)

Balance, beginning of period	$	422,820		$	410,025		$	471,892
Additions		9,900			21,602			14,010
Disposals		(37,300	)		(4,999	)		—
Property held for sale		2,548			(3,808	)		(75,877	)

Balance, close of period	$	397,968		$	422,820		$	410,025

The following table reconciles the accumulated depreciation for the years ended December 31, 2008, 2007, and 2006:


	Year ended December 31
	2008			2007			2006
	(dollars in thousands)
Balance at beginning of period	$	41,655		$	31,366		$	11,142
Depreciation and amortization		12,671			21,678			20,419
Disposals		(14,862	)		(368	)		—
Property held for sale		8,326			(11,021	)		(195	)

Balance, close of period	$	47,790		$	41,655		$	31,366

F-47

Report of Independent Registered Public Accounting Firm

The Board of Directors
BHAC Capital IV LLC

We have audited the accompanying consolidated balance sheets of BHAC Capital IV LLC (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in members’ equity (deficit), and cash flows for the year ended December 31, 2008 and for the period from Acquisition (June 11, 2007) to December 31, 2007. Our audit also included the financial statement schedule listed in the Index at F-49. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2008 and 2007, and the consolidated results of its operations, changes in members’ equity (deficit), and cash flows for the year ended December 31, 2008 and for the period from Acquisition (June 11, 2007) to December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company’s recurring losses from operations, net working capital deficiency, members’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern. Additionally, the Company may not be in compliance with certain covenants of loan agreements with banks. Management’s plans concerning these matters are also discussed in Note 1 to the consolidated financial statements. The financial statements referred to above do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

As discussed in Note 1a to the consolidated financial statements, the 2007 consolidated financial statements have been restated to correct the accounting for goodwill and amounts due from affiliate.


	/s/ Ernst & Young LLP

Greenville, South Carolina
March 27, 2009

F-50

BHAC Capital IV LLC

Consolidated Balance Sheets


	December 31
			2007
			(As Restated –
	2008		See Note 1a)
	(In Thousands)
Assets
Current assets
Cash and cash equivalents	$	19,401	$	10,574
Accounts receivable, net of allowance for doubtful accounts of $589 and $896 at December 31, 2008 and 2007, respectively		15,612		19,315
Restricted cash		66,100		88,898
Other current assets		23,382		19,103
Receivable from affiliated party (mortgage and mezzanine obligation), net of allowance of $657,117 at December 31, 2008		818,013		—
Due from affiliates		—		34,252

Total current assets		942,508		172,142

Property and equipment, net of accumulated depreciation of $468,789 and $171,151 at December 31, 2008 and 2007, respectively		5,406,059		5,683,185
Land available for sale		2,000		2,000
Deferred financing costs, net of accumulated amortization of $46,560 and $16,625 at December 31, 2008 and 2007, respectively		28,601		58,255
Trademarks		34,291		43,000
Intangible assets, net of accumulated amortization of $10,052 and $13,416 at December 31, 2008 and 2007, respectively		14,396		117,556
Goodwill		—		283,947
Receivable from affiliated party (mortgage and mezzanine obligation)		—		1,476,656
Other assets		2,851		2,239


Total assets	$	6,430,706	$	7,838,980

See accompanying notes.

F-51

BHAC Capital IV LLC

Consolidated Balance Sheets


	December 31
				2007
				(As Restated –
	2008			See Note 1a)
	(In Thousands)
Liabilities and members’ (deficit) equity
Current liabilities
Accounts payable and other accrued expenses	$	37,563		$	41,817
Accrued real estate taxes		19,827			16,887
Accrued payroll and payroll related expenses		20,198			29,776
Accrued interest payable		16,691			25,162
Construction and retainage payables		618			1,739
Mortgages payable		4,108,349			—
Mezzanine loans		3,295,456			—
Subordinated notes, net of discount of $881 and $347 at December 31, 2008 and 2007, respectively		7,268			30,553
Due to affiliates		4,670			—

Total current liabilities		7,510,640			145,934

Mortgage payable		—			4,100,000
Mezzanine loans		—			3,295,456
Subordinated notes, net of discount of $1,158 at December 31, 2007		—			6,991
Capital lease obligation		131			131
Other liabilities		793			485

Total liabilities		7,511,564			7,548,997

Commitments and contingencies

Minority interest in HVM L.L.C.		—			1,280
Minority interest in Extended Stay Inc.		109			117

Total minority interests		109			1,397

Members’ (deficit) equity		(1,080,967	)		288,586

Total liabilities and members’ (deficit) equity	$	6,430,706		$	7,838,980

See accompanying notes.

F-52

BHAC Capital IV LLC

Consolidated Statements of Operations


				Period From
				Acquisition
				(June 11, 2007)
				to December 31,
	Year Ended			2007
	December 31,			(As Restated –
	2008			See Note 1a)
	(In Thousands)
Revenues
Room revenues	$	782,566		$	474,016
Other property revenues		11,829			7,008
Management, administrative services, and G&A reimbursement fee income — affiliated party		24,259			10,666
Reimbursement of payroll from managed properties — affiliated party		41,828			23,674

Total revenues		860,482			515,364

Operating expenses
Property operating expenses		357,803			202,758
Corporate operating expenses		82,830			33,145
Managed properties payroll and payroll related expense		41,828			23,674
Depreciation and amortization		313,589			184,560
Loss on disposition of property and equipment		1,438			—
Allowance for receivable from affiliated party		657,117			—
Impairment of property and equipment		16,184			—
Impairment of trademarks		8,709			—
Impairment of intangible assets		96,083			—
Impairment of goodwill		283,947			—

Total operating expenses		1,859,528			444,137

Other income		353			484


(Loss) income from operations		(998,693	)		71,711

Interest expense		(461,648	)		(318,036	)
Loss on interest rate caps		(64	)		(2,900	)
Interest income		1,828			1,279
Interest income from affiliate		85,340			59,328

Loss from operations before minority interests		(1,373,237	)		(188,618	)

Minority interest in income of HVM L.L.C.		(2,547	)		(1,356	)


Net loss		(1,375,784	)		(189,974	)
Preferred distributions		(21,350	)		(19,257	)

Net loss after preferred distributions	$	(1,397,134	)	$	(209,231	)

See accompanying notes.

F-53

BHAC Capital IV LLC

Consolidated Statements of Cash Flows


				Period From
				Acquisition
				(June 11, 2007)
				to December 31,
	Year Ended			2007
	December 31,			(As Restated –
	2008			See Note 1a)
	(In Thousands)
Operating activities
Net loss	$	(1,375,784	)	$	(189,974	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		313,589			184,560
Allowance for receivable from affiliate		657,117			—
Impairment of property and equipment		16,184			—
Impairment of trademarks		8,709			—
Impairment of intangible assets		96,083			—
Impairment of goodwill		283,947			—
Amortization of deferred financing costs		29,935			16,625
Accretion of discount on subordinated notes		624			1,078
Loss on interest rate caps		64			2,900
Loss on disposals of property and equipment		1,438			—
Minority interest in income of HVM L.L.C.		2,547			1,356
Change in assets and liabilities:
Accounts receivable, net of change in allowance		3,703			1,669
Other current assets		30,413			(9,202	)
Accrued real estate taxes		2,940			(3,184	)
Accounts payable and other accrued expenses		(4,023	)		(86	)
Accrued payroll and payroll related expenses		(9,578	)		(7,560	)
Accrued interest payable		(6,945	)		17,910
Other current liabilities		4,670			—

Net cash provided by operating activities		55,633			16,092

Investing activities
Business combination purchase acquisition, net of cash acquired		—			(6,056,561	)
Building improvements and purchase of furniture, fixtures, and equipment		(48,052	)		(25,895	)
Decrease (increase) in restricted cash		22,798			(88,898	)
Change in other noncurrent assets		(676	)		133

Net cash used in investing activities		(25,930	)		(6,171,221	)

F-55

BHAC Capital IV LLC

Consolidated Statements of Cash Flows (continued)


				Period From
				Acquisition
				(June 11, 2007)
				to December 31,
	Year Ended			2007
	December 31,			(As Restated –
	2008			See Note 1a)
	(In Thousands)
Financing activities
Proceeds from mortgage payable	$	8,500		$	3,284,030
Proceeds from mezzanine loans		—			2,644,149
Purchase of interest rate caps		—			(2,963	)
Principal payments on mortgage payable		(151	)		—
Repayment of subordinated note		(30,900	)		—
Financing costs		(281	)		(74,880	)
Repayment of mezzanine loans		—			(4,544	)
Issuance of series units		—			339,252
Minority interest distributions — Extended Stay Inc.		(8	)		(8	)
Distributions and redemptions — HVM L.L.C.		(4,267	)		(76	)
Contribution of capital		27,581			—
Distributions		(21,350	)		(19,257	)

Net cash (used in) provided by financing activities		(20,876	)		6,165,703


Net increase in cash and cash equivalents		8,827			10,574
Cash and cash equivalents at beginning of period		10,574			—

Cash and cash equivalents at end of period	$	19,401		$	10,574


Supplemental cash flow information
Cash payments for interest	$	438,027		$	233,094

Income tax payments, net of refunds	$	3,193		$	103


Supplemental noncash disclosures
Increase in mortgage payable	$	—		$	815,970

Increase in mezzanine loan	$	—		$	655,851

(Decrease) increase in accrued interest payable	$	(1,526	)	$	4,835

Increase in receivable from affiliated party	$	—		$	1,476,656

Contribution of Series B equity interests	$	—		$	158,565

See accompanying notes.

F-56

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

As of December 31, 2008 and 2007 and for the Year Ended December 31, 2008 and for the
Period from Acquisition (June 11, 2007) to December 31, 2007 (As Restated – See Note 1a)

1. Business and Organization

General — BHAC Capital IV LLC (the Company or BHAC specifically as the parent entity within these consolidated financial statements), a Delaware limited liability company, was acquired June 11, 2007 as part of an acquisition of an affiliated group of existing hotel owner/operator companies. Upon consummation of the purchase acquisition on June 11, 2007, BHAC was owned by Prime Group Realty Trust (PGRT), Homestead Village, L.L.C. (HSD), and certain other investors. PGRT and HSD are affiliates of The Lightstone Group, a closely held real estate investment company majority-owned by David Lichtenstein.

The Company, through wholly-owned and majority-owned subsidiaries, owns and operates moderately priced, extended-stay lodging properties. The hotels are operated under the brand names “Extended Stay Deluxe,” “Extended Stay America,” “Studio Plus,” and “Crossland” in selected markets throughout the United States and Canada. The Company’s extended-stay lodging rooms are designed to appeal primarily to the corporate business traveler on temporary assignment, undergoing relocation or in training, and are located in infill locations proximate to major business centers and convenient to services desired by its customers. As of December 31, 2008 and 2007, the Company had 549 hotel properties in operation in 43 U.S. states consisting of approximately 59,000 rooms and three hotels in operation in Canada consisting of 500 rooms.

Organization — BHAC owns all of the outstanding common stock of Extended Stay Inc. (ESI), a real estate investment trust (REIT) which through its qualified REIT subsidiaries owns 552 hotels and an office building. ESI leases the hotel properties to its indirect wholly-owned subsidiaries organized as taxable REIT subsidiaries (TRSs) which operate the hotels.

HSD owns/leases and operates 132 similar extended-stay hotels. HSD is a wholly-owned subsidiary of DL-DW Holdings, L.L.C. (DLDW), an investee of an affiliate of The Lightstone Group and David Lichtenstein.

Each of the TRS hotel operating subsidiaries has contracted with HVM, L.L.C. (HVM), a separate, independently-owned affiliated hotel management, and administrative services company, to manage the hotels and to provide certain other administrative services to the hotel ownership companies and holding companies. HVM provides the same services for the management of the hotels of HSD.

F-57

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

1. Business and Organization (continued)

Basis of Presentation — The accompanying consolidated financial statements include the accounts of BHAC, its subsidiary, ESI, and HVM. The statements are prepared in conformity with U.S. generally accepted accounting principles (US GAAP). Significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation in the accompanying consolidated financial statements and other prior year amounts have been restated (See Note 1a).

The Company’s consolidated financial statements include HVM as required under the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46 revised (FIN 46(R)). HVM is managed by HVM Manager L.L.C., an affiliate of The Lightstone Group.

The consolidated results of operations are for the year ended December 31, 2008 and for the period from the date of acquisition, June 11, 2007, to December 31, 2007 (the 2007 Period).

Going Concern — The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has negative working capital and an accumulated deficit. The Company will have the majority of its debt mature in June 2009, and although the Company has an option to extend the maturing debt if the Company is not otherwise in default, the extension of the debt will require principal amortization payments in addition to interest payments. Such debt service obligations, combined with the downturn in revenues in the present economic conditions, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In late 2008 and subsequent to year end the Company has and continues to experience liquidity issues. Cash receipts have decreased and in certain periods have not and may not provide for all of the Company’s expenditures and debt service. The Company has reduced costs where possible, and continues to seek all revenue opportunities, however such measures in and of themselves are not projected to provide enough increased cash flow to offset the revenue downfall under present economic conditions to the extent necessary to meet the Company’s cash needs. The Company also forecasts it will be unable to meet the increased debt service obligations which begin in June 2009 if the debt is extended.

F-58

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

1. Business and Organization (continued)

As a result of these factors, the Company has entered into discussions with debt holders to seek a restructuring of the debt and equity of the Company. The key goals of such restructuring are a substantial reduction in the debt level of the Company, a lengthened debt maturity, and substantially reduced debt service requirements. While the Company will seek majority agreement to a plan of restructuring, there is as of yet no commitment that such a plan will be agreed to by a majority of debt holders, and the Company may seek alternative means of effecting a restructuring, including filing of bankruptcy. No assurance of the outcome of the Company’s effort to restructure its debt and equity can be given. If restructuring efforts are unsuccessful, it could create a material adverse effect on the future operating prospects of the Company.

Acquisition — On June 11, 2007, DLDW and other investors acquired all of the limited liability company interests of HSD and BHAC. The acquisition was accounted for as a business combination using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. The purchase price was allocated to the assets acquired and liabilities assumed based on their fair values on the date of acquisition. The purchase price allocation was based on preliminary estimates and was adjusted in 2008 based on the finalization of certain amounts recorded in connection with the purchase. The total purchase price for the acquisition was $6.436 billion, which exceeded the fair value of assets acquired, resulting in BHAC’s recording of goodwill of $283.9 million. The purchase price includes the assumption of working capital liabilities of $104.1 million and assumption of subordinated debentures of $36.5 million. The purchase price (as restated) was allocated as follows (in thousands):


Cash	$	43,518
Other assets		51,013
Due from affiliates		55,882
Property and equipment		5,826,163
Land available for sale		2,000
Trademarks		43,000
Intangible assets subject to amortization		130,972
Goodwill		283,947

Total allocated purchase price	$	6,436,495

F-59

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

1. Business and Organization (continued)

The fair value of the tangible assets of acquired properties was based on appraisals and management’s determination of the relative fair values of these assets. Determination of the fair value of the identified intangible assets and liabilities of acquired properties, and the below market ground leases, are based on present value calculations. The fair value of the leases acquired was calculated using an interest rate reflecting risks that reflect the difference between amounts to be paid under the leases and management’s estimate of the fair market lease rates over a period equal to the lease term, not exceeding the remaining useful life of the related building assets.

Intangible assets of trademarks, corporate customer relationships, advance booking backlog, and customer email database were valued in accordance with SFAS No. 141.

1a. Restatement

Subsequent to the issuance of the consolidated financial statements as of December 31, 2007 and for the period from acquisition (June 11, 2007) to December 31, 2007, the Company determined that a restatement was required in connection with certain amounts due from HSD and goodwill.

F-60

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

1a. Restatement (continued)

In those consolidated financial statements, amounts due from affiliate and goodwill were presented without considering the impact of a lease extension that was executed in connection with the purchase of HSD. As a result, amounts due from affiliate and goodwill were presented as if the lease expired in 2015. However, upon consideration of the lease extension through 2030, HSD re-evaluated the lease and its impact upon the purchase price allocated to assets purchased and liabilities assumed in accordance with SFAS No. 141. Consequently, applicable amounts recorded in the 2007 consolidated balance sheet were restated as noted in the following table:

Restatement Adjustments of Consolidated Balance Sheet (in thousands):


	2007 (As
	Previously		Restatement			2007 (As
	Reported)		Adjustments			Restated)

Due from affiliates	$	71,286	$	(37,034	)	$	34,252


Goodwill	$	246,913	$	37,034		$	283,947

2. Summary of Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all cash on hand, demand deposits with financial institutions, credit card receivables, and short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. The Company has deposits in excess of $250,000 with a single financial institution which are not insured by the Federal Deposit Insurance Corporation.

Accounts Receivable and Allowance for Doubtful Accounts

A provision for doubtful accounts is made when collection of receivables is considered doubtful. Accounts receivable at December 31, 2008 and 2007 are stated net of an allowance for doubtful accounts of approximately $589,000 and $896,000, respectively. Write-offs of uncollectible accounts, net of recoveries, were approximately $1,066,000 and $727,000 for the year ended December 31, 2008 and for the 2007 Period, respectively.

F-61

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Restricted Cash

Restricted cash classified as current assets consists of cash (approximately $41.4 million and $59.3 million at December 31, 2008 and 2007, respectively) held in escrow or a cash management account for the payment of ground leases, taxes and insurance, loan service agent fees, debt service, replacement reserves, management fees, preferred return and required repairs, all as required by the mortgage and mezzanine loans and cash management agreements. Restricted cash also includes funds required to be deposited to such cash management account or in transit (approximately $6.0 million and $9.6 million at December 31, 2008 and 2007, respectively). Additionally, restricted cash includes a reserve fund for the preferred return holders of the Company’s A-1 Series Units (approximately $18.7 million and $20.0 million at December 31, 2008 and 2007, respectively, see Note 5).

Property and Equipment

Property and equipment assets acquired are valued at acquisition cost based on their estimated fair values at the date of acquisition. Subsequent property and equipment additions are recorded at cost. Maintenance and repairs are charged to expense as incurred while expenditures that increase the life or utility of property or equipment are capitalized.

Depreciation is computed using the straight-line method over the following estimated useful lives:


Buildings		27 – 45 years
Building improvements		2 – 30 years
Site improvements		2 – 25 years
Furniture, fixtures, and equipment		2 – 10 years
Office equipment, computers, and computer software		3 – 10 years

The Company utilizes general contractors for the construction or major renovation of its properties. Pursuant to the terms of the Company’s contractual agreements with the general contractors, amounts are retained from payments made to them until such time as the terms of the agreement have been satisfactorily completed. Retained amounts of zero and approximately $992,000 are included in construction and retainage payables on the consolidated balance sheet as of December 31, 2008 and 2007, respectively.

F-62

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Land available for sale, comprised of land parcels not currently used in hotel operations or hotel development, is stated at acquisition cost on the consolidated balance sheet. These parcels are not currently being marketed.

In the event that facts or changes in circumstances indicate that the carrying amount of a property may be impaired, an evaluation is prepared in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). In such an event, a comparison is made of the current and projected operating cash flows of each property into the foreseeable future on an undiscounted basis to the carrying amount of such property. In the event that the sum of the undiscounted cash flows is less than the carrying value of the property, the property would be adjusted to its estimated fair value. Impairment charges of $16.2 million and zero were recorded in the year ended December 31, 2008 and for the 2007 Period, respectively. See Note 3.

Trademarks, Other Intangible Assets and Goodwill

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), the Company classifies intangible assets into three categories: (1) intangible assets with indefinite lives not subject to amortization, (2) intangible assets with definite lives subject to amortization, and (3) goodwill.

Intangible assets with indefinite lives consist of trademarks recorded at their estimated fair value at the date of the acquisition. Impairment charges of $8.7 million and zero were recorded in the year ended December 31, 2008 and for the 2007 Period, respectively. See Note 4.

In accordance with SFAS No. 144, intangible assets with definite lives, consisting of advance bookings backlog, corporate customer relationships, customer email database, and beneficial ground leases, are tested for impairment if conditions exist that indicate the carrying value may not be recoverable. Impairment charges are recorded when the carrying value of the definite lived intangible assets is not recoverable by the cash flows generated from the use of the asset. Impairment charges of $96.1 million and zero were recorded in the year ended December 31, 2008 and for the 2007 Period, respectively. See Note 4.

F-63

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

The below-market lease values are amortized as an adjustment to rental expense over the remaining lease term. Amortization expense associated with below-market leases was approximately $39,000 and $22,000 for the year ended December 31, 2008 and for the 2007 Period, respectively. Amortization expense is expected to be approximately $39,000 per year for each of the years ending December 31, 2009 — 2013.

Definite lived assets are amortized over a useful life of the expected period to be benefited.

Goodwill is recorded at the property-owning entity level and is not amortized for US GAAP. Goodwill is tested for impairment at least annually. Impairment charges of $283.9 million and zero were recorded in the year ended December 31, 2008 and for the 2007 Period, respectively. See Note 4.

Deferred Financing Costs

Deferred financing costs consist of certain costs incurred in obtaining the mezzanine and mortgage loans payable and are being amortized over the respective terms of the related components of the financings, ranging from two to five years, excluding extension provisions, using the straight-line method which approximates the effective interest method. Deferred financing cost amortization was approximately $29,935,000 and $16,625,000 for the year ended December 31, 2008 and for the 2007 Period, respectively.

Supplies

Supplies of approximately $9,809,000 at December 31, 2008 and 2007, included in other current assets, consist of linens, room supplies and hotel supplies that are periodically replenished as they are consumed and are recorded at the lower of average cost or fair value. Replenishments are charged to property operating expenses in the consolidated statements of operations.

Revenue Recognition

Room revenue and other income are recognized when earned as stays occur, using the accrual method of accounting. Amounts paid in advance are deferred until earned. Other revenue primarily consists of revenue derived from telephone, vending, guest laundry and other miscellaneous fees or services. Sales tax collected from customers is not included in revenues.

F-64

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Advertising Costs

Advertising costs are expensed as incurred and are classified in corporate operating expenses on the consolidated statements of operations. Advertising costs were approximately $10,700,000 and $3,490,000 for the year ended December 31, 2008 and for the 2007 Period, respectively.

Operating Leases

Operating ground leases provide periods of escalating rent. Rental expense is recognized on a straight-line basis over the life of the related leases.

Fair Value of Financial Instruments

The fair value of all financial instruments reflected in the consolidated balance sheets is evaluated periodically based upon an interpretation of available market information and valuation methodologies that are considered appropriate for the individual instruments. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition of the Company’s financial instruments.

Cash and cash equivalents, restricted cash, accounts receivable and accounts payable are carried at cost, which approximates fair value based on their short-term, highly liquid nature. The fair value of the Company’s mortgages payable, mezzanine loans and subordinated notes is evaluated and disclosed in Note 12. Their fair value has been estimated using loan to values based on current market conditions for comparable financial instruments. Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

Derivative Instruments

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, establishes accounting and reporting standards requiring every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative instrument’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company does not enter into financial instruments for trading or speculative purposes. The Company entered into interest rate cap agreements, considered to be derivative instruments, which cap the interest on its mezzanine and mortgage loans payable.

F-65

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

The Company did not designate the derivatives as hedges and, accordingly, accounted for the interest rate caps at fair value on the consolidated balance sheets, with adjustments to fair value recorded in the consolidated statements of operations.

Insurance Reserves

The Company has various high-deductible insurance programs which require estimates in determining the ultimate liability for claims arising under these programs. These insurance reserves are estimated by management using actuarial evaluations based on historical and projected claims and medical cost trends. At December 31, 2008 and 2007, approximately $15,120,000 and $20,208,000 of reserves for such programs are included in the consolidated balance sheets in accrued payroll and related expenses and in accounts payable and other accrued expenses, of which approximately $10,535,000 and $14,239,000 are related to HVM’s obligations for workers’ compensation and health insurance programs and approximately $4,585,000 and $5,969,000 are related to the Company’s property damage and general liability programs. For plan year beginning October 1, 2007, the Company modified its high-deductible program for worker’s compensation from a high-deductible insurance program to a premium-only based program.

Variable Interest Entity

FIN 46(R) requires that, if an entity is deemed to be the primary beneficiary in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity.

ESI holds a significant variable interest in its management company, HVM (see Note 8). HVM is consolidated with ESI as ESI represents approximately 70% of the business conducted by HVM and is the primary beneficiary of HVM. ESI’s maximum exposure to loss as a result of its involvement with HVM is related to the need to secure alternative management services and systems support if HVM were ever unable to fulfill its management agreement with ESI. Since ESI has no equity interest in HVM, the entire results of operations and members’ capital are reported as minority interest in HVM.

F-66

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

HVM is a company that provides hotel and administrative management services, including supervision, direction and control of the operations, management and promotion of the properties, in a manner associated with extended-stay hotels of similar size, type or usage in similar locations. HVM has total assets of approximately $33 million and $46 million at December 31, 2008 and 2007, respectively, and revenues of approximately $269 million and $143 million for the year ended December 31, 2008 and for the 2007 Period, respectively.

Income Taxes

BHAC, as well as HVM, are limited liability companies which are not subject to federal income taxes; accordingly, federal income taxes have not been recorded in the accompanying consolidated financial statements. For federal income tax purposes, the operating results of BHAC and HVM are reportable by each limited liability company’s members. The Company is subject to state and local taxes in certain jurisdictions.

ESI is generally not subject to federal corporate income tax on its separately filed federal tax return as long as ESI complies with various requirements to maintain REIT status. ESI, however, is subject to state and local taxes in certain jurisdictions. The TRSs are subject to federal and state income taxes on their separate tax returns.

Recently Issued Accounting Standards

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). Statement 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of SFAS No. 162 is not expected to have any impact on the Company’s consolidated financial statements.

F-67

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161). SFAS No. 161 requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. As this statement relates only to disclosure requirements, we do not expect it to have an impact on the Company’s consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. FIN 48 provides guidance for the recognition, de-recognition and measurement in financial statements of tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns. FIN 48 requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company will be required to adopt FIN 48 for its fiscal year beginning January 1, 2009. The Company is currently reviewing the provisions of FIN 48 to determine the impact on its consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS No. 155), which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 140). SFAS No. 155 provides guidance to simplify the accounting for certain hybrid instruments by permitting fair value re-measurement for any hybrid financial instrument that contains an embedded derivative, as well as to clarify that beneficial interests in securitized financial assets are subject to SFAS No. 133. In addition, SFAS No. 155 eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity may hold under SFAS No. 140. SFAS No. 155 was effective for the Company for all financial instruments acquired, issued or subject to a new basis occurring after January 1, 2007. Adopting this standard did not have an impact on the Company’s consolidated financial statements.

F-68

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 clarifies the definition of exchange price as the price between market participants in an orderly transaction to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. SFAS No. 157 was effective for the fiscal year ended December 31, 2008. Adopting this standard did not have an impact on the Company’s consolidated financial statements (see Note 13 for disclosures regarding SFAS No. 157).

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 was effective for the fiscal year ended December 31, 2008. Adopting this standard did not have an impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS No. 141R). SFAS No. 141R replaces SFAS No. 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. This standard is effective for fiscal years beginning after December 15, 2008. The Company is currently reviewing the provisions of SFAS 141R to determine the impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Accounting for Noncontrolling Interests (SFAS No. 160). SFAS No. 160 clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such non-controlling interests. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently reviewing the provisions of SFAS No. 160 to determine the impact on its consolidated financial statements.

F-69

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

3. Property and Equipment (continued)

The office building and all of the hotels are pledged as security for the Company’s debt (see Note 5).

A portion of the office building is leased from ESI to BHAC for a term of five years. BHAC in turn leases approximately half of its leased space to HVM for corporate offices. ESI received rent income of approximately $1,064,000 and $591,000 from BHAC for the year ended December 31, 2008 and for the 2007 Period, respectively, and HVM paid BHAC rent expense of approximately $1,127,000 and $626,000 for the year ended December 31, 2008 and for the 2007 Period, respectively, under these leases; these amounts have been eliminated in consolidation. Additionally, ESI received lease income from other tenants of approximately $708,000 and $398,000 for the year ended December 31, 2008 and for the 2007 Period, respectively. In connection with the office building, ESI leases a portion of a parking garage under a lease agreement that terminates in May 2018. The office building revenue and expenses are recorded in other property revenues and property operating expenses, respectively, in the consolidated statements of operations.

The Company is also a tenant under a long-term ground lease for the corporate office building. This lease is classified as a capital lease and requires payments through March 2022 aggregating approximately $370,000.

The Company is also a tenant under long-term leases for ground leases on two hotel properties. The lease agreements terminate in September 2016 and April 2031. As of December 31, 2008, future minimum cash lease payments under the long-term operating leases are as follows (in thousands):


Years Ending December 31:
2009	$	369
2010		389
2011		397
2012		398
2013		408
Thereafter		6,228

Total	$	8,189

F-71

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

3. Property and Equipment (continued)

Rent expense recognized on a straight-line basis was approximately $493,000 and $220,000 for the year ended December 31, 2008 and for the 2007 Period, respectively.

Land available for sale was comprised of one parcel of land with an aggregate carrying value of $1,500,000 at December 31, 2008 and 2007, and two parcels of land adjacent to existing operating hotel properties with a combined carrying value of $500,000 at December 31, 2008 and 2007.

In response to the recent downturn in the economy and in the hospitality industry coupled with declining market values of real estate, the Company prepared an evaluation of impairment for its property and equipment in accordance with SFAS No. 144. The first step in the impairment review is to compare the current and projected operating cash flows of the asset group on an undiscounted basis to the carrying value of that asset group. As each hotel represents the lowest level at which identifiable cash flows that can be measured independently of other asset groups, the Company assessed each hotel and the office building for impairment. As part of this first step, there were nine hotels identified for which undiscounted cash flows were not adequate to recover the carrying value. As part of the second step of the impairment review, the fair value of the nine hotels identified in the first step of the impairment was then determined using the direct capitalization method on assumptions appropriate to present market conditions. For each of the nine hotels, the estimated fair value was less than the carrying value. Consequently, the Company has recorded an impairment charge of approximately $16.2 million for these nine hotels by adjusting their carrying values to fair value at December 31, 2008. The impairment charge for property and equipment is recorded in a separate line item in operating expenses in the consolidated statements of operations.

F-72

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

4. Intangible Assets, Deferred Financing Costs and Goodwill

The following table summarizes the intangible assets, deferred financing costs and goodwill as of December 31, 2008 and December 31, 2007 (in thousands):


	December 31, 2008								December 31, 2007
		Gross							Gross
	Useful	Carrying		Accumulated					Carrying		Accumulated
	Life	Amount		Amortization			Net Value		Amount		Amortization			Net Value

Valuation of customer relationships	18 yrs.	$	14,290	$	—		$	14,290	$	120,814	$	(3,729	)	$	117,085
Valuation of customer email database	5 yrs.		154		(48	)		106		154		(17	)		137
Valuation of advance booking backlog	1 yr.		10,004		(10,004	)		—		10,004		(9,670	)		334

Total amortizable intangibles			24,448		(10,052	)		14,396		130,972		(13,416	)		117,556
Deferred financing costs	2-5 yrs.		75,161		(46,560	)		28,601		74,880		(16,625	)		58,255

Total amortizable intangibles and deferred financing costs		$	99,609	$	(56,612	)	$	42,997	$	205,852	$	(30,041	)	$	175,811

Changes in the carrying amounts of trademarks, goodwill and amortizable intangible assets during the year ended December 31, 2008 were as follows (in thousands):


							Amortizable
							Intangible
	Trademarks			Goodwill			Assets

Balance at December 31, 2007	$	43,000		$	283,947		$	117,556
Amortization		—			—			(7,077	)
Impairment loss recognized		(8,709	)		(283,947	)		(96,083	)

Balance at December 31, 2008	$	34,291		$	—		$	14,396

In accordance with SFAS No. 144, the Company evaluated its customer relationship intangible asset and determined that the asset was partially impaired. Accordingly, the Company wrote off a portion of the asset and recorded an impairment charge of approximately $96.1 million in the consolidated statement of operations for the year ended December 31, 2008.

The Company is currently the owner of the trademarks “Extended Stay Deluxe,” “Extended Stay America,” “Studio Plus,” and “Crossland.” These trademark assets were valued in connection with DLDW’s acquisition of BHAC on June 11, 2007. The Company performed an analysis of the fair value of the trademarks and recorded an impairment charge of approximately $8.7 million in the consolidated statement of operations for the year ended December 31, 2008.

F-73

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

4. Intangible Assets, Deferred Financing Costs and Goodwill (continued)

In accordance with SFAS No. 142, the Company performs an annual assessment of impairment for goodwill. SFAS No. 142 requires a two-step process. The first step is to determine if goodwill of a reporting unit may be impaired by comparing the fair value of a reporting unit to its carrying value. Secondly, if the first step indicates possible impairment, a measurement of impairment of goodwill by allocating fair value to its assets and liabilities in the manner of a business combination in accordance with SFAS No. 141, Business Combinations, is performed. The residual fair value after this allocation is the implied fair value of goodwill. As part of its impairment analysis, the Company used a variety of methodologies in determining the fair value of the reporting unit, including cash flow analyses that are consistent with the assumptions management believes hypothetical marketplace participants would use. The resulting fair value of the reporting unit did not support the carrying value of the goodwill and the Company has accordingly recorded an impairment charge of $283.9 million. The impairment charge for goodwill is recorded in a separate line item in operating expenses on the consolidated statements of operations.

The weighted average amortization period remaining for the amortizable intangible assets was approximately sixteen and seventeen years as of December 31, 2008 and 2007, respectively. The following table summarizes the estimated future amortization of amortizable intangible assets and deferred financing costs, as of December 31, 2008 (in thousands):


	Amortizable		Deferred
	Intangible		Financing
	Assets		Costs		Total
Years Ending December 31:
2009	$	900	$	16,214	$	17,114
2010		900		5,077		5,977
2011		900		5,061		5,961
2012		882		2,249		3,131
2013		869		—		869
Thereafter		9,945		—		9,945

Total	$	14,396	$	28,601	$	42,997

F-74

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

5. Debt

June 2007 Mortgage Payable—$4.1 Billion

On June 11, 2007 the mortgage payable secured by 664 hotels and one office building was issued as part of the acquisition of BHAC and HSD. Subsidiaries of ESI participated with subsidiaries of HSD as co-borrowers in obtaining the mortgage debt. The mortgage security collateral pool of properties include properties of ESI (550 hotel properties and one office building) and of HSD (114 hotel properties). ESI and HSD are jointly and severally liable on the full mortgage debt. Mortgage payable amounts recorded in the financial statements of the Company represent the full mortgage amounts based upon ESI’s obligation for the full debt. A receivable from affiliated party of $815.9 million has been recorded, which represents the mortgage amounts allocated to HSD as per the loan documents for the per property release prices and allocated loan amounts, which were based on underwritten property cash flows of the collateral owned by HSD. Additionally, the receivable from affiliate includes $2.1 million of allocated interest. In the 2008 consolidated financial statements of HSD’s parent, in which HSD and the Company were consolidated, the footnotes to those statements, similar to Note 1 herein, contain a “going concern” disclosure stating a substantial doubt about the entity’s ability to continue as a going concern. Consequently, the receivable from affiliated party is classified in current assets in the consolidated balance sheet at December 31, 2008.

The mortgage consists of components, of which $2.5 billion are fixed rate debt with interest rates ranging from 5.67995% to 6.32995% and floating rate components aggregating $900 million which bear interest at Libor plus spreads ranging from 0.45545% to 1.50545%. The remaining $700 million is floating rate debt bearing interest at Libor plus spreads ranging from 1.50545% to 4.05478%; however, $400 million is subject to a Libor floor of 5.32% and $300 million is subject to a Libor floor of 4.5%. All interest is calculated based on actual days over 360, with interest only payments due monthly on the 12th, the loan payment date. The weighted-average interest rate was 5.30% and 6.18% at December 31, 2008 and 2007, respectively.

The $2.5 billion of fixed rate debt matures June 2012. The $1.6 billion of floating rate debt matures June 2009, but with 3 one-year options to extend at the Company’s option. Amortizing payments would be required if certain debt yield thresholds are not met and an extension period is elected. The second extension election requires a fee payment of $1.2 million. The third extension election requires a fee payment of 0.125% of the outstanding balance of the loan.

F-75

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

5. Debt (continued)

Properties may be released as collateral after prepayment of a portion of the mortgage loan, but would require that debt yield calculations of remaining mortgaged properties meet certain thresholds and that mezzanine debt also be prepaid in a release amount applicable to such properties.

The floating rate components of the mortgage loan could not be voluntarily prepaid in whole or in part prior to the payment date in January 2008. From January 2008 through March 2008, the floating rate components of the loan could have been prepaid with payment of a premium of 1.9688% of the prepaid loan balance. After March 2008 and through June 2008 the prepayment premium on the floating rate components was 1.7188%, and none thereafter. The fixed rate components may not be voluntarily prepaid before March 2012. The fixed rate components may be defeased upon the earlier of 2 years after a securitization which includes the fixed components or 3 years from the funding of the loans. Voluntary prepayments and defeasance require that no event of default exists and notice of the prepayment be given. Notwithstanding the above prepayment terms of the loan, the Company can prepay up to $373,986,486 at any time without a prepayment premium. No such prepayments have occurred through December 31, 2008.

The mortgage agreement requires compliance with various covenants, one of which is the delivery of audited financial statements with an unqualified opinion. The Company may be in default upon delivery of these financials which include a “going concern” disclosure and audit opinion with an emphasis paragraph on going concern (see Note 1). Consequently, the full mortgage debt is presented as current in the accompanying consolidated balance sheet as of December 31, 2008.

The mortgage is guaranteed, under limited circumstances, by ESI, HSD, Lightstone Holdings LLC (an affiliate of The Lightstone Group and an investor in DLDW) and David Lichtenstein. The properties are collateral for the mortgage loan and generally are the only recourse to secure the loan; however, under limited circumstances of default, recourse may be obtained from the guarantors up to a maximum of $100 million.

F-76

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

5. Debt (continued)

Under the terms of the mortgage loan agreement and a cash management agreement, all receipts of the mortgaged properties are to be deposited into a Cash Management Account (CMA) in the control of the loan service agent. The loan service agent applies the receipts to subaccounts of the CMA each month beginning on the payment date until that month’s subaccount allocation is fulfilled. Monies are escrowed with respect to the mortgaged properties for the payment of ground leases of five properties, property taxes, insurance premiums, loan service agent fees, mortgage debt service, a reserve for replacements, operating expenses, mezzanine debt service, management fees, and a preferred return fund. Additionally, funds were escrowed at the acquisition date for required repairs. Operating expense funds are released to the Company twice a week until the full month’s allocation is met. Management fees are released to the Company on the loan payment date for the Company to make payments to HVM.

The ground lease reserve fund is for the ground rents on two hotel properties. The tax escrow fund is for taxes and other charges payable and requires a monthly deposit of one-twelfth of annual taxes, assessments and other charges. The insurance premium reserve requires a monthly deposit of one-twelfth of the annual estimate of property and general liability insurance premiums, and HVM’s worker compensation premiums. The mortgage and mezzanine debt service escrow funds are for all contractual debt service payments required under the mortgage and mezzanine loan agreements. The replacements reserve is for the replacement of fixtures, furniture, equipment, and other replacements and repairs, and requires a monthly deposit of 4% of gross revenues from operations of the mortgaged properties. The management fee fund is for the approximate 4% of revenues for management fees owed to HVM. The preferred return fund requires the lesser of a calculation of 8% of the liquidation value of the Series A-1 Units of BHAC or a minimum of $1.25 million per month. The required repair escrow, which was initially funded from the proceeds of the borrowing in the amount of $2,863,000, is for certain repairs, capital improvements and replacements.

The excess cash flow reserve provisions of the agreement require the deposit of funds only if excess cash flow, as defined, is available and the occurrence of (i) a mortgage loan event of default; (ii) an event of default under any of the June 2007 mezzanine loan documents; (iii) bankruptcy action involving the hotel manager (HVM); or (iv) a debt yield event. These events are defined as “cash trap events.” A debt yield event means failing to meet certain trailing debt yield benchmarks, as defined, during the loan period or extensions of the loan period. Such debt yield calculation includes, on an aggregate basis, the earnings before interest, taxes, depreciation, and amortization operating results (EBITDA) of both the 664 hotel properties and the office building securing the mortgage payable. EBITDA, less management fees and reserve for replacements, divided by outstanding mortgage and mezzanine debt, equals debt yield.

F-77

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

5. Debt (continued)

For the trailing twelve months ended December 31, 2008 and for the 2007 Period, the Company’s debt yield calculation did not meet the minimum requirement and a debt yield event is considered to have occurred. A cash trap became effective and will continue until the Company satisfies a debt yield cure minimum for 6 consecutive months. Funds held in the excess cash flow reserve are held as additional collateral for the mortgage loan during the cash trap period. Upon achievement of a debt yield cure, the trapped funds would be applied to the “waterfall” of escrows and any remaining excess funds would then be available and released to the Company.

Amounts held in escrow and the CMA were as follows (in thousands):


	December 31
	2008		2007

Debt service	$	15,007	$	17,529
Taxes and insurance		9,497		23,139
Replacements reserve		3,050		8,469
Operating expenses and management fees		5,011		7,608
Ground leases		134		117
Required repairs		2,439		2,427
Preferred return		1,250		—
Excess cash flow		5,019		—

Total	$	41,407	$	59,289

Also included in restricted cash is a preferred return reserve account with a balance of $18.7 million at December 31, 2008, and $20.0 million at December 31, 2007, which was established under the terms of the BHAC limited liability company agreement. The preferred return reserve funds are held for the benefit of the BHAC Series A-1 Unit holders, who may instruct the escrow agent to disburse a monthly distribution of up to 10% per annum towards the 12% preferred return due the BHAC Series A-1 Unit holders if BHAC does not disburse at a 10% per annum level. BHAC may also, with permission of the Series A-1 Unit holders, access the fund to make disbursements to the holders up to the 10% per annum rate. BHAC under the limited liability company agreement is obligated to replenish the reserve back up to $20 million if reserve funds are used to make any distributions to the Series A-1 Unit holders.

F-78

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

5. Debt (continued)

During the year ended December 31, 2008, BHAC Series A-1 Unit holders authorized the disbursement of $1,750,000 from the fund’s balance, including interest earnings, to the Series A-1 Unit holders. Subsequent to December 31, 2008, BHAC Series A-1 Unit holders also authorized additional disbursements of approximately $3,617,000 to the Series A-1 Unit holders. On March 11, 2009 the BHAC board of directors authorized the release of the remaining funds in the reserve of $15,179,000 to be paid to the BHAC Series A-1 Unit holders and such disbursement was made March 12, 2009. BHAC has not replenished the preferred return reserve account.

June 2007 Mezzanine Loans—$3.3 Billion

Mezzanine debt of $3.3 billion was issued as part of the acquisition of BHAC and HSD on June 11, 2007. The mezzanine debt consists of 10 mezzanine notes, which are floating rate debt, bearing interest at Libor plus spreads ranging from 1.5% to 7.0%. All interest is calculated based on actual days over 360, with interest-only payments due monthly on the 12^th, the loan payment date. The weighted-average interest rate was 4.08% and 7.92% at December 31, 2008 and 2007, respectively.

The mezzanine debt represents a joint obligation of wholly-owned mezzanine loan borrower subsidiaries of both ESI and HSD. The receivable from affiliated party of $655.9 million recorded in the financial statements represents the allocation of the mezzanine loans based on the same loan allocations described above. Additionally, the receivable from affiliate includes $1.2 million of allocated interest. In the 2008 consolidated financial statements of HSD’s parent, in which HSD and the Company were consolidated, the footnotes to those statements, similar to Note 1 herein, contain a “going concern” disclosure stating a substantial doubt about the entity’s ability to continue as a going concern. Consequently, the receivable from affiliated party is classified in current assets in the consolidated balance sheet at December 31, 2008 and an allowance for $657.1 million has been recorded.

The mezzanine debt matures June 2009, but with three one-year options to extend at the Company’s option, if the mortgage extension options are also exercised.

F-79

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

5. Debt (continued)

Each mezzanine borrower is the legal and beneficial owner of the next most senior mezzanine borrower, with the most senior mezzanine borrower being the legal and beneficial owner of the mortgagors under the June 2007 mortgage payable. Each borrower has pledged all of its regular membership or limited partnership interests or all of its shares of capital stock in the mortgagors and certain other rights and all cash flow proceeds available from each more senior subsidiary borrower as security for its mezzanine loan. With respect to the June 2007 mezzanine loans, the June 2007 mortgagors are required to distribute the cash flow from the mortgaged properties, in excess of amounts due on the mortgage loan, amounts required to be deposited into reserve accounts and operating expenses for the mortgaged properties, to the mezzanine borrowers. Such excess cash flow is then required to be applied by each of the mezzanine borrowers in order of seniority to pay debt service on the related mezzanine loan.

The mezzanine loans could not be voluntarily prepaid in whole or in part prior to the payment date in January 2008. From January 2008 through March 2008 the loans could have been prepaid with payment of a premium of 0.50% of the prepaid loan balance. After March 2008 and through June 2008 the prepayment premium on the loans was 0.25%, and none thereafter. Voluntary prepayments require that no event of default exists and notice of the prepayment be given. Notwithstanding the above prepayment terms of the loan, the Company can prepay up to $27,364,865 at any time without a prepayment premium. No such prepayments have occurred through December 31, 2008.

The mezzanine agreements require compliance with various covenants, one of which is the delivery of audited financial statements with an unqualified opinion. The Company may be in default upon delivery of these financials which include a “going concern” disclosure and audit opinion with an emphasis paragraph on going concern (see Note 1). Consequently, the full amount of the mezzanine loans are presented as current in the accompanying consolidated balance sheet as of December 31, 2008.

Amendment to June 2007 Mortgage Payable and June 2007 Mezzanine Loans

On April 15, 2008, an amendment to the mortgage and mezzanine loan agreements was entered into by the borrowers which prohibits future distributions from the borrowing entities to the investors of DLDW and BHAC except for $1,250,000 per month of preferred dividends to the Series A-1 Unit holders of BHAC permitted by the loan agreement. Subsequent to year-end, the Company instructed the loan servicer to hold and not disburse the $1,250,000 from the CMA each month. The amendment was entered into upon the Company’s resolution of the sourcing of funds to pay all amounts owed on the 2008 Notes and revision of budgeted expenditures for 2008.

F-80

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

5. Debt (continued)

Subordinated Notes due March 2008

In conjunction with the purchase acquisition on June 11, 2007, $30.9 million principal face amount of subordinated notes (the 2008 Notes) were assumed. The 2008 Notes were originally issued in March 1998, bore interest at an annual rate of 9.15%, and were payable semiannually on March 15 and September 15 of each year and matured on March 15, 2008. The 2008 Notes were redeemable at 100% of face principal amount, plus accrued interest.

On June 11, 2007, as part of the purchase acquisition, the 2008 Notes were recorded at approximately $29.6 million, net of a discount of $1.3 million. The 2008 Notes were fair valued at a discount to yield of 15.3%. The discount was being amortized by the interest method as part of interest expense over the remaining term of the 2008 Notes. The carrying amount of the 2008 Notes at December 31, 2007 was $30,553,000, net of unamortized discount of $347,000.

Holders of the 2008 Notes previously consented to proposed amendments to the 2008 Notes and to the indentures governing the notes, which eliminated substantially all of the restrictive covenants contained in the indentures and shortened certain notice periods for the redemption of notes. The 2011 Notes were unsecured and subordinated to the Company’s other secured indebtedness. The 2008 Notes were pari passu with the 2011 Notes.

The 2008 Notes were paid off on April 16, 2008. Payoff of the 2008 Notes, which had matured March 15, 2008, included $30,900,000 of principal together with accrued interest of approximately $1,724,000 ($1,414,000 of which was due at maturity and $310,000 of which accrued on the principal and accrued interest from the maturity date to April 16, 2008), and approximately $100,000 of professional fees. Upon this repayment of the 2008 Notes, the Company has no further obligation related to the 2008 Notes.

Subordinated Notes due June 2011

In conjunction with the purchase acquisition on June 11, 2007, $8.149 million principal face amount of subordinated notes (the 2011 Notes) were assumed. The 2011 Notes were originally issued in June 2001, bear interest at an annual rate of 9.875% payable semiannually on June 15 and December 15 of each year and mature on June 15, 2011. The notes are unsecured and subordinated to the Company’s other secured indebtedness.

F-81

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

5. Debt (continued)

The 2011 Notes were redeemable beginning on June 15, 2006, at 104.938% of face principal amount, plus accrued interest. The redemption price declines each year after 2006 and is 100% of face principal amount, plus accrued interest, beginning June 15, 2009.

On June 11, 2007, as part of the purchase acquisition, the 2011 Notes were recorded at approximately $6.9 million net of a discount of approximately $1.3 million. The 2011 Notes were fair valued at a discount to yield of 15.3%. The discount is being amortized using the effective interest method as part of interest expense over the remaining term of the 2011 Notes. The carrying amount of the 2011 Notes was $7,268,000 and $6,991,000, respectively, net of an unamortized discount of approximately $881,000 and $1,158,000, respectively, at December 31, 2008 and 2007.

Holders of the 2011 Notes previously consented to proposed amendments to the 2011 Notes and to the indentures governing the 2011 Notes, which eliminated substantially all of the restrictive covenants contained in the indentures and shortened certain notice periods for the redemption of the 2011 Notes. A remaining provision of the 2011 Notes states the 2011 Note holders may declare the debt immediately due and payable if a significant subsidiary is in default on its debt of greater than $25 million. There is some uncertainty as to whether the $4.1 billion June 2007 Mortgage Payable and $3.3 billion June 2007 Mezzanine Loans are in default (see above), and, therefore, whether the cross-default provisions of the 2011 Notes have been implicated. Consequently, the 2011 Notes are presented as current in the consolidated balance sheet as of December 31, 2008.

Mortgage Payable—$8.5 Million in Default

On February 14, 2008, a subsidiary of the Company mortgaged 2 hotels for $8.5 million. The mortgage is secured by land, building and furniture and fixtures of these hotels and is guaranteed by ESI. The mortgage has an initial maturity date of February 2010 with an option to extend for six months given certain conditions are met and an extension fee of 0.125% of outstanding principal balance is paid. Interest expense is calculated using the one month Libor rate plus a margin of 2.85%. The interest rate on the mortgage was 3.31% at December 31, 2008.

The mortgage also requires compliance with certain financial tests and maintenance of certain financial ratios. The Company has not complied with certain of the financial tests and ratios. The lenders thus have rights to pursue actions under the mortgage. Management of the Company is in discussion with the lenders, which may result in revisions of the loan terms or loan balance. Accordingly, the Company has presented the $8.5 million Mortgage Payable as current in the accompanying consolidated balance sheet as of December 31, 2008.

F-82

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

5. Debt (continued)

Advance from Affiliate

A TRS of ESI owes an advance of $6.5 million to BHAC. Interest expense is calculated at the greater of the federal funds daily rate plus 0.75% or the applicable federal monthly rate as issued by the Internal Revenue Service, and interest for the year ended December 31, 2008 and for the 2007 Period was approximately $181,000 and $202,000, respectively. At December 31, 2008 and 2007, accrued interest payable was approximately $1.3 million and $1.2 million, respectively, and such amounts have been eliminated in consolidation.

Interest Rate Caps

The June 2007 mortgage and mezzanine loan agreements require that the borrowers enter into interest rate protection agreements. The borrowers are required to maintain interest rate caps or swaps or replacement interest rate cap or swap agreements until the initial maturity date, as applicable, for each mortgage component and mezzanine loan. The effect of the interest rate protection agreements will be to limit the maximum interest rate exposure with respect to increases in Libor through the maturity dates. On June 11, 2007, the Company acquired interest rate caps at an allocated cost of approximately $2,964,000. The Company has not evaluated the ability of the counterparties to perform under the terms of the agreement; however, considering the gap between current and forecast interest rates and the strike price, and the short period of time until the maturity date of the interest rate cap agreements, the Company does not expect to have greater interest rate exposure if the counterparties are not able to perform under the terms of the agreements.

The following table summarizes the terms of the interest rate cap agreements, their allocated fair values as of December 31, 2008, and the allocated loss for the year ended December 31, 2008 (in thousands):


	Allocated		LIBOR												Weighted
	Notional		Strike			Effective		Maturity		Fair					Avg Interest
Debt Obligation	Amount		Price			Dates		Dates		Value		(Loss)			Rate

Mortgage payable	$	1,281,000		6	%		6/11/2007		6/15/2009	$	—					4.53	%
Mezzanine loans		1,762,000		6	%		6/11/2007		6/15/2009		—					4.06	%
Mezzanine loans		881,000		6	%		6/08/2007		6/15/2009		—					4.15	%

Totals	$	3,924,000								$	—	$	(64	)

F-83

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

5. Debt (continued)

The following table summarizes the terms of the interest rate cap agreements, their allocated fair values as of December 31, 2007, and the allocated loss for the 2007 Period (in thousands):


	Allocated		LIBOR												Weighted
	Notional		Strike			Effective		Maturity		Fair					Avg Interest
Debt Obligation	Amount		Price			Dates		Dates		Value		(Loss)			Rate

Mortgage payable	$	1,281,000		6	%		6/11/2007		6/15/2009	$	21					6.78	%
Mezzanine loans		1,762,000		6	%		6/11/2007		6/15/2009		29					7.91	%
Mezzanine loans		881,000		6	%		6/8/2007		6/15/2009		14					7.98	%

Totals	$	3,924,000								$	64	$	(2,900	)

Interest Expense

Interest expense is comprised of stated interest, amortization of deferred financing costs, amortization of premiums and accretion of discounts for the year ended December 31, 2008 and for the 2007 Period as follows (in thousands):


				Principal			Principal			Interest
				Outstanding			Outstanding			Expense for the		Interest
	Original			as of			as of			Year Ended		Expense for
	Principal			December 31,			December 31,			December 31,		the 2007
Description	Amount			2008			2007			2008		Period

June 2007 financing:
Mortgage loan	$	4,100,000		$	4,099,849		$	4,100,000		$	249,529	$	151,904
Mezzanine loans		3,300,000			3,295,456			3,295,456			209,099		162,828


Subtotal–June 2007 financing		7,400,000			7,395,305			7,395,456			458,628		314,732

Subordinated Notes:
2008 Notes		30,900			—			30,900			891		1,571
2011 Notes		8,149			8,149			8,149			805		447
Discount on 2008 and 2011 Notes		(2,583	)		(881	)		(1,505	)		624		1,078
Mortgage loan		8,500			8,500			—			527		—
Letters of credit fees and bank fees		—			—			—			173		208

Total	$	7,444,966		$	7,411,073		$	7,433,000		$	461,648	$	318,036

F-84

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

5. Debt (continued)

The future maturities of long-term debt at December 31, 2008, are as follows (in thousands):


			Premium
			Amortization/
	Debt		Discount			Total
	Payments		Accretion			Obligation
Years ending December 31,
2009	$	7,411,954	$	(881	)	$	7,411,073
2010		—		—			—
2011		—		—			—
2012		—		—			—
2013		—		—			—
Thereafter		—		—			—

Total	$	7,411,954	$	(881	)	$	7,411,073

Other

In April 2008, DLDW secured a loan from affiliated investees of the Company in the amount of $22 million and BHAC guaranteed the note. DLDW extinguished the debt March 12, 2009, by transferring to the note holders ownership of certain income-producing certificates and a cash fund held for security for the note. Thus BHAC is no longer obligated as a guarantor.

6. Income Taxes

BHAC and HVM are limited liability companies and are not subject to federal income taxes. For federal income tax purposes, the operating results of BHAC and HVM are reportable by each limited liability company’s members. Accordingly, federal income taxes have not been recorded in the accompanying consolidated financial statements for the operations of the Company.

F-85

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

6. Income Taxes (continued)

ESI has elected to be taxed as a REIT under the Internal Revenue Code (Code). To qualify as a REIT, ESI must meet a number of organizational and operational requirements, including a requirement that ESI distribute at least 90% of its taxable income to its stockholders. ESI intends to adhere to these requirements and maintain its REIT status. If ESI were to fail to qualify as a REIT in any taxable year, it would be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not qualify as a REIT for four subsequent taxable years. Even in qualifying as a REIT, ESI is subject to certain state and local income taxes, and may be subject to federal income and excise taxes on undistributed income. In addition, ESI is subject to rules which may impose corporate income tax on certain built-in gains recognized upon the disposition of assets that were acquired in connection with the acquisition of ESI. These rules apply only if the disposition occurs prior to 2015. Also, the net operating loss (NOL) and AMT credit carryforwards of ESI are available as a deduction and credit against these built-in gains and related tax. ESI believes it has met all requirements to qualify as a REIT for 2008 and 2007 and intends to continue to qualify as a REIT under applicable provisions of the Code, as amended. Accordingly, no provision for federal income tax is made in the accompanying financial statements. The tax basis of the property assets acquired has carried over to ESI, as well as ESI’s NOL carryforwards and alternative minimum tax (AMT) credit carryforwards. NOL carryforwards aggregate approximately $295 million and $220 million at December 31, 2008 and 2007, respectively. AMT credit carryforwards aggregate approximately $29 million at December 31, 2008 and 2007, respectively. As ESI has elected to be taxed as a REIT and intends to meet the distribution requirements, deferred tax liabilities (e.g., relating to fixed asset basis differences) and assets (e.g., related to net operating loss carryforwards) have not been recorded. The NOLs will begin to expire in 2024 if not utilized.

For the year ended December 31, 2008 and 2007, ESI paid an aggregate of $14,068,000 and $59,746,000, respectively, in dividends to its stockholders ($19,257,000 for the 2007 Period), all of which are considered a nontaxable distribution to the stockholders.

ESI as a REIT leases its hotel properties to TRSs which operate the hotels. The TRSs are subject to federal and state income taxes. At December 31, 2008, the TRSs had NOL carryforwards of approximately $84,367,000 which expire from 2024 — 2028 and AMT credit carryforwards of approximately $132,000, which do not expire. A valuation allowance has been recorded for the full amount of the loss carryforwards and AMT credit carryforwards at December 31, 2008 and 2007, respectively, as management has determined it is more likely than not that these carryforwards will not be utilized.

F-86

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

7. Equity

BHAC’s limited liability company agreement provides for nine classes of member interests designated as Series A-1 Units, Series A-2 Units, Series A-3 Units, and Series B Units, collectively the “Series Units,” and as Common A-1 Units, Common A-2 Units, Common A-3 Units, Common B Units, and Common J Units, collectively the “Common Units”. The Series A-1, A-2, and B Units generally have no voting rights (except as to matters of changing the organization of the Company, changes in authorized units, or rights in securities offerings), no stated maturity or mandatory redemption, and are not convertible into other securities. The Series A-1 Units may designate one board member, with the right to add additional board members under certain circumstances. Series A-3 Units have one vote for each unit for election of members to the board and any matters before the board. The Series A-3 Units have no stated maturity or mandatory redemption and are not convertible into other securities.

The Series Units have a preferential return of 12% in order of seniority from noncapital proceeds or capital proceeds such as from a sale of the Company. Seniority is in the order of Series A-1 Units, Series A-2 Units, Series A-3 Units, and Series B Units. In the case of a capital proceeds event, after satisfaction of the 12% preferential return, the Series Units have a liquidation preference in the same order of seniority.

The number of authorized Series A-1 Units is 210, of which 210 units with a liquidation value of $1,000,000 per unit are issued and outstanding. The number of authorized Series A-2 Units is 146, of which 71.180412 units with a liquidation value of $1,000,000 per unit are issued and outstanding. The Series A-2 Units are owned by PGRT. The number of authorized Series A-3 Units is 157, of which 58.071353 units with a liquidation value of $1,000,000 per unit are issued and outstanding. The Series A-3 Units are owned by HSD. The number of authorized Series B Units is 158.565910, of which 158.565910 units with a liquidation value of $1,000,000 per unit are issued and outstanding. The Series B Units are owned by HSD. Under Emerging Issues Task Force No. 88-16, Basis in Leveraged Buyout Transactions, if a seller meets certain criteria regarding the portion of their remaining ownership after an acquisition and criteria regarding control of the affairs of the company sold, then in purchase accounting the retained share of ownership may be accounted for at fair value. Such criteria were met in this transaction.

Assuming a hypothetical liquidation at December 31, 2008, the cumulative unpaid 12% preferential return for the Series A-1 Units, Series A-2 Units, Series A-3 Units, and Series B Units would be approximately $5.5 million, $16.6 million, $1.8 million, and $30.1 million, respectively.

F-87

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

7. Equity (continued)

The Common A-1, A-2, A-3, B, and J Units generally have no voting rights (except as to matters of changing the organization of the Company, changes in authorized units, or rights in securities offerings), no stated maturity or mandatory redemption, and are not convertible into other securities. The number of authorized Common A-1 Units is 210, of which 210 are issued and outstanding. The number of authorized Common A-2 Units is 146, of which 71.180412 units are issued and outstanding. The number of authorized Common A-3 Units is 157, of which 58.071353 units are issued and outstanding. The number of authorized Common B Units is 158.565910, of which 158.565910 units are issued and outstanding. The number of authorized Common J Units is 14.2464, of which 14.2464 units are issued and outstanding. In general, the Common Units rank pari passu with all other Common Units. The Common Units are allocated noncapital proceeds after deduction for the preferential 12% return of the Series Units. In the case of a capital proceeds event, after satisfaction of the Series Units’ 12% preferential return and the Series Units’ liquidation preference, the Common Units are generally allocated capital proceeds pari passu with the other Common Units.

The investors in DLDW and BHAC entered into a security holders’ agreement which sets forth certain understandings and agreements among the security holders in regards to voting of their interests, rights under security offerings, prohibitions and conditions on transfers of ownership, and other matters. The members are not required to make any additional capital contributions.

The minority interests in the consolidated balance sheets consists of the ESI preferred shareholders’ interest and the equity interests of the members of HVM.

Under the terms of the limited liability company agreements of the Company, The Lightstone Group and its affiliates may earn an asset management fee of up to $1 million per year for advisement and consultation services to the Company and HSD. Such aggregate fees of approximately $892,000 and $306,000 for the year ended December 31, 2008 and for the 2007 Period, respectively, are included in corporate operating expenses in the consolidated statements of operations. In January 2009, fees of $1.0 million were paid for the 2009 year, of which $0.8 million was allocated to the Company.

F-88

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

7. Equity (continued)

Changes in the capital accounts of the members under a hypothetical liquidation at book values would be as follows for the year ended December 31, 2008 and for the 2007 Period (in thousands):


	Series Units												Common Units
	A-1			A-2			A-3			B			A-1		A-2		A-3		B		J

Capital accounts at June 11, 2007	$	210,000		$	120,000		$	9,252		$	158,566		$	—	$	—	$	—	$	—	$	—


Preferential return of 12% of liquidation value		14,280			8,160			629			10,782			N/A		N/A		N/A		N/A		N/A
Less cash distributions paid		(13,090	)		(6,167	)		—			—			—		—		—		—		—
Adjustment of liquidation preference for losses		—			(56,008	)		(9,252	)		(158,566	)		N/A		N/A		N/A		N/A		N/A

Net change for the 2007 Period		1,190			(54,015	)		(8,623	)		(147,784	)		—		—		—		—		—


Capital accounts at December 31, 2007	$	211,190		$	65,985		$	629		$	10,782		$	—	$	—	$	—	$	—	$	—


Preferential return of 12% of liquidation value		25,620			14,640			1,129			19,346			N/A		N/A		N/A		N/A		N/A
Less cash distributions paid		(21,350	)		—			—			—			N/A		N/A		N/A		N/A		N/A
Adjustment of liquidation preference for losses		(215,460	)		(80,625	)		(1,758	)		(30,128	)		N/A		N/A		N/A		N/A		N/A

Net change for the year ended December 31, 2008		(211,190	)		(65,985	)		(629	)		(10,782	)		—		—		—		—		—


Capital accounts at December 31, 2008	$	—		$	—		$	—		$	—		$	—	$	—	$	—	$	—	$	—

During the year ended December 31, 2008, DLDW contributed $22 million to BHAC for the repayment of the 2008 Notes and approximately $5,581,000 to BHAC for the payment of preferred dividends to the Series A-1 Unit holders. Such amounts are reflected as contributed capital in the 2008 consolidated statements of changes in members’ equity (deficit).

F-89

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

8. Management Company Transactions

Hotel Management Agreements

ESI’s TRS subsidiaries and HSD have hotel management agreements with HVM with respect to all of the hotels which provide for management services including supervision, direction and control of the operation, and management and promotion of the hotel properties in a manner normally associated with extended-stay hotels of similar size, type, or usage in similar locations. As hotel manager, HVM is entitled to receive a management fee ranging from 3.75% to 4.0% of property revenues for management of the properties of the TRS subsidiaries and from 3.75% for owned properties to 6%, plus an incentive fee, for the capital leased properties for management of the properties of HSD. The fees are based on a percentage of all receipts, revenues, income and proceeds of sales of every kind received by the hotel properties, including, without limitation: room rentals, rent or other payments received from subtenants, licensees, and occupants of commercial and retail space located in the related properties. Hotel management fees for all management activities were approximately $30,566,000 and $18,563,000 for the TRS entities, and approximately $10,257,000 and $6,280,000 for HSD, for the year ended December 31, 2008 and for the 2007 Period, respectively, and such TRS amounts have been eliminated in consolidation.

In conjunction with the hotel management agreements, HVM is reimbursed on a regular basis for total aggregate compensation, including salary and fringe benefits payable with respect to onsite personnel employed by HVM at the properties of the TRS subsidiaries and HSD. HVM was reimbursed for payroll and payroll-related amounts totaling approximately $151,302,000 and $85,928,000, respectively, from the TRS subsidiaries and approximately $41,828,000 and $23,674,000, respectively, from HSD for the year ended December 31, 2008 and for the 2007 Period, and such TRS amounts have been eliminated in consolidation.

The hotel management agreements for the TRS entities expire on either December 31, 2024 or 2025, and the hotel management agreements with HSD expire on December 31, 2053; these agreements may be terminated in writing by either party at any time for any reason.

Service Agreements

ESI and HSD have service agreements with HVM whereby HVM provides services for certain administrative, legal, financial, accounting and related services, including services related to property acquisitions and oversight and procurement of capital assets. Fees consist of HVM’s cost of providing the services plus 6%. The service agreements expire January 1, 2026, but may be terminated by either party at any time for any reason upon written notice. HVM earned approximately $2,011,000 and $982,000, respectively from ESI and approximately $927,000 and $436,000, respectively, from HSD during the year ended December 31, 2008 and for the 2007 Period, respectively, and such ESI amounts have been eliminated in consolidation.

F-90

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

8. Management Company Transactions (continued)

G&A Expense Reimbursement Agreements

ESI’s TRS subsidiaries and HSD also have a G&A Expense Reimbursement Agreement with HVM under which HVM receives a reimbursement of 106% of HVM’s general and administrative (G&A) expenses, as defined, to the extent HVM incurs allocated G&A expenses in excess of HVM’s management fee income and services fee income from ESI, the TRS subsidiaries and HSD. For the year ended December 31, 2008 and the 2007 Period, respectively, HVM recorded approximately $19,418,000 and $3,556,000, respectively, in reimbursement earned from ESI’s TRS subsidiaries and approximately $12,652,000 and $3,781,000, respectively, from HSD, and such TRS amounts are eliminated in consolidation. The G&A Expense Reimbursement Agreements expire December 31, 2024, but may be terminated by ESI or HSD for any reason at any time, provided however that each receives the consent of the other.

Services to Affiliates

HVM obtained hotel management agreements to manage the operations of two hotels owned and operated by Lightstone Value Plus REIT (LVP), an affiliate of The Lightstone Group. The management agreement provides for a management fee of 5% of revenues and a fee for reservation services, travel agent commissions, and marketing and advertising of 2.5% of revenues. HVM is also reimbursed for the payroll and related costs of on-site personnel. Management agreement fees (included in other income) aggregated approximately $295,000 and $40,000, respectively and payroll and related reimbursement aggregated approximately $703,000 and $114,000, respectively for the year ended December 31, 2008 and for the 2007 Period. HVM also provided services to DLDW for evaluating potential hotel acquisitions, aggregating approximately $425,000 and $217,000 for the year ended December 31, 2008 and for the 2007 Period, respectively. Additionally, BHAC licenses trademarks for use at the two hotels for a fee of 0.2% of revenues or $1,000 for the 2007 Period. At December 31, 2007, LVP owed $316,000 for reimbursement of capital assets purchased, which is included in accounts receivable.

HVM’s fees earned from hotel management agreements, service agreements and G&A expense reimbursement agreements aggregate approximately $76,330,000 for the year ended December 31, 2008 and are included in the “management, administrative services, and G&A reimbursement fee income-affiliated party” in the consolidating statements of operations, and such TRS and ESI amounts are eliminated in consolidation.

F-91

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

9. Trademark Licenses

ESA Trademarks

BHAC is the owner of the trademarks “Extended Stay Deluxe,” “Extended Stay America,” “Studio Plus,” and “Crossland.” BHAC has licensed the use of the trademarks to its TRS subsidiaries. One license was granted for a 20-year period and previously paid for by the TRS with an issuance of a note and preferred stock to ESI. Interest on the note at 10% aggregated approximately $805,000 and $447,000, respectively, for the year ended December 31, 2008 and for the 2007 Period. Preferred dividends aggregated approximately $226,000 and $81,000, respectively for the year ended December 31, 2008 and for the 2007 Period, respectively. Such interest and preferred dividends have been eliminated in consolidation.

The other TRS subsidiaries license the trademarks under agreements with BHAC which provide for a trademark fee of 0.2% of revenues. Trademark fees under this agreement were approximately $1,061,000 and $644,000 for the year ended December 31, 2008 and for the 2007 Period, respectively, and such amounts have been eliminated in consolidation.

10. Commitments and Contingencies

In periods prior to these consolidated financial statements, ESI settled a series of product liability cases with a window manufacturer and certain of its insurers over defects in windows installed at a number of hotels. The amount recovered was approximately $25 million. That settlement included the entry of a consent judgment for an additional $30 million to be executed only against the proceeds available under the insurance policies issued by three non-settling insurers. ESI, as a judgment creditor, has filed a garnishment action against the insurers. ESI believes it has a strong case and the case is set for trial in March 2009. No estimate of recovery is available at this time.

The Company is not a party to any other litigation or claims, other than routine matters arising out of the ordinary course of business, that are incidental to the operation of the business of the Company. The Company believes that the results of all claims and litigation, individually or in the aggregate, will not have a material adverse effect on its business, financial position or results of operations.

F-92

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

11. Employee Benefit Plans

HVM has a savings plan that qualifies under Section 401(k) of the Internal Revenue Code covering substantially all employees. The plan has an employer matching contribution of 50% of the first 6% of an employee’s contribution, which vests over an employee’s initial five-year service period. The plan also provides for contributions up to 100% of eligible employee pretax salary, subject to the Internal Revenue Service’s annual deferral limit of $15,500 during 2008 and 2007. Employer contributions totaled approximately $1,006,000 and $620,000 for the year ended December 31, 2008 and for the 2007 Period.

12. Fair Value of Financial Instruments

Fair values of the Company’s mortgages payable, mezzanine loans, and subordinated notes were estimated using loan to values based on current market conditions for comparable financial instruments. As of December 31, 2008, the carrying values and estimated fair values of the Company’s mortgage payable, mezzanine loans, and subordinated notes are approximately as follows (in thousands):


	December 31, 2008				December 31, 2007
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value

Mortgages payable, mezzanine loans, and subordinated debt	$	7,411,073	$	2,670,000	$	7,433,000	$	7,331,430

Fair values presented in the above table are based on estimates that consider the terms of the individual instruments. Considerable judgment is required to interpret market data to develop estimates of fair value; however, there is not an active market for these instruments. Therefore, the estimated fair values do not necessarily represent the amounts at which these instruments could be purchased, sold, or settled. The use of different market assumptions and/or estimation methodologies may have a material effect on estimates of fair value.

F-93

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

13. Fair Value Measurement

On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157). This statement defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS No. 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: observable inputs such as quoted prices in active markets

Level 2: inputs other than the quoted prices in active markets that are observable either directly or indirectly

Level 3: unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

On a recurring basis, the Company measures its interest rate caps at their estimated fair values. The fair value of the interest rate caps is determined by discounting the expected variable cash receipts based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

During the year ended December 31, 2008, the Company recorded impairment charges of $16.2 million on property and equipment, impairment charges of $8.7 million on trademark assets, and impairment charges of $283.9 million on goodwill. See Note 3 and Note 4 for impairment reviews.

The unrealized loss on the interest rate caps of approximately $64,000 for the year ended December 31, 2008, is classified within level 2 of the fair value hierarchy. The impairment charges recorded on property and equipment, trademarks, and goodwill are classified within level 3 of the fair value hierarchy.

F-94

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Anchorage — Downtown	AK	(1)	$	220	$	14,134	$	267	$	221	$	14,401	$	14,622	$	1,205	Mar-06	Jun-07	2 – 43 years
Anchorage — Midtown	AK	(1)		809		28,279		64		809		28,344		29,153		2,639	Oct-05	Jun-07	2 – 43 years
Fairbanks — Old Airport Road	AK	(1)		333		17,929		428		333		18,356		18,690		1,499	Mar-06	Jun-07	2 – 43 years
Juneau — Shell Simmons Drive	AK	(1)		1,210		16,777		469		1,210		17,245		18,455		1,454	Mar-06	Jun-07	2 – 43 years
Birmingham — Inverness	AL	(1)		292		3,424		94		292		3,518		3,810		335	Mar-96	Jun-07	2 – 39 years
Birmingham — Wildwood	AL	(1)		789		3,315		100		789		3,415		4,204		321	May-96	Jun-07	2 – 39 years
Huntsville — U.S. Space and Rocket Center	AL	(1)		540		8,964		208		540		9,129		9,669		875	Jul-97	Jun-07	2 – 35 years
Mobile — Spring Hill	AL	(1)		380		12,948		145		380		13,094		13,474		1,326	May-97	Jun-07	2 – 35 years
Montgomery — Carmichael Rd.	AL	(1)		739		1,467		80		739		1,547		2,286		180	Feb-96	Jun-07	2 – 39 years
Montgomery — Eastern Blvd.	AL	(1)		1,053		7,841		232		1,053		8,026		9,079		803	Aug-97	Jun-07	2 – 35 years
Fayetteville — Springdale	AR	(1)		602		7,075		72		596		7,154		7,749		665	Nov-01	Jun-07	2 – 39 years
Little Rock — West	AR	(1)		618		5,966		89		618		6,055		6,673		559	Nov-97	Jun-07	2 – 40 years
Little Rock — West	AR	(1)		670		6,814		163		670		6,939		7,609		714	Sep-96	Jun-07	2 – 34 years
Phoenix — Airport	AZ	(1)		1,967		7,453		60		1,967		7,513		9,480		683	Jan-98	Jun-07	2 – 39 years
Phoenix — Airport — E. Oak St.	AZ	(1)		1,850		10,778		70		1,850		10,849		12,699		1,077	Oct-04	Jun-07	2 – 43 years
Phoenix — Biltmore	AZ	(1)		1,282		12,854		72		1,282		12,925		14,207		1,056	Jan-97	Jun-07	2 – 40 years
Phoenix — Chandler	AZ	(1)		1,209		9,886		124		1,209		10,010		11,220		895	Sep-98	Jun-07	2 – 39 years
Phoenix — Chandler — E. Chandler Blvd.	AZ	(1)		1,939		12,199		119		1,939		12,318		14,257		1,257	Oct-04	Jun-07	2 – 43 years
Phoenix — Deer Valley	AZ	(1)		1,020		8,527		116		1,020		8,643		9,663		794	Jul-98	Jun-07	2 – 39 years
Phoenix — Mesa	AZ	(1)		977		10,739		108		977		10,847		11,824		982	Dec-97	Jun-07	2 – 38 years
Phoenix — Metro Center	AZ	(1)		1,666		10,219		105		1,666		10,324		11,990		1,067	Oct-04	Jun-07	2 – 43 years
Phoenix — Midtown	AZ	(1)		1,343		14,537		60		1,343		14,597		15,940		1,462	Oct-04	Jun-07	2 – 43 years
Phoenix — Peoria	AZ	(1)		1,511		13,347		144		1,511		13,491		15,002		1,191	Dec-98	Jun-07	2 – 39 years
Phoenix — Scottsdale	AZ	(1)		1,734		12,993		65		1,734		13,058		14,792		1,267	Jun-97	Jun-07	2 – 35 years
Phoenix — Scottsdale	AZ	(1)		1,749		9,952		63		1,749		10,015		11,764		839	Sep-97	Jun-07	2 – 40 years
Phoenix — West	AZ	(1)		1,471		6,338		96		1,471		6,434		7,906		687	Sep-98	Jun-07	2 – 41 years
Tucson — Butterfield Drive	AZ	(1)		473		8,188		65		473		8,253		8,726		757	Apr-98	Jun-07	2 – 41 years
Tucson — Grant Road	AZ	(1)		448		14,583		75		448		14,657		15,106		1,417	Apr-97	Jun-07	2 – 35 years
Bakersfield — California Avenue	CA	(1)		240		9,916		93		240		10,009		10,249		1,033	Nov-96	Jun-07	2 – 34 years
Bakersfield — Chester Lane	CA	(1)		412		9,644		44		412		9,688		10,100		767	Oct-05	Jun-07	2 – 43 years
Dublin — Hacienda Dr.	CA	(1)		3,344		9,537		189		3,344		9,680		13,024		844	Feb-00	Jun-07	2 – 38 years
Fairfield — Napa Valley	CA	(1)		887		11,636		124		887		11,719		12,606		945	Aug-04	Jun-07	2 – 42 years
Fremont — Newark	CA	(1)		2,857		4,674		79		2,857		4,752		7,609		455	Aug-99	Jun-07	2 – 42 years
Fremont — Newark	CA	(1)		4,353		6,648		86		4,353		6,734		11,087		666	Dec-98	Jun-07	2 – 39 years
Fremont — Warm Springs	CA	(1)		5,101		3,683		108		5,101		3,764		8,865		361	Nov-01	Jun-07	2 – 39 years
Fresno — North	CA	(1)		722		19,391		166		722		19,515		20,237		1,860	Jul-97	Jun-07	2 – 35 years
Fresno — West	CA	(1)		818		8,277		91		818		8,367		9,186		830	Nov-98	Jun-07	2 – 36 years
Livermore — Airway Blvd.	CA	(1)		2,721		6,931		96		2,721		7,027		9,747		684	Jan-98	Jun-07	2 – 39 years
Los Angeles — Arcadia	CA	(1)		6,684		12,442		101		6,684		12,544		19,228		1,142	Apr-98	Jun-07	2 – 39 years
Los Angeles — Burbank Airport	CA	(1)		5,508		26,173		534		5,508		26,509		32,017		2,029	Dec-01	Jun-07	2 – 42 years
Los Angeles — Carson	CA	(1)		7,297		6,453		163		7,297		6,577		13,874		574	N/A	Jun-07	2 – 42 years
Los Angeles — Chino Valley	CA	(1)		1,236		11,591		39		1,236		11,630		12,866		986	Jul-04	Jun-07	2 – 42 years
Los Angeles — La Mirada	CA	(1)		5,737		9,560		93		5,737		9,652		15,390		1,148	Jun-98	Jun-07	2 – 39 years
Los Angeles — LAX Airport	CA	(1)		5,174		25,184		738		5,174		25,734		30,907		2,059	May-99	Jun-07	2 – 40 years
Los Angeles — Long Beach	CA	(1)		3,952		21,782		178		3,952		21,910		25,862		1,895	Nov-97	Jun-07	2 – 38 years

F-95

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Los Angeles — Northridge	CA	(1)		7,297		16,976		43		7,297		17,018		24,315		1,410	Jul-05	Jun-07	2 – 43 years
Los Angeles — Ontario Airport	CA	(1)		1,580		18,379		230		1,580		18,569		20,149		1,633	May-97	Jun-07	2 – 38 years
Los Angeles — San Dimas	CA	(1)		7,241		6,397		137		7,241		6,490		13,732		589	Feb-99	Jun-07	2 – 37 years
Los Angeles — Simi Valley	CA	(1)		973		14,733		61		973		14,794		15,767		1,217	Dec-04	Jun-07	2 – 42 years
Los Angeles — South	CA	(1)		6,239		9,179		112		6,239		9,291		15,530		866	Dec-98	Jun-07	2 – 39 years
Los Angeles — Torrance	CA	(1)		4,790		16,336		216		4,790		16,492		21,283		1,427	Dec-97	Jun-07	2 – 38 years
Los Angeles — Torrance Harbor Gateway	CA	(1)		6,573		13,324		201		6,573		13,477		20,050		1,198	Aug-99	Jun-07	2 – 37 years
Los Angeles — Valencia	CA	(1)		13,647		3,979		136		13,647		4,075		17,722		390	Mar-00	Jun-07	2 – 38 years
Los Angeles — Woodland Hills	CA	(1)		7,687		17,345		512		7,687		17,664		25,351		1,341	May-00	Jun-07	2 – 41 years
Oakland — Alameda	CA	(1)		3,287		18,528		131		3,287		18,625		21,912		1,617	Nov-00	Jun-07	2 – 38 years
Oakland — Alameda Airport	CA	(1)		3,174		10,711		97		3,174		10,808		13,982		926	Jul-99	Jun-07	2 – 42 years
Oakland — Emeryville	CA	(1)		3,401		19,216		377		3,401		19,514		22,915		1,657	Jun-02	Jun-07	2 – 39 years
Orange County — Anaheim Convention Center	CA	(1)		7,369		5,260		246		7,369		5,459		12,828		487	Feb-01	Jun-07	2 – 39 years
Orange County — Anaheim Hills	CA	(1)		8,427		3,514		169		8,427		3,626		12,053		307	Mar-02	Jun-07	2 – 40 years
Orange County — Huntington Beach	CA	(1)		3,260		13,364		62		3,260		13,426		16,686		1,148	Dec-98	Jun-07	2 – 41 years
Orange County — John Wayne Airport	CA	(1)		3,909		28,445		306		3,909		28,628		32,537		2,370	Mar-01	Jun-07	2 – 39 years
Orange County — Katella Ave.	CA	(1)		2,862		14,274		157		2,862		14,390		17,252		1,202	Sep-01	Jun-07	2 – 39 years
Orange County — Lake Forest	CA	(1)		4,249		11,293		243		4,249		11,492		15,741		1,121	Sep-99	Jun-07	2 – 35 years
Orange County — Yorba Linda	CA	(1)		3,024		7,624		118		3,024		7,718		10,742		645	May-03	Jun-07	2 – 41 years
Palm Springs — Airport	CA	(1)		3,416		10,058		81		3,416		10,139		13,555		866	Jan-03	Jun-07	2 – 41 years
Pleasant Hill — Buskirk Ave.	CA	(1)		4,050		14,308		225		4,050		14,485		18,535		1,263	Aug-97	Jun-07	2 – 38 years
Pleasanton — Chabot Dr.	CA	(1)		2,471		8,899		136		2,471		9,036		11,507		772	Mar-98	Jun-07	2 – 41 years
Richmond — Hilltop Mall	CA	(1)		3,078		9,918		144		3,078		10,023		13,101		879	Aug-00	Jun-07	2 – 38 years
Sacramento — Arden Way	CA	(1)		1,473		9,945		217		1,473		10,111		11,584		976	Aug-97	Jun-07	2 – 35 years
Sacramento — Elk Grove	CA	(1)		1,192		10,643		166		1,192		10,774		11,967		881	May-03	Jun-07	2 – 41 years
Sacramento — Northgate	CA	(1)		1,543		6,004		234		1,543		6,196		7,739		617	Mar-97	Jun-07	2 – 35 years
Sacramento — Point East Dr.	CA	(1)		1,473		6,944		98		1,473		7,042		8,515		666	Nov-98	Jun-07	2 – 39 years
Sacramento — Roseville	CA	(1)		4,658		12,347		65		4,658		12,412		17,070		1,118	Aug-98	Jun-07	2 – 39 years
Sacramento — Vacaville	CA	(1)		609		8,195		151		609		8,311		8,920		694	Feb-02	Jun-07	2 – 40 years
Sacramento — West Sacramento	CA	(1)		839		9,450		134		839		9,545		10,384		794	Jul-04	Jun-07	2 – 42 years
Sacramento — White Rock Rd.	CA	(1)		2,104		7,780		208		2,104		7,939		10,044		771	Jun-97	Jun-07	2 – 35 years
San Diego — Carlsbad Village by the Sea	CA	(1)		3,570		14,356		202		3,570		14,520		18,089		1,205	Sep-02	Jun-07	2 – 40 years
San Diego — Hotel Circle	CA	(1)		5,799		26,829		69		5,799		26,898		32,697		2,344	Nov-99	Jun-07	2 – 40 years
San Diego — Mission Valley — Stadium	CA	(1)		7,137		10,249		161		7,137		10,374		17,511		874	Jun-02	Jun-07	2 – 40 years
San Diego — Oceanside	CA	(1)		1,747		15,237		80		1,747		15,317		17,064		1,344	Jan-99	Jun-07	2 – 40 years
San Francisco — Belmont	CA	(1)		3,470		11,222		177		3,470		11,339		14,809		914	Apr-03	Jun-07	2 – 41 years
San Jose — Downtown	CA	(1)		7,233		18,779		75		7,233		18,855		26,087		1,494	Jan-00	Jun-07	2 – 43 years
San Jose — Milpitas	CA	(1)		6,819		9,526		66		6,819		9,592		16,411		938	Jan-98	Jun-07	2 – 39 years
San Jose — Morgan Hill	CA	(1)		4,340		3,877		55		4,340		3,932		8,272		401	Dec-98	Jun-07	2 – 39 years
San Jose — Santa Clara	CA	(1)		4,960		8,060		141		4,960		8,164		13,124		690	Mar-01	Jun-07	2 – 39 years
San Jose — South — Edenvale	CA	(1)		5,373		6,764		192		5,373		6,911		12,284		615	Nov-00	Jun-07	2 – 38 years
San Jose — South — Edenvale	CA	(1)		5,373		8,651		59		5,373		8,710		14,082		749	Dec-00	Jun-07	2 – 43 years
San Rafael — Francisco Blvd East	CA	(1)		2,189		20,759		317		2,199		21,066		23,265		1,823	Apr-07	Jun-07	2 – 43 years
San Ramon — Bishop Ranch	CA	(1)		5,184		8,594		176		5,184		8,719		13,903		768	Nov-00	Jun-07	2 – 38 years
Santa Barbara — Calle Real	CA	(1)		1,268		24,564		305		1,268		24,789		26,057		2,196	Jan-98	Jun-07	2 – 36 years

F-96

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Santa Rosa — North	CA	(1)		1,887		12,303		203		1,887		12,439		14,326		1,064	Jun-00	Jun-07	2 – 38 years
Santa Rosa — South	CA	(1)		1,398		9,718		150		1,398		9,828		11,226		938	Jun-97	Jun-07	2 – 35 years
Stockton — March Lane	CA	(1)		618		10,566		83		618		10,637		11,255		925	Sep-01	Jun-07	2 – 39 years
Stockton — Tracy	CA	(1)		683		9,023		152		683		9,139		9,822		748	Jun-03	Jun-07	2 – 41 years
Temecula — Wine Country	CA	(1)		1,473		14,761		104		1,473		14,865		16,338		1,258	Apr-02	Jun-07	2 – 40 years
Union City — Dyer St.	CA	(1)		2,834		11,567		153		2,834		11,720		14,554		1,025	Dec-99	Jun-07	2 – 40 years
Colorado Springs — Airport	CO	(1)		950		5,465		133		950		5,598		6,548		563	Nov-98	Jun-07	2 – 36 years
Colorado Springs — West	CO	(1)		1,365		5,041		50		1,365		5,080		6,445		520	Sep-98	Jun-07	2 – 39 years
Denver — Airport — Aurora	CO	(1)		1,111		3,798		90		1,111		3,887		4,998		399	Dec-98	Jun-07	2 – 39 years
Denver — Aurora	CO	(1)		1,357		8,293		130		1,357		8,424		9,781		802	Oct-04	Jun-07	2 – 43 years
Denver — Cherry Creek	CO	(1)		1,388		4,522		84		1,388		4,606		5,994		425	Jul-98	Jun-07	2 – 41 years
Denver — Lakewood South	CO	(1)		1,010		5,038		65		1,010		5,103		6,113		572	Nov-96	Jun-07	2 – 34 years
Denver — Lakewood West	CO	(1)		797		7,653		167		797		7,819		8,616		785	Jan-97	Jun-07	2 – 35 years
Denver — Park Meadows	CO	(1)		673		6,976		51		673		7,026		7,700		637	Jun-02	Jun-07	2 – 40 years
Denver — Tech Center — North	CO	(1)		2,170		2,491		94		2,170		2,585		4,755		354	Oct-04	Jun-07	2 – 43 years
Denver — Tech Center South	CO	(1)		1,415		3,490		30		1,415		3,520		4,934		377	Aug-98	Jun-07	2 – 41 years
Denver — Thornton	CO	(1)		873		4,440		75		873		4,515		5,388		462	Mar-99	Jun-07	2 – 37 years
Denver — Westminster	CO	(1)		989		9,406		113		989		9,519		10,508		858	Jan-00	Jun-07	2 – 38 years
Hartford — Farmington	CT	(1)		1,577		13,308		73		1,577		13,380		14,957		1,172	Dec-98	Jun-07	2 – 41 years
Hartford — Manchester	CT	(1)		1,536		11,915		60		1,536		11,975		13,511		1,050	Dec-01	Jun-07	2 – 39 years
Hartford — Meriden	CT	(1)		3,668		4,780		44		3,668		4,825		8,492		446	Oct-02	Jun-07	2 – 40 years
Daytona Beach — International Speedway	FL	(1)		874		8,571		38		874		8,608		9,483		750	Aug-98	Jun-07	2 – 41 years
Destin — US 98 - Emerald Coast Pkwy.	FL	(1)		4,475		8,186		100		4,455		8,306		12,762		784	Aug-06	Jun-07	2 – 43 years
Fort Lauderdale — Commercial Blvd.	FL	(1)		3,971		11,499		210		3,971		11,709		15,680		1,016	Mar-99	Jun-07	2 – 40 years
Fort Lauderdale — Convention Center — Marina	FL	(1)		3,357		14,990		114		3,357		15,104		18,461		1,307	Jul-99	Jun-07	2 – 40 years
Fort Lauderdale — Cypress Creek — Andrews Ave.	FL	(1)		4,278		8,018		100		4,278		8,119		12,397		739	Mar-98	Jun-07	2 – 39 years
Fort Lauderdale — Cypress Creek — NW 6th Way	FL	(1)		3,773		8,784		55		3,773		8,838		12,611		989	Apr-99	Jun-07	2 – 42 years
Fort Lauderdale — Cypress Creek — Park North	FL	(1)		5,505		17,136		136		5,505		17,272		22,777		1,979	Oct-04	Jun-07	2 – 43 years
Fort Lauderdale — Deerfield Beach	FL	(1)		4,278		10,365		218		4,278		10,531		14,809		918	Dec-97	Jun-07	2 – 38 years
Fort Lauderdale — Plantation	FL	(1)		8,700		11,199		301		8,700		11,395		20,096		956	Mar-00	Jun-07	2 – 38 years
Gainesville — I-75	FL	(1)		518		15,218		168		518		15,334		15,853		1,452	Jul-97	Jun-07	2 – 35 years
Jacksonville — Butler Blvd.	FL	(1)		3,012		5,993		87		3,012		6,080		9,091		583	May-97	Jun-07	2 – 38 years
Jacksonville — Butler Blvd.	FL	(1)		2,485		5,986		335		2,485		6,321		8,806		810	Jul-98	Jun-07	2 – 41 years
Jacksonville — Deerwood Park	FL	(1)		2,892		8,985		84		2,892		9,069		11,961		1,277	Oct-04	Jun-07	2 – 43 years
Jacksonville — Riverwalk	FL	(1)		1,720		10,500		98		1,720		10,598		12,318		964	Feb-00	Jun-07	2 – 38 years
Melbourne — Airport	FL	(1)		2,059		13,890		46		2,059		13,936		15,995		1,591	Oct-98	Jun-07	2 – 41 years
Miami — Airport — Doral	FL	(1)		4,214		15,324		75		4,214		15,399		19,613		1,567	Mar-02	Jun-07	2 – 43 years
Miami — Airport at Doral	FL	(1)		3,575		16,384		446		3,575		16,666		20,241		1,253	Feb-01	Jun-07	2 – 42 years
Miami — Brickell — Port of Miami	FL	(1)		2,556		17,632		563		2,556		17,999		20,556		1,355	Jun-01	Jun-07	2 – 42 years
Miami — Coral Gables	FL	(1)		1,986		15,336		519		1,986		15,834		17,820		1,323	Oct-01	Jun-07	2 – 42 years
Orlando — Convention Center — Pointe Orlando	FL	(1)		2,319		12,308		96		2,319		12,404		14,723		1,067	Jul-98	Jun-07	2 – 41 years
Orlando — Convention Center — Westwood Blvd.	FL	(1)		2,435		4,697		165		2,435		4,816		7,252		436	Nov-97	Jun-07	2 – 38 years
Orlando — Convention Center — Westwood Blvd.	FL	(1)		2,034		6,584		60		2,034		6,644		8,678		817	Oct-99	Jun-07	2 – 42 years
Orlando — John Young Parkway	FL	(1)		3,069		7,888		112		3,069		8,000		11,069		1,032	Oct-04	Jun-07	2 – 43 years
Orlando — Lake Buena Vista	FL	(1)		3,113		8,772		132		3,113		8,875		11,988		730	Jul-98	Jun-07	2 – 41 years

F-97

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Orlando — Lake Mary	FL	(1)		1,245		4,760		271		1,245		4,996		6,241		449	Sep-00	Jun-07	2 – 38 years
Orlando — Maitland — Pembrook Dr.	FL	(1)		1,846		6,558		218		1,846		6,741		8,587		617	Jun-99	Jun-07	2 – 37 years
Orlando — Maitland — Pembrook Dr.	FL	(1)		1,846		7,249		115		1,846		7,365		9,211		785	Jan-00	Jun-07	2 – 43 years
Orlando — Maitland — Summit	FL	(1)		3,300		7,247		46		3,300		7,293		10,594		861	Oct-04	Jun-07	2 – 43 years
Orlando — Universal Studios	FL	(1)		2,007		6,751		62		2,007		6,813		8,820		904	Jun-98	Jun-07	2 – 41 years
Orlando — Universal Studios	FL	(1)		2,685		9,510		83		2,685		9,593		12,278		859	Feb-99	Jun-07	2 – 40 years
Orlando — University of Central Florida	FL	(1)		2,899		9,496		128		2,899		9,624		12,523		918	Jan-99	Jun-07	2 – 37 years
Pensacola — University Mall	FL	(1)		533		9,888		234		533		10,072		10,606		880	Sep-97	Jun-07	2 – 38 years
St. Petersburg — Clearwater	FL	(1)		3,912		5,514		68		3,761		5,733		9,494		542	Mar-98	Jun-07	2 – 39 years
Tallahassee — Killearn	FL	(1)		689		4,406		81		689		4,487		5,177		400	Jan-98	Jun-07	2 – 41 years
Tampa — Airport	FL	(1)		2,084		7,462		55		2,084		7,517		9,601		668	Mar-99	Jun-07	2 – 42 years
Tampa — Airport — N. West Shore Blvd.	FL	(1)		2,191		17,648		49		2,191		17,696		19,887		1,620	Oct-04	Jun-07	2 – 43 years
Tampa — Airport — West Shore	FL	(1)		2,183		9,964		154		2,183		10,077		12,260		835	Jan-03	Jun-07	2 – 41 years
Tampa — Temple Terrace	FL	(1)		1,977		9,593		163		1,977		9,717		11,694		855	Aug-97	Jun-07	2 – 38 years
West Palm Beach — Northpoint Corporate Park	FL	(1)		3,693		10,790		77		3,693		10,867		14,560		933	Nov-98	Jun-07	2 – 41 years
Atlanta — Alpharetta — Northpoint	GA	(1)		728		5,182		69		728		5,251		5,979		484	Jul-97	Jun-07	2 – 40 years
Atlanta — Alpharetta — Northpoint	GA	(1)		1,196		5,180		76		1,196		5,256		6,453		529	Oct-04	Jun-07	2 – 43 years
Atlanta — Alpharetta — Rock Mill Rd.	GA	(1)		1,571		4,912		65		1,571		4,977		6,548		494	Jun-99	Jun-07	2 – 37 years
Atlanta — Clairmont	GA	(1)		2,344		7,295		42		2,344		7,338		9,682		680	Apr-98	Jun-07	2 – 39 years
Atlanta — Gwinnett Place	GA	(1)		1,409		3,064		2,052		1,409		5,091		6,500		465	Sep-97	Jun-07	2 – 35 years
Atlanta — Gwinnett Place	GA	(1)		1,426		6,561		179		1,426		6,740		8,166		693	Jan-90	Jun-07	2 – 28 years
Atlanta — Jimmy Carter Blvd.	GA	(1)		2,658		4,579		101		2,658		4,679		7,337		601	Jan-96	Jun-07	2 – 34 years
Atlanta — Kennesaw	GA	(1)		2,098		1,955		71		2,098		2,026		4,124		222	Dec-97	Jun-07	2 – 40 years
Atlanta — Kennesaw	GA	(1)		2,258		3,699		58		2,258		3,757		6,015		398	Dec-98	Jun-07	2 – 39 years
Atlanta — Lawrenceville	GA	(1)		1,705		4,215		280		1,705		4,446		6,151		448	Jun-96	Jun-07	2 – 34 years
Atlanta — Lenox	GA	(1)		1,438		9,922		123		1,438		10,045		11,483		874	Sep-97	Jun-07	2 – 40 years
Atlanta — Marietta — Canton Road	GA	(1)		1,788		2,282		115		1,327		1,861		3,188		164	Aug-95	Jun-07	2 – 33 years
Atlanta — Marietta — Powers Ferry Rd.	GA	(1)		1,402		6,707		103		1,402		6,810		8,212		667	Jul-96	Jun-07	2 – 39 years
Atlanta — Marietta — Windy Hill	GA	(1)		3,302		3,557		97		3,302		3,654		6,957		433	Jan-98	Jun-07	2 – 39 years
Atlanta — Marietta — Windy Hill — Int. N. Pkwy.	GA	(1)		3,128		5,906		85		3,128		5,991		9,119		756	Oct-04	Jun-07	2 – 43 years
Atlanta — Morrow	GA	(1)		754		9,761		39		754		9,801		10,554		930	Jun-98	Jun-07	2 – 39 years
Atlanta — Norcross	GA	(1)		1,562		2,628		164		1,562		2,791		4,353		381	Feb-96	Jun-07	2 – 34 years
Atlanta — Peachtree Corners	GA	(1)		1,715		4,415		92		458		1,413		1,872		72	Mar-97	Jun-07	2 – 40 years
Atlanta — Perimeter	GA	(1)		1,512		4,303		65		1,512		4,368		5,881		421	Apr-00	Jun-07	2 – 38 years
Atlanta — Perimeter	GA	(1)		1,063		7,899		145		1,063		8,004		9,067		746	Jan-97	Jun-07	2 – 40 years
Atlanta — Riverdale	GA	(1)		578		4,119		317		449		3,353		3,801		127	Feb-96	Jun-07	2 – 34 years
Atlanta — Vinings	GA	(1)		2,339		7,414		70		2,339		7,484		9,823		1,044	Dec-97	Jun-07	2 – 40 years
Columbus — Airport	GA	(1)		934		9,709		183		934		9,848		10,782		935	Jan-97	Jun-07	2 – 35 years
Columbus — Bradley Park	GA	(1)		700		8,568		159		700		8,682		9,382		746	Jun-00	Jun-07	2 – 38 years
Macon — North	GA	(1)		419		5,681		52		419		5,733		6,153		531	Mar-98	Jun-07	2 – 41 years
Savannah — Midtown	GA	(1)		356		13,486		67		356		13,553		13,909		1,193	Jul-01	Jun-07	2 – 39 years
Des Moines — Urbandale	IA	(1)		731		5,913		153		731		6,020		6,751		582	Jan-99	Jun-07	2 – 37 years
Des Moines — West Des Moines	IA	(1)		722		4,166		102		722		4,268		4,989		416	Dec-97	Jun-07	2 – 40 years
Boise — Airport	ID	(1)		779		8,263		148		779		8,386		9,165		775	Jan-97	Jun-07	2 – 38 years
Bloomington — Normal	IL	(1)		1,181		7,812		129		1,181		7,901		9,082		687	Dec-01	Jun-07	2 – 39 years

F-98

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Champaign — Urbana	IL	(1)		1,315		7,583		31		1,315		7,615		8,930		700	Sep-98	Jun-07	2 – 39 years
Chicago — Buffalo Grove — Deerfield	IL	(1)		1,298		11,779		61		1,298		11,840		13,138		1,107	May-97	Jun-07	2 – 39 years
Chicago — Burr Ridge	IL	(1)		2,281		10,511		198		2,281		10,656		12,937		974	Nov-96	Jun-07	2 – 37 years
Chicago — Darien	IL	(1)		1,871		7,837		172		1,871		7,948		9,819		716	Mar-99	Jun-07	2 – 37 years
Chicago — Downers Grove	IL	(1)		2,890		9,757		242		2,890		9,937		12,827		950	May-96	Jun-07	2 – 37 years
Chicago — Elmhurst	IL	(1)		1,924		8,048		152		1,924		8,163		10,087		761	Aug-97	Jun-07	2 – 38 years
Chicago — Gurnee	IL	(1)		1,045		5,388		162		1,045		5,549		6,594		548	Jan-97	Jun-07	2 – 38 years
Chicago — Hanover Park	IL	(1)		4,639		5,507		174		4,639		5,638		10,277		554	Jun-99	Jun-07	2 – 37 years
Chicago — Hillside	IL	(1)		1,727		7,515		236		1,727		7,693		9,420		719	Nov-99	Jun-07	2 – 37 years
Chicago — Itasca	IL	(1)		1,825		8,600		175		1,825		8,724		10,549		809	Nov-96	Jun-07	2 – 37 years
Chicago — Lansing	IL	(1)		1,587		5,481		85		1,587		5,566		7,153		613	Nov-98	Jun-07	2 – 36 years
Chicago — Lisle	IL	(1)		2,076		4,549		125		2,076		4,636		6,712		420	Jun-00	Jun-07	2 – 38 years
Chicago — Lombard — Oak Brook	IL	(1)		2,130		7,474		75		2,130		7,549		9,679		708	Mar-98	Jun-07	2 – 41 years
Chicago — Midway	IL	(1)		1,741		14,613		60		1,741		14,673		16,414		1,241	Jul-03	Jun-07	2 – 41 years
Chicago — Naperville	IL	(1)		3,346		8,824		249		3,346		9,024		12,370		855	Nov-96	Jun-07	2 – 37 years
Chicago — O’Hare	IL	(1)		1,674		10,602		69		1,674		10,670		12,344		991	Mar-98	Jun-07	2 – 39 years
Chicago — O’Hare	IL	(1)		1,674		10,933		50		1,674		10,984		12,657		923	Apr-99	Jun-07	2 – 42 years
Chicago — Rolling Meadows	IL	(1)		1,607		5,582		241		1,607		5,774		7,381		530	Oct-96	Jun-07	2 – 37 years
Chicago — Romeoville	IL	(1)		1,288		9,062		156		1,288		9,178		10,467		859	Oct-98	Jun-07	2 – 36 years
Chicago — Schaumburg	IL	(1)		2,285		6,476		164		2,285		6,591		8,876		797	Feb-02	Jun-07	2 – 40 years
Chicago — Skokie	IL	(1)		1,660		18,990		297		1,660		19,259		20,919		1,727	Jul-00	Jun-07	2 – 38 years
Chicago — Vernon Hills — Lake Forest	IL	(1)		1,591		9,466		162		1,591		9,574		11,165		863	Oct-00	Jun-07	2 – 38 years
Chicago — Waukegan	IL	(1)		898		3,206		101		898		3,307		4,205		354	Nov-97	Jun-07	2 – 35 years
Chicago — Woodfield Mall	IL	(1)		997		8,633		174		997		8,766		9,764		786	Mar-99	Jun-07	2 – 37 years
Peoria — North	IL	(1)		1,342		7,891		137		1,342		7,987		9,329		687	Dec-01	Jun-07	2 – 39 years
Rockford — East	IL	(1)		1,213		6,477		53		1,213		6,531		7,744		592	Nov-97	Jun-07	2 – 40 years
Rockford — East	IL	(1)		1,503		8,210		152		1,503		8,314		9,817		744	Sep-97	Jun-07	2 – 38 years
St. Louis — O’ Fallon, IL	IL	(1)		1,417		7,925		54		1,417		7,978		9,396		729	Sep-98	Jun-07	2 – 39 years
Evansville — East	IN	(1)		113		5,327		46		113		5,373		5,486		499	Feb-97	Jun-07	2 – 40 years
Fort Wayne — North	IN	(1)		998		2,054		124		998		2,178		3,176		240	Dec-96	Jun-07	2 – 39 years
Fort Wayne — South	IN	(1)		2,191		3,917		157		2,191		4,030		6,221		402	Sep-97	Jun-07	2 – 38 years
Indianapolis — Airport	IN	(1)		282		6,830		101		282		6,930		7,212		705	Oct-98	Jun-07	2 – 36 years
Indianapolis — Airport — W. Southern Ave.	IN	(1)		359		10,159		92		359		10,251		10,610		1,009	Oct-04	Jun-07	2 – 43 years
Indianapolis — Castleton	IN	(1)		124		8,355		73		124		8,428		8,552		798	Sep-99	Jun-07	2 – 37 years
Indianapolis — North	IN	(1)		1,037		3,490		167		1,037		3,657		4,694		426	Aug-90	Jun-07	2 – 31 years
Indianapolis — Northwest — College Park	IN	(1)		87		3,994		274		35		1,801		1,836		61	Mar-91	Jun-07	2 – 32 years
Indianapolis — Northwest — I-465	IN	(1)		343		10,883		209		343		11,091		11,435		1,080	Oct-04	Jun-07	2 – 43 years
Merrillville — US Rte. 30	IN	(1)		1,232		6,901		171		1,232		7,024		8,256		675	Nov-96	Jun-07	2 – 37 years
South Bend — Mishawaka	IN	(1)		496		5,034		79		151		1,744		1,895		70	Sep-97	Jun-07	2 – 40 years
South Bend — Mishawaka	IN	(1)		487		8,786		56		487		8,842		9,328		784	Dec-01	Jun-07	2 – 39 years
Kansas City — Lenexa — 87th St.	KS	(1)		1,225		5,189		114		1,225		5,303		6,529		964	Oct-04	Jun-07	2 – 43 years
Kansas City — Lenexa — 95th St.	KS	(1)		2,049		1,981		157		2,049		2,139		4,188		283	May-96	Jun-07	2 – 34 years
Kansas City — Overland Park	KS	(1)		1,184		8,297		172		1,184		8,423		9,607		785	Sep-97	Jun-07	2 – 38 years
Kansas City — Overland Park — Metcalf	KS	(1)		918		12,538		105		918		12,643		13,561		1,805	Oct-04	Jun-07	2 – 43 years
Wichita — East	KS	(1)		382		6,188		68		382		6,255		6,637		574	Dec-97	Jun-07	2 – 40 years

F-99

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Cincinnati — Covington	KY	(1)		1,206		8,045		151		1,206		8,164		9,371		743	Dec-97	Jun-07	2 – 38 years
Cincinnati — Florence	KY	(1)		682		2,479		122		682		2,601		3,283		276	Sep-96	Jun-07	2 – 39 years
Cincinnati — Florence	KY	(1)		1,046		6,363		136		1,046		6,498		7,545		627	Oct-97	Jun-07	2 – 38 years
Lexington — Nicholasville Road	KY	(1)		1,336		7,347		262		1,336		7,565		8,900		763	Sep-96	Jun-07	2 – 34 years
Lexington — Patchen Village	KY	(1)		521		2,291		122		521		2,414		2,935		316	July-86	Jun-07	2 – 27 years
Lexington — Tates Creek	KY	(1)		831		3,159		98		831		3,257		4,088		422	Aug-87	Jun-07	2 – 28 years
Louisville — Dutchman	KY	(1)		851		6,153		131		851		6,283		7,134		678	Oct-96	Jun-07	2 – 34 years
Louisville — Hurstbourne	KY	(1)		735		2,256		144		735		2,400		3,135		308	Dec-88	Jun-07	2 – 29 years
Louisville — St. Matthews	KY	(1)		870		1,634		106		870		1,740		2,610		226	Apr-89	Jun-07	2 – 30 years
Baton Rouge — Citiplace	LA	(1)		950		17,363		84		950		17,447		18,397		1,517	Oct-01	Jun-07	2 – 39 years
Baton Rouge — Sherwood Forest	LA	(1)		920		7,440		127		920		7,567		8,488		747	Jun-98	Jun-07	2 – 36 years
Lafayette — Airport	LA	(1)		617		11,838		67		617		11,905		12,521		1,141	Nov-98	Jun-07	2 – 36 years
Lake Charles — Sulphur	LA	(1)		469		14,445		371		469		14,816		15,285		1,409	Aug-97	Jun-07	2 – 35 years
New Orleans — Kenner	LA	(1)		1,363		20,714		207		1,363		20,860		22,223		1,998	Mar-01	Jun-07	2 – 39 years
New Orleans — Metairie	LA	(1)		590		19,352		89		590		19,441		20,031		1,683	Aug-98	Jun-07	2 – 39 years
Shreveport — Bossier City	LA	(1)		943		6,016		236		943		6,252		7,196		639	Sep-97	Jun-07	2 – 35 years
Boston — Braintree	MA	(1)		2,340		17,488		156		2,340		17,591		19,931		1,443	Mar-02	Jun-07	2 – 40 years
Boston — Danvers	MA	(1)		2,393		5,770		94		2,393		5,864		8,257		573	Feb-98	Jun-07	2 – 39 years
Boston — Norton	MA	(1)		880		7,009		116		880		7,086		7,965		603	Aug-03	Jun-07	2 – 41 years
Boston — Tewksbury	MA	(1)		2,677		5,165		249		2,677		5,357		8,034		464	Jun-01	Jun-07	2 – 39 years
Boston — Waltham	MA	(1)		2,548		17,575		66		2,548		17,641		20,190		1,521	Jun-99	Jun-07	2 – 42 years
Boston — Westborough	MA	(1)		1,061		13,032		61		1,061		13,094		14,155		1,225	Mar-01	Jun-07	2 – 43 years
Boston — Westborough	MA	(1)		1,356		6,066		175		1,356		6,209		7,565		551	Jan-01	Jun-07	2 – 39 years
Boston — Westborough — Computer Dr.	MA	(1)		1,321		10,650		93		1,321		10,744		12,065		902	Jun-98	Jun-07	2 – 41 years
Boston — Woburn	MA	(1)		3,213		7,264		103		3,213		7,368		10,580		631	May-98	Jun-07	2 – 41 years
Annapolis — Naval Academy	MD	(1)		1,413		8,651		143		1,413		8,749		10,162		708	Dec-04	Jun-07	2 – 42 years
Baltimore — Bel Air	MD	(1)		1,212		9,772		31		1,212		9,803		11,015		846	Nov-04	Jun-07	2 – 42 years
Baltimore — BWI Airport	MD	(1)		1,749		15,216		243		1,749		15,410		17,159		1,341	Jun-97	Jun-07	2 – 38 years
Baltimore — Glen Burnie	MD	(1)		1,079		16,358		136		1,079		16,444		17,523		1,299	Nov-04	Jun-07	2 – 42 years
Baltimore — Timonium	MD	(1)		1,844		12,915		46		1,844		12,961		14,806		1,406	Jun-98	Jun-07	2 – 39 years
Columbia — Columbia 100 Parkway	MD	(1)		1,260		14,295		202		1,260		14,450		15,710		1,269	Oct-97	Jun-07	2 – 38 years
Columbia — Columbia Corporate Park	MD	(1)		1,593		17,500		69		1,593		17,569		19,162		1,618	Oct-04	Jun-07	2 – 43 years
Columbia — Gateway Drive	MD	(1)		1,481		9,175		61		1,481		9,236		10,717		816	Dec-97	Jun-07	2 – 40 years
Columbia — Laurel	MD	(1)		1,094		15,203		35		1,094		15,238		16,331		1,267	Dec-04	Jun-07	2 – 42 years
Frederick — Westview Dr.	MD	(1)		888		14,760		142		888		14,858		15,746		1,313	Mar-99	Jun-07	2 – 37 years
Lexington Park — Pax River	MD	(1)		1,151		10,340		132		1,151		10,431		11,582		923	Jan-00	Jun-07	2 – 38 years
Washington, D.C. — Gaithersburg	MD	(1)		4,428		7,903		202		4,428		8,057		12,486		726	Mar-99	Jun-07	2 – 37 years
Washington, D.C. — Gaithersburg	MD	(1)		4,428		9,949		155		4,428		10,104		14,532		870	Feb-99	Jun-07	2 – 42 years
Washington, D.C. — Germantown	MD	(1)		3,105		7,735		164		3,105		7,856		10,961		701	Jan-99	Jun-07	2 – 37 years
Washington, D.C. — Landover	MD	(1)		2,808		15,084		49		2,808		15,134		17,941		1,336	Jul-98	Jun-07	2 – 39 years
Portland — Scarborough	ME	(1)		826		7,399		32		826		7,431		8,257		661	Aug-01	Jun-07	2 – 39 years
Detroit — Ann Arbor	MI	(1)		3,253		2,498		77		3,253		2,575		5,828		361	May-97	Jun-07	2 – 38 years
Detroit — Ann Arbor	MI	(1)		876		2,891		59		876		2,951		3,827		308	Dec-97	Jun-07	2 – 40 years
Detroit — Auburn Hills	MI	(1)		1,478		2,991		107		1,478		3,098		4,576		644	Feb-97	Jun-07	2 – 38 years
Detroit — Auburn Hills — Featherstone Rd.	MI	(1)		1,774		3,016		63		1,774		3,080		4,853		345	Oct-04	Jun-07	2 – 43 years

F-100

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Detroit — Canton	MI	(1)		1,518		4,103		102		1,518		4,205		5,723		405	Jul-01	Jun-07	2 – 39 years
Detroit — Dearborn	MI	(1)		1,115		7,537		52		1,115		7,588		8,703		666	Mar-02	Jun-07	2 – 43 years
Detroit — Farmington Hills	MI	(1)		1,596		3,041		81		1,596		3,122		4,718		328	Jun-97	Jun-07	2 – 38 years
Detroit — Livonia	MI	(1)		1,601		2,364		91		1,601		2,456		4,057		260	Aug-98	Jun-07	2 – 39 years
Detroit — Madison Heights	MI	(1)		1,715		2,256		91		1,715		2,347		4,062		278	May-97	Jun-07	2 – 38 years
Detroit — Metropolitan Airport	MI	(1)		1,380		5,444		56		1,380		5,500		6,881		518	Dec-01	Jun-07	2 – 42 years
Detroit — Novi	MI	(1)		1,667		6,792		90		1,667		6,882		8,549		664	Jan-97	Jun-07	2 – 38 years
Detroit — Novi	MI	(1)		1,833		4,744		67		1,833		4,811		6,644		836	Sep-00	Jun-07	2 – 43 years
Detroit — Roseville	MI	(1)		2,148		3,036		97		2,148		3,134		5,282		346	Nov-01	Jun-07	2 – 39 years
Detroit — Southfield	MI	(1)		1,626		3,392		52		1,626		3,444		5,070		344	Nov-02	Jun-07	2 – 40 years
Detroit — Sterling Heights	MI	(1)		1,926		2,299		75		1,926		2,375		4,300		284	Nov-97	Jun-07	2 – 38 years
Detroit — Warren	MI	(1)		2,296		4,484		41		2,296		4,524		6,820		727	Nov-97	Jun-07	2 – 40 years
Grand Rapids — Kentwood	MI	(1)		2,664		4,041		79		2,664		4,120		6,784		467	Sep-98	Jun-07	2 – 36 years
Minneapolis — Airport — Eagan	MN	(1)		939		8,272		64		939		8,336		9,275		825	Sep-97	Jun-07	2 – 38 years
Minneapolis — Bloomington	MN	(1)		1,794		6,099		134		1,794		6,233		8,026		607	Apr-98	Jun-07	2 – 39 years
Minneapolis — Brooklyn Center	MN	(1)		1,693		7,067		73		1,693		7,140		8,833		701	Nov-98	Jun-07	2 – 36 years
Minneapolis — Eden Prairie	MN	(1)		1,895		4,482		94		1,895		4,576		6,471		458	Jan-98	Jun-07	2 – 39 years
Minneapolis — Maple Grove	MN	(1)		3,114		7,554		118		3,114		7,672		10,786		742	Jan-98	Jun-07	2 – 39 years
Minneapolis — Woodbury	MN	(1)		2,355		6,320		134		2,355		6,455		8,810		648	May-99	Jun-07	2 – 37 years
Rochester — North	MN	(1)		919		5,160		41		919		5,202		6,120		491	Sep-01	Jun-07	2 – 39 years
Rochester — South	MN	(1)		861		5,275		39		861		5,314		6,176		505	Oct-01	Jun-07	2 – 39 years
Columbia — Stadium Blvd.	MO	(1)		980		5,269		38		980		5,306		6,287		476	Sep-03	Jun-07	2 – 39 years
Kansas City — Airport	MO	(1)		698		3,009		75		698		3,084		3,782		344	Jan-97	Jun-07	2 – 38 years
Kansas City — Independence	MO	(1)		424		3,223		73		424		3,296		3,720		594	Jan-97	Jun-07	2 – 35 years
Kansas City — Northeast — Worlds of Fun	MO	(1)		495		4,170		84		495		4,254		4,749		587	Jan-99	Jun-07	2 – 40 years
Kansas City — South	MO	(1)		638		3,913		81		638		3,994		4,631		426	Jun-97	Jun-07	2 – 38 years
Springfield — South	MO	(1)		1,113		7,873		70		1,113		7,943		9,056		729	Oct-97	Jun-07	2 – 38 years
St. Louis — Airport	MO	(1)		813		2,172		162		469		1,402		1,871		72	Jun-92	Jun-07	2 – 35 years
St. Louis — Airport	MO	(1)		878		4,657		105		878		4,762		5,639		484	Nov-96	Jun-07	2 – 37 years
St. Louis — Earth City	MO	(1)		1,160		2,586		99		1,160		2,685		3,845		293	Jun-97	Jun-07	2 – 40 years
St. Louis — St. Peters	MO	(1)		334		7,916		79		334		7,996		8,329		760	Jul-97	Jun-07	2 – 38 years
St. Louis — Westport	MO	(1)		782		3,289		153		782		3,442		4,224		359	Nov-94	Jun-07	2 – 37 years
St. Louis — Westport	MO	(1)		1,145		7,382		274		1,145		7,606		8,751		756	Aug-96	Jun-07	2 – 34 years
Jackson — East Beasley Road	MS	(1)		703		6,466		58		703		6,525		7,228		585	Jan-00	Jun-07	2 – 43 years
Jackson — North	MS	(1)		856		6,825		140		856		6,940		7,796		681	Oct-97	Jun-07	2 – 35 years
Jackson — Ridgeland	MS	(1)		981		4,841		55		981		4,897		5,878		453	Nov-96	Jun-07	2 – 39 years
Billings — West End	MT	(1)		1,199		8,909		59		1,199		8,953		10,153		791	Jul-03	Jun-07	2 – 41 years
Great Falls — Missouri River	MT	(1)		279		6,656		75		279		6,716		6,995		610	Mar-02	Jun-07	2 – 40 years
Asheville — Tunnel Rd.	NC	(1)		3,345		6,100		70		3,345		6,170		9,514		608	Feb-98	Jun-07	2 – 39 years
Charlotte — Pineville	NC	(1)		1,138		7,298		106		1,138		7,403		8,541		740	Feb-99	Jun-07	2 – 37 years
Charlotte — Pineville	NC	(1)		1,367		8,283		85		1,367		8,368		9,735		723	Sep-99	Jun-07	2 – 42 years
Charlotte — Tyvola Rd.	NC	(1)		1,448		2,029		74		1,448		2,104		3,551		240	May-95	Jun-07	2 – 38 years
Charlotte — Tyvola Rd.	NC	(1)		1,713		4,941		70		1,713		5,008		6,721		519	Oct-98	Jun-07	2 – 36 years
Charlotte — University Place	NC	(1)		925		2,894		159		403		1,467		1,870		71	Mar-96	Jun-07	2 – 39 years
Charlotte — University Place	NC	(1)		1,207		5,330		119		1,207		5,449		6,656		571	Apr-98	Jun-07	2 – 39 years

F-101

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Durham — Research Triangle Park	NC	(1)		—		2,869		79		—		2,947		2,947		311	Dec-96	Jun-07	2 – 39 years
Durham — Research Triangle Park	NC	(1)		4,091		3,071		59		4,091		3,131		7,222		445	Sep-98	Jun-07	2 – 41 years
Durham — Research Triangle Park — Miami Blvd. — N	NC	(1)		1,556		5,960		63		1,556		6,023		7,579		981	Sep-98	Jun-07	2 – 41 years
Durham — Research Triangle Park — Miami Blvd. — S	NC	(1)		1,955		7,823		141		1,955		7,964		9,919		1,194	Oct-04	Jun-07	2 – 43 years
Durham — University	NC	(1)		1,802		3,709		224		1,802		3,910		5,712		409	Oct-97	Jun-07	2 – 35 years
Fayetteville — Cross Creek Mall	NC	(1)		921		14,862		94		921		14,956		15,877		1,478	Jan-99	Jun-07	2 – 42 years
Fayetteville — Owen Dr.	NC	(1)		1,084		15,881		181		1,084		16,063		17,147		1,739	Jul-97	Jun-07	2 – 35 years
Greensboro — Airport	NC	(1)		377		6,954		46		377		7,000		7,377		908	Mar-99	Jun-07	2 – 42 years
Greensboro — Wendover Ave.	NC	(1)		300		3,153		123		148		1,724		1,872		72	Dec-95	Jun-07	2 – 38 years
Greensboro — Wendover Ave.	NC	(1)		566		8,570		181		566		8,709		9,275		1,025	Sep-96	Jun-07	2 – 34 years
Jacksonville — Camp Lejeune	NC	(1)		1,105		14,107		70		1,105		14,176		15,282		1,441	Oct-98	Jun-07	2 – 39 years
Raleigh — Cary — Harrison Ave.	NC	(1)		1,386		3,774		49		1,386		3,824		5,210		372	Sep-96	Jun-07	2 – 39 years
Raleigh — Cary — Regency Parkway	NC	(1)		1,685		6,760		38		1,685		6,798		8,483		685	Jan-98	Jun-07	2 – 39 years
Raleigh — Cary — Regency Parkway	NC	(1)		1,356		5,021		75		1,356		5,096		6,453		896	Jan-98	Jun-07	2 – 41 years
Raleigh — North Raleigh	NC	(1)		1,105		2,220		84		1,105		2,304		3,409		246	Dec-96	Jun-07	2 – 39 years
Raleigh — North Raleigh	NC	(1)		1,864		5,056		125		1,864		5,153		7,017		670	Dec-97	Jun-07	2 – 38 years
Raleigh — RDU Airport	NC	(1)		1,434		7,693		130		1,434		7,789		9,223		837	Sep-97	Jun-07	2 – 35 years
Wilmington — New Centre Drive	NC	(1)		1,250		11,213		76		1,250		11,289		12,539		1,232	Feb-98	Jun-07	2 – 39 years
Winston-Salem — Hanes Mall Blvd.	NC	(1)		425		7,785		246		425		7,993		8,418		996	Sep-96	Jun-07	2 – 34 years
Winston-Salem — University Parkway	NC	(1)		586		4,651		96		586		4,747		5,333		514	Jul-98	Jun-07	2 – 39 years
Omaha — West	NE	(1)		1,177		7,067		64		1,177		7,131		8,308		651	Dec-97	Jun-07	2 – 40 years
St. John’s — Downtown	NF	(1)		1,190		12,390		35		1,190		12,426		13,615		1,178	Jul-06	Jun-07	2 – 43 years
Boston — Nashua	NH	(1)		1,010		9,970		193		1,010		10,130		11,140		969	Dec-01	Jun-07	2 – 39 years
Edison — Raritan Center	NJ	(1)		1,224		11,860		60		1,224		11,920		13,144		1,170	Aug-97	Jun-07	2 – 38 years
Elizabeth — Newark Airport	NJ	(1)		—		17,020		135		—		17,156		17,156		1,576	Mar-02	Jun-07	2 – 40 years
Meadowlands — Rutherford	NJ	(1)		6,768		11,312		74		6,768		11,386		18,154		1,088	Dec-99	Jun-07	2 – 37 years
Mt. Olive — Budd Lake	NJ	(1)		1,518		6,879		82		1,518		6,962		8,480		765	May-03	Jun-07	2 – 41 years
Philadelphia — Cherry Hill	NJ	(1)		652		7,427		40		652		7,466		8,118		753	Jul-98	Jun-07	2 – 39 years
Philadelphia — Maple Shade	NJ	(1)		697		6,689		113		697		6,803		7,500		686	Dec-98	Jun-07	2 – 39 years
Philadelphia — Mt. Laurel	NJ	(1)		455		9,220		46		455		9,265		9,720		807	Jan-98	Jun-07	2 – 41 years
Philadelphia — Mt. Laurel	NJ	(1)		636		10,892		63		636		10,955		11,592		1,309	Mar-99	Jun-07	2 – 42 years
Piscataway — Rutgers University	NJ	(1)		738		11,303		68		738		11,370		12,108		1,129	Oct-98	Jun-07	2 – 41 years
Princeton — South Brunswick	NJ	(1)		943		9,576		105		943		9,681		10,624		916	Jun-99	Jun-07	2 – 37 years
Princeton — West Windsor	NJ	(1)		3,122		5,487		51		3,122		5,538		8,660		584	Dec-00	Jun-07	2 – 38 years
Ramsey — Upper Saddle River	NJ	(1)		2,103		12,577		40		2,103		12,617		14,720		1,089	Dec-01	Jun-07	2 – 39 years
Red Bank — Middletown	NJ	(1)		3,638		14,384		82		3,638		14,466		18,104		1,332	Dec-00	Jun-07	2 – 38 years
Secaucus — Meadowlands	NJ	(1)		1,143		25,700		102		1,143		25,803		26,945		2,269	Aug-02	Jun-07	2 – 40 years
Somerset — Franklin	NJ	(1)		732		11,816		49		732		11,865		12,597		1,044	Jun-01	Jun-07	2 – 39 years
Albuquerque — Airport	NM	(1)		1,083		5,352		76		1,083		5,428		6,511		491	Jan-99	Jun-07	2 – 42 years
Albuquerque — Northeast	NM	(1)		1,441		4,493		77		1,441		4,570		6,011		514	Jan-98	Jun-07	2 – 36 years
Albuquerque — Rio Rancho	NM	(1)		1,040		8,612		46		1,040		8,659		9,699		785	May-98	Jun-07	2 – 39 years
Albuquerque — Rio Rancho Blvd.	NM	(1)		1,174		10,658		95		1,174		10,753		11,927		1,348	Oct-04	Jun-07	2 – 43 years
Las Vegas — Boulder Highway	NV	(1)		2,636		6,743		281		2,636		6,965		9,602		752	Dec-92	Jun-07	2 – 30 years
Las Vegas — East Flamingo	NV	(1)		2,820		17,180		118		2,820		17,299		20,118		1,700	Oct-04	Jun-07	2 – 43 years
Las Vegas — Valley View	NV	(1)		3,370		18,430		156		3,370		18,586		21,956		2,581	Dec-95	Jun-07	2 – 33 years

F-102

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Reno — South Meadows	NV	(1)		3,005		14,751		134		3,005		14,843		17,848		1,220	Mar-02	Jun-07	2 – 40 years
Albany — Capital	NY	(1)		763		10,558		76		763		10,634		11,397		1,005	Nov-96	Jun-07	2 – 37 years
Buffalo — Amherst	NY	(1)		748		12,169		92		748		12,253		13,001		1,095	Sep-97	Jun-07	2 – 38 years
Fishkill — Poughkeepsie	NY	(1)		614		10,344		66		614		10,409		11,023		866	Feb-04	Jun-07	2 – 42 years
Long Island — Bethpage	NY	(1)		4,415		14,102		332		4,415		14,289		18,704		1,116	Jun-99	Jun-07	2 – 40 years
Long Island — Melville	NY	(1)		3,610		26,619		485		3,610		26,911		30,521		2,108	May-00	Jun-07	2 – 41 years
New York City — LaGuardia Airport	NY	(1)		3,444		33,105		444		3,444		33,396		36,841		2,606	Aug-01	Jun-07	2 – 42 years
Rochester — Greece	NY	(1)		1,719		9,038		77		1,719		9,115		10,835		883	Nov-96	Jun-07	2 – 37 years
Rochester — Henrietta	NY	(1)		1,169		9,787		215		1,169		9,955		11,124		907	Dec-96	Jun-07	2 – 37 years
Syracuse — Dewitt	NY	(1)		299		7,034		192		299		7,159		7,458		645	Dec-96	Jun-07	2 – 37 years
White Plains — Elmsford	NY	(1)		2,663		25,083		601		2,663		25,487		28,151		1,961	Dec-00	Jun-07	2 – 41 years
Akron — Copley	OH	(1)		492		2,246		82		313		1,556		1,869		70	Nov-96	Jun-07	2 – 39 years
Akron — Copley	OH	(1)		683		6,067		88		683		6,155		6,837		788	Feb-97	Jun-07	2 – 38 years
Cincinnati — Blue Ash — North	OH	(1)		2,225		2,399		45		2,225		2,445		4,670		771	Dec-98	Jun-07	2 – 41 years
Cincinnati — Blue Ash — South	OH	(1)		1,151		1,476		162		1,151		1,638		2,789		199	Dec-91	Jun-07	2 – 32 years
Cincinnati — Fairfield	OH	(1)		1,085		2,417		155		1,085		2,572		3,658		504	Jun-89	Jun-07	2 – 30 years
Cincinnati — Sharonville	OH	(1)		2,321		3,271		209		2,321		3,423		5,743		485	Jul-96	Jun-07	2 – 34 years
Cincinnati — Springdale — North	OH	(1)		2,194		4,680		263		2,194		4,899		7,092		580	Nov-96	Jun-07	2 – 34 years
Cincinnati — Springdale — South	OH	(1)		2,238		3,417		178		2,238		3,594		5,833		590	Nov-88	Jun-07	2 – 29 years
Cleveland — Airport — North Olmsted	OH	(1)		1,121		2,165		77		1,121		2,243		3,364		257	Sep-97	Jun-07	2 – 40 years
Cleveland — Beachwood	OH	(1)		1,133		6,470		71		1,133		6,541		7,675		741	Jan-02	Jun-07	2 – 40 years
Cleveland — Brooklyn	OH	(1)		821		7,486		98		821		7,583		8,404		715	Dec-99	Jun-07	2 – 37 years
Cleveland — Middleburg Heights	OH	(1)		861		1,819		152		861		1,971		2,832		205	Nov-97	Jun-07	2 – 40 years
Cleveland — Westlake	OH	(1)		1,430		2,399		62		1,430		2,461		3,891		412	Nov-97	Jun-07	2 – 40 years
Columbus — Dublin	OH	(1)		1,253		6,981		67		1,253		7,048		8,301		697	Jan-98	Jun-07	2 – 36 years
Columbus — East	OH	(1)		561		1,941		145		561		2,086		2,648		256	Aug-99	Jun-07	2 – 30 years
Columbus — Easton	OH	(1)		955		8,620		364		955		8,916		9,871		756	Mar-99	Jun-07	2 – 40 years
Columbus — North	OH	(1)		978		3,779		136		978		3,915		4,893		594	Jun-97	Jun-07	2 – 38 years
Columbus — Polaris	OH	(1)		1,962		11,578		86		1,962		11,663		13,625		1,367	Dec-98	Jun-07	2 – 43 years
Columbus — Sawmill Rd.	OH	(1)		500		2,857		146		500		3,003		3,503		510	May-90	Jun-07	2 – 31 years
Columbus — Tuttle	OH	(1)		676		5,142		75		676		5,217		5,893		748	Jun-98	Jun-07	2 – 43 years
Columbus — Worthington	OH	(1)		768		5,160		57		768		5,217		5,985		492	Dec-98	Jun-07	2 – 39 years
Dayton — Fairborn	OH	(1)		744		4,481		79		744		4,560		5,305		427	Jan-97	Jun-07	2 – 40 years
Dayton — North	OH	(1)		631		7,097		136		631		7,233		7,864		882	Feb-00	Jun-07	2 – 38 years
Dayton — South	OH	(1)		419		6,608		169		419		6,777		7,196		935	Nov-89	Jun-07	2 – 30 years
Toledo — Findlay — Tiffin Avenue	OH	(2)		664		6,062		502		653		6,575		7,228		629	Mar-07	Jun-07	2 – 41 years
Toledo — Holland	OH	(1)		599		7,495		98		599		7,593		8,193		903	Jan-97	Jun-07	2 – 38 years
Toledo — Maumee	OH	(1)		477		4,013		114		477		4,127		4,605		401	Jun-97	Jun-07	2 – 40 years
Oklahoma City — Airport	OK	(1)		734		6,267		197		734		6,463		7,198		651	Sep-97	Jun-07	2 – 38 years
Oklahoma City — Northwest	OK	(1)		602		3,902		63		602		3,966		4,568		652	Jan-98	Jun-07	2 – 41 years
Oklahoma City — NW Expressway	OK	(1)		674		8,302		74		674		8,376		9,050		806	Feb-99	Jun-07	2 – 37 years
Tulsa — Central	OK	(1)		439		3,586		54		439		3,640		4,079		346	Jun-97	Jun-07	2 – 40 years
Tulsa — Central	OK	(1)		483		6,800		175		483		6,928		7,411		714	Apr-97	Jun-07	2 – 35 years
Ottawa — Downtown	ON	(1)		312		30,293		129		312		30,421		30,733		2,797	Oct-05	Jun-07	2 – 43 years
Toronto — Vaughan	ON	(1)		1,149		34,395		1,312		1,149		35,678		36,827		2,897	Jul-06	Jun-07	2 – 43 years

F-103

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Eugene — Springfield	OR	(1)		998		9,433		81		998		9,514		10,512		952	Nov-97	Jun-07	2 – 35 years
Portland — Beaverton	OR	(1)		1,672		8,136		70		1,672		8,207		9,879		828	Oct-98	Jun-07	2 – 41 years
Portland — Gresham	OR	(1)		3,839		3,395		111		3,839		3,505		7,344		391	Jan-98	Jun-07	2 – 39 years
Portland — Hillsboro	OR	(1)		2,685		10,600		73		2,685		10,673		13,358		1,354	Oct-04	Jun-07	2 – 43 years
Salem — North	OR	(1)		1,169		4,193		49		1,169		4,242		5,411		481	Oct-98	Jun-07	2 – 39 years
Allentown — Bethlehem	PA	(1)		695		11,248		33		695		11,280		11,975		946	Sep-03	Jun-07	2 – 41 years
Philadelphia — Airport	PA	(1)		6,725		7,800		155		6,725		7,955		14,680		763	Feb-98	Jun-07	2 – 39 years
Philadelphia — Airport	PA	(1)		3,791		10,576		72		3,791		10,648		14,439		1,010	May-98	Jun-07	2 – 41 years
Philadelphia — Bensalem	PA	(1)		3,427		8,234		55		3,427		8,289		11,716		759	Jun-98	Jun-07	2 – 39 years
Philadelphia — Exton	PA	(1)		2,403		10,079		140		2,403		10,219		12,622		985	Jan-99	Jun-07	2 – 37 years
Philadelphia — Horsham	PA	(1)		7,078		2,017		83		7,078		2,101		9,179		232	Dec-01	Jun-07	2 – 39 years
Philadelphia — Malvern	PA	(1)		191		8,928		88		191		9,016		9,207		866	Feb-99	Jun-07	2 – 37 years
Philadelphia — Plymouth Meeting	PA	(1)		3,197		13,721		92		3,197		13,813		17,010		1,158	Nov-03	Jun-07	2 – 41 years
Pittsburgh — Airport	PA	(1)		402		6,288		57		402		6,345		6,748		684	Apr-98	Jun-07	2 – 41 years
Pittsburgh — Carnegie	PA	(1)		484		7,324		169		484		7,454		7,937		649	Jun-97	Jun-07	2 – 38 years
Pittsburgh — Monroeville	PA	(1)		627		10,527		187		627		10,656		11,283		942	Sep-99	Jun-07	2 – 37 years
Pittsburgh — West Mifflin	PA	(1)		437		7,642		107		437		7,722		8,159		649	Nov-03	Jun-07	2 – 41 years
Wilkes Barre — Hwy 315	PA	(2)		345		7,962		252		357		8,201		8,559		759	Apr-07	Jun-07	2 – 37 years
Providence — Airport — Warwick	RI	(1)		653		8,029		139		653		8,168		8,821		727	Nov-01	Jun-07	2 – 39 years
Providence — Airport — West Warwick	RI	(1)		530		7,961		51		530		8,012		8,542		941	Oct-01	Jun-07	2 – 39 years
Providence — East Providence	RI	(1)		1,252		13,444		58		1,252		13,502		14,754		1,148	Dec-02	Jun-07	2 – 40 years
Charleston — Airport — North Charleston	SC	(1)		876		8,825		202		876		8,992		9,868		1,190	Aug-96	Jun-07	2 – 34 years
Charleston — Mt. Pleasant	SC	(1)		930		11,302		52		930		11,354		12,284		1,104	Jan-98	Jun-07	2 – 39 years
Charleston — North Charleston	SC	(1)		502		8,574		76		502		8,649		9,151		789	Sep-96	Jun-07	2 – 39 years
Columbia — Ft. Jackson	SC	(1)		971		12,973		228		971		13,165		14,136		1,581	May-97	Jun-07	2 – 35 years
Columbia — Harbison	SC	(1)		711		8,445		79		711		8,524		9,235		869	Oct-04	Jun-07	2 – 43 years
Columbia — West	SC	(1)		536		4,491		99		536		4,590		5,126		435	Dec-95	Jun-07	2 – 38 years
Columbia — West	SC	(1)		949		5,890		157		949		6,047		6,996		716	Apr-96	Jun-07	2 – 34 years
Greenville — Airport	SC	(1)		1,140		8,950		78		1,140		9,029		10,169		978	Dec-96	Jun-07	2 – 37 years
Greenville — Haywood Mall	SC	(1)		1,095		5,281		134		1,095		5,415		6,510		524	Feb-95	Jun-07	2 – 38 years
Office Building — Spartanburg, SC	SC	(1)		—		10,667		196		—		10,863		10,863		1,189	Jun-03	Jun-07	2 – 16 years
Spartanburg — Asheville Hwy.	SC	(1)		729		5,685		81		729		5,766		6,495		894	Aug-95	Jun-07	2 – 33 years
Chattanooga — Airport	TN	(1)		504		3,053		217		504		3,220		3,724		664	Jul-96	Jun-07	2 – 34 years
Knoxville — Cedar Bluff	TN	(1)		372		6,405		134		372		6,505		6,876		657	May-97	Jun-07	2 – 35 years
Knoxville — West Hills	TN	(1)		335		4,547		83		335		4,630		4,964		543	Sep-90	Jun-07	2 – 31 years
Memphis — Apple Tree	TN	(1)		594		2,020		94		594		2,114		2,709		296	Oct-90	Jun-07	2 – 31 years
Memphis — Cordova	TN	(1)		443		2,689		37		443		2,726		3,169		286	Dec-96	Jun-07	2 – 39 years
Memphis — Mt. Moriah	TN	(1)		693		5,999		102		693		6,101		6,794		612	Jan-99	Jun-07	2 – 40 years
Memphis — Poplar Avenue	TN	(1)		673		6,759		46		673		6,805		7,478		677	Sep-99	Jun-07	2 – 37 years
Memphis — Sycamore View	TN	(1)		557		7,817		209		557		7,976		8,533		839	Jan-97	Jun-07	2 – 35 years
Memphis — Wolfchase Galleria	TN	(1)		923		11,285		62		923		11,348		12,271		1,181	Oct-04	Jun-07	2 – 43 years
Nashville — Airport	TN	(1)		1,612		1,346		81		1,612		1,428		3,040		186	Sep-93	Jun-07	2 – 36 years
Nashville — Airport	TN	(1)		1,950		4,380		127		1,950		4,470		6,420		493	Feb-97	Jun-07	2 – 35 years
Nashville — Airport — Briley Pkwy.	TN	(1)		2,226		3,251		93		2,226		3,344		5,570		406	Oct-97	Jun-07	2 – 35 years
Nashville — Brentwood	TN	(1)		490		2,426		105		490		2,531		3,022		291	Dec-90	Jun-07	2 – 33 years

F-104

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Nashville — Brentwood	TN	(1)		1,121		7,748		166		1,121		7,874		8,994		906	Sep-96	Jun-07	2 – 34 years
Nashville — Vanderbilt	TN	(1)		1,290		15,971		60		1,290		16,031		17,320		1,355	May-02	Jun-07	2 – 40 years
Amarillo — West	TX	(1)		378		5,819		81		378		5,900		6,278		549	Sep-00	Jun-07	2 – 38 years
Austin — Arboretum	TX	(1)		837		8,439		73		837		8,512		9,349		761	Mar-99	Jun-07	2 – 40 years
Austin — Arboretum — North	TX	(1)		1,152		9,692		69		1,152		9,761		10,914		906	Oct-04	Jun-07	2 – 43 years
Austin — Downtown — 6th St.	TX	(1)		612		14,962		102		612		15,063		15,675		1,464	Nov-00	Jun-07	2 – 41 years
Austin — Metro	TX	(1)		1,030		6,054		58		1,030		6,112		7,142		731	Jan-98	Jun-07	2 – 41 years
Austin — North Central	TX	(1)		2,162		6,278		92		2,162		6,370		8,532		712	Oct-04	Jun-07	2 – 43 years
Austin — Northwest — Lakeline Mall	TX	(1)		788		7,381		45		788		7,426		8,214		662	Apr-02	Jun-07	2 – 40 years
Austin — Northwest — Research Park	TX	(1)		1,235		11,628		82		1,235		11,710		12,945		1,050	Oct-04	Jun-07	2 – 43 years
Austin — Round Rock — North	TX	(1)		1,006		7,779		69		1,006		7,849		8,855		725	Dec-98	Jun-07	2 – 39 years
Austin — Round Rock — South	TX	(1)		912		6,630		45		912		6,674		7,586		568	Aug-03	Jun-07	2 – 41 years
Austin — Southwest	TX	(1)		6,343		8,262		52		6,343		8,315		14,657		974	Mar-02	Jun-07	2 – 40 years
Austin — West	TX	(1)		980		6,088		115		980		6,203		7,183		681	Aug-98	Jun-07	2 – 36 years
Corpus Christi — Staples	TX	(1)		305		7,176		64		305		7,240		7,545		689	Jul-98	Jun-07	2 – 41 years
Dallas — Arlington	TX	(1)		863		6,209		128		863		6,338		7,201		621	Sep-97	Jun-07	2 – 40 years
Dallas — Bedford	TX	(1)		599		5,116		61		599		5,177		5,775		590	Dec-98	Jun-07	2 – 41 years
Dallas — Farmers Branch	TX	(1)		1,305		2,895		73		1,305		2,968		4,273		499	Oct-98	Jun-07	2 – 41 years
Dallas — Greenville Avenue	TX	(1)		1,453		5,019		65		1,453		5,084		6,537		510	Nov-98	Jun-07	2 – 39 years
Dallas — Irving	TX	(1)		1,492		2,782		109		1,492		2,891		4,382		340	Jun-98	Jun-07	2 – 39 years
Dallas — Las Colinas — Green Park Dr.	TX	(1)		1,969		4,489		147		1,969		4,636		6,605		501	Oct-04	Jun-07	2 – 43 years
Dallas — Las Colinas — Meadow Creek Dr.	TX	(1)		2,053		4,445		86		2,053		4,531		6,584		620	Jan-98	Jun-07	2 – 41 years
Dallas — Lewisville	TX	(1)		706		4,677		172		706		4,849		5,554		491	Dec-98	Jun-07	2 – 36 years
Dallas — Market Center	TX	(1)		1,473		6,577		77		1,473		6,654		8,127		692	Sep-97	Jun-07	2 – 40 years
Dallas — Mesquite	TX	(1)		1,637		2,655		117		1,637		2,772		4,409		357	Jan-98	Jun-07	2 – 39 years
Dallas — North — Park Central	TX	(1)		1,736		3,637		93		1,736		3,730		5,466		397	Oct-04	Jun-07	2 – 43 years
Dallas — Plano	TX	(1)		1,317		9,138		77		1,317		9,215		10,532		833	Oct-04	Jun-07	2 – 43 years
Dallas — Plano — Plano Parkway	TX	(1)		1,208		5,070		56		1,208		5,126		6,334		484	Dec-97	Jun-07	2 – 40 years
El Paso — Airport	TX	(1)		876		14,578		215		876		14,747		15,623		1,401	Jan-97	Jun-07	2 – 35 years
El Paso — West	TX	(1)		896		5,852		74		896		5,926		6,822		539	Dec-97	Jun-07	2 – 40 years
Fort Worth — City View	TX	(1)		875		6,739		73		875		6,812		7,687		646	Jul-98	Jun-07	2 – 41 years
Fort Worth — City View	TX	(1)		872		9,606		92		872		9,699		10,571		927	May-98	Jun-07	2 – 37 years
Fort Worth — Fossil Creek	TX	(1)		614		5,779		79		614		5,858		6,471		603	Oct-98	Jun-07	2 – 41 years
Fort Worth — Fossil Creek	TX	(1)		669		4,852		99		669		4,952		5,620		519	Dec-98	Jun-07	2 – 39 years
Houston — Galleria	TX	(1)		953		10,658		96		953		10,754		11,707		955	Mar-99	Jun-07	2 – 40 years
Houston — Greenspoint	TX	(1)		1,288		3,408		85		1,288		3,493		4,781		345	Jul-98	Jun-07	2 – 41 years
Houston — Greenway Plaza	TX	(1)		1,009		10,025		108		1,009		10,133		11,142		990	Sep-98	Jun-07	2 – 36 years
Houston — Katy Freeway	TX	(1)		1,141		5,761		112		1,141		5,873		7,013		572	Apr-99	Jun-07	2 – 37 years
Houston — Med. Ctr. — Reliant Pk. — Braeswood Blvd.	TX	(1)		1,394		15,130		81		1,394		15,211		16,606		1,332	Oct-04	Jun-07	2 – 43 years
Houston — Med. Ctr. — Reliant Pk. — La Concha Ln.	TX	(1)		1,080		7,663		78		1,080		7,741		8,821		744	Dec-97	Jun-07	2 – 40 years
Houston — NASA	TX	(1)		1,663		9,209		61		1,663		9,270		10,933		850	Sep-98	Jun-07	2 – 39 years
Houston — NASA — Bay Area Blvd.	TX	(1)		1,181		10,971		145		1,181		11,117		12,298		932	Oct-04	Jun-07	2 – 43 years
Houston — Northwest	TX	(1)		1,273		6,242		71		1,273		6,313		7,585		611	Sep-97	Jun-07	2 – 40 years
Houston — Northwest	TX	(1)		1,237		4,355		90		1,237		4,446		5,683		490	Jun-98	Jun-07	2 – 39 years
Houston — Stafford	TX	(1)		1,571		4,141		95		1,571		4,236		5,807		397	Oct-04	Jun-07	2 – 43 years

F-105

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Houston — The Woodlands	TX	(1)		731		9,033		105		731		9,137		9,868		836	Jun-98	Jun-07	2 – 39 years
Houston — West Oaks	TX	(1)		1,384		4,920		61		1,384		4,981		6,365		533	May-98	Jun-07	2 – 39 years
Houston — Westchase	TX	(1)		908		9,114		68		908		9,182		10,090		797	Dec-97	Jun-07	2 – 40 years
Houston — Westchase	TX	(1)		1,136		6,384		80		1,136		6,463		7,599		579	Dec-98	Jun-07	2 – 41 years
Houston — Willowbrook	TX	(1)		1,202		6,492		83		1,202		6,576		7,777		610	Dec-98	Jun-07	2 – 41 years
Laredo — Del Mar	TX	(1)		1,199		10,424		58		1,199		10,482		11,681		927	Aug-01	Jun-07	2 – 39 years
Lubbock — Southwest	TX	(1)		482		7,115		59		482		7,174		7,657		860	Apr-02	Jun-07	2 – 43 years
San Antonio — Colonnade	TX	(1)		1,626		9,325		124		1,626		9,449		11,076		857	Feb-98	Jun-07	2 – 41 years
Waco — Woodway	TX	(1)		396		9,137		34		396		9,170		9,567		969	Oct-01	Jun-07	2 – 39 years
Salt Lake City — Sandy	UT	(1)		1,061		10,102		66		1,061		10,167		11,229		913	Jan-98	Jun-07	2 – 39 years
Salt Lake City — Union Park	UT	(1)		1,323		9,167		183		1,323		9,350		10,673		920	Sep-97	Jun-07	2 – 35 years
Salt Lake City — West Valley Center	UT	(1)		1,351		11,081		98		1,351		11,179		12,531		1,257	Aug-97	Jun-07	2 – 38 years
Chesapeake — Churchland Blvd.	VA	(1)		572		8,112		52		577		8,158		8,735		808	Jun-06	Jun-07	2 – 43 years
Chesapeake — Crossways Blvd.	VA	(1)		1,063		14,361		348		1,063		14,668		15,731		1,631	Aug-96	Jun-07	2 – 34 years
Chesapeake — Greenbrier Circle	VA	(1)		410		13,119		29		414		13,143		13,557		1,290	Jun-06	Jun-07	2 – 43 years
Hampton — Coliseum	VA	(1)		3,394		5,158		103		3,394		5,261		8,656		589	Jun-03	Jun-07	2 – 41 years
Lynchburg — University Blvd.	VA	(1)		962		9,937		113		962		10,049		11,011		973	Aug-03	Jun-07	2 – 41 years
Newport News — I-64 — Jefferson Avenue	VA	(1)		869		5,903		55		869		5,958		6,827		554	Jul-97	Jun-07	2 – 40 years
Newport News — Oyster Point	VA	(1)		892		5,571		187		892		5,708		6,600		689	Dec-96	Jun-07	2 – 34 years
Richmond — I-64 — West Broad Street	VA	(1)		209		9,543		168		209		9,683		9,891		1,066	Dec-97	Jun-07	2 – 35 years
Richmond — I-64 — West Broad Street	VA	(1)		630		10,090		47		630		10,137		10,767		888	Apr-99	Jun-07	2 – 42 years
Richmond — Innsbrook	VA	(1)		878		5,963		75		878		6,038		6,915		561	Jul-97	Jun-07	2 – 40 years
Roanoke — Airport	VA	(1)		191		5,174		34		191		5,208		5,400		531	Feb-98	Jun-07	2 – 41 years
Virginia Beach — Independence Blvd.	VA	(1)		2,386		12,036		95		2,386		12,131		14,517		1,335	Sep-96	Jun-07	2 – 34 years
Washington, D.C. — Alexandria	VA	(1)		3,621		19,247		52		3,621		19,299		22,920		1,921	Jan-99	Jun-07	2 – 40 years
Washington, D.C. — Centreville — Manassas	VA	(1)		3,655		8,839		38		3,655		8,877		12,532		884	Jan-04	Jun-07	2 – 42 years
Washington, D.C. — Chantilly	VA	(1)		2,293		15,941		44		2,293		15,985		18,278		1,485	Mar-00	Jun-07	2 – 38 years
Washington, D.C. — Chantilly	VA	(1)		3,734		9,821		58		3,734		9,879		13,612		811	Feb-98	Jun-07	2 – 41 years
Washington, D.C. — Fairfax	VA	(1)		2,297		13,632		288		2,297		13,895		16,192		1,309	Mar-00	Jun-07	2 – 38 years
Washington, D.C. — Fairfax	VA	(1)		4,220		11,333		78		4,220		11,411		15,632		925	Jun-99	Jun-07	2 – 42 years
Washington, D.C. — Herndon	VA	(1)		2,376		13,262		39		2,376		13,301		15,677		1,303	Jan-05	Jun-07	2 – 43 years
Washington, D.C. — Springfield	VA	(1)		2,964		23,917		36		2,964		23,953		26,917		1,893	Jan-04	Jun-07	2 – 42 years
Washington, D.C. — Sterling	VA	(1)		2,470		13,128		46		2,470		13,174		15,643		1,153	Jul-98	Jun-07	2 – 39 years
Olympia — Tumwater	WA	(1)		2,728		9,183		96		2,728		9,261		11,989		812	Jan-01	Jun-07	2 – 39 years
Portland — Vancouver	WA	(1)		1,184		8,960		102		1,184		9,044		10,228		816	Sep-97	Jun-07	2 – 38 years
Seattle — Bellevue	WA	(1)		4,813		19,697		532		4,813		20,112		24,925		1,781	Jan-98	Jun-07	2 – 36 years
Seattle — Bothell	WA	(1)		1,665		13,440		113		1,665		13,527		15,192		1,155	May-01	Jun-07	2 – 39 years
Seattle — Bothell	WA	(1)		2,048		16,976		26		2,048		17,002		19,050		1,378	Dec-98	Jun-07	2 – 41 years
Seattle — Everett	WA	(1)		1,233		10,514		99		1,233		10,603		11,836		948	Apr-97	Jun-07	2 – 38 years
Seattle — Everett	WA	(1)		2,294		10,185		34		2,294		10,219		12,513		901	May-99	Jun-07	2 – 42 years
Seattle — Federal Way	WA	(1)		1,333		6,909		81		1,333		6,974		8,307		643	Aug-99	Jun-07	2 – 37 years
Seattle — Kent	WA	(1)		1,777		8,140		40		1,777		8,180		9,957		758	Sep-98	Jun-07	2 – 39 years
Seattle — Kent — Des Moines	WA	(1)		1,777		4,690		68		1,777		4,758		6,535		490	Sep-98	Jun-07	2 – 39 years
Seattle — Lynnwood	WA	(1)		2,097		10,659		52		2,097		10,711		12,808		975	Feb-98	Jun-07	2 – 39 years
Seattle — Mukilteo	WA	(1)		1,560		12,176		130		1,560		12,274		13,835		1,026	Mar-02	Jun-07	2 – 40 years

F-106

BHAC Capital IV LLC

Schedule III — Real Estate and Accumulated Depreciation

December 31, 2008
(in thousands)


							Cost Capitalized
							Subsequent to
			Initial Cost to Company				Acquisition		Gross Amount at Which Carried at Close of Period										Life on Which
					Buildings,						Buildings,								Depreciation in
					Improvements and		Improvements and				Improvements and								Latest Income
					Related Personal		Related Personal				Related Personal				Accumulated		Date of		Statement is
Property/City	State/Province	Encumbrances	Land		Property		Property		Land		Property		Total		Depreciation		Construction	Date Acquired	Computed
Seattle — Northgate	WA	(1)		1,688		11,972		73		1,688		12,026		13,715		1,020	Dec-02	Jun-07	2 – 40 years
Seattle — Renton	WA	(1)		2,888		10,434		141		2,888		10,575		13,463		943	Jun-98	Jun-07	2 – 41 years
Seattle — Tukwila	WA	(1)		1,481		6,773		191		1,481		6,924		8,405		658	Jan-97	Jun-07	2 – 35 years
Spokane — Valley	WA	(1)		566		4,705		57		566		4,763		5,328		478	May-98	Jun-07	2 – 39 years
Tacoma — Fife	WA	(1)		1,333		8,299		69		1,333		8,353		9,686		746	Oct-97	Jun-07	2 – 38 years
Tacoma — Hosmer	WA	(1)		1,273		6,311		106		1,273		6,417		7,690		591	Jan-99	Jun-07	2 – 40 years
Tacoma — Puyallup	WA	(1)		1,742		6,563		100		1,742		6,663		8,405		643	Nov-98	Jun-07	2 – 39 years
Tacoma — South	WA	(1)		1,541		9,865		50		1,541		9,915		11,456		895	May-98	Jun-07	2 – 39 years
Appleton — Fox Cities	WI	(1)		316		5,798		56		316		5,854		6,171		547	Jun-97	Jun-07	2 – 38 years
Madison — West	WI	(1)		858		7,906		56		858		7,962		8,820		737	Sep-98	Jun-07	2 – 39 years
Madison — West	WI	(1)		872		5,730		70		872		5,799		6,671		548	Sep-98	Jun-07	2 – 41 years
Milwaukee — Waukesha	WI	(1)		463		10,246		211		463		10,457		10,920		974	Aug-97	Jun-07	2 – 38 years
Milwaukee — Wauwatosa	WI	(1)		1,339		12,793		92		1,339		12,885		14,223		1,174	Jun-97	Jun-07	2 – 38 years
			$	989,908	$	4,835,796	$	71,250	$	986,314	$	4,884,151	$	5,870,465	$	466,879


(1)	- Real estate pledged as collateral on the $7.4 billion mortgage and mezzanine debt of BHAC.

(2)	- Real estate pledged as collateral on the $8.5 million mortgage payable with Bank of America.

The following schedule reconciles the historical cost and accumulated depreciation as follows (in thousands):


	Historical			Accumulated
	Cost			Depreciation
Balance at June 11, 2007	$	5,825,704		$	—

Additions		71,250			—

Disposals		(7,659	)		(6,229	)

Impairment (3)		(18,830	)		(2,646	)

Deprecation expense		—			475,754


Balance at December 31, 2008	$	5,870,465		$	466,879


(3)	- Impairment recorded as a result of FAS 144 analysis. See Note 3 of BHAC financial statements.

F-107

EXHIBIT INDEX


Exhibit No.			Desciption

	10.63		Fourth Amendment to Purchase and Sale Agreement dated as of October 15, 2008 between 180 N. LaSalle II, L.L.C and YPI 180 N. LaSalle Owner, LLC.

	10.64		First Amendment to Loan Agreement dated as of October 31, 2008 between PGRT ESH, Inc., Lightstone Holdings, LLC, David Lichtenstein and Citicorp USA, Inc.

	10.65		First Amendment to Amended and Restated Guaranty dated as of October 31, 2008 between David Lichtenstein and Citicorp USA, Inc.

	10.66		Fifth Amendment to Purchase and Sale Agreement dated as of November 20, 2008 between 180 N. LaSalle II, L.L.C and YPI 180 N. LaSalle Owner, LLC.

	10.67		Sixth Amendment to Purchase and Sale Agreement dated as of December 9, 2008 between 180 N. LaSalle II, L.L.C and YPI 180 N. LaSalle Owner, LLC.

	10.68		Second Amendment to Loan Agreement dated December 31, 2008 among PGRT ESH, Inc., Lightstone Holdings LLC, David Lichtenstein and Citicorp USA, Inc.

	10.69	*	Amendment to the Amended and Restated Employment Agreement dated as of December 31, 2008 by and between Prime Group Realty Trust, Prime Group Realty, L.P. and Jeffrey A. Patterson.

	10.70	*	First Amendment Employment Agreement dated as of December 31, 2008 by and between Prime Group Realty Trust, Prime Group Realty, L.P. and James F. Hoffman.

	10.71	*	Equity Purchase Agreement dated as of December 31, 2008, by and between Jeffrey A. Patterson, and Prime Office Company LLC.

	10.72		Letter Agreement dated December 31, 2008 among PGRT ESH, Inc., Lightstone Holdings LLC, David Lichtenstein and Citicorp USA, Inc.

	21.1		Subsidiaries of Registrant.

	31.1		Rule 13a-14(a) Certification of Jeffrey A. Patterson, President and Chief Executive Officer of Registrant.

	31.2		Rule 13a-14(a) Certification of Paul G. Del Vecchio, Executive Vice President —Capital Markets of Registrant.

	32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jeffrey A. Patterson, President and Chief Executive Officer of the Board of Registrant.

	32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Paul G. Del Vecchio, Executive Vice President —Capital Markets of Registrant.


*		Management contracts or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-K pursuant to Item 15(b) of the Report on Form 10-K.


	PAGE

PART I

Item 1. Business		4

Item 1A. Risk Factors		12

Item 1B. Unresolved Staff Comments		22

Item 2. Properties		23

Item 3. Legal Proceedings		24

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

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		27

Item 6. Selected Financial Data		30

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		32

Item 7A. Quantitative and Qualitative Disclosures About Market Risk		50

Item 8. Financial Statements and Supplementary Data		51

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		51

Item 9A. Controls and Procedures		51

Item 9B. Other Information		52

PART III

Item 10. Directors and Executive Officers of the Registrant		53

Item 11. Executive Compensation		58

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		64

Item 13. Certain Relationships and Related Transactions		65

Item 14. Principal Accountant Fees and Services		65

PART IV

Item 15. Exhibits and Financial Statement Schedules		67

Signatures		77

Exhibit 10.63
Exhibit 10.64
Exhibit 10.65
Exhibit 10.66
Exhibit 10.67
Exhibit 10.68
Exhibit 10.69
Exhibit 10.70
Exhibit 10.71
Exhibit 10.72
Exhibit 21.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2


(a) (1) Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm			F-2

Consolidated Balance Sheets as of December 31, 2008 and 2007			F-3

Consolidated Statements of Operations for the years ended December 31, 2008, December 31, 2007 and December 31, 2006,			F-4

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2008, December 31, 2007 and December 31, 2006			F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2008, December 31, 2007 and December 31, 2006,			F-6

Notes to Consolidated Financial Statements			F-8

Financial Statement Schedule

Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2008			F-46

Financial Statements of Significant Subsidiary


		Consolidated Financial Statements

		BHAC Capital IV LLC
		As of December 31, 2008 and 2007 (Restated) and for the Year Ended December 31, 2008 and for the Period From Acquisition (June 11, 2007) to December 31, 2007 (Restated) With Report of Independent Auditors


			Accumulated			Total
	Members’		Deficit and			Members’
	Capital		Distributions			Equity (Deficit)
	(In Thousands)

Contribution of capital June 11, 2007	$	497,817	$	—		$	497,817
Preferred distributions		—		(19,257	)		(19,257	)
Net loss		—		(189,974	)		(189,974	)

Balance at December 31, 2007		497,817		(209,231	)		288,586
Contribution of capital		27,581		—			27,581
Preferred distributions		—		(21,350	)		(21,350	)
Net loss		—		(1,375,784	)		(1,375,784	)

Balance at December 31, 2008	$	525,398	$	(1,606,365	)	$	(1,080,967	)


BUYER:	YPI 180 N. LaSalle Owner, LLC, a Delaware limited liability company

	By:	[s] Zaya S. Younan
		Name: Zaya S. Younan
		Title: President

SELLER:	180 N. LASALLE II, L.L.C., a Delaware limited liability company

	By:	180 N. LaSalle Holdings, L.L.C.,
		a Delaware limited liability company, its sole member


		By:		PGRT Equity II LLC, a Delaware limited liability company, its administrative member


		By:		Prime Group Realty, L.P., a Delaware limited partnership, its sole member


		By:		Prime Group Realty Trust, a Maryland real estate investment trust, its sole general partner


By:	[s] James F. Hoffman

	Name:	James F. Hoffman
	Title:	Executive Vice President, General Counsel and Secretary


YOUNAN PROPERTIES, INC., a California corporation
By:	[s] Zaya S. Younan
		Name: Zaya S. Younan
		Title: President


		Borrower

		PGRT ESH, INC.

		By:		[s] David Lichtenstein

				David Lichtenstein
				Chairman

		Guarantors

		[s] David Lichtenstein

		David Lichtenstein

		LIGHTSTONE HOLDINGS LLC

		By:		[s] David Lichtenstein

				David Lichtenstein Managing Member

		Lender

		CITICORP USA, INC.

		By:		[s] Diana Yusun

				Diana Yusun Director


		Guarantor

		[s] David Lichtenstein

		David Lichtenstein

		Lender

		CITICORP USA, INC.

		By:		[s] Diana Yusun

				Diana Yusun Director


¹		Capitalized terms used in this Schedule and not otherwise defined herein shall have the meanings assigned to such terms in the Amendment to which this Schedule is attached or in the Loan Agreement referred to therein.


By:	[s] Jeffrey A. Patterson

	Name:	Jeffrey A. Patterson
	Title:	President and Chief Executive Officer


		YOUNAN PROPERTIES, INC., a California corporation

		By:		[s] Zaya S. Younan

				Name: Zaya S. Younan
				Title: President


		By:		[s] Jeffrey A. Patterson Name: Jeffrey A. Patterson
				Title: President and CEO


By:		[s] David Lichtenstein David Lichtenstein
		Managing Member

	1.		By replacing Section 5(a)(i) with the following:

			“Without Cause. Employer may terminate this Agreement and Executive’s employment at any time (other than for Cause, as that term is defined in Section 5(a)(ii) hereof) upon thirty (30) days’ prior written notice to Executive. In connection with the termination of Executive’s employment pursuant to this Section 5(a)(i), (A) Employer shall pay to Executive Executive’s Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) Employer shall pay to Executive on the effective date of such termination a pro rata portion of any Bonus Compensation otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) and Exhibit A hereof (including without limitation any guaranteed bonus for such year) up to the effective date of such termination and, to the extent not previously paid, all Bonus Compensation payable to Executive in accordance with Section 3(b) and Exhibit A hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) Employer shall provide to Executive the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) Employer shall pay to Executive the Termination Compensation specified in, at the time set forth in, Section 5(d) hereof. For purposes of this Agreement, the ‘effective date of termination’ shall mean the last day on which Executive is employed with Employer which may be later than the date of the delivery of any applicable notice of termination.”

	2.		By replacing Section 5(a)(iii) with the following:

			“Disability. If due to illness, physical or mental disability, or other incapacity, Executive shall fail during any four (4) consecutive months to perform the duties required by this Agreement, Employer may, upon thirty (30) days’ written notice to Executive, terminate this Agreement and Executive’s employment. In the event of any such termination, (A) Employer shall pay to Executive Executive’s Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) Employer shall pay to Executive on the effective date of such termination a pro rata portion of any Bonus Compensation otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) and Exhibit A hereof (including without limitation any guaranteed bonus for such year) up to the first day of such four (4) month period and, to the extent not previously paid, all Bonus Compensation payable to Executive in accordance with Section 3(b) and Exhibit A hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) Employer shall provide to Executive the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the effective date of such termination and (D) Employer shall pay to Executive the Termination Compensation specified in, at the time set forth in, Section 5(d) hereof. This Section 5(a)(iii) shall not limit the entitlement of Executive, Executive’s estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy which is maintained by Employer for Executive’s benefit (as opposed to Employer’s benefit). For purposes of this Agreement, the ‘date of disability’ shall mean the first day of the consecutive period during which Executive fails to perform the duties required by this Agreement due to illness, physical or mental disability or other incapacity.”

	3.		By replacing the first two paragraphs of Section 5(b)(i) with the following two paragraphs:

			“After Change of Control. Executive may terminate this Agreement following any ‘change of control’ (as defined below) of Employer which occurs after the Effective Date and (i) a resulting ‘diminution event’ (as defined below) or (ii) a resulting relocation of Executive’s office to a location more than twenty-five (25) miles from 77 West Wacker Drive, Chicago, Illinois, but in no event later than two years after the change of control event. In such case, Executive shall provide written notice of termination to Employer specifying in reasonable detail the nature of the diminution event or office relocation within ninety (90) days after its occurrence and must provide Employer with a period of thirty (30) days after receipt of notice by Employer during which it may reverse the diminution event or office

			relocation without giving rise to liability under this Section 5(b)(i). Executive shall continue to perform, at the election of Employer, Executive’s duties under this Agreement during the foregoing thirty (30) day period; provided, that Employer complies with, and provides the compensation and benefits provided for, in this Agreement. In the event of such termination, (A) Employer shall pay to Executive Executive’s Base Compensation up to the effective date of such termination, (B) Employer shall pay to Executive on the effective date of such termination a pro rata portion of any Bonus Compensation otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) and Exhibit A hereof (including without limitation any guaranteed bonus for such year) up to the effective date of such termination and, to the extent not previously paid, all Bonus Compensation payable to Executive in accordance with Section 3(b) and Exhibit A hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) Employer shall provide to Executive the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) Employer shall pay to Executive the Termination Compensation specified in, at the time set forth in, Section 5(d) hereof. For purposes of this Agreement, in the event Employer materially defaults in its obligation under Section 9 hereof, Executive may deliver written notice of termination, describing the circumstances in reasonable detail, to Employer within ninety (90) days after such default. If Employer fails to remedy the default within thirty (30) days of receipt after such notice, Executive may terminate employment with Employer (or Employer’s successor or assign), and such termination shall be deemed to be a termination under this Section 5(b)(i).

			For purposes of this Section 5(b)(i), (A) a ‘change of control’ of Employer shall be deemed to have occurred if after the Effective Date: (1) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the ‘Exchange Act’)), including a ‘group’ as defined in Section 13(d)(3) of the Exchange Act (but excluding a trustee or other fiduciary holding securities under an employee benefit plan of Employer), directly or indirectly, becomes the beneficial owner of shares of beneficial interests or limited partnership interests, as applicable, of Employer having at least fifty percent (50%) of the total number of votes that may be cast for the election of trustees of Employer; (2) the merger or other business combination of Employer, sale of all or substantially all of Employer’s assets or combination of the foregoing transactions (a ‘Transaction’), other than a Transaction immediately following which the shareholders of Employer immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity (excluding for this purpose any shareholder owning directly or indirectly more than ten percent (10%) of the shares of the other company involved in the Transaction); or (3) within any twenty-four (24) month period beginning on or after the Effective Date, the persons who were trustees of

			Employer at the beginning of such period (the ‘Incumbent Directors’) shall cease to constitute at least a majority of the Board or a majority of the board of trustees of any successor to Employer, provided that, any trustee who was not a trustee as of the date immediately following the Effective Date shall be deemed to be an Incumbent Director if such trustee was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the trustees who then qualified as Incumbent Directors either actually or by prior operation of this provision, unless such election, recommendation or approval was the result of an actual or threatened election contest of the type contemplated by Regulation 14a-11 promulgated under the Exchange Act or any successor provision; and (B) a ‘diminution event’ shall mean any material diminution in (1) the duties and responsibilities of Executive (including a requirement that Executive report to a corporate officer or employee instead of reporting directly to the Board and the failure of Executive to be elected and re-elected a member of the Board) or (2) the base compensation of Executive.”

	4.		By replacing Section 5(b)(iii) of the Employment Agreement with the following:

			“For Good Reason. Executive may terminate this Agreement for Good Reason (as defined below). In connection with the termination of Executive’s employment pursuant to this Section 5(b)(iii), (A) Employer shall pay to Executive Executive’s Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) Employer shall pay to Executive on the effective date of such termination a pro rata portion of any Bonus Compensation otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) and Exhibit A hereof (including without limitation any guaranteed bonus for such year) up to the effective date of such termination and, to the extent not previously paid, all Bonus Compensation payable to Executive in accordance with Section 3(b) and Exhibit A hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) Employer shall provide to Executive the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) Employer shall pay to Executive the Termination Compensation specified in, at the time set forth in, Section 5(d) hereof. For purposes of this Section 5(b)(iii), ‘Good Reason’ shall mean (1) any material breach by Employer of the terms of this Agreement which is not cured within thirty (30) days after receipt by Employer of a written notice from Executive specifying in reasonable detail the nature of the breach, or (2) any relocation of Executive’s office to a location more than twenty-five (25) miles from 77 West Wacker Drive, Chicago, Illinois, or (3) sixty (60) days have elapsed since delivery to Executive by the Employer of a notice of non-renewal pursuant to Section 2, provided that Executive is willing and able to renew the Agreement with terms and conditions substantially similar to the existing terms and conditions, and

	5.		By replacing Section 5(c) of the Employment Agreement with the following:

			“Death. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of Executive’s death. In such event, (A) Employer shall pay to Executive Executive’s Base Compensation in accordance with Section 3(a) hereof up to the date of such death, (B) Employer shall pay to Executive’s estate as soon as possible after such death a pro rata portion of any Bonus Compensation otherwise payable to Executive for or with respect to the calendar year in which such death occurs in accordance with Section 3(b) and Exhibit A hereof (including without limitation any guaranteed bonus for such year) up to the effective date of such death and, to the extent not previously paid, Executive shall be entitled to all Bonus Compensation payable to Executive in accordance with Section 3(b) and Exhibit A hereof for or with respect to any calendar years prior to the calendar year in which such death occurs, (C) Employer shall provide to Executive the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the date of such death and (D) Employer shall pay to Executive’s estate the Termination Compensation specified in, at the time set forth in, Section 5(d) hereof. This Section 5(c) shall not limit the entitlement of Executive, Executive’s estate or beneficiaries under any insurance or other benefits plan or policy which is maintained by Employer for Executive’s benefit (as opposed to Employer’s benefit).”

	6.		By replacing Section 5(d) of the Employment Agreement with the following:

			“Termination Compensation. In the event of a termination of this Agreement pursuant to Section 5(a)(i) (by Employer without cause), 5(a)(iii) (disability), 5(b)(i) (change of control), 5(b)(iii) (by Executive for good reason) or 5(c) (death) hereof, Employer shall pay to Executive, within thirty (30) days of termination, an amount in one lump sum (‘Termination Compensation’) equal to the aggregate Base Compensation payable to Executive over the remainder of the Employment Term as in effect immediately prior to the effective date of termination, determined without regard to such termination.”

	8.		By replacing Section 9 of the Employment Agreement with the following:

			“Successor to Employer. Employer will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of Employer, as the case may be, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession or assignment had taken place. Any failure of Employer to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement giving Executive the right to terminate this Agreement and, subject to the notice and remedy periods described in Section 5(b)(i), Executive shall be entitled to terminate employment and receive the compensation specified in that section. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive’s devisee, legatee or other designee or, if there be no such designee, to Executive’s estate.”

	9.		By adding the following new Section 16 to the Employment Agreement:

			“Code Section 409A. This Agreement is intended to comply with Code Section 409A and the IRS interpretative guidance thereunder, including the short-term deferral exclusion and exemptions for separation pay plans, reimbursements, and in-kind distributions, and shall be administered accordingly. The Agreement shall be construed and interpreted with such intent. If any provision of this Agreement needs to be revised to satisfy the requirements of Code Section 409A, then such provision shall be modified or restricted to the extent and in the manner necessary to be in compliance with such requirements of the Code. All amounts payable to Executive pursuant to the third paragraph of Section 5(b)(i) shall be paid in accordance with the timing requirements set forth in Code Section 409A and the Treasury Regulations issued thereunder.”


EMPLOYER:

PRIME GROUP REALTY TRUST

By:	[s] James F. Hoffman

	Name:	James F. Hoffman
	Title:	Executive Vice President, General Counsel and Secretary

PRIME GROUP REALTY, L.P.

By: PRIME GROUP REALTY TRUST
Its: General Partner

By:	[s] James F. Hoffman

	Name:	James F. Hoffman
	Title:	Executive Vice President, General Counsel and Secretary

EXECUTIVE:

[s] Jeffrey A. Patterson

Jeffrey A. Patterson

	1.		By replacing Section 4(a)(i) with the following:

			“Without Cause. Employer may terminate this Agreement and Executive’s employment at any time (other than for Cause, as that term is defined in Section 4(a)(ii) hereof) upon thirty (30) days’ prior written notice to Executive. In connection with the termination of Executive’s employment pursuant to this Section 4(a)(i), (A) Employer shall pay to Executive Executive’s Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) Employer shall pay to Executive on the effective date of such termination a pro rata portion of any Bonus Compensation otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, all Bonus Compensation payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) Employer shall provide to Executive the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) Employer shall pay to Executive the Termination Compensation specified in, at the time set forth in, Section 4(d) hereof. For purposes of this Agreement, the ‘effective date of termination’ shall mean the last day on which Executive is employed with Employer which may be later than the date of the delivery of any applicable notice of termination.”

	2.		By replacing Section 4(a)(iii) with the following:

			“Disability. If due to illness, physical or mental disability, or other incapacity, Executive shall fail during any four (4) consecutive months to perform the duties required by this Agreement, Employer may, upon thirty (30) days’ written notice to Executive, terminate this Agreement and Executive’s employment. In the event of any such termination, (A) Employer shall pay to Executive Executive’s Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) Employer shall pay to Executive on the effective date of such termination a pro rata portion of any Bonus Compensation otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the first day of such four (4) month period and, to the extent not previously paid, all Bonus Compensation payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) Employer shall provide to Executive the benefits set forth in Sections 3(c) (or the after-tax cash equivalent), 3(d) and 3(e) hereof up to the effective date of such termination and (D) Employer shall pay to Executive the Termination Compensation specified in, at the time set forth in, Section 4(d) hereof. This Section 4(a)(iii) shall not limit the entitlement of Executive, Executive’s estate or beneficiaries to any disability or other benefits available to Executive under any disability insurance or other benefits plan or policy which is maintained by Employer for Executive’s benefit (as opposed to Employer’s benefit). For purposes of this Agreement, the ‘date of disability’ shall mean the first day of the consecutive period during which Executive fails to perform the duties required by this Agreement due to illness, physical or mental disability or other incapacity.”

			Employer complies with, and provides the compensation and benefits provided for, in this Agreement. In the event of such termination, (A) Employer shall pay to Executive Executive’s Base Compensation up to the effective date of such termination, (B) Employer shall pay to Executive on the effective date of such termination a pro rata portion of any Bonus Compensation otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, all Bonus Compensation payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) Employer shall provide to Executive the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) Employer shall pay to Executive the Termination Compensation specified in, at the time set forth in, Section 4(d) hereof. For purposes of this Agreement, in the event Employer materially defaults in its obligation under Section 8 hereof, Executive may deliver written notice of termination, describing the circumstances in reasonable detail, to Employer within ninety (90) days after such default. If Employer fails to remedy the default within thirty (30) days of receipt after such notice, Executive may terminate employment with Employer (or Employer’s successor or assign), and such termination shall be deemed to be a termination under this Section 4(b)(i).

			For purposes of this Section 4(b)(i), (A) a ‘change of control’ of Employer shall be deemed to have occurred if after the Effective Date: (1) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the ‘Exchange Act’)), including a ‘group’ as defined in Section 13(d)(3) of the Exchange Act (but excluding a trustee or other fiduciary holding securities under an employee benefit plan of Employer), directly or indirectly, becomes the beneficial owner of shares of beneficial interests or limited partnership interests, as applicable, of Employer having at least fifty percent (50%) of the total number of votes that may be cast for the election of trustees of Employer; (2) the merger or other business combination of Employer, sale of all or substantially all of Employer’s assets or combination of the foregoing transactions (a ‘Transaction’), other than a Transaction immediately following which the shareholders of Employer immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity (excluding for this purpose any shareholder owning directly or indirectly more than ten percent (10%) of the shares of the other company involved in the Transaction); or (3) within any twenty-four (24) month period beginning on or after the Effective Date, the persons who were trustees of Employer at the beginning of such period (the ‘Incumbent Directors’) shall cease to constitute at least a majority of the Board or a majority of the board of trustees of any successor to Employer, provided that, any trustee who was not a trustee as of the date immediately following the Effective Date shall be deemed to be an Incumbent Director if such

	4.		By replacing Section 4(b)(iii) of the Employment Agreement with the following:

			“For Good Reason. Executive may terminate this Agreement for Good Reason (as defined below). In connection with the termination of Executive’s employment pursuant to this Section 4(b)(iii), (A) Employer shall pay to Executive Executive’s Base Compensation in accordance with Section 3(a) hereof up to the effective date of such termination, (B) Employer shall pay to Executive on the effective date of such termination a pro rata portion of any Bonus Compensation otherwise payable to Executive for or with respect to the calendar year in which such termination occurs in accordance with Section 3(b) hereof up to the effective date of such termination and, to the extent not previously paid, all Bonus Compensation payable to Executive in accordance with Section 3(b) hereof for or with respect to any calendar years prior to the calendar year in which such termination occurs, (C) Employer shall provide to Executive the benefits set forth in Sections 3(c), 3(d) and 3(e) hereof up to the effective date of such termination and (D) Employer shall pay to Executive the Termination Compensation specified in, at the time set forth in, Section 4(d) hereof. For purposes of calculating Executive’s pro rata portion of any Bonus Compensation pursuant to any section of this Agreement, if the termination takes place prior to receipt by Executive of any Bonus Compensation, the Bonus Compensation, a pro rata (based on the number of days in the year) portion of which Executive shall be entitled to receive, shall be deemed to be 50% of Executive’s then current annual Base Compensation. For purposes of this Section 4(b)(iii), ‘Good Reason’ shall mean (1) any material breach by Employer of the terms of this Agreement which is not cured within thirty (30) days after receipt by Employer of a written notice from Executive specifying in reasonable detail the nature of the breach, or (2) any relocation of Executive’s office to a location more than twenty-five (25) miles from 77 West Wacker Drive, Chicago, Illinois, or (3) sixty (60) days have elapsed since delivery to Executive by the Employer of a notice of non-renewal pursuant to Section 2, provided that Executive is willing and able to renew the Agreement with terms and conditions substantially similar to the existing terms and conditions, and