UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

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

OR

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

For the fiscal year ended December 31, 2011

Commission File Number 1-31824

FIRST POTOMAC REALTY TRUST

(Exact name of registrant as specified in its charter)

MARYLAND	37-1470730
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7600 Wisconsin Avenue, 11th Floor, Bethesda, MD	20814
(Address of principal executive offices)	(Zip Code)

(301) 986-9200

(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 upon Which Registered
Common Shares of beneficial interest, $0.001 par value per share 7.750% Series A Cumulative Redeemable Perpetual Preferred shares of beneficial interest, $0.001 par value per share	New York Stock Exchange 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 Securities Act.    YES  x    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.    YES  ¨    NO  x

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

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

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

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

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

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

The aggregate fair value of the registrant’s common shares of beneficial interest, $0.001 par value per share, at June 30, 2011, held by those persons deemed by the registrant to be non-affiliates was $745,877,280.

As of February 27, 2012, there were 50,761,963 common shares of beneficial interest, par value $0.001 per share, outstanding.

Documents Incorporated By Reference

Portions of the Company’s definitive proxy statement relating to the 2012 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K as indicated herein.

FIRST POTOMAC REALTY TRUST

FORM 10-K

INDEX

	Page
Part I
Item 1. Business		3
Item 1A. Risk Factors		10
Item 1B. Unresolved Staff Comments		28
Item 2. Properties		29
Item 3. Legal Proceedings		34
Item 4. Mine Safety Disclosures		34
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		35
Item 6. Selected Financial Data		37
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		71
Item 8. Financial Statements and Supplementary Data		72
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		72
Item 9A. Controls and Procedures		72
Item 9B. Other Information		73
Part III
Item 10. Directors, Executive Officers and Corporate Governance		75
Item 11. Executive Compensation		75
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		75
Item 13. Certain Relationships and Related Transactions, and Director Independence		75
Item 14. Principal Accountant Fees and Services		75
Part IV
Item 15. Exhibits and Financial Statement Schedules		76
Signatures		79

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PART I

ITEM 1. BUSINESS

Overview

First Potomac Realty Trust (the “Company”) is a leader in the ownership, management, development and redevelopment of office and industrial properties in the greater Washington, D.C. region. The Company separates its properties into four distinct reporting segments, which it refers to as the Washington, D.C., Maryland, Northern Virginia and Southern Virginia reporting segments. The Company strategically focuses on acquiring and redeveloping properties that it believes can benefit from its intensive property management and seeks to reposition these properties to increase their profitability and value. The Company’s portfolio contains a mix of single-tenant and multi-tenant office and industrial properties as well as business parks. Office properties are single-story and multi-story buildings that are used primarily for office use; business parks contain buildings with office features combined with some industrial property space; and industrial properties generally are used as warehouse, distribution or manufacturing facilities.

References in this Annual Report on Form 10-K to “we,” “our” or “First Potomac,” refer to the Company and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

The Company conducts its business through First Potomac Realty Investment Limited Partnership, the Company’s operating partnership (the “Operating Partnership”). The Company is the sole general partner of, and, as of December 31, 2011, owned a 94.5% interest in, the Operating Partnership. The remaining interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying consolidated financial statements, are limited partnership interests, some of which are owned by several of the Company’s executive officers and trustees who contributed properties and other assets to the Company upon its formation, and other unrelated parties.

At December 31, 2011, the Company wholly-owned or had a controlling interest in properties totaling 13.9 million square feet and had a noncontrolling ownership interest in properties totaling an additional 1.0 million square feet through six unconsolidated joint ventures. The Company also owned land that can accommodate approximately 2.4 million square feet of additional development. The Company’s consolidated properties were 81.8% occupied by 608 tenants. Excluding the Company’s fourth quarter 2010 acquisitions of Atlantic Corporate Park, which was vacant at acquisition, and Redland Corporate Center II, which was 99% vacant at acquisition, the Company’s consolidated portfolio was 84.0% occupied at December 31, 2011. The Company does not include square footage that is in development or redevelopment in its occupancy calculation, which totaled 0.6 million square feet at December 31, 2011. The Company derives substantially all of its revenue from leases of space within its properties. As of December 31, 2011, the Company’s largest tenant was the U.S. Government, which along with government contractors, accounted for over 25% of the Company’s total annualized base rent. The Company operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

For the year ended December 31, 2011, the Company had consolidated total revenues of approximately $172 million and consolidated total assets of $1.7 billion. Financial information related to the Company’s four reporting segments is set forth in footnote 18, Segment Information, to the Company’s consolidated financial statements.

The Company’s principal executive offices are located at 7600 Wisconsin Avenue, 11^th Floor, Bethesda, Maryland 20814. In 2011, the Company entered into a new lease agreement that will be effective in the spring of 2012 at its corporate headquarters, which will expand its corporate office space by an additional 19,000 square feet. The Company believes the expanded office space is sufficient to meet its current needs. As of December 31, 2011, the Company had five other offices for its property management operations, which occupy approximately 23,000 square feet within buildings it owns. During the first quarter of 2012, the Company entered into a lease agreement through November 2013 for approximately 6,000 square feet in Washington, D.C., which will serve as a temporary location for the Company’s Washington, D.C. office.

The Company’s History

First Potomac Realty Limited Partnership (the “Operating Partnership”) was formed in December 1997 by Louis T. Donatelli, our former Chairman, Douglas J. Donatelli, our current Chairman and Chief Executive Officer and Nicholas R. Smith, our Executive Vice President and Chief Investment Officer, to focus on the acquisition, redevelopment and development of industrial properties and business parks, primarily in the suburban markets of the Washington, D.C. metropolitan area. The Company completed its initial public offering (“IPO”) in October 2003, raising net proceeds of approximately $118 million. At December 31, 2003, the Company owned 17 properties totaling approximately 2.9 million square feet and had revenues of $18.4 million and total assets of $244.1 million. Through its business strategy and operating model, by December 31, 2006, the Company had almost quadrupled its square footage owned and had more than quadrupled its revenues and total assets. During 2007 and

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2008, the Company’s management team chose not to expand the Company’s portfolio given the increase in asset prices. The Company therefore focused on maximizing the value of its assets under management and maintaining a flexible balance sheet. In 2009, the Company began seeing attractive acquisition opportunities and determined that it was the appropriate time to begin growing its portfolio again, expanding its platform to include more multi-story office properties. In 2010, the Company entered the office market in Washington, D.C., with the acquisition of four properties, including one property purchased through an unconsolidated joint venture. In 2011, the Company continued to acquire office buildings in Washington, D.C. with the acquisition of three properties, including one through a consolidated joint venture and one through an unconsolidated joint venture.

Narrative Description of Business

The Operating Partnership was formed in 1997 and has used management’s knowledge of and experience in the greater Washington, D.C. region to transform the Company into a leading office and industrial property, as well as business park, owner in the region. The Company is well positioned given its reputation and access to capital combined with the large number of properties meeting its investment criteria.

The Company’s acquisition strategies focus on properties in its target markets that generally meet the following investment criteria:

• established locations;

• below-market rents; and/or

• absentee prior ownership.

The Company uses its contacts, relationships and local market knowledge to identify and opportunistically acquire office buildings, business parks and industrial properties in its target markets. The Company also believes that its reputation for professional property management and its transparency as a public company allow it to attract high-quality tenants to the properties that it acquires, leading, in some cases, to increased profitability and value for its properties.

The Company also targets properties that it believes can be converted, in whole or in part, to a higher use. With business parks in particular, the Company has found that, over time, the property can be improved by converting space that is primarily warehouse space into space that contains more office use. Because office rents are generally higher than warehouse rents, the Company has been able to opportunistically add revenue and value by converting space as market demand allows.

Significant 2011 Activity

• Completed seven property acquisitions for total consideration of $268.6 million;

• Acquired a 51% non-controlling interest in an unconsolidated joint venture for $27.8 million, net of mortgage debt assumed, that owns two office buildings in Northern Virginia and a 95% non-controlling interest in an unconsolidated joint venture for $20.4 million, net of mortgage debt issued, that owns an office building in Washington, D.C., which the Company plans to develop into a new office building;

• Raised net proceeds of $111.0 million through the issuance of 4.6 million 7.750% Series A Preferred Shares;

• Executed 2.8 million square feet of leases, consisting of 1.1 million square feet of new leases and 1.7 million square feet of renewal leases;

• Entered into and expanded a $175.0 million unsecured term loan to $225.0 million, which was subsequently increased to $300.0 million in February 2012, with staggered maturity dates ranging from July 2016 to July 2018;

• Expanded borrowing capacity of unsecured revolving credit facility from $225.0 million to $255.0 million; and

• Completed the disposition of three properties for net proceeds of $26.9 million.

Total assets were $1.7 billion at December 31, 2011 compared with $1.4 billion at December 31, 2010.

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Competitive Advantages

The Company believes that its business strategy and operating model distinguish it from other owners, operators and acquirers of real estate in a number of ways, which include:

• Experienced Management Team. The Company’s executive officers average more than 25 years of real estate experience in the greater Washington, D.C. region.

• Focused Strategy. The Company focuses on office and industrial properties, as well as business parks, in the greater Washington, D.C. region. The Company believes the greater Washington, D.C. region is one of the largest, most stable markets in the U.S. for assets of this type.

• Value-Added Management Approach. Through the Company’s hands-on approach to management, leasing, renovation and repositioning, the Company endeavors to add significant value to the properties that it acquires from absentee institutional landlords and smaller, less effective owners by improving tenant quality and increasing occupancy rates and net rent per square foot.

• Strong Market Dynamics. The Company’s target markets exhibit stable rental rates and strong tenant bases.

• Local Market Knowledge. The Company has established relationships with local owners, the brokerage community, prospective tenants and property managers in its markets. The Company believes these relationships enhance its efforts to locate attractive acquisition opportunities and lease space in its properties.

• Favorable Lease Terms. As of December 31, 2011, 469 of the Company’s 823 leases (representing approximately 63% of the Company’s annualized base rent) were triple-net leases, under which tenants are contractually obligated to reimburse the Company for virtually all costs of occupancy, including property taxes, utilities, insurance and maintenance. In addition, the Company’s leases generally provide for revenue growth through contractual rent increases.

• High Quality Tenant Mix. At December 31, 2011, over 25% of the Company’s total annualized base rent was derived from the U.S. Government, state governments or government contractors. The Company’s non-government related tenant base is highly diverse. Approximately 48% of the Company’s annualized base rent is generated from its 30 largest tenants, and its largest 100 tenants generate roughly two-thirds of its annualized base rent. The balance of the Company’s tenants, which is comprised of over 500 different companies, generates the remaining one-third of its annualized base rent. The Company believes its high concentration of government related revenue, coupled with its diversified tenant base, provide a desirable mix of stability, diversity and growth potential.

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Executive Officers of the Company

The following table sets forth information with respect to the Company’s executive officers:

Name	Age		Position and Background
Douglas J. Donatelli		50	Chairman of the Board of Trustees and Chief Executive Officer Douglas J. Donatelli is a founder of the Company and has served as Chairman since May 2007 and Chief Executive Officer and trustee of the Company since its predecessor’s founding in 1997. Mr. Donatelli previously was Executive Vice President of Donatelli & Klein, Inc. (now Donatelli Development, Inc. (“DDI”)), a real estate development and investment firm located in Washington, D.C., and from 1985 to 1991, President of D&K Broadcasting, a communications subsidiary of DDI that owned Fox network affiliated television stations. Mr. Donatelli is active in many charitable and community organizations. He serves as Chairman, Board of Directors, Catholic Charities of the Archdiocese of Washington, D.C. and as Corporate Fund Vice Chairman for the Kennedy Center Corporate Fund Board. He is a member of the Urban Land Institute and the National Association of Real Estate Investment Trusts (“NAREIT”). Mr. Donatelli holds a Bachelor of Science degree in Business Administration from Wake Forest University.
Barry H. Bass		48	Executive Vice President, Chief Financial Officer Barry H. Bass served as Senior Vice President and Chief Financial Officer since joining the Company in 2002 and was elected Executive Vice President in February 2005. From 1999 to 2002, Mr. Bass was a senior member of the real estate investment banking group of Legg Mason Wood Walker, Inc. where he advised a number of public and private real estate companies in their capital raising efforts. From 1996 to 1999, Mr. Bass was Executive Vice President of the Artery Organization in Bethesda, Maryland, an owner and operator of real estate assets in the Washington, D.C. area, and prior to that a Vice President of Winthrop Financial Associates, a real estate firm with over $6 billion of assets under management, where he oversaw the Company’s asset management group. Mr. Bass is a graduate of Dartmouth College and is a member of NAREIT.
Joel F. Bonder		63	Executive Vice President, General Counsel and Secretary Joel F. Bonder has served as Executive Vice President, General Counsel and Secretary since joining the Company in January 2005. Mr. Bonder was Counsel at Bryan Cave LLP from 2003 to 2004 in Washington, D.C., where he specialized in corporate and real estate law and project finance. He was Executive Vice President and General Counsel of Apartment Investment and Management Company (AIMCO), a public traded apartment REIT, from 1997 to 2002, and General Counsel of National Corporation for Housing Partnerships, an owner of multifamily housing, and its publicly traded parent company, NHP Incorporated, from 1994 to 1997. Mr. Bonder is a graduate of the University of Rochester and received his JD degree from Washington University School of Law. He is admitted to the bar in the District of Columbia, Massachusetts and Illinois.
James H. Dawson		54	Executive Vice President, Chief Operating Officer James H. Dawson served as Senior Vice President and Chief Operating Officer of the Company since 1998 and was elected Executive Vice President in February 2005. Mr. Dawson has coordinated the Company’s management and leasing activities since joining the Company in 1998. Prior to joining the Company, Mr. Dawson spent 18 years with Reico Distributors, a large user of business park and industrial product in the Baltimore/Washington corridor. At Reico, he was responsible for the construction and management of the firm’s warehouse portfolio. Mr. Dawson received his Bachelor of Science degree in Business Administration from James Madison University and is a member of the Northern Virginia Board of Realtors, the Virginia State Board of Realtors and the Institute of Real Estate Management.

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Name	Age		Position and Background
Nicholas R. Smith		47	Executive Vice President, Chief Investment Officer Nicholas R. Smith is one of the founders of the Company and has served as Executive Vice President and Chief Investment Officer since the founding of our Predecessor in 1997. He has over 25 years’ experience in commercial real estate in the Washington, D.C. area, including seven years with DDI and D&K Management. Prior to joining DDI, Mr. Smith was with Garrett & Smith, Inc., a real estate investment and development firm based in Mclean, Virginia and Transwestern (formerly Barrueta & Associates, Inc.), a Washington, D.C.-based commercial real estate brokerage and property management firm. Mr. Smith is a graduate of the Catholic University of America. He currently serves on the Council of Advisors for the University of Maryland’s School of Architecture, Planning and Preservation Graduate Programs in Real Estate and is a member of the Board of Directors of the Choral Arts Society of Washington. He is also a member of the National Association of Industrial and Office Parks, the Urban Land Institute and NAREIT.
Michael H. Comer		46	Senior Vice President, Chief Accounting Officer Michael H. Comer served as the Company’s Vice President and Chief Accounting Officer since August 2003 and was elected Senior Vice President in February 2005. Prior to joining the Company, Mr. Comer was Controller at Washington Real Estate Investment Trust (WRIT), a Washington, D.C.-based, diversified real estate investment trust, where from 1999 to 2003 he was responsible for overseeing the Company’s accounting operations and its internal and external financial reporting. Prior to his tenure at WRIT, he was a manager in corporate accounting at The Federal Home Loan Mortgage Corp., and, prior to that position, was with KPMG LLP in Washington, D.C. where he performed audit, consultation and advisory services from 1990 to 1994. He is a CPA and a graduate of the University of Maryland where he received a Bachelor of Science degree in Accounting. Mr. Comer is a member of the American Institute of Certified Public Accountants and NAREIT.
Timothy M. Zulick		48	Senior Vice President, Leasing Timothy M. Zulick has served as Senior Vice President, Leasing since August 2004. Prior to joining the Company, Mr. Zulick was Senior Vice President at Trammell Crow Company where, from 1998 to 2004, he concentrated on leasing, sales and development of business park and industrial properties in the Baltimore-Washington Corridor. From 1994 to 1998, he worked as a tenant and landlord representative with Casey ONCOR International where he also focused on leasing and sales of industrial properties. Prior to that, Mr. Zulick was with Colliers Pinkard and specialized in the valuation of commercial real estate in Maryland. He received a Bachelor of Science degree in Business Administration from Roanoke College. Mr. Zulick is a licensed real estate person and an active member of the Society of Industrial and Office Realtors (SIOR).

The Company’s Markets

The Company operates, invests in, and develops, office, business park and industrial properties in the greater Washington, D.C. region. Within this area, the Company’s primary markets are the Washington, D.C. metropolitan statistical area (“MSA”), which includes Washington D.C., northern Virginia and suburban Maryland, and the Richmond and Norfolk MSAs. The Company derives 70.4% of its annualized base rent from the Washington, D.C. MSA, and, in the aggregate, the Richmond and Norfolk MSAs contribute 27.2% of the Company’s annualized base rent. The Company also owns and operates assets in the Baltimore, Maryland, market, which represent 2.4% of its annualized base rent.

According to data from Transwestern, a leading commercial real estate services provider, the Washington, D.C. MSA contains approximately 401 million square feet of office property and over 393 million square feet of business park and industrial property.

The Washington, D.C. MSA has the largest economy of the Company’s target markets. In addition to its size, the Washington, D.C. MSA has been one of the top performers in terms of job creation in the past few years. In 2011, the D.C. MSA added more than 22,000 jobs, primarily in the professional and business services and financial services sectors. Although the regional economy is supported by the spending of the U.S. Government, which accounts for over 50% of the economy, the bulk of the jobs created in 2011 came from the private sector. As of December 2011, the D.C. MSA had the lowest unemployment rate among major metropolitan MSA’s at 5.5%, according to the Bureau of Labor Statistics (“BLS”).

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The outlook for the Washington D.C. region remains positive, with job creation expected to average over 32,000 new jobs annually between 2012 and 2015 based on economic projections from the Center for Regional Analysis at George Mason University (“GMU-CRA”). Regional GDP growth is expected to be similar to that of the national average through 2015, based on GMU-CRA projections.

Norfolk, Virginia, is the Company’s second largest market when measured by annualized base rent and square footage. The Company owns approximately 3.7 million square feet in Norfolk and derives approximately 19.0% of its annualized base rent from the market. Norfolk is home to the largest military installation in the world, according to the United States Navy, and remains heavily invested in the defense and shipping industries. The expansion of the Navy Cyber Forces (CYBERFOR) division, established in January of 2010, has generated considerable activity and created significant growth opportunities for the region. In December of 2011, the Norfolk MSA (formally known as the Virginia Beach, Norfolk-Newport News MSA) had an unemployment rate of 7.1%, based on BLS data. In addition, the Norfolk port is the third largest port on the East Coast of the United States with $41 billion in revenue, and has the deepest, obstruction-free channels available on the East Coast.

The Company owns approximately 1.8 million square feet in Richmond, Virginia, and derives 8.2% of its annualized base rent from the market. Richmond, the capital of Virginia, maintains a market demand for smaller to mid-size tenants, primarily in business services, healthcare and educational industries. The area remains of interest to many industries due to its relatively low cost for businesses and proximity to Washington D.C. The unemployment rate in the Richmond MSA at December 31, 2011 was 6.8%, significantly better than the 8.5% national average.

Competition

We compete with other REITs, public and private real estate companies, private real estate investors and lenders in acquiring properties. Many of these entities have greater resources than we do or other competitive advantages. We also face competition in leasing or subleasing available properties to prospective tenants.

We believe that our management’s experience and relationships in, and local knowledge of, the markets in which we operate put us at a competitive advantage when seeking acquisitions. However, many of our competitors have greater resources that we do, or may have a more flexible capital structure when seeking to finance acquisitions. We also face competition in leasing or subleasing available properties to prospective tenants. Some real estate operators may be willing to enter into leases at lower rental rates (particularly if tenants, due to the economy, seek lower rents). However, we believe that our intensive management services are attractive to tenants, and serve as a competitive advantage.

Environmental Matters

Under various federal, state and local environmental laws and regulations, a current or previous owner, operator or tenant of real estate property may be required to investigate and clean up hazardous or toxic substances or petroleum product releases or threats of releases at such property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean up and monitoring costs incurred by such parties in connection with the actual or threatened contamination. Such laws typically impose clean up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the presence of the contamination. The liability under such laws may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken. These costs may be substantial, and can exceed the fair value of the property. The presence of contamination or the failure to properly remediate contamination on such property may adversely affect the ability of the owner, operator or tenant to sell or rent such property or to borrow using such property as collateral, and may adversely impact our investment in a property.

Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials and potentially asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potentially asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potentially asbestos-containing materials as a result of the regulations. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials.

We also may incur liability arising from mold growth in the buildings we own or operate. When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological

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contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants or increase ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants, and others if property damage or personal injury occurs.

Prior to closing any property acquisition, if appropriate, the Company obtains such environmental assessments as may be prudent in order to attempt to identify potential environmental concerns at such properties. These assessments are carried out in accordance with an appropriate level of due diligence and generally may include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historic aerial photographs. The Company may also conduct limited subsurface investigations and test for substances of concern where the results of the first phase of the environmental assessments or other information, indicates possible contamination or where the Company’s consultants recommend such procedures.

The Company believes that its properties are in compliance in all material respects with all federal and state regulations regarding hazardous or toxic substances and other environmental matters. The Company has not been notified by any governmental authority of any material non-compliance, liability or claim relating to hazardous or toxic substances or other environmental matter in connection with any of its properties.

Employees

The Company had 176 employees as of February 9, 2012. The Company believes relations with its employees are good.

Availability of Reports Filed with the Securities and Exchange Commission

A copy of this Annual Report on Form 10-K, as well as the Company’s quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available, free of charge, on its Internet Web site (www.first-potomac.com). All of these reports are made available on the Company’s Web site as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). The Company’s Governance Guidelines and Code of Business Conduct and Ethics and the charters of the Audit, Finance and Investment, Compensation and Nominating and Governance Committees of the Board of Trustees are also available on the Company’s Web site at www.first-potomac.com, and are available in print to any shareholder upon request in writing to First Potomac Realty Trust, c/o Investor Relations, 7600 Wisconsin Avenue, 11^th Floor, Bethesda, MD 20814. The information on the Company’s Web site is not, and shall not be deemed to be, a part of this report or incorporated into any other filing it makes with the SEC.

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ITEM 1A. RISK FACTORS

An investment in our Company involves various risks, including the risk that an investor might lose its entire investment. The following discussion concerns the material risks associated with our business. These risks are interrelated and should be considered collectively. The risks described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us or not identified below, may also materially and adversely affect our business, financial condition, results of operations and ability to make distributions to our security holders.

Risks Related to Our Business and Properties

Real estate investments are inherently risky, which could materially adversely affect our results of operations and cash flow.

Real estate investments are subject to varying degrees of risk. If we acquire or develop properties and they do not generate sufficient operating cash flow to meet operating expenses, including debt service, capital expenditures and tenant improvements, our results of operations, cash flow and ability to make distributions to our security holders will be materially adversely affected. Income from properties may be adversely affected by, among other things,:

• downturns in the national, regional and local economic conditions (particularly in the greater Washington, D.C. region, where our properties are located);

• declines in the financial condition of our tenants (including tenant bankruptcies) and our ability to collect rents from our tenants;

• decreases in rent and/or occupancy rates due to competition, oversupply or other factors;

• increases in operating costs such as real estate taxes, insurance premiums, site maintenance (including snow removal costs, which have been higher in recent years) and utilities;

• vacancies and the need to periodically repair, renovate and re-lease space, or significant capital expenditures;

• reduced capital investment in or demand for real estate in the future;

• costs of remediation and liabilities associated with environmental conditions and laws;

• terrorist acts or acts of war, which may result in uninsured or underinsured losses;

• decreases in the underlying value of our real estate;

• changes in interest rates and the availability of financing; and

• changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes.

We significantly increased the size of our portfolio in 2010 and 2011 and may continue to meaningfully grow our portfolio, and newly developed and acquired properties may initially be dilutive and/or may not produce the returns that we expect, which could materially adversely affect our results of operations and growth prospects.

In 2010 and 2011, we focused our efforts on the acquisition, development and redevelopment of business parks and industrial and office properties, and we significantly increased the size of our portfolio. We intend to continue to acquire and develop additional business park and industrial and office properties, and the size of our portfolio could meaningfully increase even further. These acquisitions may be initially dilutive to our net income. In deciding whether to acquire or develop a particular property, we make assumptions regarding the expected future performance of that property. In particular, we estimate the return on our investment based on expected occupancy and rental rates, as well as expected development costs and leasing costs. We have acquired, and may continue to acquire, properties not fully leased, and the cash flow from existing operations may be insufficient to pay the operating expenses and debt service associated with that property until the property is more fully leased at favorable rental rates. Moreover, operating expenses related to acquired properties may be greater than anticipated, particularly if we provide tenant improvements or other concessions or additional services in order to maintain or attract new tenants. If our estimated return on investment for the property proves to be inaccurate and the property is unable to achieve the expected occupancy and rental rates, it

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may fail to perform as we expected in originally analyzing the investment (including, without limitation, as a result of tenant bankruptcies, increased tenant improvements and other concessions, our inability to collect rents and higher than anticipated operating costs), thereby having a material adverse effect on our results of operations. This risk may be particularly pronounced for properties placed into development or acquired shortly before the recent economic downturn, where we estimated occupancy and rental rates without the benefit of knowing how those assumptions might be impacted by the changing economic conditions that followed.

In addition, when we acquire certain properties that are significantly under-leased, we often plan to reposition or redevelop them with the goal of increasing profitability. Our estimate of the costs of repositioning or redeveloping such properties may prove to be inaccurate, which may result in our failure to meet our profitability goals. Moreover, we may be unsuccessful in leasing up such properties after repositioning or redeveloping them and if one or more of these new properties do not perform as expected, our results of operations may be materially adversely affected.

Our business strategy contemplates expansion through acquisitions and we may not be able to adapt our management and operational systems (including leasing and property management) to successfully integrate new properties into our portfolio without unanticipated disruption or expense, which could have a material adverse effect on our results of operations and financial condition.

Our business strategy contemplates expansion through acquisitions, and we significantly increased the size of our portfolio in 2010 and 2011. The size of our portfolio could meaningfully increase further as we execute our business plan. As we increase the size of our portfolio, we cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff to integrate new properties into our portfolio or manage any future acquisitions of properties without operating disruptions or unanticipated costs. In particular, because we began acquiring large, multi-tenant office properties in 2010 and 2011, we cannot assure you that our leasing and property management functions will successfully and efficiently lease and operate such properties. Our acquisitions of properties will generate additional operating expenses that we will be required to pay. Our past growth has required, and our growth will continue to require, increased investment in management personnel, professional fees, other personnel, financial and management systems and controls and facilities, which could cause our operating margins to decline from historical levels, especially in the absence of revenue growth. As we acquire additional properties, we will be subject to risks associated with managing new properties, including tenant retention and mortgage default. Our failure to successfully integrate acquisitions into our portfolio and manage our growth could have a material adverse effect on our results of operations and financial condition.

We have limited experience in owning, developing and operating large, multi-tenant office properties, particularly in downtown Washington, D.C., which could have a material adverse effect on our results of operations.

During 2010, we acquired four multi-story office buildings, including one through an unconsolidated joint venture, located in downtown Washington, D.C. comprising approximately 0.5 million square feet of gross leasable area. In 2011, we acquired three additional properties in downtown Washington, D.C., including two properties that we plan to develop into multi-story office buildings, one of which is owned by an unconsolidated joint venture, in which, we have a 95% interest. These office properties have (or are expected to have, in the case of the two redevelopments) the capacity to support multiple tenants. Prior to 2010, our portfolio was comprised principally of business parks and industrial properties and smaller office properties located outside of downtown Washington, D.C. We have limited experience in owning, developing, leasing and operating large, multi-tenant office properties that require, among other things, additional leasing and property management capability. We cannot assure you that management’s past experience will be sufficient to successfully own, develop, lease, manage and operate such office properties (or additional office properties that we may acquire in the future), particularly in the downtown Washington, D.C. market where we have limited operating experience, the failure of which could have a material adverse effect on our results of operations.

We have identified a material weakness in our internal control over financial reporting. If we are unable to remedy this weakness, it could result in the failure to comply with our financial covenants, which could materially adversely affect our liquidity and financial condition, and investors could lose confidence in our reported financial information, which could adversely affect the perception of our business and the market price of our securities.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. In connection with the preparation of our Annual Report on Form 10-K for the year ended December 31, 2011, management identified a material weakness in our internal control over financial reporting as of December 31, 2011 relating to our monitoring and oversight of compliance with financial covenants under our debt agreements, as more fully described under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and “Item 9A – Controls and Procedures.” A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, management has determined that our internal control over financial reporting as of December 31, 2011 was not effective. Furthermore, as a result of the material weakness described above, management also concluded that our disclosure controls and procedures were not effective as of December 31, 2011.

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This material weakness, or difficulties encountered in implementing new or improved controls or other remedial steps, could prevent us from accurately monitoring and overseeing compliance with our financial covenants. The failure to maintain compliance with our financial covenants could have a material adverse effect on our liquidity and financial condition. See “Risk Factors – Risks Related to Our Business and Properties – Covenants in our debt agreements could adversely affect our liquidity and financial condition.” Furthermore, the material weakness, or difficulties encountered in implementing new or improved controls or other remedial steps, could prevent us from accurately reporting our results of operations, result in material misstatements in our financial statements or cause us to fail to meet our reporting obligations. This could prevent or inhibit our ability to access third party sources of capital and could cause investors to lose confidence in our reported financial information, thereby adversely affecting the perception of our business and the market price of our securities. We cannot be certain that any remedial measures we have begun taking or intend to take will adequately remediate the weakness and will ensure that we maintain adequate controls over our financial processes and reporting in the future and, accordingly, additional material weaknesses may occur in the future.

Covenants in our debt agreements could adversely affect our liquidity and financial condition.

Our unsecured revolving credit facility, unsecured term loan, secured term loan and senior notes contain certain and varying restrictions on the amount of debt we are allowed to incur and other restrictions and requirements on our operations (including, among other things, requirements to maintain specified coverage ratios and other financial covenants, and limitations on our ability to make distributions, enter into joint ventures, develop properties and engage in certain business combination transactions). These restrictions, particularly if we are at or near the required ratios or thresholds, could prevent or inhibit our ability to make distributions to our shareholders and to pursue some business initiatives or effect certain transactions that may otherwise be beneficial to our company, which could adversely affect our financial condition and results of operations. Although we were in compliance with all of the financial and operating covenants of our outstanding debt agreements as of December 31, 2011, we were near the required ratios or thresholds for certain of the covenants, including the consolidated debt yield and distribution payout ratio under the senior notes, the unencumbered pool leverage ratio of the revolving credit facility and unsecured term loan, and the maximum consolidated total indebtedness under the revolving credit facility, unsecured term loan, secured term loan and senior notes. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” The consolidated debt yield covenant under our senior notes is currently being impacted by three significant factors—vacancy in certain of our operating properties and related tenant improvement costs incurred in connection with the lease up those properties, the impact of acquisition costs and our overall leverage levels. The impact of acquisition costs is unique to the calculation of the consolidated debt yield covenant in our senior notes. Therefore, as a result of the stress on the consolidated debt yield covenant, we may be limited in our ability to pursue additional developments, redevelopments or acquisitions that may not be initially accretive to our results of operations but would otherwise be in the best interests of our shareholders. Our dividend payout ratio covenant under the senior notes also is currently impacted by, among other things, impairment charges, which reduce FFO solely for purposes of this covenant calculation. As such, we may be required to limit or restrict our ability to sell underperforming properties in our portfolio, which may otherwise be in the best interests of our shareholders, and/or curtail our distributions to common shareholders if we otherwise determine that our dividend payout ratio would be adversely impacted. In addition, as a result of the stress on these covenants, our ability to draw on our revolving credit facility or incur other additional debt may be limited, and we may be forced to raise additional equity to repay the senior notes or other debt.

Moreover, our continued ability to borrow under our revolving credit facility is subject to compliance with financial and operating covenants and our failure to comply with such covenants could cause a default under the credit facility. As noted above, we were near the required ratios or thresholds for certain of the financial covenants in our debt agreements as of December 31, 2011, and we can provide no assurance that we will be able to continue to comply with these covenants in future periods. In addition, we had a disagreement with the holders of our senior notes regarding the appropriate calculation of the consolidated debt yield and the dividend payout ratio covenants under the senior notes. Although we are in compliance with these covenants under the noteholders’ interpretation, we can provide no assurance that the noteholders will not seek to declare an event of default and accelerate maturity of the senior notes. Our debt agreements also contain cross-default provisions that would be triggered if we are in default under other loans in in excess of certain amounts. For example, an event of default under our senior notes would create an event of default under our other senior debt instruments. In the event of a default, the lenders could accelerate the timing of payments under the debt obligations and we may be required to repay such debt with capital from other sources, which may not be available to us on attractive terms, or at all, which would have a material adverse effect on our liquidity, financial condition, results of operations and ability to make distributions to our shareholders.

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We may not be able to access adequate cash to fund our business or growth strategy, which could have a material adverse effect on our results of operations, financial condition and cash flow.

Our business requires access to adequate cash to finance our operations, distributions, capital expenditures, debt service obligations, development and redevelopment costs and property acquisition costs, if any, and to refinance or repay maturing debt. We may not be able to generate sufficient cash to fund our business, particularly if we are unable to renew leases, lease vacant space or re-lease space as leases expire according to expectations. This risk may be even more pronounced given the ongoing challenging economic environment.

Moreover, we rely on third-party sources to fund our capital needs. We may not be able to obtain the financing on favorable terms, in the time period we desire, or at all. Our access to third-party sources of capital depends, in part, on:

• general market conditions;

• the market’s view of the quality of our assets;

• the market’s perception of our growth potential;

• our current debt levels;

• our current and expected future earnings;

• our cash flow and cash distributions; and

• the market price per share of our common stock.

If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our principal and interest obligations or make the distributions to our shareholders.

In addition, our access to funds under our revolving credit facility depends on the ability of the lenders that are parties to such facility to meet their funding commitment to us. We cannot assure you that continuing long-term disruptions in the global economy and the continuation of tighter credit conditions among, and potential failures of, third party financial institutions as a result of such disruptions, will not have an adverse effect on our lenders. If our lenders are not able to meet their funding commitment to us, our business, results of operation, cash flow and financial condition could be materially adversely affected.

Our debt level may have a negative impact on our results of operations, financial condition, cash flow and our ability to pursue growth through acquisitions and development projects.

As of December 31, 2011, we had approximately $945.0 million of outstanding indebtednesses, consisting principally of our mortgage debt, senior unsecured notes, term loans and amounts outstanding under our credit facility. In connection with our acquisition and development activity, we significantly increased our debt in 2010 and 2011. We will incur additional indebtedness in the future in connection with, among other things, our acquisition, development and operating activities.

Our use of debt financing creates risks, including risks that:

• our cash flow will be insufficient to make required payments of principal and interest;

• we will be unable to refinance some or all of our indebtedness or that any refinancing will not be on terms as favorable as those of the existing indebtedness;

• required debt payments will not be reduced if the economic performance of any property declines;

• debt service obligations will reduce funds available for distribution to our security holders and funds available for acquisitions, development and redevelopment;

• most of our secured debt obligations require the lender to be made whole to the extent we decide to pay off the debt prior to the maturity date; and

• any default on our indebtedness, including as a result of a failure to maintain certain financial and operating covenants in our credit facility, unsecured term loan and senior notes, could result in acceleration of those obligations and possible loss of property to foreclosure.

If the economic performance of any of our properties declines, our ability to make debt service payments would be adversely affected. If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, we may lose that property to lender foreclosure with a resulting loss of income and asset value.

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Our leverage levels may make it difficult to obtain additional financing based on our current portfolio or to refinance existing debt on favorable terms or at all. Failure to obtain additional financing could impede our ability to grow and develop our business through, among other things, acquisitions and developments, and a failure to refinance our existing debt as it matures could have a material adverse effect on our financial condition, liquidity and ability to make distributions to our shareholders. Our leverage levels also could make us more vulnerable to a downturn in business or the economy generally and may adversely affect the market price of our securities if an investment in our Company is perceived to be more risky than an investment in our peers.

If recent adverse global market and economic conditions worsen or do not fully recover, our business, results of operations, cash flow and financial condition may be materially adversely affected.

Overall financial market and economic conditions have been challenging in recent years, beginning with the credit crisis and recession that began in 2008. Challenging economic conditions persisted throughout 2011, including a worsening European sovereign debt crisis and volatility in the debt and equity markets, and have continued to some degree into 2012. These conditions, which could continue or worsen, combined with the ongoing difficult financial conditions still being faced by numerous financial institutions, high unemployment and residential and commercial real estate markets that have been slow to recover, among other things, have contributed to ongoing market volatility and uncertain expectations for the U.S. and other economies.

As a result of these conditions, the cost and availability of credit has been and may continue to be adversely affected in the markets in which we own properties and we and our tenants conduct operations. Concern about the stability of the markets generally and the strength of numerous financial institutions specifically has led many lenders and institutional investors to reduce, and in some cases, cease, to provide funding to borrowers, which may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our tenants and our lenders. If these conditions do not fully recover, they may limit our ability, and the ability of our tenants, to replace or renew maturing liabilities on a timely basis, access the capital markets to meet liquidity and capital expenditure requirements and may result in material adverse effects on our and our tenants’ financial condition and results of operations. In particular, if our tenants’ businesses or ability to obtain financing deteriorates further, they may be unable to pay rent to us, which could have a material adverse effect on our cash flow.

We cannot predict the duration or severity of the current economic challenges, and if these conditions worsen or do not fully recover, our business, results of operations, cash flow and financial condition may be materially adversely affected.

Acquired properties may expose us to unknown liabilities.

We may acquire properties subject to liabilities and without any recourse, or with only limited recourse, against the prior owners or other third parties with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our results of operations and cash flow. Unknown liabilities with respect to acquired properties might include:

• liabilities for clean-up of undisclosed or undiscovered environmental contamination;

• claims by tenants, vendors or other persons against the former owners of the properties;

• liabilities incurred in the ordinary course of business; and

• claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

We compete with other parties for tenants and property acquisitions.

Our business strategy contemplates expansion through acquisitions. The commercial real estate industry is highly competitive, and we compete with substantially larger companies, including substantially larger REITs and institutional investment funds, for the acquisition, development and leasing of properties. As a result, we may not be able or have the opportunity to make suitable investments on favorable terms in the future, which may impede our growth and have a material adverse effect on our results of operations. In addition, competition for acquisitions may significantly increase the purchase price and/or require us to, among other things, make concessions to sellers and/or agree to higher non-refundable deposits, which could require us to agree to acquisition terms less favorable to us.

We also face significant competition for tenants in our properties from owners and operators of business park and industrial and office properties that may be more willing to make space available to prospective tenants at lower prices and with greater tenant improvements and other concessions than comparable spaces in our properties, especially in difficult economic times. Thus, competition could negatively affect our ability to attract and retain tenants and may reduce the rents we are able to charge and increase the tenant improvements and other concessions that we offer, which could materially and adversely affect our results of operations.

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We are subject to the credit risk of our tenants, which may declare bankruptcy or otherwise fail to make lease payments, which could have a material adverse effect on our results of operations and cash flow.

We are subject to the credit risk of our tenants. We cannot assure you that our tenants will not default on their leases and fail to make rental payments to us. In particular, the recent global recession and disruptions in the financial and credit markets, local economic conditions and other factors affecting the industries in which our tenants operate may affect our tenants’ ability to obtain financing to operate their businesses or continue to profitability execute their business plans. This, in turn, may cause our tenants to be unable to meet their financial obligations, including making rental payments to us, which may result in their bankruptcy or insolvency. A tenant in bankruptcy may be able to restrict our ability to collect unpaid rent and interest during the bankruptcy proceeding and may reject the lease. In the event of the tenant’s breach of its obligations to us or its rejection of the lease in bankruptcy proceedings, we may be unable to locate a replacement tenant in a timely manner or on comparable or better terms. The loss of rental revenues from any of our larger tenants, a number of our smaller tenants or any combination thereof, combined with our inability to replace such tenants on a timely basis may materially adversely affect our results of operations and cash flow.

A majority of our tenants hold leases covering less than 10,000 square feet. Many of these tenants are small companies with nominal net worth, and therefore may be challenged in operating their businesses during economic downturns. In addition, certain of our properties are, and may be in the future be, substantially leased to a single tenant and, therefore, such property’s operating performance and our ability to service the property’s debt is particularly exposed to the economic condition of the tenant. The loss of rental revenues from any of our larger tenants or a number of our smaller tenants may materially adversely affect our results of operations and cash flow.

Loss of the U.S. Government as a tenant could have a material adverse effect on our results of operations and cash flow, and could cause an impairment of the value of some of our properties.

The U.S. Government accounted for 10% of our total annualized rental revenue as of December 31, 2011, and the U.S. Government combined with government contractors accounted for over 25% of our total annualized base rent as of December 31, 2011. A significant reduction in federal government spending could affect the ability of these tenants to fulfill lease obligations or decrease the likelihood that they will renew their leases with us. Further, economic conditions in the greater Washington, D.C. region, particularly the Washington, D.C. metropolitan area, are significantly dependent upon the level of federal government spending in the region, and uncertainty regarding the potential for future reduction in government spending could also decrease or delay leasing activity from the U.S. Government and government contractors. Moreover, the Budget Control Act passed in 2011, which imposed caps on the federal budget in order to achieve targeted spending levels over the 2013-2021 fiscal years, has fueled further uncertainty regarding future government spending reductions. In the event of a significant reduction in federal government spending, there could be negative economic changes in our region which could adversely impact the ability of our tenants to perform their financial obligations under our leases or the likelihood of their lease renewal. In addition, some of our leases with the U.S. Government are for relatively short terms or provide for early termination rights, including termination for convenience or in the event of a budget shortfall. Further, on July 31, 2003, the United States Department of Defense issued the Unified Facilities Criteria (the “UFC”), which establish minimum antiterrorism standards for the design and construction of new and existing buildings leased by the departments and agencies of the Department of Defense. The loss of the federal government as a tenant resulting from reductions in federal government spending, exercise of the government’s contractual termination rights, our inability to comply with the UFC standards or for any other reason would have a material adverse effect on our results of operations and could cause the value of our affected properties to be impaired. A reduction or elimination of rent from the U.S. Government or other significant tenants would also materially reduce our cash flow and adversely affect our ability to make distributions to our security holders.

We may be unable to renew expiring leases or re-lease vacant space on a timely basis or on attractive terms, which could have a material adverse effect on our results of operations and cash flow.

Approximately 9%, 14% and 12% of our annualized base rent is scheduled to expire in 2012, 2013 and 2014, respectively, excluding month-to-month leases. Current tenants may not renew their leases upon the expiration of their terms. Alternatively, current tenants may attempt to terminate their leases prior to the expiration of their current terms. For example, as discussed in the risk factor above, our leases with the U.S. Government include favorable tenant termination provisions. If non-renewals or terminations occur, we may not be able to locate qualified replacement tenants and, as a result, we could lose a significant source of revenue while remaining responsible for the payment of our financial obligations. Moreover, the terms of a renewal or new lease, including the amount of rent, may be less favorable to us than the current lease terms, or we may be forced to provide tenant improvements at our expense or provide other concessions or additional services to maintain or attract tenants. Any of these factors could cause a decline in lease revenue or an increase in operating expenses, which would have a material adverse effect on our results of operations and cash flow.

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Our variable rate debt subjects us to interest rate risk.

We have an unsecured revolving credit facility, a $225.0 million unsecured term loan, which was expanded to $300.0 million in February 2012, and a $30.0 million secured term loan, of which $10.0 million was paid in January 2012, and certain other debt, some of which is unhedged, that bears interest at a variable rate, and we may incur additional variable rate debt in the future. As of December 31, 2011, we had $438.0 million of variable rate debt, of which, $200 million was hedged through interest rate swap agreements. Increases in interest rates on variable rate debt would increase our interest expense, if not hedged effectively or at all, which would adversely affect net earnings and cash available for payment of our debt obligations and distributions to our security holders. For example, if market rates of interest on our variable rate debt outstanding as of December 31, 2011 increased by 1%, or 100 basis points, the increase in interest expense on our existing variable rate debt would decrease future earnings and cash flow by approximately $2.4 million annually.

We have and may continue to engage in hedging transactions, which can limit our gains and increase exposure to losses.

We have and may continue to enter into hedging transactions to attempt to protect us from the effects of interest rate fluctuations on floating rate debt, or in some cases, prior to a proposed debt issuance. Our hedging transactions may include interest rate swap agreements or interest rate cap or floor agreements, or other interest rate exchange contracts. Hedging activities may not have the desired beneficial impact on our results of operations or financial condition. No hedging activity can completely insulate us from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect us and could adversely affect us because, among other things:

• available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection;

• the duration of the hedge may not match the duration of the related liability;

• the party owing money in the hedging transaction may default on its obligation to pay;

• the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

• the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Such downward adjustments, or “mark-to-market losses,” would reduce our equity.

Hedging involves risk and typically involves costs, including transaction costs that may reduce our overall returns on our investments. These costs increase as the period covered by the hedging increases and during periods of rising and volatile interest rates. These costs will also limit the amount of cash available for distribution to shareholders. We generally intend to hedge as much of the interest rate risk as management determines is in our best interests given the cost of such hedging transactions. REIT qualification rules may limit our ability to enter into hedging transactions by, among other things, requiring us to limit our income from hedges. If we are unable to hedge effectively because of the REIT rules, we will face greater interest rate exposure.

All of our properties are located in the greater Washington D.C. region, making us vulnerable to changes in economic, regulatory or other conditions in that region that could have a material adverse effect on our results of operations.

All of our properties are located in the greater Washington D.C. region, exposing us to greater risks than if we owned properties in multiple geographic regions. Economic conditions in the greater Washington D.C. region may significantly affect the occupancy and rental rates of our properties. A decline in occupancy and rental rates, in turn, may significantly affect our profitability and our ability to satisfy our financial obligations. There can be no assurance that these markets will continue to grow or that favorable economic conditions will exist. Further, the economic condition of the region may also depend on one or more industries and, therefore, an economic downturn in one of these industry sectors may adversely affect our performance. For example, the U.S. Government, which has a large presence in our markets, accounted for 10% of our total annualized base rent as of December 31, 2011, and the U.S. Government combined with government contractors accounted for over 25% of our total annualized base rent as of December 31, 2011. We are therefore directly affected by decreases in federal government spending (either directly through the potential loss of a U.S. Government tenant or indirectly if the businesses of tenants that contract with the U.S. Government are negatively impacted). In addition to economic conditions, we may also be subject to changes in the region’s regulatory environment (such as increases in real estate and other taxes, costs of complying with government regulations or increased regulation and other factors) or other adverse conditions or events (such as natural disasters). Thus, adverse developments and/or conditions in the greater Washington D.C. region could reduce demand for space, impact the credit-worthiness of our tenants or force our tenants to curtail operations, which could impair their ability to meet their rent obligations to us and, accordingly, could have a material adverse effect on our results of operations.

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Development and construction risks could materially adversely affect our results of operations and growth prospects.

Our renovation, redevelopment, development and related construction activities may subject us to the following risks:

• we may be unable to obtain, or suffer delays in obtaining, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in increased costs or our abandonment of these projects;

• we may incur construction costs for a property that exceeds our original estimates due to increased costs for materials or labor or other costs that we did not anticipate;

• we may not be able to obtain financing on favorable terms, if at all, especially with respect to large scale developments and redevelopments such as 440 First Street, NW, 1005 First Street, NE, and 1200 17^th Street, NW, which may render us unable to proceed with our development activities; and

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

Additionally, the time frame required for development, construction and lease-up of these properties means that we may have to wait years for a significant cash return. Because we are required to make cash distributions to our shareholders, if the cash flow from operations or refinancing is not sufficient, we may be forced to borrow additional money to fund such distributions. Any of these conditions could materially adversely affect our results of operations and growth prospects.

Failure to succeed in new markets may limit our growth and/or have a material adverse effect on our results of operations.

We may make selected acquisitions outside our current geographic market from time to time as appropriate opportunities arise. Our historical experience is in the greater Washington D.C. region, and we may not be able to operate successfully in other market areas where we have limited or no experience. We may be exposed to a variety of risks if we choose to enter new markets. These risks include, among others:

• a lack of market knowledge and understanding of the local economies;

• an inability to identify promising acquisition or development opportunities;

• an inability to identify and cultivate relationships that, similar to our relationships in the greater Washington D.C. region, are important to successfully effecting our business plan;

• an inability to employ construction trades people; and

• a lack of familiarity with local government and permitting procedures.

Any of these factors could adversely affect the profitability of projects outside our current markets and limit the success of our acquisition and development strategy. If our acquisition and development strategy is negatively affected, our growth may be impeded and our results of operations materially adversely affected.

In addition, during 2010 and 2011 we entered the downtown Washington, D.C. market in connection with our acquisition of seven downtown Washington, D.C. real estate assets, owned through direct or indirect interests. See “We have limited experience in owning, developing and operating large, multi-tenant office properties, particularly in downtown Washington, D.C., which could have a material adverse effect on our results of operations,” above.

We have limited experience in engaging in lending activities, which could have a material adverse effect on our results of operations.

In 2010 and 2011, we structured separate investments in two Washington, D.C. office properties in the form of loans to the owners of the property: a $25.0 million loan that bears interest at a rate of 12.5% per annum, is interest only and matures on April 1, 2017; and a $30.0 million loan that bears interest at a rate of 9.0% per annum, is interest only and matures on May 1, 2016. Each loan is secured by a portion of the owners’ interest in the respective property and is effectively subordinate to a senior mortgage loan on the property. We may engage in additional lending activities in the future, including mezzanine financing activities. These

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types of loans involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property, because the loan may become unsecured as a result of foreclosure by the senior lender. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements between the holder of the mortgage loan and us, as the mezzanine lender, may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies and control decisions made in bankruptcy proceedings relating to borrowers. As a result, we may not recover some or all of our investment, which could result in losses. In addition, even if we are able to foreclose on the underlying collateral following a default on a mezzanine loan, we would be substituted for the defaulting borrower and, to the extent income generated on the underlying property is insufficient to meet outstanding debt obligations on the property, may need to commit substantial additional capital to stabilize the property and prevent additional defaults to lenders with existing liens on the property. Significant losses related to mezzanine loans could have a material adverse effect on our results of operations and our ability to make distributions to our shareholders.

Under some of our leases, tenants have the right to terminate prior to the scheduled expiration of the lease, which could have a material adverse effect on our results of operations and cash flow.

Some of our leases for our current properties provide tenants with the right to terminate prior to the scheduled expiration of the lease. If a tenant terminates its lease with us prior to the expiration of the term, we may be unable to re-lease that space on as favorable terms, or at all, which could materially adversely affect our results of operations, cash flow and our ability to make distributions to our security holders.

Property owned through joint ventures, or in limited liability companies and partnerships in which we are not the sole equity holder, may limit our ability to act exclusively in our interests.

We have, and may in the future, make investments through partnerships, limited liability companies or joint ventures, some of which may be significant in size. In particular, during 2010 and 2011, we entered a number of joint ventures in connection with our acquisition and development of various real estate assets. Partnership, limited liability company or joint venture investments may involve various risks, including the following:

• our partners, co-members or joint ventures might become bankrupt (in which event we and any other remaining general partners or joint ventures would generally remain liable for the liabilities of the partnership or joint venture);

• our partners, co-members or joint ventures might at any time have economic or other business interests or goals that are inconsistent with our business interests or goals;

• our partners, co-members or joint ventures may be in a position to take action contrary to our instructions, requests, policies, or objectives, including our current policy with respect to maintaining our qualification as a real estate investment trust; and

• agreements governing joint ventures, limited liability companies and partnerships often contain restrictions on the transfer of a joint venture’s, member’s or partner’s interest or “buy-sell” or other provisions that may result in a purchase or sale of the interest at a disadvantageous time or on disadvantageous terms.

The occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flow and ability to make distributions with respect to, and the market price of, our securities.

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and have a material adverse effect on our results of operations, financial condition and cash flow.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to adverse changes in the performance of such properties may be limited. The real estate market is affected by many factors that are beyond our control, including:

• adverse changes in national and local economic and market conditions;

• changes in interest rates and in the availability, cost and terms of debt financing;

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• changes in governmental laws and regulations, fiscal policies and zoning ordinances and costs of compliance with laws and regulations, fiscal policies and ordinances;

• the ongoing need for capital improvements, particularly in older buildings;

• changes in operating expenses; and

• civil unrest, acts of war and natural disasters, including earthquakes and floods, which may result in uninsured and underinsured losses.

We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Moreover, the REIT rules governing property sales and agreements that we may enter into with joint venture partners or contributors to our operating partnership not to sell certain properties for a period of time may interfere with our ability to dispose of properties on a timely basis without incurring significant additional costs.

We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. We may also acquire properties that are subject to a mortgage loan that may limit our ability to sell the properties prior to the loan’s maturity. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a material adverse effect on our results of operations, financial condition, cash flow as well as our ability to make distributions to our security holders.

Liabilities under environmental laws for contamination may have a material adverse effect on our results of operations, financial condition and cash flow.

Our operating expenses could be higher than anticipated due to liability created under, existing or future federal, state, or local environmental laws and regulations for contamination. An owner or operator of real property can face strict, joint and several liability for environmental contamination created by the presence or discharge of hazardous substances, including petroleum-based products at, on, under or from the property. Similarly, a former owner or operator of real property can face the same liability for the disposal of hazardous substances that occurred during the time of ownership or operation. We may face liability regardless of:

• our lack of knowledge of the contamination;

• the extent of the contamination;

• the timing of the release of the contamination; or

• whether or not we caused the contamination.

Environmental liability for contamination may include the following, without limitation: investigation and feasibility study costs, remediation costs, litigation costs, oversight costs, monitoring costs, institutional control costs, penalties from state and federal agencies, and third-party claims. Moreover, operations on-site may be required to be suspended until certain environmental contamination is remediated and/or permits are received and environmental laws can impose permanent restrictions on the manner in which a property may be used depending on the extent and nature of the contamination. This may result in a default of the terms of the lease entered into with our tenants. Environmental laws also may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. In addition, the presence of hazardous substances at, on, under or from a property may adversely affect our ability to sell the property or borrow using the property as collateral, thus harming our financial condition.

There may be environmental liabilities associated with our properties of which we are unaware. For example, some of our properties contain, or may have contained in the past, underground tanks for the storage of hazardous substances, petroleum-based or waste products, or some of our properties have been used, or may have been used, historically to conduct industrial operations, and any of these circumstances could create a potential for release of hazardous substances.

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Non-compliance with environmental laws at our properties may have a material adverse effect on our results of operations, financial condition and cash flow.

Our properties are subject to various federal, state, and local environmental laws. Non-compliance with these environmental laws could subject us or our tenants to liability and changes in these laws could increase the potential costs of compliance or increase liability for noncompliance. Although our leases generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we could nonetheless be subject to strict liability by virtue of our ownership interest for environmental liabilities created by our tenants, and we cannot be sure that our tenants would satisfy their indemnification obligations under the applicable sales agreement or lease. Moreover, these environmental liabilities could affect our tenants’ ability to make rental payments to us. Non-compliance with environmental laws at our properties could have a material adverse effect on our results of operations, financial condition, cash flow and our ability to make distributions to our security holders.

Liabilities arising from the presence of hazardous building materials at our properties may have a material adverse effect on our results of operations, financial condition and cash flow.

As the owner or operator of real property, we may also incur liability based on various building conditions. For example, buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may contain, or may have contained, asbestos-containing material, or ACM. Environmental, health and safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or employers for non-compliance with those requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be subject to liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM into the environment.

The Company’s properties may contain or develop harmful mold or suffer from other indoor air quality issues, which could lead to liability for adverse health effects, property damage, or remediation costs.

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

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

All of our properties are required to comply with the Americans with Disabilities Act, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in the imposition of fines by the U.S. Government or an award of damages to private litigants, or both. While the tenants to whom we lease properties are obligated by law to comply with the ADA provisions, and typically under our leases are obligated to cover costs associated with compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs could be adversely affected and we could be required to expend our own funds to comply with the provisions of the ADA, which could adversely affect our results of operations and financial condition and our ability to make distributions to security holders. 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. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our cash flow and ability to make distributions to our security holders.

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An uninsured loss or a loss that exceeds the policies on our properties could have a material adverse effect on our results of operations, financial condition and cash flow.

Under the terms and conditions of most of the leases currently in force on our properties our tenants generally are required to indemnify and hold us harmless from liabilities resulting from injury to persons, air, water, land or property, on or off the premises, due to activities conducted on the properties, except for claims arising from the negligence or intentional misconduct of us or our agents. Additionally, tenants are generally required, at the tenant’s expense, to obtain and keep in full force during the term of the lease, liability and full replacement value property damage insurance policies. However, our largest tenant, the federal government, is not required to maintain property insurance at all. We have obtained comprehensive liability, casualty, earthquake, flood and rental loss insurance policies on our properties. All of these policies may, depending on the nature of the loss, involve substantial deductibles and certain exclusions. In addition, we cannot assure you that our tenants will properly maintain their insurance policies or have the ability to pay the deductibles. Should a loss occur that is uninsured or in an amount exceeding the combined aggregate limits for the policies noted above, or in the event of a loss that is subject to a substantial deductible under an insurance policy, we could lose all or part of our capital invested in, and anticipated revenue from, one or more of the properties, which could have a material adverse effect on our results of operations, financial condition, cash flow and our ability to make distributions to our security holders.

Terrorist attacks and other acts of violence or war may affect any market on which our securities trade, the markets in which we operate, our business and our results of operations.

Terrorist attacks may negatively affect our business and our results of operations. These attacks or armed conflicts may directly impact the value of our properties through damage, destruction, loss or increased security costs. In particular, we may be directly exposed in Washington, D.C., a large metropolitan area that has been, or may be in the future, a target of actual or threatened terrorism attacks. The terrorism insurance that we obtain may not be sufficient to cover loss for damages to our properties as a result of terrorist attacks. In addition, certain losses resulting from these types of events are uninsurable and others would not be covered by our current terrorism insurance. Additional terrorism insurance may not be available at a reasonable price or at all. If the properties in which we invest are unable to obtain sufficient and affordable insurance coverage, the value of those investments could decline, and in the event of an uninsured loss, we could lose all or a portion of an investment.

The United States may enter into armed conflicts in the future. The consequences of any armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business.

Any of these events could result in increased volatility in or damage to the United States and worldwide financial markets and economy. They also could result in a continuation of the current economic uncertainty in the United States or abroad. Adverse economic conditions could affect the ability of our tenants to pay rent, which could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to our security holders, and may adversely affect and/or result in volatility in the market price for our securities.

We face risks associated with our tenants being designated “Prohibited Persons” by the Office of Foreign Assets Control.

Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the U.S. Department of the Treasury, or OFAC, maintains a list of persons designated as terrorists or who are otherwise blocked or banned, or Prohibited Persons. OFAC regulations and other laws prohibit conducting business or engaging in transactions with Prohibited Persons. Certain of our loan and other agreements may require us to comply with these OFAC requirements. If a tenant or other party with whom we contract is placed on the OFAC list, we may be required by the OFAC requirements to terminate the lease or other agreement. Any such termination could result in a loss of revenue or a damage claim by the other party that the termination was wrongful.

Rising energy costs may have an adverse effect on our results of operations.

Electricity and natural gas, the most common sources of energy used by commercial buildings, are subject to significant price volatility. In recent years, energy costs, including energy generated by natural gas and electricity, have fluctuated significantly. Some of our properties may be subject to leases that require our tenants to pay all utility costs while other leases may provide that tenants will reimburse us for utility costs in excess of a base year amount. It is possible that some or all of our tenants will not fulfill their lease obligations and reimburse us for their share of any significant energy rate increases and that we will not be able to retain or replace our tenants if energy price fluctuations continue. Also, to the extent under a lease we agree to pay for such costs, rising energy prices will have an adverse effect on our results of operations.

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Risks Related to Our Organization and Structure

Our executive officers have agreements that provide them with benefits in the event of a change in control of our Company or if their employment agreement is terminated without cause or not renewed, which could prevent or deter a change in control of our Company.

We have entered into employment agreements with our executive officers, Douglas J. Donatelli, Nicholas R. Smith, Barry H. Bass, James H. Dawson and Joel F. Bonder, that provide them with severance benefits if their employment ends under certain circumstances following a change in control of our Company, terminated without cause, or if the executive officer resigns for “good reason” as defined in the employment agreements. These benefits could increase the cost to a potential acquirer of our Company and thereby prevent or deter a change in control of the Company that might involve a premium price for our securities or otherwise be in the interests of our security holders.

We may experience conflicts of interest with several members of our board of trustees and our executive officers relating to their ownership of units of our Operating Partnership.

Some of our trustees and executive officers may have conflicting duties because, in their capacities as our trustees and executive officers, they have a duty to our Company, and in our capacity as general partner of our Operating Partnership, they have a fiduciary duty to the limited partners, and some executive officers are themselves limited partners and own a significant number of units of limited partner interest in our Operating Partnership. These conflicts of interest could lead to decisions that are not in your best interest. Conflicts may arise when the interests of our shareholders and the limited partners of our Operating Partnership diverge, particularly in circumstances in which there may be an adverse tax consequence to the limited partners, such as upon the sale of assets or the repayment of indebtedness.

We depend on key personnel, particularly Mr. Douglas J. Donatelli, with long-standing business relationships, the loss of whom could threaten our ability to operate our business successfully and have other negative implications under certain of our indebtedness.

Our future success depends, to a significant extent, upon the continued services of our senior management team, including Douglas J. Donatelli. In particular, the extent and nature of the relationships that Mr. Donatelli has developed in the real estate community in our markets is critically important to the success of our business. Although we have an employment agreement with Mr. Donatelli and other named executive officers, there is no guarantee that Mr. Donatelli or our other key executive officers will remain employed with us. We do not maintain key person life insurance on any of our officers. The loss of services of one or more members of our senior management team, particularly Mr. Donatelli, would harm our business and prospects. Further, loss of a member of our senior management team could be negatively perceived in the capital markets, which could have an adverse effect on the market price of our securities.

Further, the terms of certain of our debt instruments, including one of our term loans, includes a default provision whereby if any two of Douglas Donatelli, Nicholas Smith or Barry Bass, three of named executive officers, cease to maintain their current positions or duties at our company for any reason, a default under such debt could be triggered unless, within six months, our board has appointed a qualified substitute individual acceptable to the majority of the lenders in their sole discretion.

One of our trustees may have conflicts of interest with our Company.

One of our Company’s trustees, Terry L. Stevens, currently serves as Senior Vice President and Chief Financial Officer of Highwoods Properties, Inc., a fully integrated, North Carolina-based REIT that owns, leases, manages, develops and constructs office and retail properties, some of which are located in our target markets. As a result, conflicts may arise when we and Highwoods Properties, Inc. compete in the same markets for properties, tenants, personnel and other services.

Our rights and the rights of our security holders to take action against our trustees and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Maryland law generally provides that a trustee has no liability for actions taken as a trustee, but may not be relieved of any liability to the company or its security holders for actions taken in bad faith, with willful misfeasance, gross negligence or reckless disregard for his or her duties. Our amended and restated declaration of trust authorizes us to indemnify, and to pay or reimburse reasonable expenses to, our trustees and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. In addition, our declaration of trust limits the liability of our trustees and officers for money damages, except as otherwise prohibited by Maryland law or for liability resulting from:

• actual receipt of an improper benefit or profit in money, property or services; or

• a final judgment or other final adjudication based upon a finding of active and deliberate dishonesty by the trustee or officer that was material to the cause of action adjudicated.

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As a result, we and our security holders may have more limited rights against our trustees than might otherwise exist. Our amended and restated bylaws require us to indemnify each trustee or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our trustees and officers.

Our Series A Preferred Shares have, and future issuances of our preferred shares may have, terms that may discourage a third party from acquiring us.

In January 2011, we issued 4.6 million of our Series A Cumulative Redeemable Perpetual Preferred Shares. Our Series A Preferred Shares have certain conversion and redemption features that could be triggered upon a change of control, which may make it more difficult for or discourage a party from taking over our company. In addition, our declaration of trust permits our board of trustees to issue up to 50 million preferred shares, issuable in one or more classes or series. Our board of trustees may increase the number of preferred shares authorized by our declaration of trust without shareholder approval. Our board of trustees may also classify or reclassify any unissued preferred shares and establish the preferences and rights (including the right to vote, to participate in earnings and to convert into securities) of any such preferred shares, which rights may be superior to those of our common shares. Thus, in addition to our Series A Preferred Shares, our board of trustees could authorize the issuance of preferred shares with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of the common shares might receive a premium for their shares over the then current market price of our common shares.

Our ownership limitations may restrict business combination opportunities.

To qualify as a REIT under the Internal Revenue Code, no more than 50% of the value of our outstanding shares of beneficial interest may be owned, directly or under applicable attribution rules, by five or fewer individuals (as defined to include certain entities) during the last half of each taxable year (other than our first REIT taxable year). To preserve our REIT qualification, our declaration of trust generally prohibits direct or indirect beneficial ownership (as defined under the Code) by any person of (i) more than 8.75% of the number or value of our outstanding common shares or (ii) more than 8.75% of the value of our outstanding shares of all classes. In addition, pursuant to the Articles Supplementary setting forth the terms of our Series A Preferred Shares, no person may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% (by value or number of shares, whichever is more restrictive) of our Series A Preferred Shares. Generally, shares owned by affiliated owners will be aggregated for purposes of the ownership limitation. Our declaration of trust has created a special higher ownership limitation of no more than 14.9% for the group comprised of Louis T. Donatelli, Douglas J. Donatelli and certain related persons. Unless the applicable ownership limitation is waived by our board of trustees prior to transfer, any transfer of our common shares that would violate the ownership limitation will be null and void, and the intended transferee will acquire no rights in such shares. Common shares that would otherwise be held in violation of the ownership limit will be designated as “shares-in-trust” and transferred automatically to a trust effective on the day before the purported transfer or other event giving rise to such excess ownership. The beneficiary of the trust will be one or more charitable organizations named by us. The ownership limitation could have the effect of delaying, deterring or preventing a change in control or other transaction in which holders of common shares might receive a premium for their common shares over the then current market price or that such holders might believe to be otherwise in their best interests. The ownership limitation provisions also may make our common shares an unsuitable investment vehicle for any person seeking to obtain, either alone or with others as a group, ownership of (i) more than 8.75% of the number or value of our outstanding common shares or (ii) more than 8.75% in value of our outstanding shares of all classes.

Our board of trustees may change our investment and operational policies and practices without a vote of our security holders, which limits your control of our policies and practices.

Our major policies, including our policies and practices with respect to investments, financing, growth, debt capitalization, REIT qualification and distributions, are determined by our board of trustees. Although we have no present intention to do so, our board of trustees may amend or revise these and other policies from time to time without a vote of our security holders. Accordingly, our security holders have limited control over changes in our policies.

Our declaration of trust and bylaws do not limit the amount of indebtedness that we or our Operating Partnership may incur. If we become highly leveraged, then the resulting increase in debt service could adversely affect our ability to make payments on our outstanding indebtedness and harm our financial condition.

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Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management.

Our declaration of trust provides that a trustee may be removed, with or without cause, only upon the affirmative vote of holders of a majority of our outstanding common shares. Vacancies may be filled by the board of trustees. This requirement makes it more difficult to change our management by removing and replacing trustees.

Our bylaws may only be amended by our board of trustees, which could limit your control of certain aspects of our corporate governance.

Our board of trustees has the sole authority to amend our bylaws. Thus, the board is able to amend the bylaws in a way that may be detrimental to your interests.

Maryland law may discourage a third party from acquiring us.

Maryland law provides broad discretion to our board of trustees with respect to their duties as trustees in considering a change in control of our Company, including that our board is subject to no greater level of scrutiny in considering a change in control transaction than with respect to any other act by our board.

The Maryland Business Combination Act restricts mergers and other business combinations between our Company and an interested shareholder for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes special shareholder voting requirements on these combinations. An “interested shareholder” is defined as any person who is the beneficial owner of 10% or more of the voting power of our common shares and also includes any of our affiliates or associates that, at any time within the two year period prior to the date of a proposed merger or other business combination, was the beneficial owner of 10% or more of our voting power. Additionally, the “control shares” provisions of the Maryland General Corporation Law, or MGCL, are applicable to us as if we were a corporation. These provisions eliminate the voting rights of issued and outstanding shares acquired in quantities so as to constitute “control shares,” as defined under the MGCL, unless our shareholders approve such voting rights by the affirmative vote of at least two-thirds of all votes entitled to be cast on the matter, excluding all interested shares and shares held by our trustees and officers. “Control shares” are generally defined as shares which, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees. Our amended and restated declaration of trust and/or bylaws, provide that we are not bound by the Maryland Business Combination Act or the control share acquisition statute. However, in the case of the control share acquisition statute, our board of trustees may opt to make this statute applicable to us at any time by amending our bylaws, and may do so on a retroactive basis. We could also opt to make the Maryland Business Combination Act applicable to us by amending our declaration of trust by a vote of a majority of our outstanding common shares. Finally, the “unsolicited takeovers” provisions of the MGCL permit our board of trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to implement certain provisions that may have the effect of inhibiting a third party from making an acquisition proposal for our Company or of delaying, deferring or preventing a change in control of our Company under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then current market price or that shareholders may otherwise believe is in their best interests.

Tax Risks of our Business and Structure

If we fail to remain qualified as a REIT for federal income tax purposes, we will not be able to deduct our distributions, and our income will be subject to taxation, which would reduce the cash available for distribution to our shareholders.

We elected to be taxed as a REIT under the Internal Revenue Code commencing with our short taxable year ended December 31, 2003. The requirements for qualification as a REIT, however, are complex and interpretations of the federal income tax laws governing REITs are limited. The REIT qualification rules are even more complicated for a REIT that invests through an operating partnership, in various joint ventures, in other REITs and in both equity and debt investments. Our continued qualification as a REIT will depend on our ability to meet various requirements concerning, among other things, the ownership of our outstanding shares of stock, the nature of our assets, the sources of our income and the amount of our distributions to our shareholders. If we fail to meet these requirements and do not qualify for certain statutory relief provisions, our distributions to our shareholders will not be deductible by us and we will be subject to a corporate level tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates, substantially reduce our cash available to make distributions to our shareholders. In addition, if we failed to qualify as a REIT, we would no longer be required to make distributions for federal income tax purposes. Incurring corporate income tax liability might cause us to borrow funds, liquidate some of our investments or take other steps that could negatively affect our operating results. Moreover, if our REIT status is terminated because of our failure to meet a REIT qualification requirement or if we voluntarily revoke our election, unless relief provisions applicable to certain REIT qualification failures apply, we would be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost. We may not qualify for relief provisions for REIT qualification failures and even if we can qualify for such relief, we may be required to make penalty payments, which could be significant in amount.

Even if we maintain our qualification as a REIT, we are subject to any applicable state, local or foreign taxes and our taxable REIT subsidiaries are subject to federal, state and local income taxes at regular corporate rates.

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Failure of our operating partnership to be treated as a partnership for federal income tax purposes would result in our failure to qualify as a REIT.

Failure of our operating partnership (or a subsidiary partnership) to be treated as a partnership would have serious adverse consequences to our shareholders. If the IRS were to successfully challenge the tax status of our operating partnership or any of its subsidiary partnerships for federal income tax purposes, our operating partnership or the affected subsidiary partnership would be taxable as a corporation. In such event, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, would cease to qualify as a REIT.

Distribution requirements relating to qualification as a REIT for federal income tax purposes limit our flexibility in executing our business plan.

Our business plan contemplates growth through acquisitions. To maintain our qualification as a REIT for federal income tax purposes, we generally are required to distribute to our shareholders at least 90% of our REIT taxable income each year. REIT taxable income is determined without regard to the deduction for dividends paid and by excluding net capital gains. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we are required to pay a 4% nondeductible excise tax on the amount, if any, by which actual distributions we pay with respect to any calendar year are less than the sum of 85% of our ordinary income for that calendar year, 95% of our capital gain net income for the calendar year and any amount of our undistributed taxable income required to be distributed from prior years.

We have distributed, and intend to continue to distribute, to our shareholders all or substantially all of our REIT taxable income each year in order to comply with the distribution requirements of the Internal Revenue Code and to eliminate all federal income tax liability at the REIT level and liability for the 4% nondeductible excise tax. Our distribution requirements limit our ability to accumulate capital for other business purposes, including funding acquisitions, debt maturities and capital expenditures. Thus, our ability to grow through acquisitions will be limited if we are unable to obtain debt or equity financing. In addition, differences in timing between the receipt of income and the payment of expenses in arriving at REIT taxable income and the effect of required debt amortization payments could require us to borrow funds or make a taxable distribution of our shares or debt securities to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.

Our disposal of properties may have negative implications, including unfavorable tax consequences.

If we make a sale of a property directly or through an entity that is treated as a partnership or a disregarded entity, for federal income tax purposes, and it is deemed to be a sale of dealer property or inventory, the sale may be deemed to be a “prohibited transaction” under the federal income tax laws applicable to REITs, in which case our gain, or our share of the gain, from the sale would be subject to a 100% penalty tax. If we believe that a sale of a property might be treated as a prohibited transaction, we may seek to conduct that sales activity through a taxable REIT subsidiary, in which case the gain from the sale would be subject to corporate income tax but not the 100% prohibited transaction tax. We cannot assure you, however, that the Internal Revenue Service will not assert successfully that sales of properties that we make directly or through an entity that is treated as a partnership or a disregarded entity, for federal income tax purposes are sales of dealer property or inventory, in which case the 100% penalty tax would apply. Moreover, we have entered and may enter into agreements with joint venture partners or contributors to our operating partnership that require us to avoid taxable property sales and to maintain property-level indebtedness on contributed properties for a period of years. Sales of properties or repayment of indebtedness may result in adverse consequences to our partners for which we may have full or partial indemnification obligations.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our securities.

At any time, the federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our shareholders, as the well as the market price of our securities, could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.

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Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to income from “qualified dividends” payable to U.S. shareholders taxed at individual rates has been reduced by legislation to 15% through the end of 2012. Dividends payable by REITs, however, generally are not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the market price of the stock of REITs, including our common shares.

Complying with REIT requirements may force us to sell otherwise attractive investments.

To qualify as a REIT, we must satisfy certain requirements with respect to the character of our assets. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter (by, possibly, selling assets notwithstanding their prospects as an investment) to avoid losing our REIT status. If we fail to comply with these requirements at the end of any calendar quarter, and the failure exceeds a de minimis threshold, we may be able to preserve our REIT status if (a) the failure was due to reasonable cause and not to willful neglect, (b) we dispose of the assets causing the failure within six months after the last day of the quarter in which we identified the failure, (c) we file a schedule with the Internal Revenue Service describing each asset that caused the failure, and (d) we pay an additional tax of the greater of $50,000 or the product of the highest applicable tax rate multiplied by the net income generated on those assets. As a result, we may be required to liquidate otherwise attractive investments.

If we or our predecessor entity failed to qualify as an S corporation for any of our tax years prior to our initial public offering, we may fail to qualify as a REIT.

To qualify as a REIT, we may not have at the close of any year undistributed “earnings and profits” accumulated in any non-REIT year, including undistributed “earnings and profits” accumulated in any non-REIT year for which we or our predecessor, First Potomac Realty Investment Trust, Inc., did not qualify as an S corporation. Although we believe that we and our predecessor corporation qualified as an S corporation for federal income tax purposes for all tax years prior to our initial public offering, if it is determined that we did not so qualify, we will not qualify as a REIT. Any such failure to qualify may also prevent us from qualifying as a REIT for any of the following four tax years.

If First Potomac Management, Inc. failed to qualify as an S corporation during any of its tax years, we may be responsible for any entity level taxes due.

We believe First Potomac Management, Inc. qualified as an S corporation for federal and state income tax purposes from the time of its incorporation in 1997 through the date it merged into our Company in 2006. However, the Company may be responsible for any entity-level taxes imposed on First Potomac Management, Inc. if it did not qualify as an S corporation at any time prior to the merger. First Potomac Management, Inc.’s former shareholders have severally indemnified us against any such loss; however, in the event one or more of its former shareholders is unable to fulfill its indemnification obligation, we may not be reimbursed for a portion of the taxes.

Risks Related to an Investment in Our Equity Securities

Our common and preferred shares trade in a limited market which could hinder your ability to sell our common or preferred shares.

Our common shares experience relatively limited trading volume; many investors, particularly institutions, may not be interested (or be permitted) in owning our common shares because of the inability to acquire or sell a substantial block of our common shares at one time. This illiquidity could have an adverse effect on the market price of our common shares. In addition, a shareholder may not be able to borrow funds using our common shares as collateral because lenders may be unwilling to accept the pledge of common shares having a limited market, thereby making our common shares a less attractive investment for some investors. In addition, an active trading market on the NYSE for our Series A Preferred Shares issued in January 2011 (which were our first issuance of preferred shares) may not develop or, if it does develop, may not last, in which case the trading price of our Series A Preferred Shares could be adversely affected or trade at prices lower than the initial offering price.

26

The market price and trading volume of our common and preferred shares may be volatile.

The market price of our common shares has been and may continue to be more volatile than in prior years and subject to wide fluctuations. In addition, the trading volume in our common and preferred shares may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common and preferred shares will not fluctuate or decline significantly in the future, including as a result of factors unrelated to our operating performance or prospects. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common and preferred shares include:

• actual or anticipated declines in our quarterly operating results or distributions;

• reductions in our funds from operations;

• declining occupancy rates or increased tenant defaults;

• general market and economic conditions, including continued volatility in the financial and credit markets;

• increases in market interest rates that lead purchasers of our securities to demand a higher dividend yield;

• changes in market valuations of similar companies;

• adverse market reaction to any increased indebtedness we incur in the future;

• additions or departures of key management personnel;

• actions by institutional shareholders;

• our issuance of additional debt or preferred equity securities;

• speculation in the press or investment community; and

• unanticipated charges due to the vesting of equity based compensation awards upon achievement of certain performance measures that cause our operating results to decline or fail to meet market expectations.

An increase in market interest rates may have an adverse effect on the market price of our common shares.

One of the factors that investors may consider in deciding whether to buy or sell our common shares is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution rate on our common shares or seek securities paying higher dividends or interest. The market price of our common shares likely will be based primarily on the earnings that we derive from rental income with respect to our properties and our related distributions to shareholders, and not from the underlying appraised value of the properties themselves. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common shares. For instance, if interest rates rise without an increase in our distribution rate, the market price of our common shares could decrease because potential investors may require a higher yield on our common shares as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our non-hedged variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and make distributions to our shareholders.

We have not established a minimum dividend payment level and we cannot assure of our ability to pay dividends in the future or the amount of any dividends.

We have not established a minimum dividend payment level and our ability to make distributions may be adversely affected by the risk factors described in this Annual Report on Form 10-K and any risk factors in our subsequent Securities and Exchange Commission filings. For example, we significantly reduced our quarterly distribution during 2009. Comparable companies to ours have also reduced and, in some cases, eliminated their distribution payments. All distributions will be made at the discretion of our board of trustees and their payment and amount will depend on our earnings, our financial condition, maintenance of our REIT status, compliance with our debt covenants and other factors as our board of trustees may deem relevant from time to time. We cannot assure you of our ability to make distributions in the future or that the distributions will be made in amounts similar to our historic distributions. In particular, our outstanding debt, and the limitations imposed on us by our debt agreements, could make it more difficult for us to satisfy our obligations with respect to our equity securities, including paying dividends. See “Risk Factors – Risks Related to Our Business and Properties – Covenants in our debt agreements could adversely affect our liquidity and financial condition.” Further, distributions with respect to our common shares are subject to our ability to first satisfy our obligations to pay distributions to the holders of our Series A Preferred Shares, and future offerings of preferred shares could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to make a dividend distribution to the holders of our common shares. In addition, some of our distributions may include a return of capital or may be taxable distributions of our shares or debt securities.

27

Future offerings of debt securities, which would rank senior to our common and preferred shares upon liquidation, and future offerings of equity securities, which would dilute our existing shareholders and may be senior to our common shares or senior to or on parity with our preferred shares for the purposes of dividend and liquidating distributions, may adversely affect the market price of our equity securities.

In the future, particularly as we seek to acquire and develop additional real estate assets consistent with our growth strategy, we may attempt to increase our capital resources through debt offerings or additional equity offerings, including senior or subordinated notes and series of preferred shares or common shares. For example, during 2010 and 2011, we sold approximately 18.3 million common shares, 4.6 million preferred shares in underwritten public offerings and approximately 0.7 million common shares through our controlled equity program.

Our preferred shares will rank junior to all of our existing and future debt and to other non-equity claims on us and our assets available to satisfy claims against us, including claims in bankruptcy, liquidation or similar proceedings. Further, upon liquidation, holders of our debt securities and preferred shares and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common shares. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our equity securities, or both. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our equity securities bear the risk of our future offerings reducing the market price of our equity securities and diluting their share holdings in us.

Shares eligible for future sale may have adverse effects on our share price.

The Company cannot predict the effect, if any, of future sales of common shares, or the availability of shares for future sales, on the market price of our common shares. Sales of substantial amounts of common shares, including common shares issuable upon the redemption of units of our Operating Partnership and exercise of options, or the perception that these sales could occur, may adversely affect prevailing market prices for our common shares and impede our ability to raise capital. Any substantial sale of our common shares could have a material adverse effect on the market price of our common shares.

The Company also may issue from time to time additional common shares or preferred shares or units of our Operating Partnership in connection with the acquisition of properties, and we may grant demand or piggyback registration rights in connection with these issuances. For example, in 2011, we issued approximately 2.0 million units of our operating partnership in connection with the acquisition of an office property in Washington, D.C. and granted the holders of those units registration rights. Sales of substantial amounts of securities or the perception that these sales could occur may adversely affect the prevailing market price for our securities. In addition, the sale of these shares could impair our ability to raise capital through a sale of additional equity securities.

Holders of Series A Preferred Shares have extremely limited voting rights.

Holders of Series A Preferred Shares have extremely limited voting rights. Our common shares are the only class of our equity securities carrying full voting rights. Voting rights for holders of Series A Preferred Shares exist primarily with respect to the ability to appoint additional trustees to our Board of Trustees in the event that six quarterly dividends (whether or not consecutive) payable on our Series A Preferred Shares are in arrears, and with respect to voting on amendments to our declaration of trust or our Series A Preferred Shares Articles Supplementary that materially and adversely affect the rights of Series A Preferred Shares holders or create additional classes or series of preferred shares that are senior to our Series A Preferred Shares. Other than very limited circumstances, holders of Series A Preferred Shares will not have voting rights.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

28

ITEM 2. PROPERTIES

The Company classifies its properties into four distinct reporting and operational segments within the broader Washington D.C, region, which it refers to as the Maryland, Washington, D.C., Northern Virginia and Southern Virginia reporting segments. Prior to 2011, the Company had reported its properties located in Washington, D.C. within its Northern Virginia reporting segment. However, due to the Company’s growth within the Washington, D.C. region, the Company feels it is appropriate to separate the properties owned in Washington, D.C. into its own reporting segment.

The following sets forth certain information for the Company’s properties by segment as of December 31, 2011 (including properties in development and redevelopment, dollars in thousands):

WASHINGTON D.C., REGION

		September 30,	September 30,		September 30,		September 30,		September 30,			September 30,
Property	Buildings		Sub-Market(1)	Square Feet		Annualized Cash Basis Rent(2)		Leased at December 31, 2011(3)			Occupied at December 31, 2011(3)
Downtown DC-Office
500 First Street, NW		1	Capitol Hill		129,035	$	4,387		100.0	%		100.0	%
840 First Street, NE		1	NoMA		247,146		6,840		100.0	%		100.0	%
1005 First Street, NE(4)		1	NoMA		30,414		2,496		100.0	%		100.0	%
1211 Connecticut Avenue, NW		1	CBD		125,119		3,299		98.2	%		98.2	%
Total		4			531,714		17,022		99.6	%		99.6	%
Redevelopment
440 First Street, NW		1	Capitol Hill		135,000		—
Joint Venture Properties (unconsolidated)
1750 H Street, NW		1	CBD		111,373		4,050		100.0	%		100.0	%
1200 17th Street, NW (Development)		1	CBD		170,000		N/A		N/A			N/A
		2			281,373		4,050		100.0	%		100.0	%
Grand Total		7			948,087	$	21,073		99.7	%		99.7	%

⁽¹⁾  CBD = Central Business District; NoMA = North of Massachusetts Avenue.

⁽²⁾  Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽³⁾ Does not include space in development or redevelopment.

⁽⁴⁾  The property was acquired through a consolidated joint venture in which the Company has a 97% controlling economic interest.

29

MARYLAND REGION

		September 30,	September 30,		September 30,		September 30,		September 30,			September 30,
Property	Buildings		Location	Square Feet		Annualized Cash Basis Rent(1)		Leased at December 31, 2011(2)			Occupied at December 31, 2011(2)
SUBURBAN MD
Business Park
Airpark Place Business Center		3	Gaithersburg		82,429	$	461		42.0	%		42.0	%
Ammendale Business Park(3)		7	Beltsville		312,736		4,168		95.1	%		91.8	%
Gateway 270 West		6	Clarksburg		255,506		2,768		76.4	%		76.4	%
Girard Business Center(4)		7	Gaithersburg		298,009		3,082		89.7	%		86.7	%
Rumsey Center		4	Columbia		134,514		1,153		72.4	%		68.8	%
Snowden Center		5	Columbia		144,847		2,001		92.1	%		92.1	%
Total Business Park		32			1,228,041		13,633		83.5	%		81.5	%
Office
Worman’s Mill Court		1	Frederick		40,051		356		87.7	%		87.7	%
Goldenrod Lane		1	Germantown		23,518		75		25.9	%		25.9	%
Annapolis Business Center		2	Annapolis		101,898		1,600		98.8	%		98.8	%
Campus at Metro Park North		4	Rockville		190,912		3,419		85.1	%		85.1	%
Cloverleaf Center		4	Germantown		173,655		2,781		88.6	%		88.6	%
Gateway Center		2	Gaithersburg		44,150		637		88.9	%		88.9	%
Hillside Center		2	Columbia		86,189		1,374		100.0	%		100.0	%
Merrill Lynch Building		1	Columbia		136,488		1,585		76.3	%		73.2	%
Patrick Center		1	Frederick		66,445		1,109		80.5	%		75.3	%
Redland Corporate Center-Bldg 3		1	Rockville		139,120		3,364		100.0	%		100.0	%
West Park		1	Frederick		28,620		331		89.7	%		73.4	%
Woodlands Business Center		1	Largo		37,886		270		50.2	%		39.6	%
Total Office		21			1,068,932		16,918		86.5	%		85.0	%
Industrial
Frederick Industrial Park(5)		3	Frederick		550,468		4,102		91.5	%		91.5	%
Glenn Dale Business Center		1	Glenn Dale		315,962		1,695		92.1	%		92.1	%
Total Industrial		4			866,430		5,796		91.7	%		91.7	%
Total Suburban Maryland		57			3,163,403		36,348		86.8	%		85.5	%
BALTIMORE
Business Park
Owings Mills Business Park(6)		6	Owings Mills		219,284		1,715		62.2	%		59.8	%
Triangle Business Center		4	Baltimore		74,182		511		63.2	%		63.2	%
Total Business Park		10			293,466		2,226		62.4	%		60.7	%
Industrial
Mercedes Center		1	Hanover		294,673		1,043		73.1	%		73.1	%
Total Baltimore		11			588,139		3,270		67.8	%		66.9	%
Stabilized Portfolio		68			3,751,542		39,617		83.8	%		82.6	%
Lease Up Property- Office(7)
Redland Corporate Center-Bldg 2		1	Rockville		209,146		3,308		68.4	%		6.4	%
Total Consolidated		69			3,960,688		42,925		83.0	%		78.6	%
Joint Venture Properties
RiversPark I		3	Columbia		161,052		1,898		89.9	%		89.9	%
RiversPark II		3	Columbia		146,515		1,718		88.2	%		88.2	%
Aviation Business Park		3	Glen Burnie		120,662		455		26.3	%		26.3	%
Total Joint Ventures		9			428,229		4,071		71.4	%		71.4	%
Grand Total		78			4,388,917	$	46,996		81.9	%		77.9	%

⁽¹⁾ Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽²⁾  Does not include space in development or redevelopment.

⁽³⁾  Ammendale Business Park consists of the following properties: Ammendale Commerce Center and Indian Creek Court.

⁽⁴⁾  Girard Business Center consists of the following properties: Girard Business Center and Girard Place.

⁽⁵⁾  Frederick Industrial Park consists of the following properties: 4451 Georgia Pacific Boulevard, 4612 Navistar Drive, and 6900 English Muffin Way.

⁽⁶⁾  Owings Mills Business Park consists of the following properties: Owings Mills Business Center and Owings Mills Commerce Center.

⁽⁷⁾  The Company classifies properties that are acquired with less than 50% occupancy as lease up properties. Redland Corporate Center-Bldg 2 was 99% vacant at its acquisition in November 2010.

30

NORTHERN VIRGINIA REGION

		Septem 30,	Septem 30,		Septem 30,		Septem 30,		Septem 30,			Septem 30,
Property	Buildings		Location	Square Feet		Annualized Cash Basis Rent(1)		Leased at December 31, 2011(2)			Occupied at December 31, 2011(2)
Business Park
Corporate Campus at Ashburn Center		3	Ashburn		194,184	$	2,727		100.0	%		100.0	%
Gateway Centre Manassas		3	Manassas		101,534		1,074		83.7	%		76.0	%
Linden Business Center		3	Manassas		109,724		819		64.8	%		58.3	%
Prosperity Business Center		1	Merrifield		71,312		700		77.4	%		77.4	%
Sterling Park Business Center(3)		7	Sterling		401,598		3,598		83.5	%		83.5	%
Total Business Park		17			878,352		8,918		84.3	%		82.6	%
Office
Cedar Hill		2	Tyson’s Corner		102,632		2,301		100.0	%		100.0	%
Herndon Corporate Center		4	Herndon		127,918		1,732		89.3	%		89.3	%
Lafayette Business Center(4)		6	Chantilly		254,296		3,394		85.0	%		85.0	%
One Fair Oaks		1	Fairfax		214,214		5,020		100.0	%		100.0	%
Reston Business Campus		4	Reston		82,988		1,034		86.0	%		86.0	%
Van Buren Office Park		4	Herndon		92,462		717		56.1	%		56.1	%
Windsor at Battlefield		2	Manassas		155,511		1,793		90.3	%		90.3	%
Total Office		23			1,030,021		15,991		88.5	%		88.5	%
Industrial
13129 Airpark Road		1	Culpeper		149,888		630		75.9	%		75.9	%
15395 John Marshall Highway		1	Haymarket		236,082		3,369		100.0	%		100.0	%
Interstate Plaza		1	Alexandria		109,029		1,088		98.9	%		78.2	%
Newington Business Park Center		7	Lorton		254,272		2,417		87.0	%		85.8	%
Plaza 500		2	Alexandria		505,074		5,115		77.8	%		77.8	%
Total Industrial		12			1,254,345		12,619		85.5	%		83.4	%
Stabilized Portfolio		52			3,162,718		37,528		86.1	%		84.8	%
Lease Up Property-Office(5)
Atlantic Corporate Park		2	Sterling		221,372		1,058		29.1	%		20.7	%
Total Consolidated		54			3,384,090		38,587		82.4	%		80.6	%
Total Development / Redevelopment(6)		2			280,068		—
Joint Venture Property
Metro Place III & IV		2	Merrifield		325,328		5,797		100.0	%		100.0	%
Grand Total		58			3,989,486	$	44,384		83.9	%		82.3	%

⁽¹⁾ Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽²⁾  Does not include space in development or redevelopment.

⁽³⁾  Sterling Park Business Center consists of the following properties: 403/405 Glenn Drive, Davis Drive, and Sterling Park Business Center.

⁽⁴⁾  Lafayette Business Center consists of the following properties: Enterprise Center and Tech Court.

⁽⁵⁾  The Company classifies properties that are acquired with less than 50% occupancy as lease up properties. Atlantic Corporate Park was vacant at its acquisition in November 2010.

⁽⁶⁾  Includes development at Sterling Park Business Center and redevelopment at Three Flint Hill, Sterling Park and Van Buren Office Park.

31

SOUTHERN VIRGINIA REGION

		September 30,		September 30,		September 30,		September 30,		September 30,			September 30,
Property	Buildings		Location		Square Feet		Annualized Cash Basis Rent(1)		Leased at December 31, 2011(2)			Occupied at December 31, 2011(2)
RICHMOND
Business Park
Chesterfield Business Center(3)		11		Richmond		320,412	$	1,647		81.9	%		81.9	%
Hanover Business Center		4		Ashland		183,587		728		63.1	%		58.7	%
Park Central		3		Richmond		204,762		2,057		87.7	%		87.7	%
Virginia Center Technology Park		1		Glen Allen		118,145		1,185		85.2	%		85.2	%
Total Business Park		19				826,906		5,617		79.6	%		78.6	%
Industrial
Northridge		2		Ashland		140,185		902		100.0	%		100.0	%
River’s Bend Center(4)		6		Chester		795,080		4,520		94.2	%		94.2	%
Total Industrial		8				935,265		5,422		95.1	%		95.1	%
Total Richmond		27				1,762,171		11,039		87.8	%		87.4	%
NORFOLK
Business Park
Crossways Commerce Center(5)		9		Chesapeake		1,087,250		10,348		93.0	%		85.3	%
Battlefield Corporate Center		1		Chesapeake		96,720		779		100.0	%		100.0	%
Greenbrier Business Park(6)		4		Chesapeake		411,815		4,007		78.0	%		77.2	%
Hampton Roads Center(7)		3		Hampton		585,213		2,572		60.5	%		60.5	%
Norfolk Commerce Park(8)		3		Norfolk		261,886		1,811		68.9	%		68.9	%
Total Business Park		20				2,442,884		19,517		80.4	%		76.8	%
Office
Greenbrier Towers		2		Chesapeake		171,914		1,871		87.8	%		84.2	%
Total Office		2				171,914		1,871		87.8	%		84.2	%
Industrial
Cavalier Industrial Park		4		Chesapeake		394,308		1,514		88.6	%		88.6	%
Diamond Hill Distribution Center		4		Chesapeake		712,683		2,721		88.5	%		88.5	%
Total Industrial		8				1,106,991		4,235		88.5	%		88.5	%
Total Norfolk		30				3,721,789		25,623		83.1	%		80.6	%
Grand Total		57				5,483,960	$	36,739		84.9	%		83.0	%

(1) Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

(2) Does not include space in development or redevelopment.

(3) Chesterfield Business Center consists of the following properties: Airpark Business Center, Chesterfield Business Center, and Pine Glen.

(4) River’s Bend Center consists of the following properties: River’s Bend Center and River’s Bend Center II.

(5) Crossways Commerce Center consists of the following properties: Coast Guard Building, Crossways Commerce Center I, Crossways Commerce Center II, 1434 Crossways Boulevard, and 1408 Stephanie Way

(6) Greenbrier Business Park consists of the following properties: Greenbrier Technology Center I, Greenbrier Technology Center II, and Greenbrier Circle Corporate Center.

(7) Hampton Roads Center consists of the following properties: 1000 Lucas Way and Enterprise Parkway.

(8) Norfolk Commerce Park consists of the following properties: Norfolk Business Center, Norfolk Commerce Park II, and Gateway II.

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Lease Expirations

Approximately 9% of the Company’s annualized base rent is scheduled to expire in 2012, excluding month-to-month leases. Current tenants may not renew their leases upon the expiration of their terms. If non-renewals or terminations occur, the Company may not be able to locate qualified replacement tenants and, as a result, could lose a significant source of revenue while remaining responsible for the payment of its financial obligations. Moreover, the terms of a renewal or new lease, including the amount of rent, may be less favorable to the Company than the current lease terms, or the Company may be forced to provide tenant improvements at its expense or provide other concessions or additional services to maintain or attract tenants. We continually strive to increase our portfolio occupancy, and the amount of vacant space in our portfolio at any given time may impact our willingness to reduce rental rates or provide greater concessions to retain existing tenants and attract new tenants. The Company’s management continually monitors its portfolio on a regional and per property basis to assess market trends, including vacancy, comparable deals and transactions, and other business and economic factors that may influence our leasing decisions. During 2011, the Company had a 73% retention rate, based on square footage. The weighted average rental rate on the Company’s renewed leases in 2011 increased 5.0% compared with the expiring leases. During 2011, the Company executed new leases for 1.1 million square feet, of which 97% (based on square footage) contained rent escalations.

The following table sets forth a summary schedule of the lease expirations at the Company’s consolidated properties for leases in place as of December 31, 2011:

		September 30,		September 30,		September 30,			September 30,		September 30,			September 30,
Year of Lease Expiration	Number of Leases Expiring		Square Feet		% of Leased Square Feet			Annualized Cash Basis Rent(1)		Percent of Total Annualized Cash Basis Rent			Average Base Rent per Square Foot(1)(2)
MTM		9		77,438		0.7	%	$	610,105		0.5	%	$	7.88
2011(3)		13		118,704		1.1	%		1,327,528		1.0	%		11.18
2012		158		1,037,509		9.2	%		11,925,366		8.8	%		11.49
2013		131		1,561,383		13.9	%		19,548,962		14.5	%		11.14
2014		147		1,622,765		14.4	%		15,563,515		11.5	%		9.59
2015		90		930,239		8.3	%		9,870,053		7.3	%		10.61
2016		90		1,820,485		16.2	%		23,181,118		17.1	%		12.73
2017		49		920,573		8.2	%		10,897,604		8.1	%		11.84
2018		37		915,947		8.1	%		8,814,785		6.5	%		9.62
2019		41		393,836		3.5	%		6,119,438		4.5	%		15.54
Thereafter		58		1,847,690		16.4	%		27,338,108		20.2	%		14.80
Total / Weighted Average		823		11,246,569		100.0	%	$	135,196,582		100.0	%	$	11.83

⁽¹⁾  Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽²⁾  Represents Annualized Cash Basis Rent divided by the square footage of the space.

⁽³⁾  The Company classifies leases that expired on the last day of the quarter as leased square footage since the tenant is contractually entitled to the space. Of the 118,704 square feet of leases that expired on December 31, 2011, 10,507 square feet were renewed, 101,411 square feet were moved out and 6,786 square feet were held over.

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The Company’s average effective annual rental rate per square foot on a cash basis for each of the previous five years is as follows:

		September 30,
	Weighted Average Base Rent per Square Foot(1)
2007	$	9.54
2008		9.68
2009		9.87
2010		10.61
2011		11.84

⁽¹⁾  Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of the Company’s full service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

The Company’s weighted average occupancy rates for each of the previous five years are summarized as follows:

		September 30,
	Weighted Average Occupancy Rates
2007		86.9	%
2008		86.3	%
2009		86.1	%
2010		84.1	%
2011(1)		81.3	%

⁽¹⁾  Excluding the Company’s fourth quarter 2010 acquisitions of Atlantic Corporate Park, which was vacant at acquisition, and Redland Corporate Center II, which was 99% vacant at acquisition.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to legal proceedings and claims rising in the ordinary course of its business. In the opinion of the Company’s management, as of December 31, 2011, the Company was not involved in any material litigation, nor, to management’s knowledge, is any material litigation threatened against the Company or the Operating Partnership.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

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

Market Information

The Company’s common shares are listed on the New York Stock Exchange under the symbol “FPO.” The Company’s common shares began trading on the New York Stock Exchange upon the closing of its initial public offering in October 2003. At December 31, 2011, there were 108 shareholders of record and an estimated 14 thousand beneficial owners of the Company’s common shares.

The following table sets forth the high and low sales prices for the Company’s common shares and the dividends paid per common share for 2011 and 2010.

		September 30,		September 30,		September 30,
	Price Range				Dividends
2011	High		Low		Per Share
Fourth Quarter	$	14.68	$	11.51	$	0.20
Third Quarter		16.63		11.31		0.20
Second Quarter		16.81		14.55		0.20
First Quarter		17.25		14.44		0.20

		September 30,		September 30,		September 30,
	Price Range				Dividends
2010	High		Low		Per Share
Fourth Quarter	$	17.24	$	14.85	$	0.20
Third Quarter		16.50		13.73		0.20
Second Quarter		16.65		12.99		0.20
First Quarter		16.07		12.38		0.20

The Company will pay future distributions at the discretion of its board of trustees. The Company’s ability to make cash distributions in the future will be dependent upon, among other things (i) the income and cash flow generated from Company operations; (ii) cash generated or used by the Company’s financing and investing activities; and (iii) the annual distribution requirements under the REIT provisions of the Internal Revenue Code described above and such other factors as the board of trustees deems relevant. The Company’s ability to make cash distributions will also be limited by the covenants contained in our Operating Partnership agreement and our financing arrangements as well as limitations imposed by state law and the agreements governing any future indebtedness. See “Item 1A – Risk Factors – Risks Related to Our Business and Properties – Covenants in our debt agreements could adversely affect our liquidity and financial condition” and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” Historically, the Company has generated sufficient cash flows from operating activities to fund distributions. The Company may rely on borrowings on its unsecured revolving credit facility or may make taxable distributions of its shares or securities to make any distributions in excess of cash available from operating activities.

Unregistered Sales of Equity Securities and Issuer Repurchases

The Company did not sell any unregistered equity securities during the twelve months ended December 31, 2011 or purchase any of its registered equity securities during the twelve months ended December 31, 2011. During 2011, 1,300 Operating Partnership units were redeemed for 1,300 common shares with a fair value of $19 thousand. There were no Operating Partnership units redeemed with available cash in 2011.

During 2011, the Operating Partnership issued 1,963,388 Operating Partnership units to partially fund the acquisition of 840 First Street, NE, which included the partial retirement of a contingent consideration obligation entered into with the seller at acquisition, resulting in 2,920,561 Operating Partnership units outstanding as of December 31, 2011. These Operating Partnership units were issued in reliance upon exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and/or Regulation D promulgated under the Securities Act (“Regulation D”). Each of the limited partners represented to the Operating Partnership that it was an “accredited investor” as defined in Regulation D and that it was acquiring the Operating Partnership units for investment purposes. The Operating Partnership issued the units only to the former owners of the property and did not engage in a general solicitation in connection with the issuance.

35

The following graph compares the cumulative total return on the Company’s common shares with the cumulative total return of the S&P 500 Stock Index and The MSCI US REIT Index for the period December 31, 2006 through December 31, 2011 assuming the investment of $100 in each of the Company and the two indices, on December 31, 2006, and the reinvestment of common dividends. The performance reflected in the graph is not necessarily indicative of future performance. We will not make or endorse any predictions as to our future share performance.

COMPARISON OF CUMULATIVE TOTAL RETURNS FOR THE PERIOD

DECEMBER 31, 2006 THROUGH DECEMBER 31, 2011

FIRST POTOMAC REALTY TRUST COMMON STOCK AND S&P 500 AND

THE MSCI US REIT INDEX (RMS)

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
			Total Return Index from 12/31/06 to the Period Ended
Index	12/31/06		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
First Potomac Realty Trust		100.00		62.88		37.13		55.51		78.23		64.00
MSCI US REIT (RMS)		100.00		83.18		51.60		66.36		85.26		92.67
S&P 500		100.00		105.49		66.46		84.05		96.71		98.76

The foregoing graph and chart shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent we specifically incorporate this information by reference, and shall not be deemed filed under those acts.

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial information of the Company and its subsidiaries. The financial information has been derived from the consolidated balance sheets and consolidated statements of operations.

The following financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

		September 30,			September 30,			September 30,			September 30,			September 30,
	Years Ended December 31,
(amounts in thousands, except per share amounts)	2011			2010			2009			2008			2007
										(unaudited)
Operating Data:
Total revenues	$	172,304		$	135,470		$	127,551		$	117,322		$	112,402
(Loss) income from continuing operations	$	(4,459	)	$	(9,375	)	$	5,162		$	2,691		$	(5,234	)
(Loss) income from discontinued operations		(4,293	)		(2,300	)		(1,106	)		17,450			4,048
Net (loss) income		(8,752	)		(11,675	)		4,056			20,141			(1,186	)
Less: Net loss (income) attributable to noncontrolling interests		688			232			(124	)		(615	)		36
Net (loss) income attributable to First Potomac Realty Trust		(8,064	)		(11,443	)		3,932			19,526			(1,150	)
Less: Dividends on preferred shares		(8,467	)		—			—			—			—
Net (loss) income attributable to common shareholders	$	(16,531	)	$	(11,443	)	$	3,932		$	19,526		$	(1,150	)
Basic and diluted earnings per share:
(Loss) income from continuing operations	$	(0.27	)	$	(0.27	)	$	0.16		$	0.09		$	(0.22	)
(Loss) income from discontinued operations		(0.08	)		(0.06	)		(0.04	)		0.68			0.16
Net (loss) income	$	(0.35	)	$	(0.33	)	$	0.12		$	0.77		$	(0.06	)
Cash dividends declared and paid per common share	$	0.80		$	0.80		$	0.94		$	1.36		$	1.36

		September 30,		September 30,		September 30,		September 30,		September 30,
	At December 31,
(amounts in thousands)	2011		2010		2009		2008		2007
Balance Sheet Data:
Total assets	$	1,739,752	$	1,396,682	$	1,071,173	$	1,080,249	$	1,052,299
Debt		945,023		725,032		645,081		653,781		669,658
Series A Preferred Shares		115,000		—		—		—		—

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

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. The discussion and analysis is derived from the consolidated operating results and activities of First Potomac Realty Trust.

Overview

The Company strategically focuses on acquiring and redeveloping properties that it believes can benefit from its intensive property management and seeks to reposition these properties to increase their profitability and value. The Company’s portfolio contains a mix of single-tenant and multi-tenant office and industrial properties as well as business parks. Office properties are single-story and multi-story buildings that are used primarily for office use; business parks contain buildings with office features combined with some industrial property space; and industrial properties generally are used as warehouse, distribution or manufacturing facilities.

At December 31, 2011, the Company wholly-owned or had a controlling interest in properties totaling 13.9 million square feet and had a noncontrolling ownership interest in properties totaling an additional 1.0 million square feet through six unconsolidated joint ventures. The Company also owned land that can accommodate approximately 2.4 million square feet of additional development. The Company’s consolidated properties were 81.8% occupied by 608 tenants. Excluding the Company’s fourth quarter 2010 acquisitions of Atlantic Corporate Park, which was vacant at acquisition, and Redland Corporate Center II, which was 99% vacant at acquisition, the Company’s consolidated portfolio was 84.0% occupied at December 31, 2011. The Company does not include square footage that is in development or redevelopment in its occupancy calculation, which totaled 0.6 million square feet at December 31, 2011. The Company derives substantially all of its revenue from leases of space within its properties. As of December 31, 2011, the Company’s largest tenant was the U.S. Government, which along with government contractors, accounted for over 25% of the Company’s total annualized base rent.

The primary source of the Company’s revenue and earnings is rent received from customers under long-term (generally three to ten years) operating leases at its properties, which includes reimbursements from customers for certain operating costs. Additionally, the Company may generate earnings from the sale of assets or the contribution of assets into joint ventures.

The Company’s long-term growth will principally be driven by its ability to:

• maintain and increase occupancy rates and/or increase rental rates at its properties;

• sell assets to third parties at favorable prices or contribute properties to joint ventures; and

• continue to grow its portfolio through acquisition of new properties, potentially through joint ventures.

Significant 2011 Activity

• Completed seven property acquisitions for total consideration of $268.6 million;

• Acquired a 51% non-controlling interest in an unconsolidated joint venture for $27.8 million, net of mortgage debt assumed, that owns two office buildings in Northern Virginia and a 95% non-controlling interest in an unconsolidated joint venture for $20.4 million, net of mortgage debt issued, that owns an office building in Washington, D.C., which the Company plans to develop into a new office building.

• Raised net proceeds of $111.0 million through the issuance of 4.6 million 7.75% Series A Preferred Shares;

• Executed 2.8 million square feet of leases, consisting of 1.1 million square feet of new leases and 1.7 million square feet of renewal leases;

• Entered into and expanded a $175.0 million unsecured term loan to $225.0 million, which was subsequently increased to $300.0 million in February 2012, with staggered maturity dates ranging from July 2016 to July 2018;

• Expanded borrowing capacity of unsecured revolving credit facility from $225.0 million to $255.0 million; and

• Completed the disposition of three properties for net proceeds of $26.9 million.

Total assets were $1.7 billion at December 31, 2011 compared with $1.4 billion at December 31, 2010.

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Development and Redevelopment Activity

The Company constructs office buildings, business parks and/or industrial buildings on a build-to-suit basis or with the intent to lease upon completion of construction. Also, the Company owns developable land that can accommodate 2.4 million square feet of additional building space. Below is a summary of the approximate building square footage that can be developed on the Company’s developable land and the Company’s current development and redevelopment activity of the Company’s consolidated portfolio as of December 31, 2011 (amounts in thousands):

		September 30,		September 30,		September 30,		September 30,		September 30,
Reporting Segment	Developable Square Feet		Square Feet Under Development		Cost to Date of Development Activities		Square Feet Under Redevelopment		Cost to Date of Redevelopment Activities
Washington, D.C.		712		—	$	—		135	$	1,624
Maryland		250		—		—		—		—
Northern Virginia		568		—		—		—		—
Southern Virginia		841		166		536		—		—
		2,371		166	$	536		135	$	1,624

On December 28, 2010, the Company acquired 440 First Street, NW, a vacant eight-story, 105,000 square foot office building in the Company’s Washington, D.C. reporting segment. The Company intends to completely redevelop the property, including adding additional square footage. In 2011, the Company purchased 30,000 square feet of transferable development rights for $0.3 million. At December 31, 2011, the Company’s projected incremental investment in the redevelopment project is approximately $25 million.

At December 31, 2011, the Company had completed development and redevelopment activities that have yet to be placed in service on 280,000 square feet, at a cost of $18.6 million, in its Northern Virginia reporting segment. The majority of the costs on the construction projects to be placed in service relate to redevelopment activities at Three Flint Hill, located in the Company’s Northern Virginia reporting segment, which were substantially completed in the third quarter of 2011 at a cost of approximately $13.3 million. The Company will place completed construction activities in service upon the shorter of a tenant taking occupancy or twelve months from substantial completion.

During 2011, the Company completed and placed in-service redevelopment efforts on 93,000 square feet of space, which includes 13,000 square feet in its Maryland reporting segment, 41,000 square feet in its Northern Virginia reporting segment and 39,000 square feet in its Southern Virginia reporting segment. No development efforts were placed in-service in 2011.

During 2010, the Company completed and placed in-service redevelopment efforts on 98,000 square feet of space, which includes 30,000 square feet in its Maryland reporting segment, 14,000 square feet in its Washington, D.C. reporting segment, 23,000 square feet in its Northern Virginia reporting segment and 31,000 square feet in its Southern Virginia reporting segment. No development efforts were placed in-service in 2010.

During 2011, the Company acquired 1005 First Street, NE, in its Washington, D.C. reporting segment. The site currently has a 30,000 square foot building that is occupied by Greyhound Lines, Inc., “Greyhound”, which leased back the site under a ten-year lease agreement with a termination option, at no penalty, after the second year. Greyhound has announced that it intends to relocate its operations to nearby Union Station, at which point the joint venture anticipates developing the 1.6 acre site, which can accommodate development of up to approximately 712,000 square feet of office space. See footnote 5, Acquisitions, for more information.

In October 2011, the Company, through an unconsolidated joint venture, in which the Company has a 95% interest, acquired 1200 17th Street, NW in the Company’s Washington, D.C. reporting segment. The property currently consists of a land parcel that contains an 85,000 square foot office building. The Company has terminated the existing tenant’s leases and intends to demolish the existing building and develop a new 170,000 square foot office building. Construction is currently expected to commence in 2012 and is expected to be completed in late 2014. The Company’s projected incremental investment in the development project is approximately $50 million. The Company does not consolidate this joint venture as it cannot exercise control of the entity.

39

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) that require the Company to make certain estimates and assumptions. Critical accounting policies and estimates are those that require subjective or complex judgments and are the policies and estimates that the Company deems most important to the portrayal of its financial condition and results of operations. It is possible that the use of different reasonable estimates or assumptions in making these judgments could result in materially different amounts being reported in its consolidated financial statements. The Company’s critical accounting policies and estimates relate to revenue recognition, including evaluation of the collectability of accounts and notes receivable, impairment of long-lived assets, purchase accounting for acquisitions of real estate, derivative instruments and share-based compensation.

The following is a summary of certain aspects of these critical accounting policies and estimates.

Revenue Recognition

The Company generates substantially all of its revenue from leases on its office and industrial properties as well as business parks. The Company recognizes rental revenue on a straight-line basis over the term of its leases, which includes fixed-rate renewal periods leased at below market rates at acquisition or inception. Accrued straight-line rents represent the difference between rental revenue recognized on a straight-line basis over the term of the respective lease agreements and the rental payments contractually due for leases that contain abatement or fixed periodic increases. The Company considers current information, credit quality, historical trends, economic conditions and other events regarding the tenants’ ability to pay their obligations in determining if amounts due from tenants, including accrued straight-line rents, are ultimately collectible. The uncollectible portion of the amounts due from tenants, including accrued straight-line rents, is charged to property operating expense in the period in which the determination is made.

Tenant leases generally contain provisions under which the tenants reimburse the Company for a portion of property operating expenses and real estate taxes incurred by the Company. Such reimbursements are recognized in the period in which the expenses are incurred. The Company records a provision for losses on estimated uncollectible accounts receivable based on its analysis of risk of loss on specific accounts. Lease termination fees are recognized on the date of termination when the related lease or portion thereof is cancelled, the collectability of the fee is reasonably assured and the Company has possession of the terminated space.

Accounts and Notes Receivable

The Company must make estimates of the collectability of its accounts and notes receivable related to minimum rent, deferred rent, tenant reimbursements, lease termination fees and interest and other income. The Company specifically analyzes accounts and notes receivable and historical bad debt experience, tenant concentrations, tenant creditworthiness and current economic trends when evaluating the adequacy of its allowance for doubtful accounts receivable. These estimates have a direct impact on the Company’s net income as a higher required allowance for doubtful accounts receivable will result in lower net income. The uncollectible portion of the amounts due from tenants, including straight-line rents, is charged to property operating expense in the period in which the determination is made. The Company considers similar criteria in assessing impairment associated with outstanding loans or notes receivable and whether any allowance for anticipated credit loss is appropriate.

Investments in Real Estate and Real Estate Entities

Investments in real estate and real estate entities are initially recorded at fair value if acquired in a business combination or carried at initial cost when constructed or acquired in an asset purchase, less accumulated depreciation and, when appropriate, impairment losses. Improvements and replacements are capitalized at fair value when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of the Company’s assets, by class, are as follows:

Buildings	39 years
Building improvements	5 to 20 years
Furniture, fixtures and equipment	5 to 15 years
Tenant improvements	Shorter of the useful lives of the assets or the terms of the related leases
Lease related intangible assets	Term of related lease

40

The Company regularly reviews market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of the fair value of a property, an impairment analysis is performed. The Company assesses potential impairments based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the property’s use and eventual disposition. This estimate is based on projections of future revenues, expenses, capital improvement costs, expected holding periods and capitalization rates. These cash flows consider factors such as expected market trends and leasing prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment based on forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The Company is required to make estimates as to whether there are impairments in the carrying values of its investments in real estate. Further, the Company will record an impairment loss if it expects to dispose of a property, in the near term, at a price below carrying value. In such an event, the Company will record an impairment loss based on the difference between a property’s carrying value and its projected sales price, less any estimated costs to sell.

The Company will classify a building as held-for-sale in the period in which it has made the decision to dispose of the building, the Company’s Board of Trustees or a designated delegate has approved the sale, there is a high likelihood a binding agreement to purchase the property will be signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. If these criteria are met, the Company will cease depreciation of the asset. The Company will classify any impairment loss, together with the building’s operating results, as discontinued operations in its consolidated statements of operations for all periods presented and classify the assets and related liabilities as held-for-sale in its consolidated balance sheets in the period the sale criteria are met. Interest expense is reclassified to discontinued operations only to the extent the held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by the Company after the disposition.

The Company recognizes the fair value, if sufficient information exists to reasonably estimate the fair value, of any liability for conditional asset retirement obligations when incurred, which is generally upon acquisition, construction, development or redevelopment and/or through the normal operation of the asset.

The Company capitalizes interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment, which include assets owned through unconsolidated joint ventures that are under development or redevelopment, while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. The Company will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress and interest on the direct compensation costs of the Company’s construction personnel who manage the development and redevelopment projects, but only to the extent the employee’s time can be allocated to a project. Any portion of construction management costs not directly attributable to a specific project are recognized as general and administrative expense in the period incurred. The Company does not capitalize any other general administrative costs such as office supplies, office rent expense or an overhead allocation to its development or redevelopment projects. Capitalized compensation costs were immaterial during 2011, 2010 and 2009. Capitalization of interest will end when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity, if the property is not occupied. The Company will also place redevelopment and development assets in service at this time and commence depreciation upon the substantial completion of tenant improvements and the recognition of revenue. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.

Purchase Accounting

Acquisitions of rental property from third parties are accounted for at fair value. Any liabilities assumed or incurred are recorded at their fair value at the time of acquisition. The fair value of the acquired property is allocated between land and building (on an as-if vacant basis) based on management’s estimate of the fair value of those components for each type of property and to tenant improvements based on the depreciated replacement cost of the tenant improvements, which approximates their fair value. The fair value of the in-place leases is recorded as follows:

• the fair value of leases in-place on the date of acquisition is based on absorption costs for the estimated lease-up period in which vacancy and foregone revenue are avoided due to the presence of the acquired leases;

• the fair value of above and below-market in-place leases based on the present value (using a discount rate that reflects the risks associated with the acquired leases) of the difference between the contractual rent amounts to be paid under the assumed lease and the estimated market lease rates for the corresponding spaces over the remaining non-cancelable terms of the related leases, which range from one to fifteen years; and

• the fair value of intangible tenant or customer relationships.

41

The Company’s determination of these fair values requires it to estimate market rents for each of the leases and make certain other assumptions. These estimates and assumptions affect the rental revenue, and depreciation and amortization expense recognized for these leases and associated intangible assets and liabilities.

Derivative Instruments

In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company may enter into derivative agreements to mitigate exposure to unexpected changes in interest rates and may use interest rate protection or cap agreements to reduce the impact of interest rate changes. The Company does not use derivatives for trading or speculative purposes and intends to enter into derivative agreements only with counterparties that it believes have a strong credit rating to mitigate the risk of counterparty default or insolvency.

The Company may designate a derivative as either a hedge of the cash flows from a debt instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debt instrument (fair value hedge). All derivatives are recognized as assets or liabilities at fair value. For effective hedging relationships, the change in the fair value of the assets or liabilities is recorded within equity (cash flow hedge) or through earnings (fair value hedge). Ineffective portions of derivative transactions will result in changes in fair value recognized in earnings. For a cash flow hedge, the Company records its proportionate share of unrealized gains or losses on its derivative instruments associated with its unconsolidated joint ventures within equity and “Investment in affiliates.” The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual inputs and guarantees.

Share-Based Compensation

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. For options awards, the Company uses a Black-Scholes option-pricing model. Expected volatility is based on an assessment of the Company’s realized volatility over the preceding five years, which is equivalent to the awards expected life. The expected term represents the period of time the options are anticipated to remain outstanding as well as the Company’s historical experience for groupings of employees that have similar behavior and considered separately for valuation purposes. For non-vested share awards that vest over a predetermined time period, the Company uses the outstanding share price at the date of issuance to fair value the awards. For non-vested shares awards that vest based on performance conditions, the Company uses a Monte Carlo simulation (risk-neutral approach) to determine the value and derived service period of each tranche. The expense associated with the share-based awards will be recognized over the period during which an employee is required to provide services in exchange for the award – the requisite service period (usually the vesting period). The fair value for all share-based payment transactions are recognized as a component of income or loss from continuing operations.

Results of Operations

Comparison of the Years Ended December 31, 2011, 2010 and 2009

During 2011, the Company acquired the following consolidated properties: One Fair Oaks; Cedar Hill; Merrill Lynch; 840 First Street, NE; Greenbrier Towers; 1005 First Street, NE; and Hillside Center for an aggregate purchase cost of $268.6 million.

During 2010, the Company acquired the following consolidated properties: Three Flint Hill; 500 First Street, NW; Battlefield Corporate Center; Redland Corporate Center; Atlantic Corporate Park; 1211 Connecticut Ave, NW; 440 First Street, NW and Mercedes Center for an aggregate purchase cost of $286.2 million.

The Company acquired 1005 First Street, NE and Redland Corporate Center through joint ventures in which it had a 97% controlling economic interest.

During 2009, the Company acquired Cloverleaf Center and Corporate Campus at Ashburn Center for an aggregate purchase cost of $40.0 million.

On January 1, 2010 and March 17, 2009, the Company deconsolidated RiversPark I and II, respectively, from its consolidated financial statements; however, the operating results of the properties are included in the Company’s consolidated statements of operations through their respective dates of deconsolidation.

42

In the year-over-year discussion of operating results below, all properties acquired during the years being compared and the consolidated operating results of RiversPark I and II are referred to as the “Non-comparable Properties.”

The term “Existing Portfolio” refers to all consolidated properties owned by the Company, with operating results reflected in the Company’s continuing operations, for the entirety of the periods presented.

For discussion of the operating results of the Company’s reporting segments, the terms “Washington, D.C.”, “Maryland”, “Northern Virginia” and “Southern Virginia” will be used to describe the respective reporting segments.

Total Revenues

Total revenues are summarized as follows:

		Sept 30,		Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,						Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011		2010		Increase		Change			2010		2009		Increase		Change
Rental	$	139,196	$	109,297	$	29,899		27	%	$	109,297	$	103,460	$	5,837		6	%
Tenant reimbursements and other	$	33,108	$	26,173	$	6,935		26	%	$	26,173	$	24,091	$	2,082		9	%

Rental Revenue

Rental revenue is comprised of contractual rent, the impact of straight-line revenue and the amortization of deferred market rent assets and liabilities representing above and below market rate leases at acquisition. Rental revenue increased $29.9 million in 2011 compared with 2010 due primarily to the Non-comparable Properties contributing $30.6 million of additional rental revenue during 2011 compared with 2010. Rental revenue for the Existing Portfolio decreased $0.7 million in 2011 compared with 2010 due to an increase in vacancy. The weighted average occupancy of the Existing Portfolio was 83.5% during 2011 compared with 85.0% during 2010. The Company expects aggregate rental revenues to increase in 2012 due to a full-year of revenues from the properties acquired in 2011. The increase in rental revenue in 2011 compared with 2010 includes $7.9 million for Maryland, $14.3 million for Washington, D.C., $6.3 million for Northern Virginia and $1.4 million for Southern Virginia.

Rental revenue increased $5.8 million in 2010 as compared with 2009 due to increased revenues resulting from the Company’s Non-comparable Properties, which contributed $6.5 million of additional rental revenue in 2010 compared with 2009. For the Existing Properties, rental revenue decreased $0.7 million in 2010 compared with 2009 primarily due to an increase in vacancy; however, rental rates increased 9.1% on new leases during 2010. The increase in rental revenue in 2010 compared with 2009 includes $1.3 million for Maryland, $2.8 million for Washington, D.C. and $1.9 million for Northern Virginia. For Southern Virginia, rental revenue decreased $0.2 million in 2010 compared to 2009.

Tenant Reimbursements and Other Revenues

Tenant reimbursements and other revenues include operating and common area maintenance costs reimbursed by the Company’s tenants as well as other incidental revenues such as lease termination payments, parking revenue and joint venture and construction related management fees. Tenant reimbursements and other revenues increased $6.9 million in 2011 compared with 2010. The increase is due to the Non-comparable Properties, which contributed $8.0 million of additional tenant reimbursements and other revenues in 2011 compared with 2010. For the Existing Portfolio, tenant reimbursements and other revenues decreased $1.1 million in 2011 compared with 2010 due to a reduction in recoverable operating expenses, primarily relating to snow and ice removal costs that were incurred in 2010. The Company expects tenant reimbursements and other revenues to increase in 2012 due to a full-year of recoverable operating expenses from properties acquired in 2011. The increase in tenant reimbursements and other revenues in 2011 compared with 2010 includes $0.7 million for Maryland, $4.5 million for Washington, D.C. and $1.9 million for Northern Virginia. For Southern Virginia, tenant reimbursements and other revenues decreased $0.2 million in 2011 compared with 2010.

Tenant reimbursements and other revenues increased $2.1 million in 2010 compared with 2009. The increase in tenant reimbursements and other revenues is primarily due to the Non-comparable Properties, which contributed $1.5 million of additional tenant reimbursements and other revenues in 2011 compared with 2010. The Existing Portfolio contributed $0.6 million

43

of additional tenant reimbursements and other revenues in 2010 compared with 2009 due to an increase in termination fee income and higher recoverable property operating expenses as a result of an increase in recoverable snow and ice removal costs in 2010 compared with 2009. The increase in tenant reimbursements and other revenues in 2010 compared with 2009 include $0.5 million for Maryland, $0.8 million for Washington, D.C. and $0.8 million for Southern Virginia. Tenant reimbursements and other revenues remained flat in Northern Virginia in 2010 compared with 2009.

Total Expenses

Property Operating Expenses

Property operating expenses are summarized as follows:

		Sept 30,		Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,						Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011		2010		Increase		Change			2010		2009		Increase		Change
Property operating	$	41,891	$	32,639	$	9,252		28	%	$	32,639	$	30,916	$	1,723		6	%
Real estate taxes and insurance	$	16,699	$	12,582	$	4,117		33	%	$	12,582	$	12,273	$	309		3	%

Property operating expenses increased $9.3 million in 2011 compared with 2010. The increase is due to the Non-comparable Properties, which contributed $10.3 million of additional property operating expenses in 2011 compared with 2010. For the Existing Portfolio, property operating expenses decreased $1.0 million in 2011 compared with 2010 primarily due to a decline in snow and ice removal costs. The Company expects property operating expenses to increase in 2012 due to a full-year of property operating expenses from properties acquired in 2011. The increase in property operating expenses in 2011 compared with 2010 includes $2.5 million for Maryland, $3.8 million for Washington, D.C., $2.3 million for Northern Virginia and $0.7 million for Southern Virginia.

Property operating expenses increased $1.7 million in 2010 compared with 2009. The Non-comparable Properties contributed additional property operating expenses of $1.7 million in 2010 compared with 2009. Property operating expenses for the Existing Portfolio were essentially flat in 2010 compared with 2009 as higher snow and ice removal costs in 2009 were offset by lower reserves for bad debt expense in 2010. The increase in property operating expenses in 2010 compared with 2009 includes $0.3 million for Maryland, $0.7 million for Washington, D.C., $0.4 million for Northern Virginia and $0.3 million for Southern Virginia.

Real estate taxes and insurance expense increased $4.1 million in 2011 compared with 2010. The Non-comparable Properties contributed an increase in real estate taxes and insurance expense of $4.4 million in 2011 compared with 2010. For the Existing Portfolio, real estate taxes and insurance expense decreased $0.3 million in 2011 compared with 2010 due to lower real estate tax assessments. The increase in real estate taxes and insurance expense in 2011 compared with 2010 includes $0.7 million for Maryland, $2.5 million for Washington, D.C. and $1.0 million for Northern Virginia. Southern Virginia experienced a decrease in real estate taxes and insurance expense of $0.1 million in 2011 compared with 2010.

Real estate taxes and insurance expense increased $0.3 million in 2010 compared with 2009. The Non-comparable Properties contributed an increase in real estate taxes and insurance expense of $1.0 million in 2010. For the Existing Portfolio, real estate taxes and insurance expense decreased $0.7 million in 2010 compared with 2009 primarily due to lower real estate assessments and real estate tax rates on the Company’s Northern Virginia properties located in Fairfax County and Prince William County, Virginia. The increase in real estate taxes and insurance expense in 2010 compared with 2009 includes $0.2 million for Maryland and $0.4 million for Washington, D.C. Real estate taxes and insurance expense decreased $0.2 million in Northern Virginia and $0.1 million in Southern Virginia in 2010 compared with 2009.

44

Other Operating Expenses

General and administrative expenses are summarized as follows:

		Sept 30,		Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,						Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011		2010		Increase		Change			2010		2009		Increase		Change
	$	16,027	$	14,523	$	1,504		10	%	$	14,523	$	13,219	$	1,304		10	%

General and administrative expenses increased $1.5 million during 2011 compared with 2010 primarily due to an increase in employee compensation costs as the Company had 174 employees at December 31, 2011 compared with 144 employees at December 31, 2010. The increase in general and administrative expenses in 2011 compared with 2010 was also due to an increase in marketing and advertising expenses, consulting and accounting fees and the expense of $0.2 million of redevelopment costs associated with a project that is being deferred. The increase in general and administrative costs in 2011 compared with 2010 was partially offset by a decrease in non-cash, share-based compensation expense and a decrease in short-term incentive compensation expense as a result of the lower cash awards to certain members of senior management, relative to 2010, in light of the issues related to the monitoring and oversight of compliance with financial covenants as described elsewhere in this Annual Report on Form 10-K. The Company anticipates general and administration expenses will increase in 2012 as a result of a larger workforce, the amortization of the costs associated with its new enterprise accounting software, which was implemented in late 2011, and higher office rent for the Company’s corporate offices.

General and administrative expenses increased $1.3 million during 2010 compared with 2009. The increase is primarily due to an increase in employee compensation costs and non-cash, share-based compensation expense as a result of the restricted shares awarded to the Company’s officers in 2009 and 2010, which are amortized over derived service periods that are comparably shorter than those associated with previous awards.

Acquisition costs are summarized as follows:

		Sept 30,		Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,						Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011		2010		Decrease		Change			2010		2009		Increase		Change
	$	5,042	$	7,169	$	2,127		30	%	$	7,169	$	1,076	$	6,093		566	%

Acquisition costs decreased $2.1 million during 2011 compared with 2010. During 2011, the Company acquired nine properties, including two properties through unconsolidated joint ventures, compared with the acquisition of ten properties, including two properties through unconsolidated joint ventures, in 2010.

Acquisition costs increased $6.1 million during 2010 compared with 2009 as the Company acquired ten properties, including two properties through unconsolidated joint ventures, in 2010 compared with the acquisition of two properties in 2009.

Depreciation and amortization expense is summarized as follows:

		Sept 30,		Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,						Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011		2010		Increase		Change			2010		2009		Increase		Change
	$	60,385	$	41,752	$	18,633		45	%	$	41,752	$	39,119	$	2,633		7	%

Depreciation and amortization expense includes depreciation of real estate assets and amortization of intangible assets and leasing commissions. Depreciation and amortization expense increased $18.6 million in 2011 compared with 2010 primarily due to the Company’s recent acquisitions. The Non-comparable Properties contributed additional depreciation and amortization expense of $18.3 million in 2011 compared with 2010 as certain acquired intangible assets had short useful lives. Depreciation and amortization expense attributable to the Existing Portfolio increased $0.3 million in 2011 compared with 2010 primarily due to the disposal of assets from tenants that vacated during 2011 prior to reaching the full term of their lease. The Company anticipates depreciation and amortization expense to increase in 2012 due to recognizing a full-year of depreciation and amortization expense for properties acquired in 2011.

Depreciation and amortization expense increased $2.6 million in 2010 compared with 2009 due to the Non-comparable Properties, which contributed additional depreciation and amortization expense of $2.6 million. Depreciation and amortization expense for the Existing Portfolio remained relatively flat in 2010 compared with 2009.

45

Impairment of real estate assets are summarized as follows:

		Sept 30,		Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,						Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011		2010		Increase		Change			2010		2009		Increase		Change
	$	2,461	$	2,386	$	75		3	%	$	2,386	$	—	$	2,386		—

During the fourth quarter of 2011, the Company adjusted its anticipated holding period for its Woodlands Business Center and Goldenrod Lane properties, which are both located in the Company’s Maryland reporting segment. The Company acquired both properties as part of a portfolio acquisition in 2004. Based on an analysis of the each property’s cash flows over the Company’s reduced holding period for the respective property, the Company recorded impairment charges of $1.6 million and $0.9 million for Woodlands Business Center and Goldenrod Lane, respectively, in the fourth quarter of 2011. On December 29, 2010, the Company acquired Mercedes Center in the Company’s Maryland reporting segment for $22.6 million. On January 6, 2011, the Company was notified that the largest tenant at the property filed for Chapter 11 bankruptcy protection. As a result, the Company recorded an impairment charge of $2.4 million in 2010 associated with the non-recoverable value of the intangible assets associated with the lease.

Change in contingent consideration related to acquisition of property is summarized as follows:

		Sept 30,			Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,							Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011			2010		Decrease		Change			2010		2009		Increase		Change
	$	(1,487	)	$	710	$	2,197		309	%	$	710	$	—	$	710		—

On March 25, 2011, the Company acquired 840 First Street, NE, in Washington, D.C. for an aggregate purchase price of $90.0 million, with up to $10.0 million of additional consideration payable in Operating Partnership units upon the terms of a lease renewal by the building’s sole tenant or the re-tenanting of the property through November 2013. Based on an assessment of the probability of renewal and anticipated lease rates, the Company recorded a contingent consideration obligation of $9.4 million at acquisition. In July 2011, the building’s sole tenant renewed its lease through August 2023 on the entire building with the exception of two floors. As a result, the Company issued 544,673 Operating Partnership units to satisfy $7.1 million of its contingent consideration obligation. The Company recognized a $1.5 million gain associated with the issuance of the additional units, which represented the difference between the contractual value of the units and the fair value of the units at the date of issuance.

As part of the consideration for the Company’s 2009 acquisition of Corporate Campus at Ashburn Center, the Company is obligated to record contingent consideration arising from a fee agreement entered into with the seller in which the Company will be obligated to pay additional consideration if certain returns are achieved over the five year term of the agreement or if the property is sold within the term of the five year agreement. The Company initially recorded $0.7 million at the time of acquisition in December 2009, which represented the fair value of the Company’s potential obligation at acquisition. During the first quarter of 2010, the Company was able to lease vacant space at Corporate Campus at Ashburn Center faster than it had anticipated and, therefore, recorded additional contingent consideration of $0.7 million that reflected an increase in the potential consideration that may be owed to the seller.

Other Expenses, net

Interest expense is summarized as follows:

		Sept 30,		Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,						Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011		2010		Increase		Change			2010		2009		Increase		Change
	$	41,689	$	33,725	$	7,964		24	%	$	33,725	$	32,369	$	1,356		4	%

46

The Company seeks to employ cost-effective financing methods to fund its acquisitions, development and redevelopment projects and to refinance its existing debt to provide greater balance sheet flexibility or to take advantage of lower interest rates. The methods used to fund the Company’s activities impact the period-over-period comparisons of interest expense.

Interest expense increased $8.0 million in 2011 compared with 2010. At December 31, 2011, the Company had $945.0 million of debt outstanding with a weighted average interest rate of 4.8% compared with $725.0 million of debt outstanding with a weighted average interest rate of 4.8% at December 31, 2010.

The increase in the Company’s interest expense is primarily attributable to an increase in mortgage interest expense, which increased $5.7 million in 2011 compared with 2010 due to the assumption and issuance of additional mortgage debt. During 2011 and 2010, the Company assumed or issued $211.5 million of mortgage debt in connection with its property acquisitions compared with the repayment of $55.7 million of mortgage debt over the same period. In July 2011, the Company entered into a three-tranche $175.0 million unsecured term loan, which was subsequently increased to $225.0 million in December 2011 (further increased to $300.0 million in February 2012). The Company used the funds received in 2011 to pay down $166.0 million of the outstanding balance on its unsecured revolving credit facility, to repay its $50.0 million secured term loan and for other general corporate purposes. The unsecured term loan contributed additional interest expense of $2.0 million in 2011 compared with 2010. The $50.0 million secured term loan that was repaid with funds from the issuance of the unsecured term loan contributed additional interest expense of $0.8 million in 2011 compared with 2010 as the loan was issued in the fourth quarter of 2010. During 2011, the Company amended and restated its unsecured revolving credit facility, resulting in a lower applicable interest rate, which offset the higher average outstanding balance. In 2011, the Company’s weighted average borrowings outstanding on its unsecured revolving credit facility was $147.2 million with a weighted average interest rate of 2.9% compared with weighted average borrowings of $123.4 million with a weighted average interest rate of 3.5% in 2010. As a result, interest expense relating to the unsecured revolving credit facility remained relatively flat in 2011 compared with 2010. Also, the Company had incurred additional deferred financing costs with the assumption and issuance of new debt and the refinancing of its unsecured credit facility, which increased interest expense $1.0 million in 2011 compared with 2010.

The Company uses derivative financial instruments to manage exposure to interest rate fluctuations on its variable rate debt. On January 18, 2011, the Company fixed LIBOR at 1.474% on $50.0 million of its variable rate debt through an interest rate swap agreement. During the third quarter of 2011, the Company entered into five interest rate swap agreements that fixed LIBOR on an additional $150.0 million of its variable rate debt. As of December 31, 2011, the Company had hedged $200.0 million of its variable rate debt through six interest rate swap agreements that fixed LIBOR to a weighted average interest rate of 1.772%. In 2010, the Company had fixed LIBOR on $85.0 million of variable rate debt through two effective interest rate swap agreements, which both expired in August 2010. As a result, interest expense related to the interest rate swap agreements increased $0.3 million in 2011 compared with 2010. On January 18, 2012, the Company fixed LIBOR at 1.394% on an additional $25.0 million of its variable rate debt through an interest rate swap agreement that matures on July 18, 2018.

The increase in interest expense in 2011 compared with 2010 was partially offset by a decrease of $0.6 million in interest expense associated with the Company’s Exchangeable Senior Notes as $20.1 million of the notes were repurchased in the second quarter of 2010 and the remaining balance of $30.4 million was repaid in December 2011. In August 2011, the Company repaid its $20.0 million secured term loan with a draw under its unsecured revolving credit facility, which resulted in a decrease in interest expense of $0.2 million in 2011 compared with 2010. Also, the Company experienced an increase in capitalized interest, as a result of an increase in construction activities, as it recorded capitalized interest of $1.9 million in 2011 compared with $0.8 million in 2010.

Interest expense increased $1.4 million in 2010 compared with 2009. In December 2009, the Company extended the maturity dates on approximately $185.0 million of debt, which included expanding the capacity of the Company’s unsecured revolving credit facility, which was further expanded in the second quarter of 2010. As part of the refinancing, the Company used the additional capacity to repay $40.0 million of its secured term loans. The refinancing resulted in a higher effective interest rate on the Company’s unsecured revolving credit facility, which resulted in additional interest expense of $2.9 million in 2010 compared with the same period in 2009. In 2010, the Company’s weighted average borrowings on its unsecured revolving credit facility was $123.4 million with a weighted average interest rate of 3.5% compared with weighted average borrowings of $95.2 million with a weighted average interest rate of 1.6% in 2009. The repayment of a portion of the Company’s term loans as described above resulted in a decline in interest expense of $0.6 million in 2010 compared with the same period in 2009. The Company had fixed LIBOR on $85.0 million of variable rate debt through two interest rate swap agreements, which both expired in August 2010. As a result, the interest expense related to the interest rate swap agreements declined $0.8 million in 2010 compared with 2009. During the fourth quarter of 2010, the Company entered into a $50.0 million term loan, which was scheduled to mature in February 2011 and was later extended to May 2011. The term loan contributed additional interest of $0.3 million in 2010 compared with 2009. Due to the Company’s recent debt issuances and refinancing, it has incurred additional deferred financing costs, which increased interest expense $0.6 million in 2010 compared with 2009.

47

During the second quarter of 2010, the Company issued 0.9 million common shares of its common stock in exchange for retiring $13.0 million of its Exchangeable Senior Notes and used available cash to retire an additional $7.0 million of its Exchangeable Senior Notes. The Company repurchased $34.5 million of Exchangeable Senior Notes in 2009. The repurchase of Exchangeable Senior Notes resulted in a reduction of interest expense of $1.3 million in 2010 compared with 2009. Mortgage interest expense increased $0.3 million during 2010 compared with 2009 due to a full-year of mortgage interest expense incurred on the Cloverleaf Center mortgage loan entered into during the fourth quarter of 2009, and mortgage interest expense on mortgage loans encumbering 500 First Street, NW, Battlefield Corporate Center and Mercedes Center, which were acquired in 2010. The increase in mortgage debt was offset by a reduction in outstanding mortgages as the Company retired $23.7 million of mortgage debt during 2010 compared with $14.3 million of mortgage debt retired during 2009. Also, the Company deconsolidated $9.9 million of variable rate mortgage debt encumbering RiversPark I and a related cash flow hedge on January 1, 2010. The deconsolidated RiversPark I resulted in an increase in interest expense of $0.4 million in 2010 compared to 2009, as the Company recognized a reduction in interest expense related to its Financing Obligation in 2009. The Company further increased its construction activities in 2010 compared with 2009, which resulted in additional capitalized interest of $0.5 million.

Interest and other income are summarized as follows:

		Sept 30,		Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,						Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011		2010		Increase		Change			2010		2009		Increase		Change
	$	5,291	$	632	$	4,659		737	%	$	632	$	511	$	121		24	%

In December 2010, the Company provided a $25.0 million subordinated loan to the owners of 950 F Street, NW, a 287,000 square-foot office building in Washington, D.C. The loan has a fixed interest rate of 12.5%. In April 2011, the Company provided a $30.0 million subordinated loan to the owners of America’s Square, a 461,000 square foot, office complex in Washington, D.C. The loan has a fixed interest rate of 9.0%. The Company recorded interest income related to these loans of $5.1 million and $0.1 million during 2011 and 2010, respectively. The increase in interest and other income during 2011 compared with 2010 was partially offset by a $0.3 million decline in other income related to income received from the Company subleasing its former corporate office space. The Company’s lease on its former corporate office space and the associated sublease agreements expired on December 31, 2010.

Interest and other income increased $0.1 million during 2010 compared with 2009 due to recording interest income of $0.1 million related to the $25.0 million subordinated loan to the owners of 950 F Street, NW. Interest income on the Company’s various cash operating and escrow accounts decreased in 2010 compared with 2009 primarily due to lower average interest rates. The Company earned a weighted average interest rate of 1.5% on an average cash balance of $7.4 million during 2010 compared with a weighted average interest rate of 3.5% on an average cash balance of $6.7 million during 2009.

Equity in (earnings) losses of affiliates is summarized as follows:

		Sept 30,			Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,							Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011			2010		Increase		Change			2010		2009		Decrease		Change
	$	(20	)	$	124	$	144		116	%	$	124	$	95	$	29		31	%

Equity in (earnings) losses of affiliates reflects the Company’s ownership interest in the operating results of the properties, in which it does not have a controlling interest. On March 17, 2009 and January 1, 2010, the Company deconsolidated RiversPark II and RiversPark I, respectively. The Company acquired 1750 H Street, NW and Aviation Business Park, in the fourth quarter of 2010, and Metro Place III and IV and 1200 17^th Street, NW, in the fourth quarter of 2011, through unconsolidated joint ventures. The decrease in equity (earnings) in losses of affiliates during 2011 compared with 2010 reflects aggregate income generated by the properties owned by these ventures in 2011 compared to an aggregate loss incurred in 2010. The increase in equity in (earnings) losses of affiliates in 2010 compared with 2009 reflects a higher aggregate loss generated by the properties owned by these ventures.

Gains on early retirement of debt are summarized as follows:

		Sept 30,		Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,						Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011		2010		Decrease		Change			2010		2009		Decrease		Change
	$	—	$	164	$	164		100	%	$	164	$	6,167	$	6,003		97	%

48

In 2010, the Company issued 0.9 million common shares in exchange for retiring $13.03 million of Exchangeable Senior Notes and used available cash to retire $7.02 million of its Exchangeable Senior Notes, which resulted in a gain of $0.2 million, net of deferred financing costs and discounts.

In 2009, the Company retired $34.5 million of its Exchangeable Senior Notes, which resulted in a gain of $6.3 million, net of deferred financing costs and discounts. The Exchangeable Senior Notes repurchased in 2009 were funded with proceeds from the Company’s controlled equity offering program, borrowings under Company’s unsecured revolving credit facility and available cash. The gains on early retirement of debt were partially offset by debt retirement charges during the fourth quarter of 2009 associated with the restructuring the Company’s unsecured revolving credit facility and two secured term loans.

During the fourth quarter of 2011, the Company repaid the outstanding balance of $30.4 million on its Exchangeable Senior Notes with borrowings under its unsecured revolving credit facility and available cash.

Benefit (Provision) for Income Taxes

Benefit (provision) for income taxes is summarized as follows:

		Sept 30,		Sept 30,			Sept 30,		Sept 30,			Sept 30,			Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,							Percent			Year Ended December 31,							Percent
(amounts in thousands)	2011		2010			Increase		Change			2010			2009		Decrease		Change
	$	633	$	(31	)	$	664		2142	%	$	(31	)	$	—	$	31		—

During the fourth quarter of 2010, the Company acquired its first two properties in Washington, D.C. that are subject to an income-based franchise tax. In 2011, the Company acquired two additional properties in Washington, D.C. that were subject to the franchise tax. As a result, the Company recorded a benefit from income taxes of $0.6 million in 2011 compared with a provision for income taxes of $31 thousand in 2010. The Company also has interests in two unconsolidated joint ventures that own real estate in Washington, D.C. that is subject to the franchise tax. The impact for income taxes related to these unconsolidated joint ventures is reflected within “Equity in (earnings) losses of affiliates” in the Company’s consolidated statements of operations. Since the Company did not own any properties in Washington, D.C. prior to 2010, it was not subject to any income-based taxes in 2009.

Loss from Discontinued Operations

Loss from discontinued operations is summarized as follows:

		Sept 30,		Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,		Sept 30,		Sept 30,
	Year Ended December 31,						Percent			Year Ended December 31,						Percent
(amounts in thousands)	2011		2010		Increase		Change			2010		2009		Increase		Change
	$	4,293	$	2,300	$	1,993		87	%	$	2,300	$	1,106	$	1,194		108	%

Discontinued operations reflect the operating results of Airpark Place Business Center (which is expected to be sold in March 2012), Aquia Commerce Center I & II and Gateway West (which were both sold in the second quarter of 2011), Old Courthouse Square (which was sold in the first quarter of 2011) and Deer Park and 7561 Lindbergh Drive (which were both sold in the second quarter of 2010). Airpark Place Business Center, Gateway West, Old Courthouse Square, Deer Park and 7561 Lindbergh Drive were located in the Company’s Maryland reporting segment and Aquia Commerce Center I & II was located in the Company’s Northern Virginia reporting segment. The operating results of the disposed properties were adversely affected by impairment charges totaling $6.3 million, $4.0 million and $2.5 million in 2011, 2010 and 2009, respectively. For the years ended December 31, 2011 and 2010, the loss from operations of the disposed properties were partially offset by gains on sale of real estate properties of $2.0 million and $0.6 million, respectively. The Company did not recognize any gains on the sale of real estate properties in 2009. The Company has had, and will have, no continuing involvement with these properties subsequent to their disposal.

49

Net loss (income) attributable to noncontrolling interests

Net loss (income) attributable to noncontrolling interests is summarized as follows:

		Sept 30,		Sept 30,		Sept 30,		Sept 30,			Sept 30,		Sept 30,			Sept 30,		Sept 30,
	Year Ended December 31,						Percent			Year Ended December 31,							Percent
(amounts in thousands)	2011		2010		Increase		Change			2010		2009			Decrease		Change
	$	688	$	232	$	456		197	%	$	232	$	(124	)	$	356		287	%

Net loss (income) attributable to noncontrolling interests reflects the ownership interests in the Company’s net income or loss attributable to parties other than the Company. During 2011, the Company incurred a net loss of $8.8 million compared with a net loss of $11.7 million in 2010.

The percentage of the Operating Partnership owned by noncontrolling interests increased to 5.5% during 2011 from 1.9% at December 31, 2010, which was due to the issuance of 2.0 million Operating Partnership units to partially fund the acquisition of 840 First Street, NE during 2011. As of December 31, 2011, the Company consolidated two joint ventures in which it had a controlling interest compared with the consolidation of one joint venture in which it had a controlling interest as of December 31, 2010. The Company consolidates the operating results of its consolidated joint ventures and recognizes its joint venture partner’s percentage of gains or losses within net loss (income) attributable to noncontrolling interests. The joint venture partners’ aggregate share of the loss in the operating results of the Company’s consolidated joint ventures was $15 thousand and $2 thousand in 2011 and 2010, respectively.

Due to the issuance of 18.3 million of the Company’s common shares during 2010, the noncontrolling interests owned by limited partners decreased to 1.9% as of December 31, 2010 compared with 2.3% as of December 31, 2009. The reduction in noncontrolling parties ownership percentage in the Operating Partnership was partially offset by the issuance of 0.2 million Operating Partnership units to fund a portion of the Company’s acquisition of Battlefield Corporate Center. During the fourth quarter of 2010, the Company acquired Redland Corporate Center through a joint venture, in which, it had a 97% economic interest. During 2010, the joint venture partner’s share of the loss in the operations of Redland Corporate Center was $2 thousand.

Same Property Net Operating Income

Same Property Net Operating Income (“Same Property NOI”), defined as operating revenues (rental, tenant reimbursements and other revenues) less operating expenses (property operating expenses, real estate taxes and insurance) from the properties whose period-over-period operations can be viewed on a comparative basis , is a primary performance measure the Company uses to assess the results of operations at its properties. Same Property NOI is a non-GAAP measure. As an indication of the Company’s operating performance, Same Property NOI should not be considered an alternative to net income calculated in accordance with GAAP. A reconciliation of the Company’s Same Property NOI to net income from its consolidated statements of operations is presented below. The Same Property NOI results exclude corporate-level expenses, as well as certain transactions, such as the collection of termination fees, as these items vary significantly period-over-period and thus impact trends and comparability. Also, the Company eliminates depreciation and amortization expense, which are property level expenses, in computing Same Property NOI because these are non-cash expenses that are based on historical cost accounting assumptions and management believes these expenses do not offer the investor significant insight into the operations of the property. This presentation allows management and investors to distinguish whether growth or declines in net operating income are a result of increases or decreases in property operations or the acquisition of additional properties. While this presentation provides useful information to management and investors, the results below should be read in conjunction with the results from the consolidated statements of operations to provide a complete depiction of total Company performance.

50

2011 Compared with 2010

The following tables of selected operating data provide the basis for our discussion of Same Property NOI in 2011 compared with 2010:

		September 30,			September 30,			September 30,			September 30,
(dollars in thousands)	Year Ended December 31,
	2011			2010			$ Change			% Change
Number of buildings(1)		163			163			—			—
Same property revenues
Rental	$	104,612		$	105,523		$	(911	)		(0.9	)
Tenant reimbursements and other		22,398			23,750			(1,352	)		(5.7	)
Total same property revenues		127,010			129,273			(2,263	)		(1.8	)
Same property operating expenses
Property		28,630			30,393			(1,763	)		(5.8	)
Real estate taxes and insurance		11,509			11,910			(401	)		(3.4	)
Total same property operating expenses		40,139			42,303			(2,164	)		(5.1	)
Same property net operating income	$	86,871		$	86,970		$	(99	)		(0.1	)
Reconciliation to net loss:
Same property net operating income	$	86,871		$	86,970
Non-comparable net operating income(2)(3)		26,843			3,279
General and administrative expenses		(16,027	)		(14,523	)
Depreciation and amortization		(60,385	)		(41,752	)
Other(4)		(41,761	)		(43,349	)
Discontinued operations		(4,293	)		(2,300	)
Net loss	$	(8,752	)	$	(11,675	)

		September 30,			September 30,
	Full Year Weighted Average Occupancy
	2011			2010
Same Properties		83.5	%		85.1	%
Total		81.5	%		84.6	%

⁽¹⁾ Represents properties owned for the entirety of the periods presented.

⁽²⁾ Non-comparable Properties include: RiversPark I and II, Three Flint Hill, NW, Battlefield Corporate Center, 500 First Street, NW, Redland Corporate Center, Atlantic Corporate Park, 1211 Connecticut Ave, NW, 440 First Street, NW, Mercedes Center, 1750 H Street, NW, Aviation Business Park, Cedar Hill I & III, Merrill Lynch, 840 First Street, NE, One Fair Oaks, Greenbrier Towers I & II, 1005 First Street, NE, 1200 17th Street, NW, Metro Place III & IV, Hillside Center, Airpark Place Business Center, Davis Drive and Sterling Park – Building 7.

⁽³⁾  Non-comparable property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

⁽⁴⁾  Combines acquisition costs, impairment of real estate assets, change in contingent consideration related to acquisition of property, total other expenses, net and (provision) benefit for income taxes from the Company’s consolidated statements of operations.

Same Property NOI decreased $0.1 million for the twelve months ended December 31, 2011 compared with the same period in 2010. Same property rental revenue decreased $0.9 million for the twelve months ended December 31, 2011 due to an increase in vacancy. Tenant reimbursements and other revenue decreased $1.4 million for the year ended December 31, 2011 as a result of a decrease in recoverable property operating expenses, primarily, related to snow and ice removal costs. Same property operating expenses decreased $1.8 million for the full year of 2011 due to lower snow and ice removal costs and reserves for anticipated bad debt expense. Real estate taxes and insurance expense decreased $0.4 million for the 2011 compared with 2010 due to lower tax assessments. The Company expects its Same Property NOI to increase in 2012 as it has leased space at several properties that it acquired in 2010 that had high vacancy levels at acquisition.

51

Maryland

		September 30,		September 30,		September 30,			September 30,
(dollars in thousands)	Year Ended December 31,
	2011		2010		$ Change			% Change
Number of buildings(1)		60		60		—			—
Same property revenues
Rental	$	33,810	$	33,971	$	(161	)		(0.5	)
Tenant reimbursements and other		7,113		7,214		(101	)		(1.4	)
Total same property revenues		40,923		41,185		(262	)		(0.6	)
Same property operating expenses
Property		8,863		9,947		(1,084	)		(10.9	)
Real estate taxes and insurance		3,831		3,996		(165	)		(4.1	)
Total same property operating expenses		12,694		13,943		(1,249	)		(9.0	)
Same property net operating income	$	28,229	$	27,242	$	987			3.6
Reconciliation to total property operating income:
Same property net operating income	$	28,229	$	27,242
Non-comparable net operating income (2)(3)		5,181		785
Total property operating income	$	33,410	$	28,027

		September 30,			September 30,
	Full Year Weighted Average Occupancy
	2011			2010
Same Properties		83.3	%		84.5	%
Total		77.4	%		82.8	%

⁽¹⁾ Represents properties owned for the entirety of the periods presented.

⁽²⁾  Non-comparable Properties include: RiversPark I and II, Redland Corporate Center, Mercedes Center, Aviation Business Park, Merrill Lynch, Hillside Center and Airpark Place Business Center.

⁽³⁾ Non-comparable property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI for the Maryland properties increased $1.0 million for the twelve months ended December 31, 2011 compared with the same period in 2010. Total same property revenues decreased $0.3 million during 2011 primarily due to an increase in vacancy. Total same property operating expenses for the Maryland properties decreased $1.2 million for the twelve months ended December 31, 2011 compared with 2010 primarily due to lower reserves for anticipated bad debt expense and snow and ice removal costs.

52

Northern Virginia

		September 30,		September 30,			September 30,			September 30,
(dollars in thousands)	Year Ended December 31,
	2011		2010			$ Change			% Change
Number of buildings(1)		49		49			—			—
Same property revenues
Rental	$	32,496	$	32,317		$	179			0.6
Tenant reimbursements and other		6,822		7,297			(475	)		(6.5	)
Total same property revenues		39,318		39,614			(296	)		(0.7	)
Same property operating expenses
Property		8,405		8,583			(178	)		(2.1	)
Real estate taxes and insurance		3,863		3,861			2			(0.1	)
Total same property operating expenses		12,268		12,444			(176	)		(1.4	)
Same property net operating income	$	27,050	$	27,170		$	(120	)		(0.4	)
Reconciliation to total property operating income:
Same property net operating income	$	27,050	$	27,170
Non-comparable net operating income (loss)(2)(3)		4,906		(155	)
Total property operating income	$	31,956	$	27,015

		September 30,			September 30,
	Full Year Weighted Average Occupancy
	2011			2010
Same Properties		84.1	%		84.5	%
Total		79.2	%		82.9	%

⁽¹⁾  Represents properties owned for the entirety of the periods presented.

⁽²⁾  Non-comparable Properties include Three Flint Hill, Atlantic Corporate Center, Cedar Hill I & III, One Fair Oaks, Metro Place III & IV, Davis Drive and Sterling Park – Building 7.

⁽³⁾  Non-comparable property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI for the Northern Virginia properties decreased $0.1 million for the twelve months ended December 31, 2011 compared with the same period in 2010. Total same property revenues decreased $0.3 million during the twelve months ended December 31, 2011 compared with 2010 due to a decrease in recoverable property operating expenses, primarily, snow and ice removal costs. During 2011, total same property operating expenses decreased $0.2 million compared with 2010 due to a decrease in snow and ice removal costs.

53

Southern Virginia

		September 30,		September 30,		September 30,		September 30,
(dollars in thousands)	Year Ended December 31,
	2011		2010		$ Change		% Change
Number of buildings(1)		54		54		—		—
Same property revenues