10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2006
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number 000-51963

COLE CREDIT PROPERTY TRUST II, INC.

(Exact name of registrant as specified in its charter)

Maryland	20-1676382
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
2555 East Camelback Road, Suite 400 Phoenix, Arizona, 85016	(602) 778-8700 (Registrant’s telephone number, including area code)
(Address of principal executive offices; zip code)

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

Title of Each Class	Name of Exchange on Which Registered
None	None

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

Common Stock, $0.01 par value per share

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

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 o     No þ

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 þ     No o

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

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

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

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

The aggregate market value of the voting stock held by nonaffiliates as of June 30, 2006: approximately $114.0 million assuming a market value of $10.00 per share

The number of shares of common stock outstanding as of March 16, 2007 was approximately 40,629,207.

Documents Incorporated by Reference:

The Registrant incorporates by reference portions of the Cole Credit Property Trust II, Inc. Definitive Proxy Statement for the 2007 Annual Meeting of Stockholders (into Items 10, 11, 12, 13 and 14 of Part III).

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS			2
PART I
	ITEM 1.	BUSINESS	3
	ITEM 1A.	RISK FACTORS	16
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	36
	ITEM 2.	PROPERTIES	36
	ITEM 3.	LEGAL PROCEEDINGS	38
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	38
PART II
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	39
	ITEM 6.	SELECTED FINANCIAL DATA	43
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	44
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS	55
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	55
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	55
	ITEM 9A.	CONTROLS AND PROCEDURES	56
	ITEM 9B.	OTHER INFORMATION	56
PART III
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE	56
	ITEM 11.	EXECUTIVE COMPENSATION	56
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	56
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	56
	ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	56
PART IV
	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	57
SIGNATURES			58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			F-2
CONSOLIDATED BALANCE SHEETS			F-3
CONSOLIDATED STATEMENTS OF OPERATIONS			F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY			F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS			F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			F-7
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION			S-1
EXHIBIT INDEX
EX-10.9 PURCHASE AGREEMENT
EX-10.10 PROMISSORY NOTE
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATIONS OF THE CEO AND CFO

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K of Cole Credit Property Trust II, Inc. other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission (“SEC”). We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Annual Report on Form 10-K, and we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Any forward-looking statements are subject to unknown risks and uncertainties, including those discussed in Item 1A, the “Risk Factors” section of this Annual Report on Form 10-K.

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PART I

ITEM 1.   BUSINESS

Formation

Cole Credit Property Trust II, Inc. (the “Company,” “we,” “our,” or “us”) is a Maryland corporation formed on September 29, 2004, that has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”). We were organized to acquire and operate commercial real estate primarily consisting of high quality, freestanding, single-tenant properties net leased to investment grade and other creditworthy tenants located throughout the United States. As of December 31, 2006, we owned 91 properties located in 26 states, comprising approximately 2.9 million rentable square feet. At December 31, 2006, these properties were 100% leased.

Substantially all of our business is conducted through our operating partnership, Cole Operating Partnership II, LP, a Delaware limited partnership organized in 2004 (“Cole OP II”). We own a 99.99% interest in Cole OP II as its general partner. The remaining 0.01% of Cole OP II is held as a limited partner’s interest by Cole REIT Advisors II, LLC (“Cole Advisors II”), which is our affiliated advisor.

Cole Advisors II, pursuant to a contractual arrangement, is responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf. The agreement with Cole Advisors II is for a one-year term and is reconsidered on an annual basis by our board of directors.

On June 27, 2005, we commenced a public offering on a “best efforts” basis of up to 45,000,000 shares of common stock offered at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a Registration Statement on Form S-11 filed with the SEC under the Securities Act (the “Offering”). The Registration Statement also covered up to 5,000,000 shares available pursuant to a distribution reinvestment plan (the “DRIP”) under which our stockholders may elect to have their distributions reinvested in additional shares of our common stock at the greater of $9.50 per share or 95% of the estimated value of a share of common stock. On November 13, 2006, we filed a registration statement with the SEC under Rule 462(b) to add securities to the Offering. The registration statement registers an additional 4,390,000 shares of common stock for sale in the primary offering and an additional 952,000 shares of common stock for sale pursuant to our DRIP.

On November 6, 2006, we filed a registration statement with the SEC with respect to a proposed secondary public offering of up to 150,000,000 shares of common stock. The offering would include up to 125,000,000 shares to be offered for sale at $10.00 per share in the primary offering and up to 25,000,000 shares to be offered for sale pursuant to our DRIP.

We commenced our principal operations on September 23, 2005, when we issued the initial 486,000 shares of our common stock in the Offering. Prior to such date, we were considered a development stage company. As of December 31, 2006, we had accepted subscriptions for 30,691,204 shares of our common stock, including 20,000 shares owned by Cole Holdings Corporation (“Cole Holdings”) for aggregate gross proceeds of approximately $306.5 million before offering costs and selling commissions of approximately $29.4 million. As of December 31, 2006, we were authorized to issue 10,000,000 shares of preferred stock, but had none issued and outstanding. As of March 16, 2007, we had raised approximately $406.3 million in gross offering proceeds through the issuance of 40,629,407 shares of our common stock. As of March 16, 2007, approximately $87.6 million in shares (8,760,593 shares) remained available for sale to the public under the Offering, exclusive of shares available under the DRIP.

We admit new stockholders pursuant to the Offering at least monthly. All subscription proceeds are held in a separate account until the subscribing investors are admitted as stockholders. Upon admission of new stockholders, subscription proceeds are released to us and may be utilized as consideration for investments and the payment or reimbursement of dealer manager fees, selling commissions, organization and offering expenses, and operating expenses. We also have used, and may continue to use, a portion of the net proceeds from the Offering to fund all or part of our distributions to stockholders. Such distributions may constitute a

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return of capital and reduce the amount of capital we ultimately invest in properties. Until required for use, net offering proceeds are held in short-term, liquid investments.

Our common stock is not currently listed on a national securities exchange. We will seek to list our stock for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our shares at this time. We do not anticipate that there will be any market for our common stock until our shares are listed or quoted. In the event we do not obtain listing prior to the tenth anniversary of the completion or termination of the Offering, our charter requires that we either: (1) seek stockholder approval of an extension or amendment of this listing deadline or (2) seek stockholder approval to adopt a plan of liquidation of the company.

Investment Objectives and Policies

Our objective is to invest primarily in high quality, freestanding, income-generating properties, net leased to investment grade and other creditworthy tenants. We may also invest in mortgage loans or other investments related to real property or entities or joint ventures that make similar investments. Our primary investment objectives are:

•  to provide current income to our stockholders through the payment of cash distributions; and

•  to preserve and return our stockholders’ capital contributions.

We also seek capital gain from our investments. We cannot assure investors that we will attain these objectives or that our capital will not decrease.

Decisions relating to the purchase or sale of our investments are made by our advisor, Cole Advisors II, subject to approval by our board of directors, including a majority of our independent directors. Our board of directors may revise our investment policies without the concurrence of our stockholders. Our independent directors will review our investment policies at least annually to determine that our policies are in the best interest of our stockholders.

Acquisition and Investment Policies

Primary Investments

We invest primarily in income-generating retail properties, net leased to investment grade and other creditworthy tenants. Our investments may be direct investments in such properties or in other entities that own or invest in, directly or indirectly, interests in such properties. We seek to acquire a portfolio of real estate that is diversified by geographical location and by type and size of property. Currently, our portfolio consists primarily of freestanding, single-tenant properties net leased for use as retail establishments. A portion of our portfolio also includes multi-tenant retail properties and single-tenant properties leased to office and industrial tenants. Although we expect our portfolio will continue to consist primarily of freestanding, single-tenant properties, we expect to continue to invest in other property types, including office and industrial properties, leased to one or more tenants. In addition, we expect to further diversify our portfolio by investing in multi-tenant properties that compliment our overall investment objectives and mortgage loans.

Many of our properties will be leased to tenants in the chain or franchise retail industry, including but not limited to convenience stores, drug stores and restaurant properties. Other properties may be leased to large, national “big box” retailers, so-called “power centers,” which are comprised of big box retailers and smaller retail establishments, and other multi-tenant properties that compliment our overall investment objectives. Our advisor monitors industry trends and invests in properties on our behalf that serve to provide a favorable return balanced with risk. Our management primarily targets retail businesses with established track records. This industry is highly property dependent, therefore our advisor believes it offers highly competitive sale-leaseback investment opportunities.

We believe that our general focus on the acquisition of freestanding, single-tenant retail properties net leased to investment grade and other creditworthy tenants presents lower investment risks and greater stability than other sectors of today’s commercial real estate market. Unlike funds that invest solely in multi-tenant

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properties, we plan to acquire a diversified portfolio comprised primarily of single-tenant properties and a smaller number of multi-tenant properties that compliment our overall investment objectives. By primarily acquiring single-tenant properties, we believe that lower than expected results of operations from one or a few investments will not necessarily preclude our ability to realize our investment objectives of cash flow and preservation of capital from our overall portfolio. In addition, we believe that freestanding retail properties, as compared to shopping centers, malls and other traditional retail complexes, offer a distinct investment advantage since these properties generally require less management and operating capital, have less recurring tenant turnover and generally offer superior locations that are less dependent on the financial stability of adjoining tenants. In addition, since we intend to acquire properties that are geographically diverse, we expect to minimize the potential adverse impact of economic downturns in local markets. Our management believes that a portfolio consisting primarily of freestanding, single-tenant retail properties, net leased to creditworthy tenants diversified geographically and by the industry and brand of tenants will enhance our liquidity opportunities for investors by making the sale of individual properties, multiple properties or our investment portfolio as a whole attractive to institutional investors and by making a possible listing of our shares attractive to the public investment community.

To the extent feasible, we seek to achieve a well-balanced portfolio diversified by geographic location, age of the property and lease maturity. We pursue properties with tenants that represent a variety of industries so as to avoid concentration in any one industry. We expect these industries to include all types of retail establishments, such as “big box” retailers, convenience stores, drug stores and restaurant properties. We expect that tenants of our properties will also be diversified between national, regional and local brands. We will generally target properties with lease terms in excess of ten years. We may acquire properties with shorter terms if the property is in an attractive location, if the property is difficult to replace, or if the property has other significant favorable attributes. We expect that these investments will provide long-term value by virtue of their size, location, quality and condition and lease characteristics. We currently expect all of our acquisitions will be in the United States, including United States protectorates.

Many retail companies today are entering into sale-leaseback arrangements as a strategy for applying more capital that would otherwise be applied to their real estate holdings to their core operating businesses. We believe that our investment strategy will enable us to take advantage of the increased emphasis on retailers’ core business operations in today’s competitive corporate environment as retailers attempt to divest from real estate assets.

There is no limitation on the number, size or type of properties that we may acquire or on the percentage of net proceeds of this offering that may be invested in a single property. The number and mix of properties will depend upon real estate market conditions and other circumstances existing at the time of acquisition of properties and the amount of proceeds raised in this offering. For a further description, see the section titled “— Other Possible Investments” below.

We intend to incur debt to acquire properties where our board determines that incurring such debt is in our best interest. In addition, from time to time, we may acquire some properties without financing and later incur mortgage debt secured by one or more of such properties if favorable financing terms are available. We will use the proceeds from such loans to acquire additional properties. See “— Borrowing Policies” under this section for a more detailed explanation of our borrowing intentions and limitations.

Investment Grade and Other Creditworthy Tenants

In evaluating potential property acquisitions consistent with our investment objectives, we apply credit underwriting criteria to the tenants of existing properties. Similarly, we will apply credit underwriting criteria to possible new tenants when we are re-leasing properties in our portfolio. Tenants of our properties frequently are national or super-regional retail chains that are investment grade or otherwise creditworthy entities having high net worth and operating income. Generally, these tenants must be experienced multi-unit operators with a proven track record in order to meet the credit tests applied by our advisor.

A tenant will be considered “investment grade” when the tenant has a debt rating by Moody’s of Baa3 or better or a credit rating by Standard & Poor’s of BBB- or better, or its payments are guaranteed by a company

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with such rating. Changes in tenant credit ratings, coupled with future acquisition and disposition activity, may increase or decrease our concentration of investment grade tenants in the future.

Moody’s ratings are opinions of future relative creditworthiness based on an evaluation of franchise value, financial statement analysis and management quality. The rating given to a debt obligation describes the level of risk associated with receiving full and timely payment of principal and interest on that specific debt obligation and how that risk compares with that of all other debt obligations. The rating, therefore, measures the ability of a company to generate cash in the future.

A Moody’s debt rating of Baa3, which is the lowest investment grade rating given by Moody’s, is assigned to companies with adequate financial security. However, certain protective elements may be lacking or may be unreliable over any given period of time. A Moody’s debt rating of Aaa, which is the highest investment grade rating given by Moody’s, is assigned to companies with exceptional financial security. Thus, investment grade tenants will be judged by Moody’s to have at least adequate financial security, and will in some cases have exceptional financial security.

Standard & Poor’s assigns a credit rating to both companies as a whole and to each issuance or class of a company’s debt. A Standard & Poor’s credit rating of BBB−, which is the lowest investment grade rating given by Standard & Poor’s, is assigned to companies that exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the company to meet its financial commitments. A Standard & Poor’s credit rating of AAA+, which is the highest investment grade rating given by Standard & Poor’s, is assigned to companies or issuances with extremely strong capacities to meet their financial commitments. Thus, investment grade tenants will be judged by Standard & Poor’s to have at least adequate protection parameters, and will in some cases have extremely strong financial positions.

Other creditworthy tenants are tenants with financial profiles that our advisor believes meet our investment objectives. In evaluating the credit worthiness of a tenant or prospective tenant, our advisor does not use specific quantifiable standards, but does consider many factors, including the proposed terms of the acquisition. The factors our advisor considers include the financial condition of the tenant and/or guarantor, the operating history of the property with such tenant or tenants, the tenant’s or tenants’ market share and track record within its industry segment, the general health and outlook of the tenant’s or tenants’ industry segment, and the lease length and terms at the time of the acquisition.

Description of Leases

We typically purchase single-tenant properties with existing leases, and when spaces become vacant or existing leases expire we anticipate entering into “net” leases. “Net” leases means leases that typically require that tenants pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs related to the property, in addition to the lease payments. There are various forms of net leases, typically classified as triple net or double net. Triple net leases typically require the tenant to pay all costs associated with a property in addition to the base rent and percentage rent, if any. Double net leases typically have the landlord responsible for the roof and structure, or other aspects of the property, while the tenant is responsible for all remaining expenses associated with the property. In the event that we acquire multi-tenant properties, we expect to have a variety of lease arrangements with the tenants of such properties. Since each lease is an individually negotiated contract between two or more parties, each contract will have different obligations of both the landlord and tenant. Many large national tenants have standard lease forms that generally do not vary from property to property, and we will have limited ability to revise the terms of leases to those tenants.

We anticipate that a majority of our acquisitions will have lease terms of ten years or more at the time of the acquisition. We may acquire properties under which the lease term has partially expired. We also may acquire properties with shorter lease terms if the property is in an attractive location, if the property is difficult to replace, or if the property has other significant favorable real estate attributes. Under most commercial leases, tenants are obligated to pay a predetermined annual base rent. Some of the leases for our properties also will contain provisions that increase the amount of base rent payable at points during the lease term

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and/or percentage rent that can be calculated by a number of factors. Under triple net and double net leases, the tenants are generally required to pay the real estate taxes, insurance, utilities and common area maintenance charges associated with the properties. Generally, the leases require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable, as the additional insured on the policy. As a precautionary measure, our advisor may obtain, to the extent available, secondary liability insurance, as well as loss of rents insurance that covers one year of annual rent in the event of a rental loss. The secondary insurance coverage names the ownership entity as the named insured on the policy. The insurance coverage insures Cole Holdings and any entity formed under Cole Holdings.

Some leases do require that we procure the insurance for both commercial general liability and property damage insurance; however, the premiums are fully reimbursable from the tenant. In the event we procures such insurance, the policy lists us as the named insured on the policy and the tenant as the additional insured.

Tenants are required to provide proof of insurance by furnishing a certificate of insurance to our advisor on an annual basis. The insurance certificates are carefully tracked and reviewed for compliance by our advisor’s property management department.

In general, leases may not be assigned or subleased without our prior written consent. If we do consent to an assignment or sublease, the original tenant generally will remain fully liable under the lease unless we release the tenant from its obligations under the lease.

Other Possible Investments

Although we expect that most of our property acquisitions will be of the type described above, we may make other investments. For example, we are not limited to investments in single-tenant, freestanding retail properties or properties leased to investment grade and other creditworthy tenants and complimentary multi-tenant properties. We may invest in other commercial properties such as business and industrial parks, manufacturing facilities, office buildings and warehouse and distribution facilities, or in other entities that make such investments or own such properties, in order to reduce overall portfolio risks or enhance overall portfolio returns if our advisor and board of directors determine that it would be advantageous to do so. Further, to the extent that our advisor and board of directors determine it is in our best interest, due to the state of the real estate market, in order to diversify our investment portfolio or otherwise, we will make or invest in mortgage loans secured by the same types of commercial properties that we intend to acquire.

Our criteria for investing in mortgage loans will be substantially the same as those involved in our investment in properties. We do not intend to make loans to other persons (other than mortgage loans), to underwrite securities of other issuers or to engage in the purchase and sale of any types of investments other than interests in real estate.

Investment Decisions

Cole Advisors II has substantial discretion with respect to the selection of specific investments and the purchase and sale of our properties, subject to the approval of our board of directors. In pursuing our investment objectives and making investment decisions for us, Cole Advisors II evaluates the proposed terms of the purchase against all aspects of the transaction, including the condition and financial performance of the property, the terms of existing leases and the creditworthiness of the tenant, terms of the lease and property and location characteristics. Because the factors considered, including the specific weight we place on each factor, will vary for each potential investment, we do not, and are not able to, assign a specific weight or level of importance to any particular factor.

In addition to procuring and reviewing an independent valuation estimate and property condition report, our advisor also, to the extent such information is available, consider the following:

•  unit level store performance;

•  property location, visibility and access;

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•  age of the property, physical condition and curb appeal;

•  neighboring property uses;

•  local market conditions including vacancy rates;

•  area demographics, including trade area population and average household income;

•  neighborhood growth patterns and economic conditions;

•  presence of nearby properties that may positively impact store sales at the subject property; and

•  lease terms, including length of lease term, scope of landlord responsibilities, presence and frequency of contractual rental increases, renewal option provisions, exclusive and permitted use provisions, co-tenancy requirements and termination options.

Our advisor considers whether properties are leased by, or have leases guaranteed by, companies that maintain an investment grade rating by either Standard and Poor’s or Moody’s Investor Services. Our advisor also will consider non-rated and non-investment grade rated tenants that we consider creditworthy, as described in “— Investment Grade and Other Creditworthy Tenants” above.

Our advisor reviews the terms of each existing lease by considering various factors, including:

•  rent escalations;

•  remaining lease term;

•  renewal option terms;

•  tenant purchase options;

•  termination options;

•  scope of the landlord’s maintenance, repair and replacement requirements;

•  projected net cash flow yield; and

•  projected internal rates of return.

Conditions to Closing Our Acquisitions

Generally, we condition our obligation to close the purchase of any investment on the delivery and verification of certain documents from the seller or developer, including, where appropriate:

•  plans and specifications;

•  surveys;

•  evidence of marketable title, subject to such liens and encumbrances as are acceptable to Cole Advisors II;

•  financial statements covering recent operations of properties having operating histories;

•  title and liability insurance policies; and

•  tenant estoppel certificates.

We generally will not purchase any property unless and until we also obtain what is generally referred to as a “Phase I” environmental site assessment and are generally satisfied with the environmental status of the property. However, we may purchase a property without obtaining such assessment if our advisor determines it is not warranted. A Phase I environmental site assessment basically consists of a visual survey of the building and the property in an attempt to identify areas of potential environmental concerns, visually observing neighboring properties to asses surface conditions or activities that may have an adverse environmental impact on the property, and contacting local governmental agency personnel who perform a regulatory agency file search in an attempt to determine any known environmental concerns in the immediate identity of the property.

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A Phase I environmental site assessment does not generally include any sampling or testing of soil, ground water or building materials from the property and may not reveal all environmental hazards on a property.

We may enter into purchase and sale arrangements with a seller or developer of a suitable property under development or construction. In such cases, we will be obligated to purchase the property at the completion of construction, provided that the construction conforms to definitive plans, specifications, and costs approved by us in advance. In such cases, prior to our acquiring the property, we generally would receive a certificate of an architect, engineer or other appropriate party, stating that the property complies with all plans and specifications. If renovation or remodeling is required prior to the purchase of a property, we expect to pay a negotiated maximum amount to the seller upon completion. We do not currently intend to construct or develop properties or to render any services in connection with such development or construction.

In determining whether to purchase a particular property, we may, in accordance with customary practices, obtain an option on such property. The amount paid for an option, if any, normally is surrendered if the property is not purchased and normally is credited against the purchase price if the property is purchased.

In purchasing, leasing and developing properties, we will be subject to risks generally incident to the ownership of real estate. See “Risk Factors — General Risks Related to Investments in Real Estate.”

Ownership Structure

Our investment in real estate generally takes the form of holding fee title or a long-term leasehold estate. We acquire such interests either directly through our operating partnership, or indirectly through limited liability companies, limited partnerships, or through investments in joint ventures, partnerships, co-tenancies or other co-ownership arrangements with the developers of the properties, affiliates of Cole Advisors II or other persons. See the “— Joint Venture Investments” section below. In addition, we may purchase properties and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback transaction so that the lease will be characterized as a “true lease” and so that we will be treated as the owner of the property for federal income tax purposes, the Internal Revenue Service could challenge this characterization. In the event that any sale-leaseback transaction is re-characterized as a financing transaction for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed.

Joint Venture Investments

We may enter into joint ventures, partnerships, co-tenancies and other co-ownership arrangements with third parties as well as affiliated entities, including other real estate programs sponsored by affiliates of our advisor for the acquisition, development or improvement of properties with affiliates of our advisor, including other real estate programs sponsored by affiliates of our advisor. We may also enter into such arrangements with real estate developers, owners and other unaffiliated third parties for the purpose of developing, owning and operating real properties. In determining whether to invest in a particular joint venture, Cole Advisors II will evaluate the real property that such joint venture owns or is being formed to own under the same criteria described above in “— Investment Decisions” for the selection of our real estate property investments.

Our general policy is to invest in joint ventures only when we will have a right of first refusal to purchase the co-venturer’s interest in the joint venture if the co-venturer elects to sell such interest. In the event that the co-venturer elects to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer’s interest in the property held by the joint venture. In the event that any joint venture with an affiliated entity holds interests in more than one property, the interest in each such property may be specially allocated based upon the respective proportion of funds invested by each co-venturer in each such property.

Cole Advisors II may have conflicts of interest in determining which Cole-sponsored program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, Cole Advisors II may face a conflict in structuring the terms of the relationship between our interests and the interest of the

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affiliated co-venturer and in managing the joint venture. Since Cole Advisors II and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may have liabilities that exceed the percentage of our investment in the joint venture.

We may enter into joint ventures with other Cole real estate programs only if a majority of our directors not otherwise interested in the transaction and a majority of our independent directors approve the transaction as being fair and reasonable to us and on substantially the same terms and conditions as those received by other joint venturers.

Borrowing Policies

Our advisor believes that utilizing borrowing is consistent with our investment objective of maximizing the return to investors. By operating on a leveraged basis, we will have more funds available for investment in properties. This will allow us to make more investments than would otherwise be possible, resulting in a more diversified portfolio. There is no limitation on the amount we may borrow against any single improved property. However, under our charter, we are required to limit our borrowings to 60% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets, unless excess borrowing is approved by a majority of the independent directors and disclosed to our stockholders in the next quarterly report along with the justification for such excess borrowing. In the event that we issue preferred stock that is entitled to a preference over the common stock in respect of distributions or liquidation or is treated as debt under generally accepted accounting principles in the United States (“GAAP”), we will include it in the leverage restriction calculations, unless the issuance of the preferred stock is approved or ratified by our stockholders. We expect that during the period of our offering of common stock we will request that our independent directors approve borrowings in excess of this limitation since we will then be in the process of raising our equity capital to acquire our portfolio. However, we anticipate that our overall leverage following our offering stage will be within our charter limit.

Our advisor will use its best efforts to obtain financing on the most favorable terms available to us. All of our financing arrangements must be approved by a majority of our board members including a majority of our independent directors. Lenders may have recourse to assets not securing the repayment of the indebtedness. Our advisor may refinance properties during the term of a loan only in limited circumstances, such as when a decline in interest rates makes it beneficial to prepay an existing mortgage, when an existing mortgage matures or if an attractive investment becomes available and the proceeds from the refinancing can be used to purchase such investment. The benefits of the refinancing may include increased cash flow resulting from reduced debt service requirements, an increase in dividend distributions from proceeds of the refinancing, if any, and an increase in property ownership if some refinancing proceeds are reinvested in real estate.

Our ability to increase our diversification through borrowing may be adversely impacted if banks and other lending institutions reduce the amount of funds available for loans secured by real estate. When interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, we may purchase properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. To the extent that we do not obtain mortgage loans on our properties, our ability to acquire additional properties will be restricted.

We may not borrow money from any of our directors or from our advisor or its affiliates unless such loan is approved by a majority of the directors not otherwise interested in the transaction (including a majority of the independent directors) as fair, competitive and commercially reasonable and no less favorable to us than a comparable loan between unaffiliated parties. During the year ended December 31, 2006 and 2005, we borrowed an aggregate of approximately $7.0 million and approximately $4.5 million, respectively, from our advisor’s affiliates. Our board of directors, including a majority of our independent directors, not otherwise interested in the transaction approved each of these loans as being fair, competitive, and commercially

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reasonable to the Company and no less favorable to the Company than between unaffiliated parties under the same circumstances.

Acquisition of Properties from Affiliates

We may acquire properties or interests in properties from or in co-ownership arrangements with entities affiliated with our advisor, including properties acquired from affiliates of our advisor engaged in construction and development of commercial real properties. We will not acquire any property from an affiliate unless a majority of our directors not otherwise interested in the transaction and a majority of our independent directors determine that the transaction is fair and reasonable to us. The purchase price that we will pay for any property we acquire from affiliates of our advisor, including property developed by an affiliate as well as property held by an affiliate that has already been developed, will not exceed the current appraised value of the property. In addition, the price of the property we acquire from an affiliate may not exceed the cost of the property to the affiliate, unless a majority of our directors and a majority of our independent directors determine that substantial justification for the excess exists and the excess is reasonable.

Conflicts of Interest

We are subject to various conflicts of interest arising out of our relationship with Cole Advisors II, our advisor, and its affiliates, including conflicts related to the arrangements pursuant to which Cole Advisors II and its affiliates will be compensated by us. The agreements and compensation arrangements between us and our advisor and its affiliates were not determined by arm’s-length negotiations. Some of the conflicts of interest in our transactions with our advisor and its affiliates, and the limitations on our advisor adopted to address these conflicts, are described below.

Our advisor and its affiliates have and will continue to try to balance our interests with their duties to other Cole-sponsored programs. However, to the extent that our advisor or its affiliates take actions that are more favorable to other entities than to us, these actions could have a negative impact on our financial performance and, consequently, on distributions to our stockholders and the value of our stock. In addition, our directors, officers and certain of our stockholders may engage for their own account in business activities of the types conducted or to be conducted by our subsidiaries and us.

Our independent directors have an obligation to function on our behalf in all situations in which a conflict of interest may arise, and all of our directors have a fiduciary obligation to act on behalf of our stockholders.

Interests in Other Real Estate Programs

An affiliate of our advisor acts as an advisor to, and our named executive officers and one of our directors act as officers and a director of, Cole Credit Property Trust, Inc., which is a real estate investment trust that has similar investment objectives to us. Affiliates of our officers and entities owned or managed by such affiliates also may acquire or develop real estate for their own accounts, and have done so in the past. Furthermore, affiliates of our officers and entities owned or managed by such affiliates intend to form additional real estate investment entities in the future, whether public or private, which can be expected to have the same investment objectives and policies as we do and which may be involved in the same geographic area, and such persons may be engaged in sponsoring one or more of such entities at approximately the same time as our shares of common stock are being offered. Our advisor, its affiliates and affiliates of our officers are not obligated to present to us any particular investment opportunity that comes to their attention, even if such opportunity is of a character that might be suitable for investment by us. Our advisor and its affiliates likely will experience conflicts of interest as they simultaneously perform services for us and other affiliated real estate programs.

Any affiliated entity, whether or not currently existing, could compete with us in the sale or operation of the properties. We will seek to achieve any operating efficiency or similar savings that may result from affiliated management of competitive properties. However, to the extent that affiliates own or acquire property that is adjacent, or in close proximity, to a property we own, our property may compete with the affiliate’s property for tenants or purchasers.

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Every transaction that we enter into with our advisor or its affiliates is subject to an inherent conflict of interest. Our board of directors may encounter conflicts of interest in enforcing our rights against any affiliate in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between us and our advisor or any of its affiliates.

Other Activities of Cole Advisors II and its Affiliates

We rely on Cole Advisors II for the day-to-day operation of our business pursuant to an advisory agreement. As a result of the interests of members of its management in other Cole-sponsored programs and the fact that they have also engaged and will continue to engage in other business activities, Cole Advisors II and its affiliates will have conflicts of interest in allocating their time between us and other Cole-sponsored programs and other activities in which they are involved. However, Cole Advisors II believes that it and its affiliates have sufficient personnel to discharge fully their responsibilities to all of the Cole-sponsored programs and other ventures in which they are involved.

In addition, each of our executive officers, including Christopher H. Cole, who also serves as the chairman of our board of directors, also serves as an officer of our advisor, our property manager, our dealer manager and/or other affiliated entities. As a result, these individuals owe fiduciary duties to these other entities which may conflict with the fiduciary duties that they owe to us and our stockholders.

We may purchase properties or interests in properties from affiliates of Cole Advisors II. The prices we pay to affiliates of our advisor for these properties will not be the subject of arm’s-length negotiations, which could mean that the acquisitions may be on terms less favorable to us than those negotiated with unaffiliated parties. However, our charter provides that the purchase price of any property we acquire from an affiliate may not exceed its fair market value as determined by a competent independent appraiser. In addition, the price must be approved by a majority of our directors who have no financial interest in the transaction, including a majority of our independent directors. If the price to us exceeds the cost paid by our affiliate, our board of directors must determine that there is substantial justification for the excess cost.

Competition in Acquiring, Leasing and Operating of Properties

Conflicts of interest will exist to the extent that we may acquire properties in the same geographic areas where properties owned by other Cole-sponsored programs are located. In such a case, a conflict could arise in the leasing of properties in the event that we and another Cole-sponsored program were to compete for the same tenants in negotiating leases, or a conflict could arise in connection with the resale of properties in the event that we and another Cole-sponsored program were to attempt to sell similar properties at the same time. Conflicts of interest may also exist at such time as we or our affiliates managing property on our behalf seek to employ developers, contractors or building managers, as well as under other circumstances. Cole Advisors II will seek to reduce conflicts relating to the employment of developers, contractors or building managers by making prospective employees aware of all such properties seeking to employ such persons. In addition, Cole Advisors II will seek to reduce conflicts that may arise with respect to properties available for sale or rent by making prospective purchasers or tenants aware of all such properties. However, these conflicts cannot be fully avoided in that there may be established differing compensation arrangements for employees at different properties or differing terms for resales or leasing of the various properties.

Affiliated Dealer Manager

Since Cole Capital Corporation (“Cole Capital”), the dealer manager for our Offering, is an affiliate of Cole Advisors II, we did not have the benefit of an independent due diligence review and investigation of the type normally performed by an unaffiliated, independent underwriter in connection with the Offering.

Affiliated Property Manager

Our properties are, and we anticipate that properties we acquire will be, managed and leased by our affiliated property manager, Cole Realty Advisors, Inc., f/k/a Fund Realty Advisors, Inc. (“Cole Realty Advisors”), pursuant to a property management and leasing agreement. Our agreement with Cole Realty

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Advisors has a one year term. We expect Cole Realty Advisors to also serve as property manager for properties owned by affiliated real estate programs, some of which may be in competition with our properties. Management fees to be paid to our property manager are based on a percentage of the rental income received by the managed properties.

Lack of Separate Representation

Morris, Manning & Martin, LLP acts, and may in the future act, as counsel to us, Cole Advisors II, and certain of our respective affiliates. There is a possibility that in the future the interests of the various parties may become adverse, and under the Code of Professional Responsibility of the legal profession, Morris, Manning & Martin, LLP may be precluded from representing any one or all of such parties. In the event that a dispute were to arise between us, Cole Advisors II, or any of our respective affiliates, separate counsel for such matters will be retained as and when appropriate.

Receipt of Fees and Other Compensation by Cole Advisors II and Its Affiliates

A transaction involving the purchase and sale of properties may result in the receipt of commissions, fees and other compensation by Cole Advisors II and its affiliates, including acquisition and advisory fees, the dealer manager fee, property management and leasing fees, real estate brokerage commissions and participation in nonliquidating net sale proceeds. However, the fees and compensation payable to Cole Advisors II and its affiliates relating to the net sale proceeds from the sale of properties will only be payable after the return to the stockholders of their capital contributions plus cumulative returns on such capital. Subject to oversight by our board of directors, Cole Advisors II will have considerable discretion with respect to all decisions relating to the terms and timing of all transactions. Therefore, Cole Advisors II may have conflicts of interest concerning certain actions taken on our behalf, particularly due to the fact that such fees will generally be payable to Cole Advisors II and its affiliates regardless of the quality of the properties acquired or the services provided to us.

Certain Conflict Resolution Procedures

Every transaction that we enter into with Cole Advisors II or its affiliates will be subject to an inherent conflict of interest. Our board of directors may encounter conflicts of interest in enforcing our rights against any affiliate in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between us and Cole Advisors II or any of its affiliates.

In order to reduce or to eliminate certain potential conflicts of interest, our charter contains a number of restrictions relating to (1) transactions we enter into with Cole Advisors II and its affiliates, (2) certain future offerings, and (3) allocation of investment opportunities among affiliated entities. These restrictions include, among others, the following:

•  We will not purchase or lease properties in which Cole Advisors II, any of our directors or any of their respective affiliates has an interest without a determination by a majority of the directors, including a majority of the independent directors not otherwise interested in such transaction, that such transaction is fair and reasonable to us and at a price to us no greater than the cost of the property to the seller or lessor unless there is substantial justification for any amount that exceeds such cost and such excess amount is determined to be reasonable. In no event will we acquire any such property at an amount in excess of its appraised value. We will not sell or lease properties to Cole Advisors II, any of our directors or any of their respective affiliates unless a majority of the directors, including a majority of the independent directors not otherwise interested in the transaction, determines that the transaction is fair and reasonable to us.

•  We will not make any loans to Cole Advisors II, any of our directors or any of their respective affiliates, except that we may make or invest in mortgage loans involving Cole Advisors II, our directors or their respective affiliates, provided that an appraisal of the underlying property is obtained from an independent appraiser and the transaction is approved as fair and reasonable to us and on terms no less favorable to us than those available from third parties. In addition, Cole Advisors II, any of our

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directors and any of their respective affiliates will not make loans to us or to joint ventures in which we are a joint venture partner unless approved by a majority of the directors, including a majority of the independent directors not otherwise interested in the transaction, as fair, competitive and commercially reasonable, and no less favorable to us than comparable loans between unaffiliated parties.

•  Cole Advisors II and its affiliates will be entitled to reimbursement, at cost, for actual expenses incurred by them on behalf of us or joint ventures in which we are a joint venture partner; provided, however, Cole Advisors II must reimburse us for the amount, if any, by which our total operating expenses, including the advisor asset management fee, paid during the previous fiscal year exceeded the greater of: (i) 2.0% of our average invested assets for that fiscal year, or (ii) 25.0% of our net income, before any additions to reserves for depreciation, bad debts or other similar non-cash reserves and before any gain from the sale of our assets, for that fiscal year.

•  In the event that an investment opportunity becomes available that is suitable, under all of the factors considered by Cole Advisors II, for both us and one or more other entities affiliated with Cole Advisors II, and for which more than one of such entities has sufficient uninvested funds, then the entity that has had the longest period of time elapse since it was offered an investment opportunity will first be offered such investment opportunity. It will be the duty of our board of directors, including the independent directors, to insure that this method is applied fairly to us. In determining whether or not an investment opportunity is suitable for more than one program, Cole Advisors II, subject to approval by our board of directors, shall examine, among others, the following factors:

•  the anticipated cash flow of the property to be acquired and the cash requirements of each program;

•  the effect of the acquisition on diversification of each program’s investments by type of property, geographic area and tenant concentration;

•  the policy of each program relating to leverage of properties;

•  the income tax effects of the purchase to each program;

•  the size of the investment; and

•  the amount of funds available to each program and the length of time such funds have been available for investment.

•  If a subsequent development, such as a delay in the closing of a property or a delay in the construction of a property, causes any such investment, in the opinion of Cole Advisors II, to be more appropriate for a program other than the program that committed to make the investment, Cole Advisors II may determine that another program affiliated with Cole Advisors II or its affiliates will make the investment.

•  We will not accept goods or services from Cole Advisors II or its affiliates or enter into any other transaction with Cole Advisors II or its affiliates unless a majority of our directors, including a majority of the independent directors, not otherwise interested in the transaction approve such transaction as fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.

Employees

We have no direct employees. The employees of Cole Advisors II and other affiliates of our advisor provide services for us related to acquisition, property management, asset management, accounting, investor relations, and all other administrative services. The employees of Cole Capital, our affiliated dealer manager, provide wholesale brokerage services.

We are dependent on our advisor and its affiliates for services that are essential to us, including the sale of shares of our common stock, asset acquisition decisions, property management and other general administrative responsibilities. In the event that these companies were unable to provide these services to us, we would be required to obtain such services from other sources.

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We reimburse Cole Advisors II and its affiliates for expenses incurred in connection with its provision of administrative services to us, including personnel costs, subject to certain limitations. During the year ended December 31, 2006 and 2005, no amounts were reimbursed to Cole Advisors II or its affiliates for personnel costs and third-party costs allocated in connection with the issuance of shares under the Offering.

Insurance

See “— Description of Leases” section above.

Competition

As we purchase properties to build our portfolio, we are in competition with other potential buyers for the same properties and may have to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our investment criteria. Although our properties are currently 100% leased and we intend to acquire properties subject to existing leases, the leasing of real estate is highly competitive in the current market, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for its properties.

Concentration of Credit Risk

At December 31, 2006 and 2005, we had cash on deposit in one financial institution in excess of federally insured levels; however, we have not experienced any losses in such accounts. We limit investment of cash investments to financial institutions with high credit standing; therefore, we believe we are not exposed to any significant credit risk on cash.

No single tenant accounted for greater than 10% of our gross annualized base rental revenues as of December 31, 2006. One tenant in the drugstore industry and one tenant in the automotive supply industry accounted for approximately 34% and 31% of our gross annualized base rental revenues, respectively, as of December 31, 2005. Tenants in the drugstore, specialty retail and automotive supply industries comprised approximately 25%, 12% and 11%, respectively, of our gross annualized base rental revenues as of December 31, 2006. Tenants in the drugstore and automotive supply industries comprised approximately 44% and 31% of our gross annualized base rental revenues, respectively, as of December 31, 2005.

Litigation

In the ordinary course of business, we may become subject to litigation or claims. There are no material pending legal proceedings or proceedings known to be contemplated against us.

Environmental Matters

In connection with the ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. We have not been notified by any governmental authority of any non-compliance, liability or other claim, and we are not aware of any other environmental condition that we believe will have a material adverse effect on the consolidated results of operations.

Available Information

We electronically file an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the SEC. We have also filed a registration statement and supplements to our prospectus in connection with our Offering with the SEC. Copies of our filings with the SEC may be obtained from the SEC’s website, at http://www.sec.gov. Access to these filings is free of charge.

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ITEM 1A.   RISK FACTORS

Set forth below are investment risks that we believe are material to our investors.

Risks Related to an Investment in Cole Credit Property Trust II, Inc.

You will not have the opportunity to evaluate our future investments before we make them, which makes an investment in us more speculative.

We will not provide you with information to evaluate our future investments prior to our acquisition of properties. We will seek to use our net offering proceeds, after the payment of fees and expenses, to continue to acquire a portfolio of commercial real estate comprised primarily of a large number of freestanding, single-tenant commercial properties net leased to investment grade or other creditworthy tenants and a smaller number of multi-tenant properties that compliment our overall investment objectives. We may also, in the discretion of our advisor, invest in other types of real estate or in entities that invest in real estate. In addition, our advisor may make or invest in mortgage loans or participations therein on our behalf if our board of directors determines, due to the state of the real estate market or in order to diversify our investment portfolio or otherwise, that such investments are advantageous to us. We established policies relating to the creditworthiness of tenants of our properties, but our board of directors has wide discretion in implementing these policies, and you will not have the opportunity to evaluate potential tenants.

There is no public trading market for our shares and there may never be one; therefore, it will be difficult for you to sell your shares.

There currently is no public market for our shares and there may never be one. If you are able to find a buyer for your shares, you may not sell your shares unless the buyer meets applicable suitability and minimum purchase standards. Our charter also prohibits the ownership of more than 9.8% of our stock by a single investor, unless exempted by our board of directors, which may inhibit large investors from desiring to purchase your shares. Moreover, our share redemption program includes numerous restrictions that would limit your ability to sell your shares to us. Our board of directors may reject any request for redemption of shares, or amend, suspend or terminate our share redemption program upon 30 days’ notice. Therefore, it will be difficult for you to sell your shares promptly or at all. If you are able to sell your shares, you will likely have to sell them at a substantial discount to the price you paid for the shares. It also is likely that your shares would not be accepted as the primary collateral for a loan. You should purchase the shares only as a long-term investment because of the illiquid nature of the shares.

We may suffer from delays in locating suitable additional investments, which could adversely affect our ability to make distributions and the value of your investment.

Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of Cole REIT Advisors II, our advisor, in the acquisition of our investments, the selection of our tenants and the determination of any financing arrangements. You must rely entirely on the management ability of Cole Advisors II and the oversight of our board of directors. We could suffer from delays in locating suitable additional investments, particularly as a result of our reliance on our advisor at times when management of our advisor is simultaneously seeking to locate suitable investments for other affiliated programs. Delays we encounter in the selection, acquisition and, in the event we develop properties, development of income-producing properties, likely would adversely affect our ability to make distributions and the value of your overall returns. In such event, we may pay all or a substantial portion of our distributions from the proceeds of our offering or from borrowings in anticipation of future cash flow, which may constitute a return of your capital. Distributions from the proceeds of our offering or from borrowings also could reduce the amount of capital we ultimately invest in properties. This, in turn, would reduce the value of your investment. In particular, if we acquire properties prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and rent available space. Therefore, you could suffer delays in the receipt of cash distributions attributable to those particular properties. If Cole Advisors II is unable to obtain suitable investments, we will hold our offering proceeds in an interest-bearing

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account or invest the proceeds in short-term, investment-grade investments. If we cannot invest our offering proceeds within a reasonable amount of time, or if our board of directors determines it is in the best interests of our stockholders, we will return uninvested offering proceeds to investors.

If our advisor loses or is unable to obtain key personnel, our ability to implement our investment strategies could be delayed or hindered, which could adversely affect our ability to make distributions and the value of your investment.

Our success depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our advisor, including Christopher H. Cole, Blair D. Koblenz, Christopher P. Robertson, John M. Pons, D. Kirk McAllaster, Jr., Sean D. Leahy and Marc T. Nemer, each of whom would be difficult to replace. Our advisor does not have an employment agreement with any of these key personnel and we cannot guarantee that all, or any particular one, will remain affiliated with us and/or advisor. If any of our key personnel were to cease their affiliation with our advisor, our operating results could suffer. Further, we do not intend to separately maintain key person life insurance on Mr. Cole or any other person. We believe that our future success depends, in large part, upon our advisor’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure you that our advisor will be successful in attracting and retaining such skilled personnel. If our advisor loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of your investment may decline.

Our rights and the rights of our stockholders to recover claims against our officers, directors and our advisor are limited, which could reduce your and our recovery against them if they cause us to incur losses.

Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter, in the case of our directors, officers, employees and agents, and the advisory agreement, in the case of our advisor, require us to indemnify our directors, officers, employees and agents and our advisor and its affiliates for actions taken by them in good faith and without negligence or misconduct. Additionally, our charter limits the liability of our directors and officers for monetary damages to the fullest extent permitted under Maryland law, subject to the limitations required by the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Associations, also known as the NASAA REIT Guidelines. Although our charter does not allow us to exonerate and indemnify our directors and officers to a greater extent than permitted under Maryland law and the NASAA REIT Guidelines, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our advisor and its affiliates, than might otherwise exist under common law, which could reduce your and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our advisor in some cases which would decrease the cash otherwise available for distribution to our stockholders.

Risks Related to Conflicts of Interest

Cole Advisors II will face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.

Affiliates of our advisor may sponsor other real estate investment programs in the future. We may buy properties at the same time as one or more of the other Cole-sponsored programs managed by officers and key personnel of Cole Advisors II. There is a risk that Cole Advisors II will choose a property that provides lower returns to us than a property purchased by another Cole-sponsored program. We cannot be sure that officers and key personnel acting on behalf of Cole Advisors II and on behalf of managers of other Cole-sponsored programs will act in our best interests when deciding whether to allocate any particular property to us. In addition, we may acquire properties in geographic areas where other Cole-sponsored programs own properties. Also, we may acquire properties from, or sell properties to, other Cole-sponsored programs. If one of the other

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Cole-sponsored programs attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant. You will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved as a stockholder. Similar conflicts of interest may apply if our advisor determines to make or purchase mortgage loans or participations in mortgage loans on our behalf, since other Cole-sponsored programs may be competing with us for these investments.

Cole Advisors II faces conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to the other venture partners at our expense.

We may enter into joint ventures with other Cole-sponsored programs for the acquisition, development or improvement of properties. Cole Advisors II may have conflicts of interest in determining which Cole-sponsored program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, Cole Advisors II may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Since Cole Advisors II and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture.

We may participate in 1031 exchange programs with affiliates of our advisor that will not be the result of arm’s-length negotiations and will result in conflicts of interest.

Cole Capital Partners, LLC (“Cole Capital Partners”), an affiliate of our advisor, has developed programs to facilitate the acquisition of real estate properties in co-ownership arrangements with persons who are looking to invest proceeds from a sale of real estate in order to qualify for like-kind exchange treatment under Section 1031 of the Internal Revenue Code (a “Section 1031 Program”). Section 1031 Programs are structured as co-ownership arrangements with other investors in the property (“Section 1031 Participants”) who are seeking to defer taxes under Section 1031 of the Internal Revenue Code. These programs are structured either as a tenant-in-common program or by use of a Delaware Statutory Trust. When Cole Capital Partners develops such a program, it generally organizes a new entity (a “Cole Exchange Entity”) to acquire all or part of a property. We may participate in the program by either co-investing in the property with the Cole Exchange Entity or purchasing a co-ownership interest from the Cole Exchange Entity, generally at the Cole Exchange Entity’s cost. In that event, as a co-owner of properties, we will be subject to the risks inherent in the co-ownership arrangements with unrelated third parties. Our purchase of co-ownership interests will present conflicts of interest between us and affiliates of our advisor. The business interests of Cole Capital Partners and the Cole Exchange Entity may be adverse to, or to the detriment of, our interests. Further, any agreement that we enter into with a Cole Exchange Entity will not be negotiated in an arm’s-length transaction and, as a result of the affiliation between our advisor, Cole Capital Partners and the Cole Exchange Entity, our advisor may be reluctant to enforce the agreements against such entities.

Cole Advisors II and its officers and employees and certain of our key personnel face competing demands relating to their time, and this may cause our operating results to suffer.

Cole Advisors II and its officers and employees and certain of our key personnel and their respective affiliates are key personnel, general partners and sponsors of other real estate programs having investment objectives and legal and financial obligations similar to ours and may have other business interests as well. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and fewer resources to our business than is necessary or appropriate. If this occurs, the returns on our investments may suffer.

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Our officers face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our business strategy and to generate returns to our stockholders.

Each of our executive officers, including Christopher H. Cole, who also serves as the chairman of our board of directors, also are officers of our advisor, our property manager, our dealer manager and other affiliated entities. As a result, these individuals owe fiduciary duties to these other entities and their stockholders and limited partners, which fiduciary duties may conflict with the duties that they owe to us and our stockholders. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (i) allocation of new investments and management time and services between us and the other entities, (ii) our purchase of properties from, or sale of properties, to affiliated entities, (iii) the timing and terms of the investment in or sale of an asset, (iv) development of our properties by affiliates, (v) investments with affiliates of our advisor, (vi) compensation to our advisor, and (vii) our relationship with our dealer manager and property manager. If we do not successfully implement our business strategy, we may be unable to generate cash needed to make distributions to our stockholders and to maintain or increase the value of our assets.

Cole Advisors II faces conflicts of interest relating to the incentive fee structure under our advisory agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.

Under our advisory agreement, Cole Advisors II is entitled to fees that are structured in a manner intended to provide incentives to our advisor to perform in our best interests and in the best interests of our stockholders. However, because our advisor does not maintain a significant equity interest in us and is entitled to receive substantial minimum compensation regardless of performance, our advisor’s interests are not wholly aligned with those of our stockholders. In that regard, our advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance or sales proceeds that would entitle our advisor to fees. In addition, our advisor’s entitlement to fees upon the sale of our assets and to participate in sale proceeds could result in our advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle the advisor to compensation relating to such sales, even if continued ownership of those investments might be in our best long-term interest. Our advisory agreement requires us to pay a performance-based termination fee to our advisor in the event that we terminate the advisor prior to the listing of our shares for trading on an exchange or, absent such listing, in respect of its participation in net sales proceeds. To avoid paying this fee, our independent directors may decide against terminating the advisory agreement prior to our listing of our shares or disposition of our investments even if, but for the termination fee, termination of the advisory agreement would be in our best interest. In addition, the requirement to pay the fee to the advisor at termination could cause us to make different investment or disposition decisions than we would otherwise make, in order to satisfy our obligation to pay the fee to the terminated advisor. Moreover, our advisor has the right to terminate the advisory agreement upon a change of control of our company and thereby trigger the payment of the performance fee, which could have the effect of delaying, deferring or preventing the change of control.

There is no separate counsel for us and our affiliates, which could result in conflicts of interest.

Morris, Manning & Martin, LLP acts as legal counsel to us and also represents our advisor and some of its affiliates. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Morris, Manning & Martin, LLP may be precluded from representing any one or all of such parties. If any situation arises in which our interests appear to be in conflict with those of our advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of

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interest not be readily apparent, Morris, Manning & Martin, LLP may inadvertently act in derogation of the interest of the parties which could affect our ability to meet our investment objectives.

Risks Related to Our Offering and Our Corporate Structure

The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.

Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% in value of our outstanding stock and more than 9.8% in value or number, whichever is more restrictive, of any class of our outstanding stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.

Our charter permits our board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.

Our charter permits our board of directors to issue up to 250,000,000 shares of stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.

Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit your ability to exit the investment.

Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

•  any person who beneficially owns 10% or more of the voting power of the corporation’s shares;

•  an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

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After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

•  80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

•  two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority vote requirements do not apply if the corporation’s stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has exempted any business combination involving Cole Advisors II or any affiliate of Cole Advisors II. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and Cole Advisors II or any affiliate of Cole Advisors II. As a result, Cole Advisors II and any affiliate of Cole Advisors II may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

Maryland law also limits the ability of a third-party to buy a large stake in us and exercise voting power in electing directors.

Maryland law provides a second anti-takeover statute, its Control Share Acquisition Act, which provides that “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by the corporation’s disinterested stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by interested stockholders, that is, by the acquirer, by officers or by directors who are employees of the corporation, are excluded from shares entitled to vote on the matter. “Control shares” are voting shares of stock that would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the articles of incorporation or bylaws of the corporation. Our bylaws contain a provision exempting from the Control Share Acquisition act any and all acquisitions of our common stock by Cole Advisors II or any affiliate of Cole Advisors II. This statute could have the effect of discouraging offers from third parties to acquire us and increasing the difficulty of successfully completing this type of offer by anyone other than our affiliates or any of their affiliates.

If we are required to register as an investment company under the Investment Company Act, we could not continue our business, which may significantly reduce the value of your investment.

We are not registered as an investment company under the Investment Company Act of 1940, as amended (Investment Company Act), pursuant to an exemption in Section 3(c)(5)(C) of the Investment Company Act and certain No-Action Letters from the Securities and Exchange Commission. Pursuant to this exemption, (1) at least 55% of our assets must consist of real estate fee interests or loans secured exclusively by real estate or both, (2) at least 25% of our assets must consist of loans secured primarily by real estate (this percentage will be reduced by the amount by which the percentage in (1) above is increased); and (3) up to 20% of our assets may consist of miscellaneous investments. We intend to monitor compliance with these requirements on an ongoing basis. If we were obligated to register as an investment company, we would have

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to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:

•  limitations on capital structure;

•  restrictions on specified investments;

•  prohibitions on transactions with affiliates; and

•  compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

In order to maintain our exemption from regulation under the Investment Company Act, we must engage primarily in the business of buying real estate, and these investments must be made within a year after our offering ends. If we are unable to invest a significant portion of our offering proceeds in properties within one year of the termination of our offering, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns. This would reduce the cash available for distribution to investors and possibly lower your returns.

To maintain compliance with the Investment Company Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court were to require enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

If you do not agree with the decisions of our board of directors, you only have limited control over changes in our policies and operations and may not be able to change such policies and operations.

Our board of directors determines our major policies, including our policies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under the Maryland General Corporation Law and our charter, our stockholders have a right to vote only on the following:

•  the election or removal of directors;

•  any amendment of our charter (including a change in our investment objectives), except that our board of directors may amend our charter without stockholder approval, to increase or decrease the aggregate number of our shares, to increase or decrease the number of our shares of any class or series that we have the authority to issue, or to classify or reclassify any unissued shares by setting or changing the preferences, conversion or other rights, restrictions, limitations as to distributions, qualifications or terms and conditions of redemption of such shares, provided however, that any such amendment does not adversely affect the rights, preferences and privileges of the stockholders;

•  our liquidation or dissolution;

•  a reorganization of our company, as provided in our charter; and

•  any merger, consolidation or sale or other disposition of substantially all of our assets.

All other matters are subject to the discretion of our board of directors.

Our board of directors may change our investment policies without stockholder approval, which could alter the nature of your investments.

Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interest of the stockholders. These policies may change over time. The methods of implementing our investment policies may also vary, as new real estate

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development trends emerge and new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of your investment could change without your consent.

You are limited in your ability to sell your shares pursuant to our share redemption program and may have to hold your shares for an indefinite period of time.

Our board of directors may amend the terms of our share redemption program without stockholder approval. Our board also is free to suspend or terminate the program upon 30 days notice or to reject any request for redemption. In addition, the share redemption program includes numerous restrictions that would limit your ability to sell your shares. Generally, you must have held your shares for at least one year in order to participate in our share redemption program. Subject to funds being available, we will limit the number of shares redeemed pursuant to our share redemption program as follows: (1) during any calendar year, we will not redeem in excess of 3% of the weighted average number of shares outstanding during the prior calendar year; and (2) funding for the redemption of shares will be limited to the net proceeds we receive from the sale of shares under our distribution reinvestment plan. These limits might prevent us from accommodating all redemption requests made in any year.

We established the share price in our offering on an arbitrary basis; as a result, the actual value of your investment may be substantially less than what you pay.

Our board of directors has arbitrarily determined the selling price of the shares in our offering, and such price bears no relationship to our book or asset values, or to any other established criteria for valuing issued or outstanding shares. Because the offering price is not based upon any independent valuation, the offering price is not indicative of the proceeds that you would receive upon liquidation.

Because the dealer manager is one of our affiliates, investors will not have the benefit of an independent review of our prospectus as is customarily performed in underwritten offerings.

The dealer manager, Cole Capital, in our offering, is one of our affiliates and will not make an independent review of us or the offering. Accordingly, you will have to rely on your own broker-dealer to make an independent review of the terms of our offering. If your broker-dealer does not conduct such a review, you will not have the benefit of an independent review of the terms of our offering. Further, the due diligence investigation of us by the dealer manager cannot be considered to be an independent review and, therefore, may not be as meaningful as a review conducted by an unaffiliated broker-dealer or investment banker.

Your interest in Cole REIT II will be diluted if we issue additional shares.

Existing stockholders and potential investors in our offering do not have preemptive rights to any shares issued by us in the future. Our charter currently has authorized 250,000,000 shares of stock, of which 240,000,000 shares are designated as common stock and 10,000,000 are designated as preferred stock. Subject to any limitations set forth under Maryland law, our board of directors may increase the number of authorized shares of stock, increase or decrease the number of shares of any class or series of stock designated, or reclassify any unissued shares without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our board of directors. Existing stockholders and investors purchasing shares in our offering likely will suffer dilution of their equity investment in us, in the event that we (1) sell shares in our offering or sell additional shares in the future, including those issued pursuant to our distribution reinvestment plan, (2) sell securities that are convertible into shares of our common stock, (3) issue shares of our common stock in a private offering of securities to institutional investors, (4) issue shares of our common stock upon the exercise of the options granted to our independent directors, (5) issue shares to our advisor, its successors or assigns, in payment of an outstanding fee obligation as set forth under our advisory agreement, or (6) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of Cole OP II, existing stockholders and investors purchasing shares in our

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offering will likely experience dilution of their equity investment in us. In addition, the partnership agreement for Cole OP II contains provisions that would allow, under certain circumstances, other entities, including other Cole-sponsored programs, to merge into or cause the exchange or conversion of their interest for interests of Cole OP II. Because the limited partnership interests of Cole OP II may, in the discretion of our board of directors, be exchanged for shares of our common stock, any merger, exchange or conversion between Cole OP II and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. Because of these and other reasons described in this “Risk Factors” section, you should not expect to be able to own a significant percentage of our shares.

Payment of fees to Cole Advisors II and its affiliates reduces cash available for investment and distribution.

Cole Advisors II and its affiliates perform services for us in connection with our offer and sale of our shares, the selection and acquisition of our investments, and the management and leasing of our properties, the servicing of our mortgage loans, if any, and the administration of our other investments. They are paid substantial fees for these services, which reduces the amount of cash available for investment in properties or distribution to stockholders.

We may be unable to pay or maintain cash distributions or increase distributions over time.

There are many factors that can affect the availability and timing of cash distributions to stockholders. Distributions will be based principally on cash available from our operations. The amount of cash available for distributions is affected by many factors, such as our ability to buy properties as offering proceeds become available, rental income from such properties, and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We may not be able to pay or maintain our current level of distributions or increase distributions over time. Rents from the properties may not increase, the securities we buy may not increase in value or provide constant or increased distributions over time, and future acquisitions of real properties, mortgage loans and any investments in securities may not increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing the distribution rate to stockholders. We may not have sufficient cash from operations to make a distribution required to maintain our REIT status. We may increase borrowing or use proceeds from our offering to make distributions, each of which could be deemed to be a return of your capital.

General Risks Related to Investments in Real Estate

Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we may not be profitable and may not realize growth in the value of our real estate properties.

Our operating results are subject to risks generally incident to the ownership of real estate, including:

•  changes in general economic or local conditions;

•  changes in supply of or demand for similar or competing properties in an area;

•  changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;

•  changes in tax, real estate, environmental and zoning laws; and

•  periods of high interest rates and tight money supply.

These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.

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Many of our retail properties will depend upon a single tenant for all or a majority of their rental income, and our financial condition and ability to make distributions may be adversely affected by the bankruptcy or insolvency, a downturn in the business, or a lease termination of a single tenant.

Almost all of our properties are, and we expect that many of our future properties will be, occupied by only one tenant or will derive a majority of their rental income from one tenant and, therefore, the success of those properties will be materially dependent on the financial stability of such tenants. Lease payment defaults by tenants could cause us to reduce the amount of distributions we pay. A default of a tenant on its lease payments to us would cause us to lose the revenue from the property and force us to find an alternative source of revenue to meet any mortgage payment and prevent a foreclosure if the property is subject to a mortgage. In the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting the property. If a lease is terminated, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. A default by a tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease, or a tenant’s election not to extend a lease upon its expiration, could have an adverse effect on our financial condition and our ability to pay distributions.

If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases.

Any of our tenants, or any guarantor of a tenant’s lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only in the event funds were available, and then only in the same percentage as that realized on other unsecured claims.

A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to our stockholders. In the event of a bankruptcy, we cannot assure you that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to our stockholders may be adversely affected.

A high concentration of our properties in a particular geographic area, or that have tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.

We expect that our properties will be diverse according to geographic area and industry of our tenants. However, in the event that we have a concentration of properties in any particular geographic area, any adverse situation that disproportionately effects that geographic area would have a magnified adverse effect on our portfolio. Similarly, if our tenants are concentrated in a certain industry or industries, any adverse effect to that industry generally would have a disproportionately adverse effect on our portfolio.

If a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.

We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our

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ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and the amount available for distributions to our stockholders.

Properties that have vacancies for a significant period of time could be difficult to sell, which could diminish the return to our stockholderst.

A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash to be distributed to stockholders. In addition, because properties’ market values depend principally upon the value of the properties’ leases, the resale value of properties with prolonged vacancies could suffer, which could further reduce your return.

We may obtain only limited warranties when we purchase a property and would have only limited recourse in the event our due diligence did not identify any issues that lower the value of our property.

The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from that property.

We may be unable to secure funds for future tenant improvements or capital needs, which could adversely impact our ability to pay cash distributions to our stockholders.

When tenants do not renew their leases or otherwise vacate their space, it is usual that, in order to attract replacement tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. In addition, although we expect that our leases with tenants will require tenants to pay routine property maintenance costs, we will likely be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops. We will use substantially all of our gross proceeds from our offering to buy real estate and pay various fees and expenses. We intend to reserve only 0.1% of the gross proceeds from our offering for future capital needs. Accordingly, if we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain financing from other sources, such as cash flow from operations, borrowings, property sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both.

Our inability to sell a property when we desire to do so could adversely impact our ability to pay cash distributions to our stockholders.

The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. 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 cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

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 such defects or to make such

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improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of 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. These provisions would restrict our ability to sell a property.

We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased such property, which may lead to a decrease in the value of our assets.

Many of our leases do not, and will not, contain rental increases over time. Therefore, the value of the property to a potential purchaser may not increase over time, which may restrict our ability to sell a property, or in the event we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the property.

Certain of our properties are subject to lock-out provisions, and in the future we may acquire or finance additional properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.

Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions affect our ability to turn our investments into cash and thus affect cash available for distributions to our stockholders. Lock out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.

Rising expenses could reduce cash flow and funds available for future acquisitions.

Our current properties are, and any properties that we buy in the future will be, subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses. The properties will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. While we expect that many of our properties will be leased on a triple-net-lease basis or will require the tenants to pay a portion of such expenses, renewals of leases or future leases may not be negotiated on that basis, in which event we may have to pay those costs. If we are unable to lease properties on a triple-net-lease basis or on a basis requiring the tenants to pay all or some of such expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs which could adversely affect funds available for future acquisitions or cash available for distributions.

Adverse economic conditions will negatively affect our returns and profitability.

Our operating results may be affected by the following market and economic challenges, which may result from a continued or exacerbated general economic slow down experienced by the nation as a whole or by the local economics where our properties may be located:

•  poor economic conditions may result in tenant defaults under leases;

•  re-leasing may require concessions or reduced rental rates under the new leases; and

•  increased insurance premiums may reduce funds available for distribution or, to the extent such increases are passed through to tenants, may lead to tenant defaults. Increased insurance premiums may make it difficult to increase rents to tenants on turnover, which may adversely affect our ability to increase our returns.

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The length and severity of any economic downturn cannot be predicted. Our operations could be negatively affected to the extent that an economic downturn is prolonged or becomes more severe.

If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits.

Generally, each of our tenants is responsible for insuring its goods and premises and, in some circumstances, may be required to reimburse us for a share of the cost of acquiring comprehensive insurance for the property, including casualty, liability, fire and extended coverage customarily obtained for similar properties in amounts that our advisor determines are sufficient to cover reasonably foreseeable losses. Tenants of single-user properties leased on a triple-net-lease basis typically are required to pay all insurance costs associated with those properties. Material losses may occur in excess of insurance proceeds with respect to any property, as insurance may not be sufficient to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorism acts could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential properties. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure you that will have adequate coverage for such losses. The Terrorism Risk Insurance Act of 2002 is designed for a sharing of terrorism losses between insurance companies and the federal government. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If such an event damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from such property.

Real estate related taxes may increase and if these increases are not passed on to tenants, our income will be reduced.

Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of the property. Generally, from time to time our property taxes increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. Although some tenant leases may permit us to pass through such tax increases to the tenants for payment, there is no assurance that renewal leases or future leases will be negotiated on the same basis. Increases not passed through to tenants will adversely affect our income, cash available for distributions, and the amount of distributions to our stockholders.

Revenue from our properties depends on the amount of our tenants’ retail revenue, making us vulnerable to general economic downturns and other conditions affecting the retail industry.

Some of our leases may also include a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases that contain percentage rent clauses, our revenue from tenants may decrease as the sales of our tenants decrease. Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue that we derive from percentage rent leases could decline upon a general economic downturn.

CC&Rs may restrict our ability to operate a property.

Some of our properties will most likely be contiguous to other parcels of real property, comprising part of the same retail center. In connection with such properties, there will likely exist significant covenants, conditions and restrictions, known as “CC&Rs,” restricting the operation of such properties and any improvements on such properties, and related to granting easements on such properties. Moreover, the

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operation and management of the contiguous properties may impact such properties. Compliance with CC&Rs may adversely affect our operating costs and reduce the amount of funds that we have available to pay distributions.

Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks.

While we do not currently intend to do so, we may use proceeds to acquire and develop properties upon which we will construct improvements. We will be subject to uncertainties associated with re-zoning for development, environmental concerns of governmental entities and/or community groups, and our builder’s ability to build in conformity with plans, specifications, budgeted costs, and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder’s performance may also be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other such factors can result in increased costs of a project or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.

While we do not currently intend to do so, we may invest in unimproved real property. Returns from development of unimproved properties are also subject to risks associated with re-zoning the land for development and environmental concerns of governmental entities and/or community groups. Although we intend to limit any investment in unimproved property to property we intend to develop, your investment nevertheless is subject to the risks associated with investments in unimproved real property.

If we contract with an affiliated development company for newly developed property, we cannot guarantee that our earnest money deposit made to the development company will be fully refunded.

While we currently do not have an affiliated development company, our sponsor and/or its affiliates may form a development company. In such an event, we may enter into one or more contracts, either directly or indirectly through joint ventures with affiliates or others, to acquire real property from an affiliate of Cole Advisors II that is engaged in construction and development of commercial real properties. Properties acquired from an affiliated development company may be either existing income-producing properties, properties to be developed or properties under development. We anticipate that we will be obligated to pay a substantial earnest money deposit at the time of contracting to acquire such properties. In the case of properties to be developed by an affiliated development company, we anticipate that we will be required to close the purchase of the property upon completion of the development of the property by our affiliate. At the time of contracting and the payment of the earnest money deposit by us, our development company affiliate typically will not have acquired title to any real property. Typically, our development company affiliate will only have a contract to acquire land, a development agreement to develop a building on the land and an agreement with one or more tenants to lease all or part of the property upon its completion. We may enter into such a contract with our development company affiliate even if at the time of contracting we have not yet raised sufficient proceeds in our offering to enable us to close the purchase of such property. However, we will not be required to close a purchase from our development company affiliate, and will be entitled to a refund of our earnest money, in the following circumstances:

•  our development company affiliate fails to develop the property;

•  all or a specified portion of the pre-leased tenants fail to take possession under their leases for any reason; or

•  we are unable to raise sufficient proceeds from our offering to pay the purchase price at closing.

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The obligation of our development company affiliate to refund our earnest money will be unsecured, and no assurance can be made that we would be able to obtain a refund of such earnest money deposit from it under these circumstances since our development company affiliate may be an entity without substantial assets or operations. However, our development company affiliate’s obligation to refund our earnest money deposit may be guaranteed by Cole Realty Advisors, our property manager, which will enter into contracts to provide property management and leasing services to various Cole-sponsored programs, including us, for substantial monthly fees. As of the time Cole Realty Advisors may be required to perform under any guaranty, we cannot assure that Cole Realty Advisors will have sufficient assets to refund all of our earnest money deposit in a lump sum payment. If we were forced to collect our earnest money deposit by enforcing the guaranty of Cole Realty Advisors, we will likely be required to accept installment payments over time payable out of the revenues of Cole Realty Advisors’ operations. We cannot assure you that we would be able to collect the entire amount of our earnest money deposit under such circumstances.

Competition with third parties in acquiring properties and other investments may reduce our profitability and the return on your investment.

We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. Larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and therefore increased prices paid for them. If we pay higher prices for properties and other investments, our profitability will be reduced and you may experience a lower return on your investment.

Our properties face competition that may affect tenants’ ability to pay rent and the amount of rent paid to us may affect the cash available for distributions and the amount of distributions.

Our properties typically are, and we expect will be, located in developed areas. Therefore, there are and will be numerous other retail properties within the market area of each of our properties that will compete with us for tenants. The number of competitive properties could have a material effect on our ability to rent space at our properties and the amount of rents charged. We could be adversely affected if additional competitive properties are built in locations competitive with our properties, causing increased competition for customer traffic and creditworthy tenants. This could result in decreased cash flow from tenants and may require us to make capital improvements to properties that we would not have otherwise made, thus affecting cash available for distributions, and the amount available for distributions to our stockholders.

Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the cash available for any distributions.

All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.

Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing condition of

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land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions and may reduce the value of your investment.

We will not obtain an independent third-party environmental assessment for every property we acquire. In addition, any such assessment that we do obtain may not reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims would materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.

If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.

If we decide to sell any of our properties, we intend to use our best efforts to sell them for cash. However, in some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash distributions to our stockholders.

Our recovery of an investment in a mortgage that has defaulted may be limited.

There is no guarantee that the mortgage, loan or deed of trust securing an investment will, following a default, permit us to recover the original investment and interest that would have been received absent a default. The security provided by a mortgage, deed of trust or loan is directly related to the difference between the amount owed and the appraised market value of the property. Although we intend to rely on a current real estate appraisal when we make the investment, the value of the property is affected by factors outside our control, including general fluctuations in the real estate market, rezoning, neighborhood changes, highway relocations and failure by the borrower to maintain the property.

Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distributions.

Our properties will be subject to the Americans with Disabilities Act of 1990 (Disabilities Act). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally requires that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act or place the burden on the seller or other third party, such as a tenant, to ensure compliance with the Disabilities Act. However, we cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for Disabilities Act compliance may affect cash available for distributions and the amount of distributions to our stockholders.

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Risks Associated with Debt Financing

We have incurred, and expect to continue to incur, mortgage indebtedness and other borrowings, which may increase our business risks.

We expect to incur additional indebtedness even if we raise significant proceeds in our offering. We expect that in most instances, we will acquire real properties by using either existing financing or borrowing new funds. In addition, we may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties. We may borrow if we need funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. We may also borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes.

Our advisor believes that utilizing borrowing is consistent with our investment objective of maximizing the return to investors. There is no limitation on the amount we may borrow against any single improved property. However, under our charter, we are required to limit our borrowings to 60% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets, unless excess borrowing is approved by a majority of the independent directors. This level of borrowing is less than, and our borrowings will not exceed, 300% of our net assets, as set forth in the NASAA REIT Guidelines. We expect that during the period of our offering we will request that our independent directors approve borrowings in excess of this limitation since we will then be in the process of raising our equity capital to acquire our portfolio. As a result, we expect that our debt levels will be higher until we have invested most of our capital.

If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on a property, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of your investment. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected, which could result in our losing our REIT status and would result in a decrease in the value of our stockholders investment.

High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make.

If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties and our income could be reduced. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.

Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.

In connection with providing us financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or

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replace Cole Advisors II as our advisor. These or other limitations may adversely affect our flexibility and our ability to achieve our investment and operating objectives.

Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.

We expect that we will incur variable-rate indebtedness in the future. To the extent that we incur variable rate debt, increases in interest rates would increase our interest costs, which could reduce our cash flows and our ability to pay distributions to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.

We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions and could decrease the value of your investment.

Our charter generally limits us to incurring debt no greater than 60% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of all of our assets, unless any excess borrowing is approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report, along with a justification for such excess borrowing. We expect that during the period of our offering we will request that our independent directors approve borrowings in excess of this limitation since we will then be in the process of raising our equity capital to acquire our portfolio. As a result, we expect that our debt levels will be higher until we have invested most of our capital. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments, and could be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of your investment.

Risks Associated with Co-Ownership Transactions

Our participation in a co-ownership arrangement would subject us to risk that otherwise may not be present in other real estate investments.

We may enter in co-ownership arrangements with respect to a portion of the properties we acquire. Co-ownership arrangements involve risks generally not otherwise present with an investment in real estate such as the following:

•  the risk that a co-owner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;

•  the risk that a co-owner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives;

•  the possibility that an individual co-owner might become insolvent or bankrupt, or otherwise default under the applicable mortgage loan financing documents, which may constitute an event of default under all of the applicable mortgage loan financing documents or allow the bankruptcy court to reject the agreements entered into by the co-owners owning interests in the property;

•  the possibility that a co-owner might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss of current or prospective tenants and may otherwise adversely affect the operation and maintenance of the property, and could cause a default under the mortgage loan financing documents applicable to the property and may result in late charges, penalties and interest, and may lead to the exercise of foreclosure and other remedies by the lender;

•  the risk that a co-owner could breach agreements related to the property, which may cause a default, or result in personal liability for, the applicable mortgage loan financing documents, violate applicable securities law, result in a foreclosure or otherwise adversely affect the property and the co-ownership arrangement;

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•  we could have limited control and rights, with management decisions made entirely by a third-party; or

•  the possibility that we will not have the right to sell the property at a time that otherwise could result in the property being sold for its maximum value.

Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce the amount available for distribution to our stockholders.

In the event that our interests become adverse to those of the other co-owners, we will not have the contractual right to purchase the co-ownership interests from the other co-owners. Even if we are given the opportunity to purchase such co-ownership interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-ownership interests from the co-owners.

We might want to sell our co-ownership interests in a given property at a time when the other co-owners in such property do not desire to sell their interests. Therefore, because we anticipate that it will be much more difficult to find a willing buyer for our co-ownership interests in a property than it would be to find a buyer for a property we owned outright, we may not be able to sell our interest in a property at the time we would like to sell.

Federal Income Tax Risks

Failure to qualify as a REIT would adversely affect our operations and our ability to make distributions.

We elected to be taxed as a REIT beginning with the tax year ended December 31, 2005. In order for us to continue to qualify as a REIT, we must satisfy certain requirements set forth in the Internal Revenue Code and Treasury Regulations and various factual matters and circumstances that are not entirely within our control. We intend to structure our activities in a manner designed to satisfy all of these requirements. However, if certain of our operations were to be recharacterized by the Internal Revenue Service, such recharacterization could jeopardize our ability to satisfy all of the requirements for qualification as a REIT. Morris, Manning & Martin, LLP, our legal counsel, rendered its opinion that we will qualify as a REIT, based upon our representations as to the manner in which we are and will be owned, invest in assets and operate, among other things. However, our qualification as a REIT will depend upon our ability to meet, through investments, actual operating results, distributions and satisfaction of specific rules, the various tests imposed by the Internal Revenue Code. Morris, Manning & Martin, LLP will not review these operating results or compliance with the qualification standards on an ongoing basis. This means that we may fail to satisfy the REIT requirements at any time after the date of this opinion. Also, this opinion represents Morris, Manning & Martin, LLP’s legal judgment based on the law in effect as of the date of the opinion. Morris, Manning & Martin, LLP’s opinion is not binding on the Internal Revenue Service or the courts and we will not apply for a ruling from the Internal Revenue Service regarding our status as a REIT. Future legislative, judicial or administrative changes to the federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.

If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.

Re-characterization of the Section 1031 programs may result in a 100% tax on income from a prohibited transaction, which would diminish our cash distributions to our stockholders.

The Internal Revenue Service could re-characterize transactions under the Section 1031 program such that Cole OP II, rather than the co-owner in the program (Section 1031 Participant), is treated as the bona fide owner, for tax purposes, of properties acquired and resold by a Section 1031 Participant in connection with the Section 1031 program. Such characterization could result in the fees paid to Cole OP II by a Section 1031

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Participant as being deemed income from a prohibited transaction, in which event the fee income paid to us in connection with the Section 1031 programs would be subject to a 100% penalty tax. If this occurs, our ability to pay cash distributions to our stockholders will be adversely affected. We expect to obtain a legal opinion in connection with each co-ownership program to the effect that the program will qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code. However, the Internal Revenue Service may take a position contrary to such an opinion.

Re-characterization of sale-leaseback transactions may cause us to lose our REIT status.

We may purchase properties and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback transaction so that the lease will be characterized as a “true lease,” thereby allowing us to be treated as the owner of the property for federal income tax purposes, the IRS could challenge such characterization. In the event that any sale-leaseback transaction is challenged and re-characterized as a financing transaction or loan for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification “asset tests” or the “income tests” and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated which might also cause us to fail to meet the distribution requirement for a taxable year.

You may have tax liability on distributions you elect to reinvest in our common stock.

If you participate in our distribution reinvestment plan, you will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless you are a tax-exempt entity, you may have to use funds from other sources to pay your tax liability on the value of the common stock received.

In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for distribution to our stockholders.

Even if we qualify and maintain our status as a REIT, we may be subject to federal income taxes or state taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Internal Revenue Code) will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of Cole OP II or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce our cash available for distribution to stockholders.

Legislative or regulatory action could adversely affect investors.

Because our operations are governed to a significant extent by the federal tax laws, new legislative or regulatory action could adversely affect investors.

You are urged to consult with your own tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our common stock. You should also note that our counsel’s tax opinion assumes that no legislation will be enacted after the date of the opinion that will be applicable to an investment in our shares.

Foreign holders of our common stock may be subject to FIRPTA tax upon the sale of their shares.

A foreign person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to a tax, known as FIRPTA tax,

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on the gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is “domestically controlled.” A REIT is “domestically controlled” if less than 50% of the REIT’s stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence. We cannot assure you that we will qualify as a “domestically controlled” REIT. If we were to fail to so qualify, gain realized by foreign investors on a sale of our shares would be subject to FIRPTA tax, unless our shares were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 5% of the value of our outstanding common stock.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

As of December 31, 2006, we owned, through separate wholly-owned limited partnerships or limited liability companies or our operating partnership, a portfolio of 91 properties located in 26 states comprising approximately 2.9 million rentable square feet. As of December 31, 2006, 83 of the properties are freestanding, single-tenant retail properties, four of the properties are freestanding, single-tenant commercial properties and four of the properties are multi-tenant retail properties. As of December 31, 2006, 71 of the properties in our portfolio and the related tenant leases are pledged as collateral securing mortgage debt of approximately $218.3 million. As of December 31, 2006, each of the properties was 100% leased with an average remaining lease term of approximately 13.2 years.

Property Statistics

The following table shows the tenant diversification of our portfolio as of December 31, 2006:

					Percentage of 2006
	Total Number		2006 Annualized		Annualized Gross
Tenant	of Leases		Gross Base Rent		Base Rent
Walgreens-drugstore		8	$	2,998,885		9	%
CVS-drugstore		11		2,929,894		8	%
Rite Aid-drugstore		10		2,719,501		8	%
Lowe’s-home improvement store		3		2,191,240		6	%
FedEx-distribution facility		3		2,183,809		6	%
Plastech-automotive parts		1		2,138,878		6	%
Advance Auto-automotive parts store		16		1,821,343		5	%
Office Depot-office supply store		5		1,225,170		4	%
Tractor Supply-specialty retail store		5		1,155,959		3	%
Atlanta Eurocars-motor vehicle dealership		1		1,043,851		3	%
Other		33		14,022,315		42	%
		96	$	34,430,845		100	%

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The following table shows the tenant industry diversification of our portfolio as of December 31, 2006:

							Percentage of 2006
	Total Number		Rentable		2006 Annualized		Annualized Gross
Industry	of Leases		Square Feet		Gross Base Rent		Base Rent
Drugstore		29		375,975	$	8,648,280		25	%
Specialty retail		15		422,990		4,103,342		12	%
Automotive parts		18		232,017		4,020,941		11	%
Home improvement		3		366,703		2,191,240		6	%
Distribution		3		247,400		2,183,809		6	%
Office supply		8		173,733		2,046,613		6	%
Motor vehicle dealerships		2		61,515		1,818,470		5	%
Theaters		2		85,000		1,749,255		5	%
Consumer electronics		3		154,482		1,370,900		4	%
Sporting goods		2		130,277		1,205,781		4	%
Other		11		671,341		5,092,213		16	%
		96		2,921,433	$	34,430,845		100	%

The following table shows the geographic diversification of our portfolio as of December 31, 2006:

							Percentage of 2006
	Total Number		Rentable		2006 Annualized		Annualized Gross
Location	of Properties		Square Feet		Gross Base Rents		Base Rent
Texas		9		468,515	$	3,917,448		11	%
Kansas		5		314,785		3,241,765		9	%
Missouri		7		144,363		3,113,324		9	%
Michigan		5		144,561		2,757,480		8	%
Illinois		5		354,551		2,606,670		8	%
Mississippi		7		127,086		2,389,684		7	%
Ohio		12		137,626		2,338,632		7	%
Georgia		3		125,245		1,693,625		5	%
Florida		3		46,990		1,534,514		4	%
Tennessee		6		136,812		1,481,637		4	%
Other		29		920,899		9,356,066		28	%
		91		2,921,433	$	34,430,845		100	%

Leases

Although there are variations in the specific terms of the leases, the following is a summary of the general structure of our leases. Generally, the leases of the properties owned provide for initial terms of 10 to 20 years. As of December 31, 2006, the weighted average remaining lease term was approximately 13.2 years. The operating properties are generally leased under net leases pursuant to which the tenant will bear responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. The leases of the properties provide for annual base rental payments (payable in monthly installments) ranging from approximately $85,000 to approximately $2.1 million (average of approximately $359,000). Tenant leases may provide for limited increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume.

Generally, the property leases provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease. Certain leases also provide that in the event we wish to sell the property subject to that lease, we first must offer the lessee the right to purchase the property on the same terms and conditions as any offer which we intend to accept for the sale of the property.

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The following table shows lease expirations of our portfolio as of December 31, 2006, during each of the next ten years and thereafter, assuming no exercise of renewal options or termination rights:

							Percentage of 2006
	Total Number		Rentable Square		2006 Annualized		Annualized Gross
Year of Lease Expiration	of Leases		Feet Expiring		Gross Base Rent		Base Rent
2007		—		—	$	—		0	%
2008		2		20,438		186,204		1	%
2009		—		—		—		0	%
2010		—		—		—		0	%
2011		1		2,000		33,733		0	%
2012		1		6,480		89,805		0	%
2013		3		37,925		453,045		1	%
2014		—		—		—		0	%
2015		8		637,915		3,408,007		10	%
2016		12		587,482		4,713,097		14	%
Thereafter		69		1,629,193		25,546,954		74	%
		96		2,921,433	$	34,430,845		100	%

ITEM 3.   LEGAL PROCEEDINGS

In the ordinary course of business, we may become subject to litigation or claims. There are no material pending legal proceedings or proceedings known to be contemplated against us.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our stockholders during the fourth quarter of 2006.

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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

As of March 16, 2007, we had approximately 40,629,000 shares of common stock outstanding held by a total of 9,834 stockholders of record. The number of stockholders is based on the records of Phoenix American Financial Services, Inc., who serves as our registrar and transfer agent.

There is no established trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. Pursuant to the Offering, we are selling shares of our common stock to the public at a price of $10.00 per share and at a price of $9.50 per share pursuant to our distribution reinvestment plan. Additionally, we provide discounts in our Offering for certain categories of purchasers, including based on volume discounts. Under our charter, certain restrictions are imposed on the ownership and transfer of shares.

Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for the shares will develop. To assist fiduciaries of tax-qualified pension, stock bonus or profit-sharing plans, employee benefit plans and annuities described in Section 403(a) or (b) of the Internal Revenue Code or an individual retirement account or annuity described in Section 408 of the Internal Revenue Code subject to the annual reporting requirements of ERISA and IRA trustees or custodians in preparation of reports relating to an investment in the shares, we intend to provide reports of the quarterly and annual determinations of the current estimated share value to those fiduciaries who request such reports. In addition, in order for NASD members and their associated persons to participate in the offering and sale of our shares of common stock, we are required pursuant to NASD Rule 2710(f)(2)(M) to disclose in each annual report distributed to investors a per share estimated value of the shares, the method by which it was developed and the date of the data used to develop the estimated value. For these purposes, the deemed value of our common stock is $10.00 per share as of December 31, 2006. Until two full fiscal years after the later of the termination of the Offering or the termination of any subsequent offering of shares, we intend to use the offering price of shares in the most recent offering, as adjusted for any special distribution of net sales proceeds, as the per share value of the shares. Beginning two full fiscal years after the last offering of shares, our board of directors will determine the value of our properties and other assets based on such information as our board determines appropriate, which may include independent valuations of our properties or our enterprise as a whole.

Share Redemption Program

Our board of directors has adopted a share redemption program that enables our stockholders to sell their shares to us in limited circumstances. Our share redemption program permits stockholders to sell their shares back to us after they have held them for at least one year, subject to the significant conditions and limitations described below.

Our common stock is currently not listed on a national securities exchange, or included for quotation on a national securities market, and we will not seek to list our stock until such time as our independent directors believe that the listing of our stock would be in the best interest of our stockholders. In order to provide stockholders with the benefit of interim liquidity, stockholders who have held their shares for at least one year may present all, or a portion consisting of at least 25%, of the holder’s shares to us for redemption at any time in accordance with the procedures outlined below. At that time, we may, subject to the conditions and limitations described below, redeem the shares presented for redemption for cash to the extent that we have sufficient funds available to us to fund such redemption. We will not pay to our board of directors, advisor or its affiliates any fees to complete any transactions under our share redemption program.

During the term of the Offering the redemption price per share will depend on the length of time a redeeming stockholder held such shares as follows: after one year from the purchase date — 92.5% of the amount paid for each share; after two years from the purchase date — 95.0% of the amount paid for each

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share, after three years from the purchase date — 97.5% of the amount paid for each share; and after four years from the purchase date — 100.0% of the amount paid for each share (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). At any time we are engaged in an offering of shares, the per share price for shares purchased under our redemption plan will always be equal to or lower than the applicable per share offering price. Thereafter the per share redemption price will be based on the then-current net asset value of the shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). Our board of directors will announce any redemption price adjustment and the time period of its effectiveness as a part of its regular communications with our stockholders. At any time the redemption price is determined by any method other than the net asset value of the shares, if we have sold property and have made one or more special distributions to our stockholders of all or a portion of the net proceeds from such sales, the per share redemption price will be reduced by the net sale proceeds per share distributed to investors prior to the redemption date as a result of the sale of such property in the special distribution. Our board of directors will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While our board of directors does not have specific criteria for determining a special distribution, we expect that a special distribution will only occur upon the sale of a property and the subsequent distribution of the net sale proceeds. Upon receipt of a request for redemption, we will conduct a Uniform Commercial Code search to ensure that no liens are held against the shares. We will charge an administrative fee to the stockholder for the search and other costs, which will be deducted from the proceeds of the redemption or, if a lien exists, will be charged to the stockholder. Subject to our waiver of the one-year holding period requirement, shares required to be redeemed in connection with the death of a stockholder may be repurchased without the one-year holding period requirement, at a purchase price equal to the price actually paid for the shares.

During any calendar year, we will not redeem in excess of 3.0% of the weighted average number of shares outstanding during the prior calendar year. The cash available for redemption will be limited to the proceeds from the sale of shares pursuant to our distribution reinvestment plan.

We will redeem our shares on the last business day of the month following the end of each quarter. Requests for redemption would have to be received on or prior to the end of the quarter in order for us to repurchase the shares as of the end of the next month. Stockholders may withdraw their request to have their shares redeemed at any time prior to the last day of the applicable quarter.

If we could not purchase all shares presented for redemption in any quarter, based upon insufficient cash available and the limit on the number of shares we may redeem during any calendar year, we would attempt to honor redemption requests on a pro rata basis. We would treat the unsatisfied portion of the redemption request as a request for redemption the following quarter. At such time, stockholders may then (1) withdraw their request for redemption at any time prior to the last day of the new quarter or (2) ask that we honor their request at such time, if any, when sufficient funds become available. Such pending requests will generally be honored on a pro rata basis. We will determine whether we have sufficient funds available as soon as practicable after the end of each quarter, but in any event prior to the applicable payment date.

Our board of directors may choose to amend, suspend or terminate our share redemption program upon 30 days notice at any time. Additionally, we will be required to discontinue sales of shares under the distribution reinvestment plan on the earlier of June 27, 2007, which is two years from the effective date of the Offering, unless the offering is extended, or the date we sell 5,952,000 shares under the plan, unless we file a new registration statement with the SEC and applicable states. Because the redemption of shares will be funded with the net proceeds we receive from the sale of shares under the distribution reinvestment plan, the discontinuance or termination of the distribution reinvestment plan will adversely affect our ability to redeem shares under the share redemption program. We would notify stockholders of such developments (i) in the annual or quarterly reports mentioned above or (ii) by means of a separate mailing to stockholders, accompanied by disclosure in a current or periodic report under the Exchange Act. During the Offering, we would also include this information in a prospectus supplement or post-effective amendment to the registration statement, as then required under federal securities laws.

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Our share redemption program is only intended to provide interim liquidity for stockholders until a liquidity event occurs, such as the listing of the shares on a national securities exchange, inclusion of the shares for quotation on a national market system, or our merger with a listed company. The share redemption program will be terminated if the shares become listed on a national securities exchange or included for quotation on a national market system. We cannot guarantee that a liquidity event will occur.

The shares we redeem under our share redemption program will be cancelled and return to the status of authorized and unissued shares. We do not intend to resell such shares to the public unless they are first registered with the SEC under the Securities Act and under appropriate state securities laws or otherwise sold in compliance with such laws.

During the years ended December 31, 2006 and 2005, we did not redeem any shares under our share redemption program. As of December 31, 2006 and 2005, the Company had issued approximately 371,000 and 0 shares of common stock under the DRIP, respectively, for proceeds of approximately $3.5 million and $0, respectively, which has been recorded as redeemable common stock on the consolidated balance sheets.

Distributions

We qualified as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005. As a REIT, we have made, and intend to make, distributions each taxable year (not including a return of capital for federal income tax purposes) equal to at least 90% of our taxable income. One of our primary goals is to pay regular (monthly) distributions to our stockholders.

For income tax purposes, distributions to common stockholders are characterized as ordinary income, capital gains, or as a return of a stockholder’s invested capital. To the extent that we make a distribution in excess of our current or accumulated earnings and profits, the distribution will be treated as a tax-free return of capital, reducing the tax basis in each U.S. stockholder’s shares, and the amount of each distribution of a U.S. stockholder’s tax basis in its shares will be taxable as gain realized from the sale of its shares.

The following table shows the distributions we have declared during the years ended December 31, 2006, 2005 and 2004:

			Weighted Average
	Total		Distributions
	Distributions		Declared per		Return of		Ordinary
Year	Declared		Common Share		Capital		Income
2006	$	8,492,214	$	0.64	$	0.37	$	0.27
2005		195,209		0.47		—		—
2004(1)		—		—		—		—

(1) Period from Inception (September 29, 2004) through December 31, 2004.

Use of Initial Public Offering Proceeds

We registered 50,000,000 shares of our common stock in our ongoing Offering (SEC File no. 333-121094, effective June 27, 2005), of which we registered 45,000,000 shares at $10.00 per share to be offered to the public and 5,000,000 shares offered to our investors pursuant to our DRIP at $9.50 per share. We filed an additional registration statement to increase the aggregate number of shares available in our primary offering to 49,390,000 and the aggregate number of shares available in our DRIP to 5,952,000. As of December 31, 2006, we had issued 30,691,204 shares of common stock in our ongoing Offering, raising gross offering proceeds of approximately $306.5 million. From this amount, we paid approximately $7.5 million in acquisition fees to Cole Realty, approximately $25.6 million in selling commissions and dealer manager fees to Cole Capital, an affiliate of Cole Advisors II, approximately $2.1 million in finance coordination fees to Cole Advisors II and approximately $3.8 million in organization and offering costs to Cole Advisors II. With the net offering proceeds and indebtedness, we acquired approximately $446.5 million in real estate and related assets and made the other payments reflected under “Cash Flows from Financing Activities” in our

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consolidated statements of cash flows. As of March 16, 2007, we had issued approximately 40,629,000 shares at an aggregate gross offering price of approximately $406.3 million.

Unregistered Sale of Securities and Issuance of Stock Options

We issued 20,000 shares of our common stock to Cole Holdings in connection with our inception in 2004 at $10.00 per share. On May 2, 2005 and May 23, 2006, we issued options to purchase 10,000 shares, respectively, of our common stock to our independent directors under our Independent Director Stock Option Plan. These shares and options were not registered under the Securities Act of 1933, as amended, and were issued in reliance on Rule 4(2) of the Securities Act.

The following table provides information regarding our equity compensation plan as of December 31, 2006:

	Number of Securities		Weighted-Average		Number of Securities
	to be Issued Upon		Exercise Price of		Remaining Available for
	Exercise of		Outstanding		Future Issuance Under
	Outstanding Options,		Options, Warrants		Equity Compensation
Plan Category	Warrants and Rights		and Rights		Plans
Equity compensation plans approved by security holders		20,000		9.15		980,000
Equity compensation plans not approved by security holders		—		N/A		—
Total		20,000		9.15		980,000

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ITEM 6.   SELECTED FINANCIAL DATA

The following data should be read in conjunction with our consolidated financial statements and the notes thereto and “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. The selected financial data presented below has been derived from our audited consolidated financial statements.

							From Inception
							(September 29,
	Year Ended			Year Ended			2004) through
	December 31, 2006			December 31, 2005			December 31, 2004
Balance Sheet Data:
Total real estate assets	$	446,544,041		$	91,618,285		$	—
Cash and cash equivalents	$	37,566,490		$	4,575,144		$	200,000
Restricted cash	$	5,839,733		$	1,813,804		$	—
Total assets	$	500,420,792		$	98,809,838		$	—
Mortgage notes payable	$	218,265,916		$	66,804,041		$	—
Notes payable to affiliates	$	—		$	4,453,000		$	—
Escrowed investor proceeds	$	5,710,730		$	1,813,804		$	—
Stockholders’ equity	$	266,236,497		$	25,204,966		$	200,000
Operating Data:
Total revenue	$	19,519,507		$	741,669		$	—
General and administrative	$	952,789		$	156,252		$	—
Property operating expenses	$	1,416,745		$	—		$	—
Property and asset management fees	$	936,977		$	38,768		$	—
Depreciation and amortization	$	6,469,366		$	221,411		$	—
Interest expense	$	8,901,113		$	467,386		$	—
Net income (loss)	$	1,345,996		$	(114,591	)	$	—
Funds from operations(1)	$	7,815,362		$	106,820		$	—
Cash Flow Data:
Cash flows provided by operations	$	7,861,475		$	397,741		$	—
Cash flows used in investing activities	$	(320,176,509	)	$	(93,640,753	)	$	—
Cash flows provided by financing activities	$	345,306,381		$	97,618,156		$	200,000
Dividends declared and unpaid	$	1,612,094		$	195,209		$	—
Per share data:
Net income (loss) — basic and diluted	$	0.10		$	(0.28	)	$	—
Funds from operations(1)	$	0.59		$	0.26		$	—
Weighted average dividends declared	$	0.64		$	0.47		$	—
Weighted average shares outstanding		13,275,635			411,909			—

(1) See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Funds From Operations” for information regarding why we present funds from operations and for a reconciliation of this non- GAAP financial measure to net income (loss).

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

The following discussion and analysis should be read in conjunction with the “Selected Financial Data” and our accompanying consolidated financial statements and notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.

Overview

We were formed on September 29, 2004 to acquire and operate commercial real estate primarily consisting of high quality, freestanding, single-tenant properties net leased to investment grade and other creditworthy tenants located throughout the United States. We commenced our principal operations on September 23, 2005, when we issued the initial 486,000 shares of our common stock in the Offering. Prior to such date, we were considered a development stage company. We acquired our first real estate property on September 26, 2005. We have no paid employees and are externally advised and managed by Cole Advisors II, an affiliate of ours. We intend to qualify, and currently qualify, as a real estate investment trust for federal income tax purposes.

We derive a substantial portion of our revenue from our rental income. As a result, our operating results and cash flows are primarily influenced by rental income from our commercial properties and interest expense on our property acquisition indebtedness. Rental income accounted for approximately 94% and 100% of total revenue during the years ended December 31, 2006 and 2005, respectively. As 100% of our properties are under lease, with an average remaining lease term of approximately 13.2 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated. Our advisor regularly monitors the creditworthiness of our tenants by reviewing the tenant’s financial results, credit rating agency reports (if any) on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment, and other information for changes and possible trends. If our advisor identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant’s financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property, or identifying a possible replacement tenant should the current tenant fail to perform on the lease. As of December 31, 2006, the debt leverage ratio of our portfolio, which is the ratio of total real estate assets to mortgage notes payable, was approximately 49%, with approximately 1% of the debt, or approximately $2.7 million subject to variable interest rates. As of March 16, 2007, we had repaid all of the approximately $2.7 million variable interest rate mortgage notes payable. The repayments of the variable interest rate mortgage notes payable loans was made with proceeds from our ongoing Offering. As we continue to raise capital under our Offering and our proposed secondary offering and invest the proceeds in commercial real estate, we will be subject to changes in real estate prices and changes in interest rates on new indebtedness used to acquire the properties. We may manage our risk of changes in real estate prices on future property acquisitions by entering into purchase agreements and loan commitments simultaneously such that our operating yield is determinable, by contracting with developers for future delivery of properties, or by entering into sale-leaseback transactions. We expect to manage our interest rate risk by monitoring the interest rate environment in connection with our planned property acquisitions to determine the appropriate acquisition financing, which may include fixed rate loans, variable rate loans or interest rate hedges. If we are unable to acquire suitable properties or obtain suitable financing for future acquisitions, our results of operations may be adversely affected.

As of December 31, 2006, we owned 83 single-tenant, freestanding retail properties, four single-tenant freestanding commercial properties, and four multi-tenant retail properties, all of which were 100% leased. During the years ended December 31, 2006 and 2005, we acquired 77 and 14 properties, respectively. Our results of operations are not indicative of those expected in future periods as we expect that rental income, operating expenses, asset management fees, depreciation expense, interest expense, and net income will each increase in the future as we acquire additional properties and as our current properties are owned for an entire period.

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Our management is not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally (such as lower capitalization rates and increasing interest rates, which lead to higher interest expense) that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition and operations of real properties and mortgage loans, other than those referred to in this annual report on Form 10-K.

With our objectives of providing current income to our stockholders and preserving their capital, we view our most significant challenges as:

•  continuing to raise sufficient amounts of equity capital in order to acquire a large, diversified portfolio while maintaining a moderate leverage ratio; and

•  investing net offering proceeds in properties that are accretive to our stockholders distributions at a time when the demand for high-quality, income-producing properties is high and the market competitive.

Application of Critical Accounting Policies

Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus, resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.

The critical accounting policies outlined below have been discussed with members of the audit committee of the board of directors.

Investment in Real Estate Assets

We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments, which are based on estimates, have a direct impact on net income. The estimated useful lives of our assets by class are generally as follows:

Building	40 years
Tenant improvements	Lesser of useful life or lease term
Intangible lease assets	Lesser of useful life or lease term

Allocation of Purchase Price of Acquired Assets

Upon the acquisition of real properties, it is our policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and building, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values. We utilize independent appraisals to determine the fair values of the tangible assets of an acquired property (which includes land and building).

The fair values of above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference

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between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment of rental income over the remaining terms of the respective leases.

The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets in the accompanying consolidated balance sheet and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles are included in intangible lease assets in the accompanying consolidated balance sheet and are amortized to expense over the remaining term of the respective leases.

The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of our purchase price allocations, which could impact the amount of our reported net income.

Valuation of Real Estate Assets

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, we assess the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, we will adjust the real estate and related intangible assets to the fair value and recognize an impairment loss. As of December 31, 2006, the undiscounted future operating cash flows of any property with potential impairment indicators exceeded its carrying value and no impairment losses had been recorded. As of December 31, 2005, no potential impairment indicators existed and no losses had been recorded.

Projections of expected future cash flows require us to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow analysis would result in an incorrect assessment of the property’s future cash flow and fair value and could result in the overstatement of the carrying value of our real estate and related intangible assets and net income.

Revenue Recognition

Upon the acquisition of real estate, certain properties have leases where minimum rent payments increase during the term of the lease. We record rental revenue for the full term of each lease on a straight-line basis. Accordingly, we record a receivable from tenants that we expect to collect over the remaining lease term rather than currently, which we record as rents receivable. When we acquire a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. In accordance with Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements, we defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Cost recoveries from tenants are included in tenant reimbursement income in the period the related costs are incurred.

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Income Taxes

We have made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with our taxable year ended December 31, 2005. If we qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax to the extent we distribute our REIT taxable income to our stockholders, and so long as we distribute at least 90% of our REIT taxable income. REITs are subject to a number of other organizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income. We believe we are organized and operating in such a manner as to qualify to be taxed as a REIT for the taxable year ended December 31, 2006.

Results of Operations

We commenced our principal operations on September 23, 2005, when we issued the initial 486,000 shares of our common stock in the Offering. Prior to such date, we were considered a development stage company. We acquired our first real estate property on September 26, 2005.

Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

As of December 31, 2006, we owned 91 commercial properties compared to 14 commercial properties at December 31, 2005, all of which were 100% leased. Accordingly, our results of operations for the year ended December 31, 2006 as compared to the year ended December 31, 2005 reflect significant increases in all categories.

Revenue. — Rental income increased approximately $17.6 million to approximately $18.4 million for the year ended December 31, 2006 compared to approximately $742,000 for the year ended December 31, 2005. The increase was primarily due to the acquisition of 77 new properties during 2006 and the recording of rental income for the 14 properties acquired during 2005 for 12 months during 2006 compared to three months, or less, during 2005. Our revenue primarily consists of rental income from net leased commercial properties, which accounted for approximately 94% and 100% of total revenues during the year ended December 31, 2006 and December 31, 2005, respectively. During 2006, we acquired certain properties for which we pay certain operating expenses subject to reimbursement by the tenant, which resulted in approximately $1.2 million of tenant reimbursement income in 2006 compared to no amounts in 2005.

General and Administrative Expenses.  General and administrative expenses increased approximately $797,000 to approximately $953,000 for the year ended December 31, 2006 compared to approximately $156,000 for the year ended December 31, 2005. The increase was primarily due to increases in legal and accounting fees, primarily due to our increase in assets and operations and a full year of SEC reporting obligations in 2006, compared to six months in 2005, and increases in state franchise and income taxes due to the increase in the number of properties owned from 14 properties in 2005 to 91 properties in 2006. The primary general and administrative expense items are legal and accounting fees, organizational costs, state franchise and income taxes, other licenses and fees, and insurance.

Property Operating Expenses.  Property operating expenses increased to approximately $1.4 million during the year ended December 31, 2006 compared to $0 for the year ended December 31, 2005. The increase was primarily due to the acquisition of certain properties subsequent to December 31, 2005, for which we initially paid certain operating expenses and are reimbursed by the tenant in accordance with the respective lease agreements. At December 31, 2005, our portfolio consisted of properties in which each tenant paid substantially all expenses directly. The primary property operating expense items are repairs and maintenance, property taxes, and insurance.

Property and Asset Management Fees.  Pursuant to the advisory agreement with our advisor, we are required to pay to our advisor a monthly asset management fee equal to 1/12 of 0.25% of the aggregate asset value of our properties determined in accordance with the advisory agreement as of the last day of the preceding month. Pursuant to the property management agreement with our advisor, we are required to pay to

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our advisor a property management and leasing fee in an amount equal to 2.0% of gross revenues determined pursuant to the agreement, less all payments to third-party management subcontractors.

Property and asset management fees increased approximately $898,000 to approximately $937,000 for the year ended December 31, 2006 compared to approximately $39,000 for the year ended December 31, 2005. Property management fees increased approximately $336,000 to approximately $350,000 in 2006 from approximately $14,000 in 2005. The increase in property management fees was primarily due to an increase in rental income to approximately $18.4 million in 2006 from approximately $742,000 in 2005. Asset management fees increased approximately $562,000 to approximately $587,000 in 2006 from approximately $25,000 in 2005. The increase in asset management fees was primarily due to an increase in the aggregate book value of properties owned to approximately $444.0 million at December 31, 2006 from approximately $91.6 million at December 31, 2005.

Depreciation & Amortization Expenses.  Depreciation and amortization expenses increased approximately $6.3 million to approximately $6.5 million for the year ended December 31, 2006 compared to approximately $221,000 for the year ended December 31, 2005. The increase was primarily due to an increase in the average aggregate book value of properties owned to approximately $443.9 million at December 31, 2006 from approximately $91.6 million at December 31, 2005 and the recording of depreciation and amortization for 12 months during 2006 compared to three months during 2005. The increase in aggregate book value is due to the acquisition of 77 new properties during 2006 and the ownership of the 14 properties acquired during 2005 for a full year in 2006.

Interest Income.  Interest income increased approximately $475,000 to approximately $503,000 during the year ended December 31, 2006 compared to approximately $28,000 for the year ended December 31, 2005. The increase was primarily due to having higher uninvested cash throughout the year due to proceeds from the Offering. Cash and cash equivalents was approximately $37.6 million at December 31, 2006 compared to approximately $4.6 million at December 31, 2005.

Interest Expense.  Interest expense increased approximately $8.4 million to approximately $8.9 million for the year ended December 31, 2006 compared to approximately $467,000 during the year ended December 31, 2005. The increase was primarily due to an increase in the average mortgage notes payable outstanding during 2006 to approximately $142.5 million from approximately $33.4 million during 2005 and the recording of interest expense for 12 months during 2006 compared to four months during 2005. The increase in average mortgage notes payable was primarily due to the acquisition of 77 new properties during 2006 and the ownership of the 14 properties acquired during 2005 for a full year in 2006.

Net Income.  Net income increased approximately $1.5 million to approximately $1.3 million for the year ended December 31, 2006 compared to a net loss of approximately $115,000 for the year ended December 31, 2005. The increase was primarily due to the acquisition and ownership of 77 new properties during 2006 and the ownership of the 14 properties acquired during 2005 for a full year in 2006.

Our property acquisitions during the year ended December 31, 2006 were financed in part with short-term and long-term notes payable as discussed in Note 5 to our consolidated financial statements. Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the level of proceeds raised in the Offering, the cost of borrowings, and the opportunity to acquire real estate assets which meet our investment objectives.

Year Ended December 31, 2005 Compared to the Period from September 29, 2004 (Date of Inception) to December 31, 2004

As previously disclosed, we commenced our principal operations on September 23, 2005 and we made our initial real estate acquisition on September 26, 2005. As a result, our consolidated financial results for the year ended December 31, 2005 are not comparable to the results for the period from September 29, 2004 (date of inception) to December 31, 2004.

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Results of operations for the year ended December 31, 2005 primarily consisted of the following:

Real Estate Operations.  Rental income was approximately $742,000, depreciation and amortization expense was approximately $221,000, property and asset management fees were approximately $39,000, and interest expense was approximately $467,000 for the year ended December 31, 2005. All of such costs were directly related to the timing of our real estate acquisitions during 2005. We acquired our initial property on September 26, 2005, and 13 additional properties during the fourth quarter of 2005.

General and Administrative Expenses.  General and administrative expenses for the year ended December 31, 2005 totaled approximately $156,000, constituting 21.0% of total revenues. The primary components of general and administrative expenses were board of directors fees, legal fees, accounting fees, and organizational costs. Such expenses represented approximately six months of expense as we incurred no general and administrative expenses prior to the June 27, 2005, the effective date of the Offering.

We sustained a net loss for the year ended December 31, 2005 of approximately $115,000, primarily as a result of incurring overhead-related general and administrative expenses, depreciation and amortization expenses and interest expense without sufficient rental income from properties to cover the costs.

Portfolio Information

As of December 31, 2006, we owned 91 properties located in 26 states, all of which were 100% leased with an average lease term remaining of approximately 13.2 years.

As of December 31, 2006, our five highest geographic concentrations were as follows:

							Percentage of 2006
	Total Number		Rentable		2006 Annualized		Annualized Gross
Location	of Properties		Square Feet		Gross Base Rents		Base Rent
Texas		9		468,515	$	3,917,448		11	%
Kansas		5		314,785		3,241,765		9	%
Missouri		7		144,363		3,113,324		9	%
Michigan		5		144,561		2,757,480		8	%
Illinois		5		354,551		2,606,670		8	%
		31		1,426,775	$	15,636,687		45	%

As of December 31, 2006, our five highest tenant industry concentrations were as follows:

							Percentage of 2006
	Total Number		Rentable		2006 Annualized		Annualized Gross
Industry	of Leases		Square Feet		Gross Base Rent		Base Rent
Drugstore		29		375,975	$	8,648,280		25	%
Specialty retail		15		422,990		4,103,342		12	%
Automotive parts		18		232,017		4,020,941		12	%
Home improvement		3		366,703		2,191,240		6	%
Distribution		3		247,400		2,183,809		6	%
		68		1,645,085	$	21,147,612		61	%

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As of December 31, 2006, our five highest tenant concentrations were as follows:

					Percentage of 2006
	Total Number		2006 Annualized		Annualized Gross
Tenant	of Leases		Gross Base Rent		Base Rent
Walgreens-drugstore		8	$	2,998,885		9	%
CVS-drugstore		11		2,929,894		9	%
Rite Aid-drugstore		10		2,719,501		8	%
Lowe’s-home improvement store		3		2,191,240		6	%
FedEx-distribution facility		3		2,183,809		6	%
		35	$	13,023,329		38	%

For more information on our portfolio diversification and statistics, see “Item 2 — Properties” above.

Funds From Operations

We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of a REIT. Because FFO calculations exclude such factors as depreciation and amortization of real estate assets and gains or losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. Our management believes that accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictability over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. Other REITs may not define FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition (as we do) or may interpret the current NAREIT definition differently than we do.

FFO is a non-GAAP financial measure and does not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO includes adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization. Accordingly, FFO should not be considered as an alternative to net income as an indicator of our operating performance.

Our calculation of FFO is presented in the following table for the period ended as indicated:

	Year Ended
	December 31,		December 31,
	2006		2005
Net income (loss)	$	1,345,996	$	(114,591	)
Add:
Depreciation of real estate assets		4,396,460		151,472
Amortization of lease related costs		2,072,906		69,939
FFO	$	7,815,362	$	106,820

Set forth below is additional information (often considered in conjunction with FFO) that may be helpful in assessing our operating results:

•  In order to recognize revenues on a straight-line basis over the terms of the respective leases, we recognized additional revenue by straight-lining rental revenue of approximately $790,000 and approximately $34,000 during the years ended December 31, 2006 and 2005, respectively.

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•  Amortization of deferred financing costs totaled approximately $548,000 and approximately $18,000 during the years ended December 31, 2006 and 2005, respectively.

Liquidity and Capital Resources

We expect to continue to raise capital through our ongoing Offering of common stock and to utilize the net proceeds of the Offering and proceeds from secured or unsecured financings to complete future property acquisitions. As of December 31, 2006, we had received and accepted subscriptions for 30,691,204 shares of common stock in our Offering for gross proceeds of approximately $306.5 million.

Short-term Liquidity and Capital Resources

We expect to meet our short-term liquidity requirements through net cash provided by property operations and proceeds from the Offering. We expect our operating cash flows to increase as additional properties are added to our portfolio. We expect that approximately 88.6% of the gross proceeds from our Offering will be invested in real estate, approximately 9.2% will be used to pay sales commissions, dealer manager fees and offering and organizational costs, with the remaining 2.2% used to pay acquisition and advisory fees and acquisition expenses. The offering and organizational costs associated with the Offering are initially paid by our advisor, which we reimburse for such costs up to 1.5% of the capital raised by us in the Offering. As of December 31, 2006, Cole Advisors II had paid approximately $3.8 million of offering and organization costs since the inception of the Offering and we had reimbursed our advisor for approximately $3.8 million of such costs, of which approximately $59,000 was expensed as organizational costs.

During the period from January 1, 2007 to March 19, 2007, we completed the acquisition of 14 single-tenant properties and three multi-tenant properties in separate transactions for an aggregate purchase price of approximately $229.4 million, exclusive of closing costs. The acquisitions were funded with proceeds from the Offering and approximately $145.9 million in aggregate proceeds from 15 loans. Additionally, we issued an approximately $6.3 million mortgage note payable on a property owned as of December 31, 2006.

On December 15, 2006, our board of directors declared a daily distribution of $0.0017808 per share for stockholders of record as of the close of business on each day of the period commencing on January 1, 2007 and ending on March 31, 2007. The distributions for the period commencing on January 1, 2007 and ending on January 31, 2007 were paid in February 2007 and totaled approximately $1.8 million, of which approximately $950,000 was reinvested in shares through our distribution reinvestment program. The distributions for the period commencing on February 1, 2007 and ending on February 28, 2007 were paid in March 2007 and totaled approximately $1.8 million, of which approximately $970,000 was reinvested in shares through our distribution reinvestment program.

Long-term Liquidity and Capital Resources

We expect to meet our long-term liquidity requirements through proceeds from the sale of our common stock, including through the Offering, proceeds from secured or unsecured financings from banks and other lenders, the selective and strategic sale of properties and net cash flows from operations. We expect that our primary uses of capital will be for property acquisitions, for the payment of tenant improvements, for the payment of offering-related costs, for the payment of operating expenses, including interest expense on any outstanding indebtedness, and for the payment of distributions to our stockholders.

We expect that substantially all net cash generated from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid at the properties; however, we may use other sources to fund distributions as necessary. To the extent that cash flows from operations are lower due to fewer properties being acquired or lower returns on the properties, distributions paid to our stockholders may be lower. We expect that substantially all net cash resulting from equity or debt financing will be used to fund acquisitions, certain capital expenditures identified at acquisition, repayments of outstanding debt, or distributions to our stockholders. Over the long term, we intend to reduce our aggregate borrowings as a percentage of our real estate assets.

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As of December 31, 2006, we had cash and cash equivalents of approximately $37.6 million, which we expect to be used primarily to invest in additional real estate, pay operating expenses and pay stockholder distributions.

As of December 31, 2006, we had approximately $218.3 million of debt outstanding consisting of approximately $215.6 million in fixed rate, term mortgage loans and approximately $2.7 million in variable rate term mortgage loans. The weighted average interest rate at December 31, 2006 under the fixed rate term mortgage loans was 5.72% and the variable rate term mortgage interest rate is stated at LIBOR plus 2.0%. Additionally the ratio of debt to total assets was approximately 44% and the weighted average years to maturity was 7.70 years.

Our contractual obligations as of December 31, 2006 are as follows:

	Payments Due by Period(2)
			Less Than		1-3		4-5		More Than
Contractual Obligations	Total		1 Year		Years		Years		5 Years
Principal payments — fixed rate debt	$	215,555,559	$	355,849	$	26,819,031	$	39,518,216	$	148,862,463
Interest payments — fixed rate debt		100,009,247		12,413,771		36,546,514		18,537,916		32,511,046
Principal payments — variable rate debt		2,710,357		2,710,357		—		—		—
Interest payments — variable rate debt		198,300		198,300		—		—		—
Total	$	318,473,463	$	15,678,277	$	63,365,545	$	58,056,132	$	181,373,509

(1)	A rate of 7.32% was used to calculate the variable debt payment obligations in future periods. This is the rate effective as of December 31, 2006.
(2)	Principle paydown amounts are included in payments due by period amounts.

Our charter prohibits us from incurring debt that would cause our borrowings to exceed the greater of 60% of our assets, valued at the greater of the aggregate cost (before depreciation and other non-cash reserves) or fair market value of all assets owned by us, unless approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report. During the fourth quarter of 2005 and the quarter ended March 31, 2006, the independent directors approved borrowings that caused our leverage ratio at certain times to exceed the 60% limitation. The independent directors believed such borrowing levels were justified for the following reasons:

•  the borrowings enabled us to purchase the properties and earn rental income more quickly;

•  the property acquisitions were likely to increase the net offering proceeds from our initial public offering by allowing us to show potential investors actual acquisitions, thereby improving our ability to meet our goal of acquiring a diversified portfolio of properties to generate current income for investors and preserve investor capital; and

•  based on expected equity sales at the time and scheduled maturities of our short-term variable rate debt, leverage was likely to exceed the charter’s guidelines only for a limited period of time.

Cash Flow Analysis

Year Ended December 31, 2006 Compared to the Year ended December 31, 2005

Operating Activities

Net cash provided by operating activities increased approximately $7.5 million to approximately $7.9 million for the year ended December 31, 2006, compared to net cash provided by operating activities of approximately $398,000 for the year ended December 31, 2005. The increase was primarily due to net income for the period of approximately $1.3 million and depreciation and amortization expenses totaling

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approximately $7.0 million offset by increases in rents and tenant receivables of approximately $2.4 million. See “Results of Operations” for a more complete discussion of the factors impacting our operating performance.

Investing Activities

Net cash used in investing activities increased approximately $226.6 million to approximately $320.2 million for the year ended December 31, 2006, compared to net cash used in investing activities of approximately $93.6 million for the year ended December 31, 2005. The increase was primarily due to the acquisition of 77 real estate properties during 2006 compared to the acquisition of 14 properties during 2005 and an approximately $2.2 million increase in restricted cash, due to an increase cash held in escrow pending the issuance of shares to investors.

Financing Activities

Net cash provided by financing activities increased approximately $247.7 million to approximately $345.3 million for the year ended December 31, 2006, compared to net cash provided by financing activities of approximately $97.6 million for the year ended December 31, 2005. The increase was primarily due to an increase in net proceeds from the issuance of common stock in the Offering of approximately $222.8 million and an increase in proceeds from the issuance of mortgage and affiliate notes of approximately $93.9 million, offset by an increase in repayments of mortgage and affiliate notes payable of approximately $63.5 million. The increase in proceeds from issuance of mortgage and affiliate notes payable was due to the issuance of 59 new mortgages in 2006 compared to nine new mortgages in 2005. The increase in repayments of mortgage and affiliate notes payable was due to the repayment of short-term variable rate debt at its maturity during 2006 and the repayment of approximately $4.5 million of affiliate notes payable during 2006.

Year Ended December 31, 2005 Compared to the Period from September 29, 2004 (Date of Inception) to December 31, 2004

As previously disclosed, we commenced our principal operations on September 23, 2005 and we made our initial real estate acquisition on September 26, 2005. As a result, our consolidated cash flows for the year ended December 31, 2005 are not comparable to the cash flows for the period from September 29, 2004 (date of inception) to December 31, 2004.

Operating Activities

Net cash provided by operating activities was approximately $398,000 for the year ended December 31, 2005, primarily due to a net loss for the period of approximately $115,000 offset by depreciation and amortization expenses totaling approximately $241,000 and an increase in accounts payable and accrued expenses of approximately $283,000. Our initial property acquisition was made on September 26, 2005. See “Results of Operations” for a more complete discussion of the factors impacting our operating performance.

Investing Activities

Net cash used in investing activities was approximately $93.6 million for the year ended December 31, 2005, primarily due to approximately $91.8 million used on the acquisition of 14 real estate properties and their associated intangible lease assets and acquisition costs and approximately $1.8 million in restricted cash, which is held in escrow pending the issuance of shares to investors.

Financing Activities

Net cash provided by financing activities was approximately $97.6 million for the year ended December 31, 2005, primarily due to net proceeds from the issuance of common stock in the Offering of approximately $25.3 million, net proceeds of $70.5 million from the issuance of notes in connection with the acquisition of 14 properties and an approximately $1.8 million liability related to investor proceeds, which are held in escrow pending our acceptance of subscriptions and the issuance of shares to the investors.

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Election as a REIT

We are taxed as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income for four years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying consolidated financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying financial statements.

Inflation

We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations. There are provisions in certain of our tenant leases that would protect us from the impact of inflation such as step rental increases and percentage rent provisions. However, due to the long-term nature of the leases, the leases may not re-set frequently enough to cover inflation.

Related-Party Transactions and Agreements

We have entered into agreements with Cole Advisors II and its affiliates, whereby we pay certain fees to, or reimburse certain expenses of, Cole Advisors II or its affiliates for acquisition and advisory fees and expenses, organization and offering costs, sales commissions, dealer manager fees, asset and property management fees and reimbursement of operating costs. See Note 9 to our consolidated financial statements included in this annual report on Form 10-K for a discussion of the various related-party transactions, agreements and fees.

Conflicts of Interest

Affiliates of Cole Advisors II act as sponsor, general partner or advisor to various private real estate limited partnerships and a REIT that offered its shares pursuant to an exemption from registration. As such, there are conflicts of interest where Cole Advisors II or its affiliates, while serving in the capacity as sponsor, general partner or advisor for another Cole sponsored program, may be in competition with us in connection with property acquisitions, property dispositions, and property management. The compensation arrangements between affiliates of Cole Advisors II and these other Cole sponsored programs could influence its advice to us. See “Item 1. Business — Conflicts of Interest” in this annual report on Form 10-K.

Subsequent Events

Certain events subsequent to December 31, 2006 through March 16, 2007, including the sale of shares of common stock, the acquisition of 17 properties, the attainment of additional mortgage financing, and the addition of various extended rate lock agreements are discussed in Note 16 to the consolidated financial statements included in this annual report on Form 10-K.

Impact of Recent Accounting Pronouncements

Reference is made to Note 1 to the consolidated financial statements included in this annual report on Form 10-K regarding the impact of recent accounting pronouncements.

Reference is made to Note 10 to the consolidated financial statements included in this annual report on Form 10-K regarding our adoption of SFAS No. 123R, “Share-based Payment.”

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Off Balance Sheet Arrangements

As of December 31, 2006 and 2005, we had no off balance sheet arrangements.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of our use of debt, primarily to acquire properties, we are exposed to interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flow primarily through a moderate level of overall borrowings. We manage our ratio of fixed to floating rate debt with the objective of achieving a mix that we believe is appropriate. Our floating rate debt is based on variable interest rates in order to provide the necessary financing flexibility; however, we are closely monitoring interest rates and will continue to consider the sources and terms of our borrowing facilities to determine whether we have appropriately guarded ourselves against the risk of increasing interest rates in future periods.

We have entered into interest rate lock agreements with various lenders to secure interest rates on mortgage debt on properties we plan to purchase in the future. We have outstanding rate lock deposits in the amount of approximately $3.9 million as of December 31, 2006, which are applied as credits to the mortgage fundings as they occur. These agreements lock interest rates ranging from 5.52% to 6.56% for periods of 90 days on approximately $247 million in principal of which approximately $49.6 million has been allocated as of December 31, 2006. Our financial instruments consist of both fixed and variable rate debt.

As of December 31, 2006, our consolidated debt consisted of the following, with scheduled maturities:

	2007			2008			2009		2010			2011			Thereafter
Maturing debt
Variable rate debt	$	2,710,357		$	—		$	—	$	—		$	—		$	—
Fixed rate debt	$	355,849		$	9,729,334		$	205,511	$	16,884,186		$	39,272,285		$	149,108,393
Average interest rate on debt
Variable rate debt		Libor + 2.00	%		—			—		—			—			—
Fixed rate debt		—			5.15	%		—		5.59	%		5.84	%		5.84	%

Approximately $215.6 million of our total debt outstanding as of December 31, 2006 is subject to fixed rates, with a weighted average interest rate of 5.72% and expirations ranging from 2008 to 2018. A change in the market interest rate impacts the net financial instrument position of our fixed rate debt portfolio but has no impact on interest incurred or cash flows.

As of December 31, 2006, a 1% change in interest rates would result in a change in interest expense of approximately $27,000 per year.

We do not have any foreign operations or assets. As a result, we are not exposed to fluctuations in foreign currently rates.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data filed as part of this report are set forth beginning on page F-1 of this report.

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

There were no changes in or disagreements with our independent registered public accountants during the year ended December 31, 2006.

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ITEM 9A.   CONTROLS AND PROCEDURES

In accordance with Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of December 31, 2006, were effective for the purpose of ensuring that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, can only provide reasonable assurance, and not absolute assurance, that the objectives of the controls system are met, and an evaluation of controls can provide only reasonable assurance, and not absolute assurance, that all control issues and instances of fraud or error, if any, within a company have been detected.

No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B.   OTHER INFORMATION

As of the quarter ended December 31, 2006, all items required to be disclosed under Form 8-K were reported under Form 8-K.

PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC with respect to our 2007 annual meeting of stockholders.

ITEM 11.   EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with respect to our 2007 annual meeting of stockholders.

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

The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with respect to our 2007 annual meeting of stockholders.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORS INDEPENDENCE

The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with respect to our 2007 annual meeting of stockholders.

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with respect to our 2007 annual meeting of stockholders.

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PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) List of Documents Filed.

1. The list of the financial statements contained herein is set forth on page F-1 hereof.

2. Schedule III — Real Estate Assets and Accumulated Depreciation is set forth beginning on page S-1 hereof. All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.

3. The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.

(b) See (a) 3 above.

(c) See (a) 2 above.

57

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 20th day of March 2007.

Cole Credit Property Trust II, Inc.
(Registrant)

By:  /s/  CHRISTOPHER H. COLE

Christopher H. Cole

Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacity as and on the date indicated.

Signature	Title	Date
/s/  CHRISTOPHER H. COLE Christopher H. Cole	Chief Executive Officer, President and Director (Principal Executive Officer)	March 20, 2007
/s/  BLAIR D. KOBLENZ Blair D. Koblenz	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 20, 2007
/s/  MARCUS E. BROMLEY Marcus E. Bromley	Director	March 20, 2007
/s/  ELIZABETH L. WATSON Elizabeth L. Watson	Director	March 20, 2007

58

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Financial Statements	Page
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements		F-2
Consolidated Balance Sheets as of December 31, 2006 and 2005		F-3
Consolidated Statements of Operations for the Years Ended December 31, 2006 and 2005 and the Period from Inception (September 29, 2004) to December 31, 2004		F-4
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2006 and 2005 and the Period from Inception (September 29, 2004) to December 31, 2004		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006 and 2005 and the Period from Inception (September 29, 2004) to December 31, 2004		F-6
Notes to Consolidated Financial Statements		F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Cole Credit Property Trust II, Inc.

Phoenix, Arizona

We have audited the accompanying consolidated balance sheets of Cole Credit Property Trust II, Inc. and subsidiaries (“the Company”) as of December 31, 2006 and 2005 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2006, 2005 and for the period from September 29, 2004 (date of inception) to December 31, 2004. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements presents fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005 and the results of its operations and its cash flows for the years ended December 31, 2006, 2005 and for the period from September 29, 2004 (date of inception) to December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

The Company was in the development stage at December 31, 2004; during the year ended December 31, 2005, the Company completed its development activities and commenced its planned principal operations.

As discussed in Note 11 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123(R), Share-Based Payment, using the modified prospective method.

/s/  DELOITTE & TOUCHE, LLP

Phoenix, Arizona

March 20, 2007

F-2

COLE CREDIT PROPERTY TRUST II, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2006			2005
ASSETS:
Real estate assets, at cost:
Land	$	109,506,269		$	23,854,308
Buildings and improvements, less accumulated depreciation of $4,547,932 and $151,472 at December 31, 2006 and 2005, respectively		282,468,749			57,338,359
Acquired intangible lease assets, less accumulated amortization of $2,251,172 and $71,881 at December 31, 2006 and 2005, respectively		54,569,023			10,425,618
Total real estate assets		446,544,041			91,618,285
Cash and cash equivalents		37,566,490			4,575,144
Restricted cash		5,839,733			1,813,804
Rents and tenant receivables, net		2,432,536			36,001
Prepaid expenses, mortgage loan deposits and other assets		4,248,973			11,928
Deferred financing costs, less accumulated amortization of $565,946 and $17,964 at December 31, 2006 and 2005, respectively		3,789,019			754,676
Total assets	$	500,420,792		$	98,809,838
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Mortgage notes payable	$	218,265,916		$	66,804,041
Notes payable to affiliates		—			4,453,000
Accounts payable and accrued expenses		2,016,343			282,797
Escrowed investor proceeds		5,710,730			1,813,804
Due to affiliates		67,608			41,384
Acquired below market lease intangibles, less accumulated amortization of $96,484 and $52 at December 31, 2006 and 2005, respectively		2,649,374			14,637
Distributions payable		1,612,094			195,209
Deferred rent and other liabilities		340,974			—
Total liabilities		230,663,039			73,604,872
Redeemable Common Stock		3,521,256			—
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $.01 par value; 240,000,000 and 90,000,000 shares authorized, 30,691,204 and 2,832,387 shares issued and outstanding at December 31, 2006 and 2005, respectively		306,912			28,324
Capital in excess of par value		273,385,603			25,486,442
Accumulated distributions in excess of earnings		(7,456,018	)		(309,800	)
Total stockholders’ equity		266,236,497			25,204,966
Total liabilities and stockholders’ equity	$	500,420,792		$	98,809,838

The accompanying notes are an integral part of these consolidated financial statements.

F-3

COLE CREDIT PROPERTY TRUST II, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended			Year Ended			Period from Inception
	December 31,			December 31,			(September 29, 2004) to
	2006			2005			December 31, 2004
Revenues:
Rental income	$	18,357,174		$	741,669		$	—
Tenant reimbursement income		1,162,333			—			—
Total revenue		19,519,507			741,669			—
Expenses:
General and administrative		952,789			156,252			—
Property operating expenses		1,416,745			—			—
Property and asset management fees		936,977			38,768			—
Depreciation		4,396,460			151,472			—
Amortization		2,072,906			69,939			—
Total operating expenses		9,775,877			416,431			—
Real estate operating income		9,743,630			325,238			—
Other income (expense):
Interest income		503,479			27,557			—
Interest expense		(8,901,113	)		(467,386	)		—
Total other income		(8,397,634	)		(439,829	)		—
Net income (loss)	$	1,345,996		$	(114,591	)	$	—
Weighted average number of common shares outstanding
Basic and diluted		13,275,635			411,909			—
Net income (loss) per common share
Basic and diluted	$	0.10		$	(0.28	)	$	—

The accompanying notes are an integral part of these consolidated financial statements.

F-4

COLE CREDIT PROPERTY TRUST II, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

								Accumulated
	Common Stock				Capital in			Distributions			Total
	Number of		Par		Excess of Par			in Excess of			Stockholders’
	Shares		Value		Value			Earnings			Equity
Balance, September 29, 2004 (Date of Inception)		—	$	—	$	—		$	—		$	—
Issuance of Common Stock to Cole Holdings Corporation		20,000		200		199,800						200,000
Balance, December 31, 2004		20,000		200		199,800			—			200,000
Issuance of common stock		2,812,387		28,124		28,080,997			—			28,109,121
Distributions		—		—		—			(195,209	)		(195,209	)
Commissions on stock sales and related dealer manager fees		—		—		(2,375,780	)		—			(2,375,780	)
Other offering costs		—		—		(418,575	)		—			(418,575	)
Net loss		—		—		—			(114,591	)		(114,591	)
Balance, December 31, 2005		2,832,387		28,324		25,486,442			(309,800	)		25,204,966
Issuance of common stock		27,858,817		278,588		277,953,219			—			278,231,807
Distributions		—		—		—			(8,492,214	)		(8,492,214	)
Commissions on stock sales and related dealer manager fees		—		—		(23,254,138	)		—			(23,254,138	)
Other offering costs		—		—		(3,332,577	)		—			(3,332,577	)
Stock option compensation expense						53,913						53,913
Redeemable common stock		—		—		(3,521,256	)		—			(3,521,256	)
Net income		—		—		—			1,345,996			1,345,996
Balance, December 31, 2006		30,691,204	$	306,912	$	273,385,603		$	(7,456,018	)	$	266,236,497

The accompanying notes are an integral part of these consolidated financial statements.

F-5

COLE CREDIT PROPERTY TRUST II, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended			Year Ended			Period from Inception
	December 31,			December 31,			(September 29, 2004) to
	2006			2005			December 31, 2004
Cash Flows from Operating Activities:
Net income (loss)	$	1,345,996		$	(114,591	)	$	—
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		4,396,460			151,472			—
Amortization		2,630,841			89,793			—
Stock compensation expense		53,913			—			—
Changes in assets and liabilities:
Rents and tenant receivables		(2,396,534	)		(36,001	)		—
Prepaid expenses and other assets		(269,945	)		(11,928	)		—
Accounts payable and accrued expenses		1,733,546			282,797			—
Deferred rent and other liabilities		340,974			—			—
Due to affiliates		26,224			36,199			—
Net cash provided by operating activities		7,861,475			397,741			—
Cash Flows from Investing Activities:
Investment in real estate and related assets		(278,576,503	)		(81,344,139	)		—
Acquired intangible lease assets		(40,305,246	)		(10,497,499	)		—
Acquired below market lease intangibles		2,731,169			14,689			—
Restricted cash		(4,025,929	)		(1,813,804	)		—
Net cash used in investing activities		(320,176,509	)		(93,640,753	)		—
Cash Flows from Financing Activities:
Proceeds from issuance of common stock		274,710,551			28,109,121			200,000
Proceeds from mortgage and affiliate notes payable		168,764,469			72,084,404			—
Repayment of mortgage and affiliate notes payable		(64,375,352	)		(827,363	)		—
Refund of mortgage rate lock deposits		1,936,000			—			—
Payment of mortgage rate lock deposits		(5,903,100	)		—			—
Escrowed investor proceeds liability		3,896,925			1,813,804			—
Offering costs on issuance of common stock		(26,586,715	)		(2,789,170	)		—
Distributions to investors		(3,554,073	)		—			—
Deferred financing costs paid		(3,582,325	)		(772,640	)		—
Net cash provided by financing activities		345,306,381			97,618,156			200,000
Net increase in cash and cash equivalents		32,991,347			4,375,144			200,000
Cash and cash equivalents, beginning of period		4,575,144			200,000			—
Cash and cash equivalents, end of period	$	37,566,490		$	4,575,144		$	200,000
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Dividends declared and unpaid	$	1,612,094		$	195,209		$	—
Mortgage notes assumed in real estate acquisitions	$	42,619,758		$	—		$	—
Common stock issued through distribution reinvestment plan	$	3,521,256		$	—		$	—
Commissions and dealer manager fees due to affiliate	$	—		$	5,185		$	—
Supplemental Cash Flow Disclosures:
Interest paid	$	7,981,952		$	223,183		$	—

The accompanying notes are an integral part of these consolidated financial statements.

F-6

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND BUSINESS

Cole Credit Property Trust II, Inc. (the “Company”) was formed on September 29, 2004 and is a Maryland corporation that is organized and operating as a real estate investment trust (“REIT”) for federal income tax purposes. Substantially all of the Company’s business is conducted through Cole Operating Partnership II, LP (“Cole OP II”), a Delaware limited partnership. The Company is the sole general partner of and owns a 99.99% partnership interest in Cole OP II. Cole REIT Advisors II, LLC (“Cole Advisors II”) the affiliate advisor to the Company, is the sole limited partner and owner of 0.01% (minority interest) of the partnership interests of Cole OP II.

At December 31, 2006, the Company owned 91 properties comprising approximately 2.9 million square feet of single and multi-tenant commercial space located in 26 states. At December 31, 2006, these properties were 100% leased.

On June 27, 2005, the Company commenced a public offering on a “best efforts” basis of up to 45,000,000 shares of common stock offered at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a Registration Statement on Form S-11 filed with the Securities and Exchange Commission (the “SEC”) under the Securities Act (the “Offering”). The Registration Statement also covered up to 5,000,000 shares available pursuant to a distribution reinvestment plan (the “DRIP”) under which our stockholders may elect to have their distributions reinvested in additional shares of the Company’s common stock at the greater of $9.50 per share or 95% of the estimated value of a share of common stock. On November 13, 2006, the Company filed a registration statement with the SEC under Rule 462(b) to add securities to the Offering. The registration statement registers an additional 4,390,000 shares of common stock for sale in the primary offering and an additional 952,000 shares of common stock for sale pursuant to the Company’s DRIP.

On November 6, 2006, the Company filed a registration statement with the SEC with respect to a proposed secondary public offering of up to 150,000,000 shares of common stock. The offering would include up to 125,000,000 shares to be offered for sale at $10.00 per share in the primary offering and up to 25,000,000 shares to be offered for sale pursuant to the Company’s DRIP.

The Company commenced its principal operations on September 23, 2005, when it issued the initial 486,000 shares of our common stock in the Offering. Prior to such date, the Company was considered a development stage company. As of December 31, 2006, the Company had accepted subscriptions for 30,691,204 shares of its common stock, including 20,000 shares owned by Cole Holdings Corporation (“Cole Holdings”) for aggregate gross proceeds of approximately $306.5 million before offering costs and selling commissions of approximately $29.4 million. As of December 31, 2006, the Company was authorized to issue 10,000,000 shares of preferred stock, but had none issued and outstanding. As of March 16, 2007, the Company had raised approximately $406.3 million in offering proceeds through the issuance of 40,629,407 shares of its common stock. As of March 16, 2007, approximately $87.6 million in shares (8,760,693 shares) remained available for sale to the public under the Offering, exclusive of shares available under the DRIP.

The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its common stock until its shares are listed or quoted. In the event it does not obtain listing prior to the tenth anniversary of the completion or termination of the Offering, its charter requires that it either: (1) seek stockholder approval of an extension or amendment of this listing deadline; or (2) seek stockholder approval to adopt a plan of liquidation of the corporation.

F-7

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements. These accounting policies conform to generally accepted accounting principles in the United States (“GAAP”), in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

Investment in Real Estate Assets

Real estate assets are stated at cost, less accumulated depreciation. Amounts capitalized to real estate assets consist of the cost of acquisition or construction and any tenant improvements or major improvements and betterments that extend the useful life of the related asset. All repairs and maintenance are expensed as incurred.

All assets are depreciated on a straight line basis. The estimate useful lives of our assets by class are generally as follows:

Building	40 years
Tenant improvements	Lesser of useful life or lease term
Intangible lease assets	Lesser of useful life or lease term

The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, the Company assesses the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, the Company will adjust the real estate and related intangible assets to the fair value and recognize an impairment loss. As of December 31, 2006, the undiscounted future operating cash flows of any property with potential impairment indicators exceeded its carrying value and no impairment losses had been recorded. As of December 31, 2005, no potential impairment indicators existed and no losses had been recorded.

Allocation of Purchase Price of Acquired Assets

Upon the acquisition of real properties, the Company allocates the purchase price of such properties to acquired tangible assets, consisting of land and building, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases and value of tenant relationships, based in each case on their fair values. The Company utilizes independent appraisals to determine the fair values of the tangible assets of an acquired property (which includes land and building).

F-8

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair values of above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below- market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment of rental income over the remaining terms of the respective leases.

The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets in the accompanying consolidated balance sheet and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles are included in intangible lease assets in the accompanying consolidated balance sheet and are amortized to expense over the remaining term of the respective leases.

The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the Company’s purchase price allocations, which could impact the amount of its reported net income.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with maturities when purchased of three months or less to be cash equivalents.

Restricted Cash and Escrowed Investor Proceeds

The Company is currently engaged in a public offering of its common stock. Included in restricted cash and escrowed investor proceeds is approximately $5.7 million and $1.8 million of offering proceeds for which shares of common stock had not been issued as of December 31, 2006 and 2005, respectively.

Rents and Tenant Receivables

Rents and tenant receivables primarily includes amounts to be collected in future periods related to the recognition of rental income on a straight-line basis over the lease term and cost recoveries from tenants. See “—Revenue Recognition” below. Allowance for doubtful accounts was approximately $75,000 and $0 at December 31, 2006 and 2005, respectively.

Prepaid Expenses and Other Assets

Prepaid expenses and other assets includes expenses incurred as of the balance sheet date that relate to future periods and will be expensed or reclassified to another account during the period to which the costs relate. Any amounts with no future economic benefit are charged to earnings when identified.

Deferred Financing Costs

Deferred financing costs are capitalized and amortized on a straight-line basis, which approximates the effective interest method, over the term of the related financing arrangement. Amortization of deferred

F-9

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

financing costs for the years ended December 31, 2006 and 2005, and the period from inception (September 29, 2004) to December 31, 2004, was approximately $548,000, $18,000 and $0, respectively, and was recorded in interest expense in the consolidated statements of operations.

Revenue Recognition

Upon the acquisition of real estate, certain properties have leases where minimum rent payments increase during the term of the lease. The Company records rental revenue for the full term of each lease on a straight-line basis. Accordingly, the Company records a receivable from tenants that the Company expects to collect over the remaining lease term rather than currently, which is recorded as rents receivable. When the Company acquires a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. In accordance with Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements, the Company defers the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Cost recoveries from tenants are included in rental income in the period the related costs are incurred. Tenant reimbursement income includes payments from tenants as reimbursement for property taxes, utilities, and other property operating expenses.

Income Taxes

The Company generally will not be subject to federal corporate income tax to the extent it distributes its REIT taxable income to its stockholders, and so long as it distributes at least 90% of its REIT taxable income. REITs are subject to a number of other organizational and operational requirements. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.

Concentration of Credit Risk

At December 31, 2006 and 2005, the Company had cash on deposit in one financial institution in excess of federally insured levels; however, the Company has not experienced any losses in such account. The Company limits investment of cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk on cash.

As of December 31, 2006, no single tenant accounts for more than 10% of the Company’s gross annualized base rental revenues. Tenants in the drugstore, specialty retail and automotive supply industries comprise approximately 25%, 12% and 11%, respectively, of the Company’s gross annualized base rental revenues for the year ended December 31, 2006. As of December 31, 2005, one tenant in the drugstore industry and one tenant in the automotive supply industry accounted for approximately 34% and 31% of the Company’s gross annualized base rental revenues, respectively. Tenants in the drugstore, and automotive supply industries comprise approximately 44% and 31%, respectively, of the Company’s gross annualized base rental revenues for the year ended December 31, 2005.

Offering and Related Costs

Cole Advisors II funds all of the organization and offering costs on the Company’s behalf and may be reimbursed for such costs up to 1.5% of the cumulative capital raised by the Company in the Offering. As of December 31, 2006 and 2005, Cole Advisors II had incurred organization and offering costs of approximately $3.8 million and $1.4 million, respectively, on behalf of the Company. Of these amounts, the Company was responsible for approximately $3.8 million and $421,000 at December 31, 2006 and 2005, respectively. The offering costs, which include items such as legal and accounting fees, marketing, and promotional printing costs, are recorded as a reduction of capital in excess of par value along with sales commissions and dealer manager fees of 7% and 1.5%, respectively. Organization costs are expensed as incurred, of which

F-10

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

approximately $57,000, $2,000 and $0 was expensed during the years ended December 31, 2006, and 2005 and the period from inception (September 29, 2004) to December 31, 2004, respectively.

Due to affiliates

As of December 31, 2006, due to affiliates consists of approximately $47,000 due to Cole Advisors II for reimbursement of organization and offering costs and $20,000 to an affiliate of Cole Advisors II for reimbursement of certain loan costs. As of December 31, 2005, due to affiliates consists of approximately $36,000 due to Cole Advisors II for reimbursement of legal fees and approximately $5,000 due to Cole Capital Corporation (“Cole Capital”), the Company’s affiliated dealer manager, for commissions and dealer manager fees payable on stock issuances.

Stockholders’ Equity

At December 31, 2006, 2005, and 2004 the Company was authorized to issue 240,000,000, 90,000,000, and 90,000,000 respectively, shares of common stock and 10,000,000 shares of preferred stock. All shares of such stock have a par value of $.01 per share. The Company’s board of directors may authorize additional shares of capital stock and amend their terms without obtaining stockholder approval.

The par value of investor proceeds raised from the Offering is classified as common stock, with the remainder allocated to capital in excess of par value. The Company’s share redemption program provides that all redemptions during any calendar year, including those upon death or qualifying disability, are limited to those that can be funded with proceeds raised from the Company’s distribution reinvestment plan. In accordance with Accounting Series Release No. 268, “Presentation in Financial Statements of Redeemable Preferred Stock,” the Company accounts for the proceeds received from its distribution reinvestment plan outside of permanent equity for future redemption of shares. During the years ended December 31, 2006 and 2005, proceeds of approximately $3.5 million and $0 were received from the distribution reinvestment plan, respectively, which have been recorded as redeemable common stock in the respective consolidated balance sheets. As of December 31, 2006 and 2005, no shares had been redeemed under the Company’s share redemption program.

Earnings Per Share

Earnings per share are calculated based on the weighted average number of common shares outstanding during each period. The weighted average number of common shares outstanding is identical for basic and fully diluted earnings per share. The effect of all the outstanding stock options was anti-dilutive to earnings per share for the year ended December 31, 2005. See Note 11.

Stock Options

As permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, the Company elected to follow Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock options under the 2004 Independent Directors Stock Option Plan (“IDSOP”) (see Note 11). Under APB No. 25, compensation expense is recorded when the exercise price of stock options is less than the fair value of the underlying stock on the date of grant. On January 1, 2006, the Company adopted SFAS 123R, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options related to the IDSOP, based on estimated fair values. The Company adopted FAS 123R using the modified prospective application. Accordingly, prior period amounts have not been restated. As of December 31, 2006, there were 20,000 stock options outstanding under the IDSOP at an average exercise price of $9.15 per share.

F-11

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reportable Segments

The Financial Accounting Standards Board (“FASB”) issued SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have determined that we have one reportable segment, with activities related to investing in real estate. Our investments in real estate generate rental revenue and other income through the leasing of properties, which comprised 100% of our total consolidated revenues for the years ended December 31, 2006 and 2005. Although our investments in real estate are geographically diversified throughout the United States, management evaluates operating performance on an individual property level. Our properties have been aggregated into one reportable segment.

Interest

Interest is charged to interest expense as it accrues. No interest costs were capitalized during the years ended December 31, 2006 and 2005.

Distributions Payable and Distribution Policy

In order to maintain its status as a REIT, the Company is required to make distributions each taxable year equal to at least 90% of its REIT taxable income excluding capital gains. To the extent funds are available, the Company intends to pay regular monthly distributions to stockholders. Distributions are paid to those stockholders who are stockholders of record as of applicable record dates.

On December 15, 2006, the Company’s board of directors declared a distribution of $0.0017808 per share for stockholders of record as of the close of business on each day of the period commencing on January 1, 2007 and ending on March 31, 2007. The monthly distributions were calculated to be equivalent to an annualized distribution of six and one half percent (6.50%) per share, assuming a purchase price of $10.00 per share. As of December 31, 2006, the Company had distributions payable of approximately $1.6 million. The distributions were paid in January 2007, of which approximately $844,000 was reinvested in shares through our distribution reinvestment program.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS No. 123R is effective for fiscal years beginning after June 15, 2005.

SFAS No. 123 (revised 2004) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award. The Company adopted the provisions of SFAS 123 (revised 2004) using a modified prospective application. The modified prospective method requires companies to recognize compensation cost for unvested awards that are outstanding on the effective date based on the fair value that the Company had originally estimated for purposes of preparing its SFAS 123 pro forma disclosures. For all new awards that are granted or modified after the effective date, a company would use SFAS 123R’s measurement model. The Company adopted the new standard on January 1, 2006. See Note 11.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB No. 108”). Due to diversity in practice among registrants, SAB No. 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB No. 108 is effective for fiscal years

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COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ending after November 15, 2006. The adoption of SAB No. 108 did not have a material impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not determined what impact, if any, the adoption of SFAS No. 157 will have on its consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has not determined what impact, if any, the provisions of FIN 48 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 allows entities to choose to measure eligible financial instruments at fair value with changes in fair value recognized in earnings of each subsequent reporting date. The fair value election is available for most financial assets and liabilities on an instrument-by-instrument basis and is to be elected on the date of the financial instrument is initially recognized. SFAS 159 is effective for all entities as of the beginning of a reporting entity’s first fiscal year that begins after November 15, 2007 (with earlier application permitted under certain circumstances). The Company has not determined what impact, if any, the adoption of SFAS No. 159 will have on its consolidated financial statements.

NOTE 3 — REAL ESTATE ACQUISITIONS

During the year ended December 31, 2006, the Company acquired a 100% interest in 77 commercial properties for an aggregate purchase price of approximately $358.8 million, including acquisition costs of approximately $7.9 million. The Company financed the acquisitions through the issuance and assumption of approximately $213.2 million of mortgage loans generally secured by the individual properties. In accordance with SFAS, No. 141, “Business Combinations”, the Company allocated the purchase price of these properties, including aggregate acquisition costs, to the fair value of the assets acquired and liabilities assumed. The Company allocated approximately $85.7 million to land, approximately $229.5 million to building and improvements, approximately $46.3 million to acquired in-place leases, approximately ($2.7) million to acquired below-market leases and approximately $42.6 million related to debt assumed on properties acquired during the year ended December 31, 2006.

During the year ended December 31, 2005, the Company acquired a 100% interest in 14 commercial properties for an aggregate purchase price of approximately $91.8 million, including acquisition costs of approximately $2.0 million. The Company financed the acquisitions through the issuance of approximately $66.8 million of mortgage loans generally secured by the individual properties. In accordance with SFAS, No. 141, “Business Combinations”, the Company allocated the purchase price of these properties, including aggregate acquisition costs, to the fair value of the assets acquired and liabilities assumed. The Company allocated approximately $23.8 million to land, approximately $57.5 million to building and improvements, approximately $10.5 million to acquired in-place leases, and approximately ($15,000) to acquired below-market leases.

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COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 4 — INTANGIBLE LEASE ASSETS

Identified intangible assets relating to the real estate acquisitions discussed in Note 3 consisted of the following:

	December 31,
	2006		2005
Acquired in place leases and tenant relationships, net of accumulated amortization of $2,142,845 and $69,939 at December 31, 2006 and 2005, respectively (with a weighted average life of 159 and 172 months for in-place leases and tenant relationships, respectively)	$	51,939,520	$	9,970,272
Acquired above market leases, net of accumulated amortization of $108,327 and $1,942 at December 31, 2006 and 2005, respectively (with a weighted average life of 162 and 118 months for acquired above market leases, respectively)	$	2,629,503	$	455,346
	$	54,569,023	$	10,425,618

Amortization expense recorded on the identified intangible assets, for each of fiscal years ended December 31, 2006, 2005 and 2004 was approximately $2.2 million, $72,000 and $0, respectively.

Estimated amortization expense of the respective intangible lease assets as of December 31, 2006 for each of the five succeeding fiscal years is as follows:

	Amount
	Lease
	In-Place and Tenant		Above
Year	Relationships		Market Lease
2007	$	3,902,608	$	199,240
2008	$	3,882,619	$	199,240
2009	$	3,821,858	$	199,240
2010	$	3,821,858	$	199,240
2011	$	3,819,312	$	199,240

NOTE 5 — MORTGAGE NOTES PAYABLE

As of December 31, 2006, the Company had 71 mortgage notes payable totaling approximately $218.3 million, of which approximately $215.6 million was fixed rate debt with interest rates ranging from 5.15% to 6.31% with a weighted average interest rate of approximately 5.72%. The Company also had approximately $2.7 million of short-term variable rate debt outstanding at December 31, 2006.

As of December 31, 2005, the Company had 13 mortgage notes payable totaling approximately $71.3 million, of which approximately $41.8 million was fixed rate debt with interest rates ranging from 5.15% to 5.76% with a weighted average interest rate of approximately 5.47%. The Company also had approximately $29.5 million of short-term variable rate debt outstanding at December 31, 2005.

The fixed rate debt mortgage notes require monthly interest-only payments with the principal balance due on various dates from July 2008 through October 2018. The variable rate debt mortgage notes bear interest at the one-month LIBOR rate plus 200 basis points and require monthly interest-only payments and generally mature within 90 days. Each of the mortgage notes are secured by the respective property. Certain of the mortgage notes have cross-default provisions and are cross-collateralized. Under certain cross-default provisions, a default under any mortgage note included in a cross-default agreement may constitute a default under all such mortgage notes in the agreement and may lead to acceleration of the indebtedness due on each

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COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

property within the cross-default agreement. The mortgage notes are generally non-recourse to the Company and Cole Op II, but both are liable for customary non-recourse carveouts.

The fixed rate mortgage notes may not be prepaid, in whole or in part, except under the following circumstances: (i) full prepayment may be made on any of the three (3) monthly payment dates occurring immediately prior to the maturity date, and (ii) partial prepayments resulting from the application of insurance or condemnation proceeds to reduce the outstanding principal balance of the mortgage notes. Notwithstanding the prepayment limitations, the Company may sell the properties to a buyer that assumes the respective mortgage loan. The transfer would be subject to the conditions set forth in the individual property’s mortgage note document, including without limitation, the lender’s approval of the proposed buyer and the payment of the lender’s fees, costs and expenses associated with the sale of the property and the assumption of the loan.

In the event that a mortgage note is not paid off on the respective maturity date, each mortgage note includes hyperamortization provisions. The interest rate during the hyperamortization period shall be the fixed interest rate as stated on the respective mortgage note agreement plus two percent (2.0%). The individual mortgage note maturity date, under the hyperamortization provisions, will be extended by twenty (20) years. During such period, the lender will apply 100% of the rents collected to (i) all payments for escrow or reserve accounts, (ii) payment of interest at the original fixed interest rate, (iii) payments for the replacement reserve account, (iv) any other amounts due in accordance with the mortgage note agreement other than any additional interest expense, (v) any operating expenses of the property pursuant to an approved annual budget, (vi) any extraordinary expenses, (vii) payments to be applied to the reduction of the principal balance of the mortgage note, and (viii) any additional interest expense, which is not paid will be added to the principal balance of the mortgage note.

We have entered into interest rate lock agreements. See Note 7.

Related Party Notes

On December 15, 2005, Cole OP II borrowed approximately $2.5 million and approximately $2.0 million from Series C, LLC (“Series C”), which is an affiliate of the Company and the Company’s advisor, by executing two promissory notes which was secured by the membership interests held by Cole OP II in Cole WG St. Louis MO, LLC and Cole RA Alliance OH, LLC, respectively. Each of the loans had a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest payable in full on June 30, 2006. Each of the loans was generally non recourse to Cole OP II and could be prepaid at any time without penalty or premium. The Company’s board of directors, including a majority of its independent directors, approved the loans and determined that the terms of the loans were no less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the notes in full in April 2006.

On February 6, 2006, Cole OP II borrowed approximately $2.3 million from Series C by executing a promissory note which was secured by the membership interest held by Cole OP II in a wholly-owned subsidiary. The loan proceeds were used to acquire a property with a purchase price of approximately $18.5 million, exclusive of closing costs. The loan had a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest was payable in full on December 31, 2006. The loan was generally non recourse to Cole OP II and could be prepaid at any time without penalty or premium. The Company’s board of directors, including all of the independent directors, approved the loan and determined that its terms were no less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the note in full in April 2006.

On February 10, 2006, Cole OP II borrowed approximately $4.7 million from Series B, LLC (“Series B”), an affiliate of the Company and the Company’s advisor, by executing a promissory note which was secured by

F-15

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the membership interest held by Cole OP II in a wholly-owned subsidiary. The loan proceeds were used to acquire a property with a purchase price of approximately $5.9 million, exclusive of closing costs. The loan had a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest was payable in full on December 31, 2006. The loan was generally non-recourse to Cole OP II and could be prepaid at any time without penalty or premium. The Company’s board of directors, including all of the independent directors, approved the loan and determined that its terms were no less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the note in full in May 2006.

During the years ended December 31, 2006 and 2005 and the period from inception (September 29, 2004) to December 31, 2004 Cole OP II incurred approximately $210,000, $13,000 and $0 in interest expense to affiliates under the aforementioned loans, respectively.

The following table summarizes the scheduled aggregate principal repayments for the five years subsequent to December 31, 2006:

	Principal
For the Year Ending December 31:	Repayments
2007	$	3,066,207
2008		9,729,334
2009		205,511
2010		16,884,186
2011		39,272,285
Thereafter		149,108,393
Total	$	218,265,916

The variable rate mortgages approximate fair market value. The fair value of our fixed rate mortgage notes payable at December 31, 2006 approximates $215.0 million.

NOTE 6 — INTANGIBLE LEASE LIABILITY

Identified intangible liability relating to the real estate acquisitions discussed in Note 3 consisted of the following:

	December 31,
	2006		2005
Acquired below — market leases, net of accumulated amortization of $96,484 and $52 at December 31, 2006 and 2005, respectively (with a weighted average life of 144 and 141 months, respectively)	$	2,649,374	$	14,637

Amortization income recorded on the identified intangible liability, for each of fiscal years ended December 31, 2006, 2005 and the period from inception (September 29, 2004) to December 31, 2004 was $96,000, $52 and $0, respectively.

F-16

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Estimated amortization income of the respective intangible lease liability as of December 31, 2006 for each of the five succeeding fiscal years is as follows:

	Amount
	Below
Year	Market Lease
2007	$	231,097
2008	$	231,097
2009	$	231,097
2010	$	231,097
2011	$	230,059

NOTE 7 — EXTENDED RATE LOCK AGREEMENTS

The Company entered into Extended Rate Lock Agreements with Wachovia Bank, N.A. (“Wachovia”) and Bear Stearns Commercial Mortgage, Inc. (“Bear Stearns”) (the “Rate Locks”) to lock interest rates ranging from 5.52% to 6.56% for up to approximately $247 million in total borrowings. Under the terms of the Rate Locks, the Company made rate lock deposits totaling approximately $5.9 million to Wachovia and Bear Stearns. As of December 31, 2006, the Company had available borrowings of approximately $197 million under the Rate Locks.

The Company has approximately $3.9 million in rate lock deposits outstanding at December 31, 2006, which are reflected as Mortgage Loan Deposits and recorded in Prepaid Expenses, Mortgage Loan Deposits and Other Assets on the Company’s consolidated balance and statement of cashflows.

The deposits are refundable to the Company in amounts generally equal to 2% of any loans funded under the agreements. The Rate Locks expire 60 days from execution and may be extended by 30 days for a rate lock fee of 0.25% of the loan amount or, at the borrower’s election, by converting the fee into interest rate spread.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Litigation

In the ordinary course of business, the Company may become subject to litigation or claims. There are no material pending legal proceedings known to be contemplated against us.

Environmental Matters

In connection with the ownership and operation of real estate, the Company may be potentially liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and the Company is not aware of any other environmental condition that it believes will have a material adverse effect on the consolidated results of operations.

NOTE 9 — RELATED PARTY TRANSACTIONS AND ARRANGEMENTS

Certain affiliates of the Company receive, and will continue to receive fees and compensation in connection with the Offering, and the acquisition, management and sale of the assets of the Company. Cole Capital receives, and will continue to receive a selling commission of up to 7% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers. Cole Capital reallows, and intends to continue to reallow 100% of commissions earned to participating broker-dealers. In addition, Cole Capital will receive up to 1.5% of gross proceeds from the Offering, before reallowance to participating broker-

F-17

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

dealers, as a dealer-manager fee. Cole Capital, in its sole discretion, may reallow all or a portion of its dealer-manager fee to such participating broker-dealers as a marketing and due diligence expense reimbursement, based on such factors as the volume of shares sold by such participating broker-dealers and marketing support incurred as compared to those of other participating broker-dealers. No selling commissions or dealer-manager fees are paid to Cole Capital in respect to shares sold under the DRIP. During the years ended December 31, 2006 and 2005, the Company paid approximately $23.3 million and $2.4 million to Cole Capital for commissions and dealer manager fees, of which approximately $20.0 million and $2.0 million was reallowed to participating broker-dealers.

All organization and offering expenses (excluding selling commissions and the dealer-manager fee) are paid for by Cole Advisors II or its affiliates and are reimbursed by the Company up to 1.5% of gross offering proceeds. Cole Advisors II or its affiliates also receive acquisition and advisory fees of up to 2% of the contract purchase price of each asset for the acquisition, development or construction of real property and will be reimbursed for acquisition costs incurred in the process of acquiring properties, but not to exceed 2.0% of the contract purchase price. The Company expects the acquisition expenses to be approximately 0.5% of the purchase price of each property. During the years ended December 31, 2006 and 2005, the Company reimbursed the advisor approximately $3.4 million and $421,000, respectively, for organizational and offering expenses, of which approximately $57,000 and $2,000, respectively, was expensed as organization costs. During the years ended December 31, 2006 and 2005, the Company paid Cole Realty Advisors approximately $5.8 million and approximately $1.7 million for acquisition fees, respectively.

If Cole Advisors II provides services, as determined by the independent directors, in connection with the origination or refinancing of any debt financing obtained by the Company that is used to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay Cole Advisors II a financing coordination fee equal to 1% of the amount available under such financing; provided however, that Cole Advisors II shall not be entitled to a financing coordination fee in connection with the refinancing of any loan secured by any particular property that was previously subject to a refinancing in which Cole Advisors II received such a fee. Financing coordination fees payable from loan proceeds from permanent financing will be paid to Cole Advisors II as the Company acquires such permanent financing. However, no acquisition fees will be paid on loan proceeds from any line of credit until such time as all net offering proceeds have been invested by the Company. During the years ended December 31, 2006 and 2005, the Company paid Cole Advisors II approximately $1.8 million and approximately $320,000 for finance coordination fees.

The Company pays, and expects to continue to pay, Cole Realty Advisors, its affiliated property manager, fees for the management and leasing of the Company’s properties. Such fees currently equal, and are expected to continue to equal 2% of gross revenues, plus leasing commissions at prevailing market rates; provided however, that the aggregate of all property management and leasing fees paid to affiliates plus all payments to third parties will not exceed the amount that other nonaffiliated management and leasing companies generally charge for similar services in the same geographic location. Cole Realty Advisors may subcontract its duties for a fee that may be less than the fee provided for in the property management agreement. During the years ended December 31, 2006 and 2005, respectively, the Company paid Cole Realty Advisors approximately $350,000 and approximately $14,000 for property management fees, respectively.

The Company pays Cole Advisors II an annualized asset management fee of 0.25% of the aggregate asset value of the Company’s assets (the “Asset Management Fee”). The fee will be payable monthly in an amount equal to 0.02083% of aggregate asset value as of the last day of the immediately preceding month. During the years ended December 31, 2006 and 2005, respectively the Company paid asset management fees to Cole Advisors II of approximately $587,000 and approximately $25,000, respectively.

If Cole Advisors II or its affiliates provides a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of one or more properties, the Company will

F-18

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

pay Cole Advisors II up to one-half of the brokerage commission paid, but in no event to exceed an amount equal to 2% of the sales price of each property sold. In no event will the combined real estate commission paid to Cole Advisors II, its affiliates and unaffiliated third parties exceed 6% of the contract sales price. In addition, after investors have received a return of their net capital contributions and an 8% annual cumulative, non-compounded return, then Cole Advisors II is entitled to receive 10% of the remaining net sale proceeds. During the years ended December 31, 2006 and 2005, respectively, the Company did not pay any fees or amounts to Cole Advisors II relating to the sale of properties.

Upon listing of the Company’s common stock on a national securities exchange, a fee equal to 10% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing, exceeds the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate an 8% annual cumulative, non-compounded return to investors will be paid to Cole Advisors II (the “Subordinated Incentive Listing Fee”).

Upon termination of the advisory agreement with Cole Advisors II, other than termination by the Company because of a material breach of the advisory agreement by Cole Advisors II, a performance fee of 10% of the amount, if any, by which (i) the appraised asset value at the time of such termination plus total distributions paid to stockholders through the termination date exceeds (ii) the aggregate capital contribution contributed by investors less distributions from sale proceeds plus payment to investors of an 8% annual, cumulative, non-compounded return on capital. No subordinated performance fee will be paid if the Company has already paid or become obligated to pay Cole Advisors II a Subordinated Incentive Listing Fee.

The Company will reimburse Cole Advisors II for all expenses it paid or incurred in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse for any amount by which it’s operating expenses (including the Asset Management Fee) at the end of the four preceding fiscal quarters exceeds the greater of (i) 2% of average invested assets, or (ii) 25% of net income other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of assets for that period. The Company will not reimburse for personnel costs in connection with services for which Cole Advisors II receives acquisition fees or real estate commissions. During the years ended December 31, 2006, 2005 and the period from inception (September 29, 2004) to December 31, 2004, the Company did not reimburse Cole Advisors II for any such costs.

On December 15, 2005, Cole OP II borrowed approximately $2.5 million and approximately $2.0 million from Series C by executing two promissory notes which are secured by the membership interests held by Cole OP II in Cole WG St. Louis MO, LLC and Cole RA Alliance OH, LLC, respectively. Each of the loans has a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest payable in full on June 30, 2006. Each of the loans is generally non recourse to Cole OP II and may be prepaid at any time without penalty or premium. The Company’s board of directors, including a majority of its independent directors, approved the loans and determined that the terms of the loans are no less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the notes in full in April 2006.

On February 6, 2006, Cole OP II borrowed approximately $2.3 million from Series C, an affiliate of the Company and the Company’s advisor, by executing a promissory note which was secured by the membership interest held by Cole OP II in a wholly-owned subsidiary. The loan proceeds were used to acquire a property with a purchase price of approximately $18.5 million, exclusive of closing costs. The loan had a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest was payable in full on December 31, 2006. The loan was generally non recourse to Cole OP II and could be prepaid at any time without penalty or premium. The Company’s board of directors, including all of the independent directors, approved the loan and determined that its terms were no less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the note in full in April 2006.

F-19

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On February 10, 2006, Cole OP II borrowed approximately $4.7 million from Series B, an affiliate of the Company and the Company’s advisor, by executing a promissory note which was secured by the membership interest held by Cole OP II in a wholly-owned subsidiary. The loan proceeds were used to acquire a property with a purchase price of approximately $5.9 million, exclusive of closing costs. The loan had a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest was payable in full on December 31, 2006. The loan was generally non-recourse to Cole OP II and could be prepaid at any time without penalty or premium. The Company’s board of directors, including all of the independent directors, approved the loan and determined that its terms were no less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the note in full in May 2006.

During the years ended December 31, 2006, 2005 and the period from inception (September 29, 2004) to December 31, 2004 Cole OP II incurred approximately $210,000, $13,000 and $0 in interest expense to affiliates under the aforementioned loans, respectively.

During the year ended, December 31, 2006, Cole OP II acquired the following properties from various affiliates of the Company and the Company’s advisor. The acquisitions were funded by net proceeds from the Company’s Offering and the assumption of loans secured by the respective properties.

	Acquisition
Property Description	Date	Location	Seller	Purchase Price			Loan Assumed
Wawa — convenience store	March 29, 2006	Hockessin, DE	Series A, LLC	$	4,830,000	(1)	$	2,598,068
Wawa — convenience store	March 29, 2006	Manahawkin, NJ	Series A, LLC		4,414,000	(1)		2,374,301
Wawa — convenience store	March 29, 2006	Narberth, PA	Series A, LLC		4,206,000	(1)		2,262,417
Conns — appliance retailer	May 26, 2006	San Antonio, TX	Series D, LLC		4,624,619	(2)		3,580,000
Rite Aid — drugstore	May 26, 2006	Defiance, OH	Cole Acquisitions I, LLC		4,326,165	(2)		2,321,000
CVS — drugstore	May 26, 2006	Madison, MS	Cole Acquisitions I, LLC		4,463,088	(2)		2,809,000
CVS — drugstore	June 28, 2006	Portsmouth, OH	Cole Acquisitions I, LLC		2,101,708	(2)		1,753,000
CVS — drugstore	July 7, 2006	Okeechobee, FL	Cole Acquisitions I, LLC		6,459,262	(2)		4,076,000
Office Depot — office supply	July 7, 2006	Dayton, OH	Cole Acquisitions I, LLC		3,416,526	(2)		2,130,000
Advance Auto — specialty retailer	July 12, 2006	Holland, MI	Cole Acquisitions I, LLC		2,071,843	(2)		1,193,000
Advance Auto — specialty retailer	July 12, 2006	Holland Township, MI	Cole Acquisitions I, LLC		2,137,244	(2)		1,231,000
Advance Auto — specialty retailer	July 12, 2006	Zeeland, MI	Cole Acquisitions I, LLC		1,840,715	(2)		1,057,000
CVS — drugstore	July 12, 2006	Orlando, FL	Series D, LLC		4,956,763	(2)		3,016,000
Office Depot — office supply	July 12, 2006	Greenville, MS	Cole Acquisitions I, LLC		3,491,470	(2)		2,192,000
Office Depot — office supply	July 19, 2006	Warrensburg, MO	Series D, LLC		2,880,552	(2)		1,810,000
CVS — drugstore	August 10, 2006	Gulfport, MS	Cole Acquisitions I, LLC		4,414,117	(2)		2,611,000
				$	60,634,072		$	37,013,786

(1)

The Company’s board of director’s, including all of the independent directors, approved the transaction as being fair and reasonable to the Company, at a price in excess of the cost to Series A, LLC, which is an affiliate of our advisor, but substantial justification exists for such excess, such excess is reasonable and the costs of the interest did exceed its current fair market value as determined by an independent expert selected by the Company’s independent directors.

(2)

The Company’s board of director’s, including all of the independent directors, approved the transactions above as being fair and reasonable to the Company, at a price no greater than the cost to the affiliated entity, and at a cost that did not exceed its current fair market value as determined by an independent expert.

F-20

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — ECONOMIC DEPENDENCY

Under various agreements, the Company has engaged or will engage Cole Advisors II and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company’s common stock available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations. As a result of these relationships, the Company is dependent upon Cole Advisors II and its affiliates. In the event that these companies were unable to provide the Company with the respective services, the Company would be required to find alternative providers of these services.

NOTE 11 — INDEPENDENT DIRECTOR’S STOCK OPTION PLAN

The Company has a stock option plan, the Independent Director’s Stock Option Plan (the “IDSOP”), which authorizes the grant of non-qualified stock options to the Company’s independent directors, subject to the absolute discretion of the board of directors and the applicable limitations of the plan. The Company intends to grant options under the IDSOP to each qualifying director annually. The exercise price for the options granted under the IDSOP initially will be $9.15 per share (or greater, if such higher price is necessary so that such options shall not be considered a “nonqualified deferred compensation plan” under Section 409A of the Internal Revenue Code of 1986, as amended). It is intended that the exercise price for future options granted under the IDSOP will be at least 100% of the fair market value of the Company’s common stock as of the date the option is granted. As of December 31, 2006 and 2005, the Company had granted options to purchase 20,000 and 10,000 shares at $9.15 per share, respectively, each with a one year vesting period. A total of 1,000,000 shares have been authorized and reserved for issuance under the IDSOP. On January 1, 2006, we adopted SFAS 123R which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options related to the IDSOP, based on estimated fair values. The Company adopted FAS 123R using the modified prospective application. Accordingly, prior period amounts have not been restated.

During the year ended December 31, 2006, the adoption of SFAS 123R resulted in stock-based compensation charges of approximately $54,000. Stock-based compensation expense recognized in the year ended December 31, 2006 was based on awards ultimately expected to vest, and has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s calculations do not assume any forfeitures.

Prior to SFAS 123R, we applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees ,” and related interpretations, including FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25 ,” issued in March 2000, to account for our fixed-plan stock options. Under this method, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. No stock-based employee compensation cost was reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, during prior periods we elected to apply the intrinsic-value-based method of accounting described above, and adopted only the disclosure requirements of SFAS No. 123.

F-21

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

No grants were made under the Independent Director Plan in 2004. A summary of the Company’s stock option activity under its Independent Director Plan during the years ended December 31, 2006 and 2005 is as follows:

			Exercise
	Number		Price		Exercisable
Outstanding at December 31, 2004		—				—
Granted in 2005		10,000	$	9.15
Outstanding at December 31, 2005		10,000	$	9.15		—
Granted in 2006		10,000	$	9.15
Outstanding at December 31, 2006		20,000	$	9.15		10,000

As of December 31, 2006 and 2005, options to purchase 10,000 shares were unvested with a weighted average contractual remaining life of approximately 9.3 and 8.9 years, respectively.

The weighted average fair value of options granted were $6.04 in 2005 and $5.55 in 2006. As of December 31, 2006 the number of options that were currently vested and expected to become vested was 20,000 shares and have an intrinsic value of $17,000. The 2005 pro forma impact on the results of operations is a reduction in EPS of $.10. The total 2005 stock-based employee compensation proforma expense determined under fair-value-based method for all awards, net of tax was approximately, $40,000.

In accordance with Statement 123R, the fair value of each stock option granted has been estimated as of the date of the grant using the Black-Scholes method based on the following assumptions; a weighted average risk-free interest rate from 4.19% to 5.07%, a projected future dividend yield from 6.0% to 6.25%, expected volatility of 0%, and an expected life of an option of 10 years. Based on these assumptions, the fair value of the options granted during the years ended December 31, 2006 and 2005 was approximately $55,000 and $60,000, respectively. As of December 31, 2006, there was approximately $22,000 of total unrecognized compensation cost related to unvested share-based compensation awards granted under the IDSOP. That cost is expected to be recognized during 2007.

NOTE 12 — STOCKHOLDERS EQUITY

Distribution Reinvestment Plan

The Company maintains a distribution reinvestment plan that allows common stockholders (the “Stockholders”) to elect to have the distributions the Stockholders receive reinvested in additional shares of the Company’s common stock. The purchase price per share under the distribution reinvestment plan will be the higher of 95% of the fair market value per share as determined by the Company’s board of directors and $9.50 per share. No sales commissions or dealer manager fees will be paid on shares sold under the distribution reinvestment plan. The Company may terminate the distribution reinvestment plan at the Company’s discretion at any time upon ten days prior written notice to the Stockholders. Additionally, the Company will be required to discontinue sales of shares under the distribution reinvestment plan on the earlier of June 27, 2007, which is two years from the effective date of the Offering, unless the Offering is extended, or the date the Company sells 5,952,000 shares under the Offering, unless the Company files a new registration statement with the Securities and Exchange Commission and applicable states. During the years ended December 31, 2006 and 2005, approximately 371,000 and 0 shares were purchased under the distribution reinvestment plan for $3.5 million and $0, respectively, which have been recorded as redeemable common stock on the consolidated balance sheets.

F-22

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Share Redemption Program

The Company’s share redemption program permits the Stockholders to sell their shares back to the Company after they have held them for at least one year, subject to the significant conditions and limitations described below.

There are several restrictions on the Stockholder’s ability to sell their shares to the Company under the program. The Stockholders generally have to hold their shares for one year before selling the shares to the Company under the plan; however, the Company may waive the one-year holding period in the event of the death or bankruptcy of a Stockholder. In addition, the Company will limit the number of shares redeemed pursuant to the Company’s share redemption program as follows: (1) during any calendar year, the Company will not redeem in excess of 3.0% of the weighted average number of shares outstanding during the prior calendar year; and (2) funding for the redemption of shares will be limited to the amount of net proceeds the Company receives from the sale of shares under the Company’s distribution reinvestment plan. These limits may prevent the Company from accommodating all requests made in any year. During the term of the Offering, and subject to certain provisions the redemption price per share will depend on the length of time the Stockholder has held such shares as follows: after one year from the purchase date — 92.5% of the amount the Stockholder paid for each share; after two years from the purchase date — 95.0% of the amount the Stockholder paid for each share; after three years from the purchase date — 97.5% of the amount the Stockholder paid for each share; and after four years from the purchase date — 100.0% of the amount the Stockholder paid for each share.

Upon receipt of a request for redemption, the Company will conduct a Uniform Commercial Code search to ensure that no liens are held against the shares. The Company will charge an administrative fee to the Stockholder for the search and other costs, which will be deducted from the proceeds of the redemption or, if a lien exists, will be charged to the Stockholder. Repurchases will be made quarterly. If funds are not available to redeem all requested redemptions at the end of each quarter, the shares will be purchased on a pro rata basis and the unfulfilled requests will be held until the next quarter, unless withdrawn. The Company’s board of directors may amend, suspend or terminate the share redemption program at any time upon 30 days prior written notice to the Stockholders. No shares were redeemed under the share redemption program during the years ended December 31, 2006 and 2005.

NOTE 13 — INCOME TAXES

For income tax purposes, dividends to common stockholders are characterized as ordinary income, capital gains, or as a return of a stockholder’s invested capital. The following table represents the character of distributions to stockholder for the years ended December 31, 2006 and 2005.

	2006			2005
Character of Distributions:
Ordinary income		42	%		0	%
Return of capital		58	%		0	%
Total		100	%		100	%

At December 31, 2006 and 2005, the tax basis carrying value of the Company’s total assets was approximately $500.5 million and approximately $98.8 million, respectively. During the years ended December 31, 2006 and 2005 and the period from inception (September 29, 2004) to December 31, 2004, the Company had state income taxes of approximately $24,000, $3,000, and $0, respectively, which has been recorded in general and administrative expenses in the consolidated statements of operations.

During 2006, the state of Texas enacted new tax legislation that restructures the state business tax in Texas by replacing the taxable capital and earned surplus components of the current franchise tax with a new

F-23

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

“margin tax,” which for financial reporting purposes is considered an income tax. The Company believes the impact of this legislation was not material to the Company for the year ended December 31, 2006. Accordingly, it has not recorded a provision for income taxes in its accompanying consolidated condensed financial statements for the year ended December 31, 2006.

NOTE 14 — OPERATING LEASES

All of the Company’s real estate assets are leased to tenants under operating leases for which the terms and expirations vary. The leases frequently have provisions to extend the lease agreement and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants.

The future minimum rental income from the Company’s investment in real estate assets under non-cancelable operating leases, at December 31, 2006 is as follows:

	Amount
Year ending December 31:
2007	$	34,430,846
2008		34,385,306
2009		34,244,642
2010		34,244,642
2011		34,230,502
Thereafter		302,476,178
Total	$	474,012,116

NOTE 15 — QUARTERLY RESULTS (Unaudited)

Presented below is a summary of the unaudited quarterly financial information for the year ended December 31, 2006. The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with GAAP, the selected quarterly information.

	2006
	First Quarter			Second Quarter			Third Quarter		Fourth Quarter
Revenues	$	2,571,786		$	3,715,493		$	5,392,741	$	7,839,487
Net income (loss)		(182,588	)		(181,847	)		548,942		1,161,489
Basic and diluted net income (loss) per share		(0.04	)		(0.02	)		0.04		0.05
Dividends per share	$	0.15		$	0.15		$	0.16	$	0.16

	2005(1)
	Third Quarter			Fourth Quarter
Revenues	$	2,761		$	738,908
Net loss		(29,543	)		(85,048	)
Basic and diluted net loss per share(2)		(0.46	)		(0.05	)
Dividends per share		—		$	0.15

(1) No quarterly financial information is presented for the first two quarters of 2005 as the Company was a development stage company during those quarters and had no operations.

F-24

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(2) The total of the two quarterly amounts for the year ended December 31, 2005, does not equal the total for the year then ended. This difference results from the increase in shares outstanding over the year.

NOTE 16 — SUBSEQUENT EVENTS

Sale of Shares of Common Stock

As of March 16, 2007, the Company had raised approximately $406.3 million in offering proceeds through the issuance of approximately 40,600,000 shares of the Company’s common stock. As of March 16, 2007, approximately $87.6 million in shares (8,760,593 million shares) remained available for sale to the public under the Offering, exclusive of shares available under the DRIP.

Property Acquisition and Borrowings

During the period from January 1, 2007 through March 19, 2007, the Company acquired 17 commercial real estate properties in separate transactions for an aggregate acquisition cost of approximately $229.4 million and issued mortgage notes payable totaling approximately $152.2 million to finance the transactions or finance previous transactions (see detailed borrowings below). The acquisitions are as follows:

Property	Location	Acquisition Date	Square Feet		Purchase Price(1)
HOM-furniture store	Fargo, ND	January 4, 2007		122,108	$	12,000,000
La-Z-Boy-furniture store	Newington, CT	January 5, 2007		20,701		6,900,000
Advance Auto-parts store	Maryland Heights, MO	January 12, 2007		7,000		1,893,000
Victoria Crossing-multi-tenant retail center	Victoria, TX	January 12, 2007		87,473		12,750,000
Academy Sports-corporate offices/distribution	Katy, TX	January 18, 2007		1,500,596		102,000,000
Gordmans-department store	Peoria, IL	January 18, 2007		60,947		9,000,000
One Pacific Place-multi-tenant retail center	Omaha, NE	February 6, 2007		91,564		36,000,000
Sack n Save-convenience store/O’Reilly Auto-parts store	Garland, TX	February 6, 2007		65,295		5,060,000
Tractor Supply-specialty retail store	Ankeny, IA	February 9, 2007		19,097		3,000,000
ABX Air-distribution center	Coventry, RI	February 14, 2007		33,000		4,090,000
Office Depot-office supply store	Enterprise, AL	February 27, 2007		20,000		2,776,357
Northern Tool-specialty retail store	Blaine, MN	February 28, 2007		25,685		4,900,000
Office Max-office supply store	Orangeburg, SC	February 28, 2007		23,600		3,125,000
Walgreens-drugstore	Cincinnati, OH	March 5, 2007		15,120		5,140,000
Walgreens-drugstore	Madeira, OH	March 5, 2007		13,905		4,425,000
Walgreens-drugstore	Sharonville, OH	March 5, 2007		13,905		4,085,000
AT&T-office building	Beaumont, TX	March 19, 2007		141,525		12,275,000
Total				2,261,521	$	229,419,357

(1) Purchase price excludes related closing and acquisition costs.

F-25

COLE CREDIT PROPERTY TRUST II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following mortgage notes require monthly interest-only payments and either relate to the aforementioned acquisitions or previous acquisitions of the Company:

		Fixed Rate		Fixed				Variable
		Loan		Interest				Rate Loan			Total Loan
Property	Location	Amount		Rate			Maturity Date	Amount(1)		Maturity Date	Outstanding
Dick’s Sporting Goods	Amherst, NY	$	6,321,000		5.62	%	February 1, 2017	$	—	N/A	$	6,321,000
HOM Furniture	Fargo, ND		4,800,000		5.56	%	February 1, 2017		—	N/A		4,800,000
Victoria Crossing	Victoria, TX		8,288,000		5.71	%	February 11, 2017		1,912,000	April 12, 2007		10,200,000
Academy Sports	Katy, TX		68,250,000		5.61	%	February 1, 2017		—	N/A		68,250,000
La-Z-Boy	Newington, CT		4,140,000		5.66	%	February 1, 2017		—	N/A		4,140,000
Gordman’s	Peoria, IL		4,950,000		5.71	%	February 1, 2017		—	N/A		4,950,000
One Pacific Place	Omaha, NE		23,400,000		5.53	%	March 1, 2017		—	N/A		23,400,000
Sack ’N Save	Garland, TX		3,290,000		5.54	%	March 1, 2037		—	N/A		3,290,000
ABX Air	Coventry, RI		2,454,000		5.70	%	April 1, 2012		—	N/A		2,454,000
Office Depot	Enterprise, RI		1,850,000		6.29	%	March 1, 2017		—	N/A		1,850,000
Northern Tool	Blaine, MN		3,185,000		6.00	%	September 1, 2016		—	N/A		3,185,000
Office Max	Orangeburg, SC		1,875,000		5.61	%	April 1, 2012		—	N/A		1,875,000
Walgreens	Cincinnati, OH		3,341,000		6.00	%	September 1, 2016		—	N/A		3,341,000
Walgreens	Madeira, OH		2,876,000		5.70	%	April 1, 2012		—	N/A		2,876,000
Walgreens	Sharonville, OH		2,655,000		5.62	%	April 1, 2012		—	N/A		2,655,000
AT&T	Beaumont, TX		8,592,000		5.87	%	April 1, 2017		—	N/A		8,592,000
Total		$	150,267,000					$	1,912,000		$	152,179,000

(1) The variable rate debt mortgage notes bear interest at the one-month LIBOR rate plus 200 basis points with interest paid monthly.

Extended Rate Lock Agreement

During the period from January 1, 2007 through March 16, 2007, the Company entered into Rate Locks with Bear Stearns to lock interest rates ranging from 5.49% to 5.80% for up to approximately $265.3 million in borrowings. Under the terms of Rate Locks, the Company made rate lock deposits totaling approximately $5.9 million to Bear Stearns. As of March 16, 2007, the Company had available total borrowings of approximately $347.6 million under the Rate Locks and approximately $7.5 million in rate lock deposits outstanding.

The deposits are refundable to the Company in amounts generally equal to 2% of any loans funded under the agreements. The Rate Locks expire 60 days from execution and may be extended by 30 days for a rate lock fee of 0.25% of the loan amount or, at the borrower’s election, by converting the fee into interest rate spread.

F-26

COLE CREDIT PROPERTY TRUST II, INC.

SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION

December 31, 2006

							Gross Amount at Which Carried at
	Initial Costs to Company						December 31, 2006
					Buildings and				Buildings and				Accumulated
Description	Encumbrances		Land		Improvements		Land		Improvements		Total		Depreciation
Tractor Supply — Parkersburg, WV	$	1,793,000	$	934,094	$	2,049,813	$	934,094	$	2,049,813	$	2,983,907	$	(76,638	)
Walgreens — Brainerd, MN		3,463,000		981,431		2,879,090		981,431		2,879,090		3,860,521		(99,601	)
Rite Aid — Alliance, OH		—		431,879		1,445,749		431,879		1,445,749		1,877,628		(52,107	)
La-Z-Boy — Glendale, AZ		4,553,000		2,515,230		2,968,168		2,515,230		2,968,168		5,483,398		(100,563	)
Walgreens — Florissant, MO		4,150,000		1,481,823		3,204,729		1,481,823		3,204,729		4,686,552		(93,189	)
Walgreens (Telegraph Rd) — St. Louis, MO		4,048,000		1,744,792		2,874,581		1,744,792		2,874,581		4,619,373		(83,725	)
Walgreens (Gravois Rd) — St. Louis, MO		4,922,000		2,220,036		3,304,989		2,220,036		3,304,989		5,525,025		(96,216	)
Walgreens — Columbia, MO		4,487,894		2,349,209		3,345,990		2,349,209		3,345,990		5,695,199		(103,845	)
Walgreens — Olivette, MO		5,379,146		3,076,687		3,797,713		3,076,687		3,797,713		6,874,400		(114,451	)
CVS — Alpharetta, GA		2,480,000		1,214,170		1,693,229		1,214,170		1,693,229		2,907,399		(50,486	)
Lowe’s — Enterprise, AL		5,980,000		1,011,873		5,803,040		1,011,873		5,803,040		6,814,913		(172,184	)
CVS — Richland Hills, TX		2,928,000		1,141,450		2,302,484		1,141,450		2,302,484		3,443,934		(63,875	)
FedEx Package Distribution Center — Rockford, IL		4,920,000		1,468,781		3,668,567		1,468,781		3,668,567		5,137,348		(110,365	)
Plastech — Auburn Hills, MI		17,700,000		3,282,853		18,151,689		3,282,853		18,151,689		21,434,542		(504,875	)
Academy Sports — Macon, Georgia		4,280,000		1,232,263		3,900,882		1,232,263		3,900,882		5,133,145		(107,134	)
David’s Bridal Lenexa, KS		2,616,000		765,520		2,196,877		765,520		2,196,877		2,962,397		(71,576	)
Rite Aid — Enterprise, AL		2,971,000		919,527		2,390,771		919,527		2,390,771		3,310,298		(63,800	)
Rite Aid — Wauseon, OH		3,115,000		1,020,780		2,274,879		1,020,780		2,274,879		3,295,659		(62,930	)
Staples — Crossville, TN		2,320,000		488,394		2,227,311		488,394		2,227,311		2,715,705		(71,726	)
Rite Aid — Saco, ME		2,000,000		391,401		1,989,472		391,401		1,989,472		2,380,873		(53,552	)
Wadsworth Boulevard — Denver, CO		12,025,000		4,722,891		12,615,284		4,722,891		12,615,284		17,338,175		(287,993	)
Mountainside Fitness — Chandler, AZ		—		1,176,013		4,475,967		1,176,013		4,475,967		5,651,980		(129,427	)
Drexel Heritage — Hickory, NC		3,400,000		393,637		3,621,909		393,637		3,621,909		4,015,546		(172,619	)
Rayford Square — Spring, TX		5,940,000		2,338,988		6,695,818		2,338,988		6,798,959		9,137,947		(134,829	)
CVS — Scioto Trail, OH		1,753,000		560,614		1,639,355		560,614		1,639,355		2,199,970		(38,212	)
Wawa — Hockessin, DE		2,604,523		1,849,527		1,999,555		1,849,527		1,999,555		3,849,082		(47,106	)
Wawa — Manahawkin, NJ		2,387,480		1,359,042		2,360,169		1,359,042		2,360,169		3,719,211		(43,181	)
Wawa — Narberth, PA		2,242,784		1,659,442		1,781,616		1,659,442		1,781,616		3,441,059		(40,564	)
CVS — Lakewood, OH		1,960,000		552,398		1,225,358		552,398		1,225,358		1,777,756		(29,796	)
Rite Aid — Cleveland, OH		2,055,000		565,621		1,752,830		565,621		1,752,830		2,318,452		(37,666	)
Rite Aid — Fremont, OH		2,020,000		862,601		1,434,798		862,601		1,434,798		2,297,399		(30,031	)
Walgreens — Knoxville, TN		3,800,000		1,825,563		2,465,399		1,825,563		2,465,399		4,290,962		(44,767	)
Conns — San Antonio, TX		—		1,025,607		3,054,246		1,025,607		3,054,246		4,079,853		(50,863	)
CVS — Madison, MS		2,809,000		1,067,833		2,834,999		1,067,833		2,834,999		3,902,832		(49,374	)
Rite Aid — Defiance, OH		2,321,000		1,174,368		2,372,765		1,174,368		2,372,765		3,547,134		(41,599	)
Dollar General — Crossville, TN		2,400,000		646,516		2,087,900		646,516		2,087,900		2,734,416		(33,272	)
Dollar General — Ardmore, TN		2,220,000		735,251		1,839,020		735,251		1,839,020		2,574,271		(29,024	)
Dollar General — Livingston, TN		2,285,000		899,366		1,686,871		899,366		1,686,871		2,586,237		(27,157	)

S-1

COLE CREDIT PROPERTY TRUST II, INC.

SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)

							Gross Amount at Which Carried at
	Initial Costs to Company						December 31, 2006
					Buildings and				Buildings and				Accumulated
Description	Encumbrances		Land		Improvements		Land		Improvements		Total		Depreciation
Wehrenberg Theatre — Arnold, MO		—		2,798,101		4,610,072		2,798,101		4,610,072		7,408,173		(66,527	)
Sportsmans Warehouse — Wichita, KS		6,173,250		1,585,901		5,953,865		1,585,901		5,953,865		7,539,766		(82,732	)
CVS — Portsmouth, OH		—		331,566		1,882,850		331,566		1,882,850		2,214,417		(30,201	)
Advance Auto — Greenfield, IN		—		670,376		608,924		670,376		608,924		1,279,300		(11,131	)
Advance Auto — Trenton, OH		—		333,410		650,513		333,410		650,513		983,923		(11,880	)
Rite Aid — Lansing, MI		1,041,000		253,728		1,276,423		253,728		1,276,423		1,530,151		(22,004	)
Advance Auto — Columbia Heights, MN		1,384,000		548,504		1,071,332		548,504		1,071,332		1,619,836		(14,757	)
Advance Auto — Fergus Falls, MN		963,000		186,571		911,215		186,571		911,215		1,097,786		(12,983	)
CVS — Okeechobee, FL		4,076,000		1,622,567		3,565,482		1,622,567		3,565,482		5,188,049		(44,296	)
Office Depot — Dayton, OH		2,130,000		806,590		2,187,766		806,590		2,187,766		2,994,356		(26,080	)
Advance Auto — Holland Township, MI		1,231,000		647,207		1,134,493		647,207		1,134,493		1,781,700		(16,320	)
Advance Auto — Holland, MI		1,193,000		613,597		1,117,758		613,597		1,117,758		1,731,355		(16,079	)
Advance Auto — Zeeland, MI		1,057,000		429,608		1,108,675		429,608		1,108,675		1,538,284		(15,949	)
CVS — Lake Pickett, Florida		3,016,000		2,125,478		2,213,491		2,125,478		2,213,491		4,338,969		(28,411	)
Office Depot — Greenville, MS		2,192,000		665,789		2,469,061		665,789		2,469,061		3,134,850		(29,976	)
Office Depot — Warrensburg, MO		1,810,000		1,024,240		1,539,821		1,024,240		1,539,821		2,564,061		(25,982	)
CVS — Gulfport, MS		2,611,000		1,230,582		2,533,367		1,230,582		2,533,367		3,763,949		(25,756	)
Advance Auto — Grand Forks, ND		1,120,000		345,742		889,151		345,742		889,151		1,234,893		(10,547	)
CVS — Clinton, NY		2,440,000		683,648		2,013,683		683,648		2,013,683		2,697,331		(19,831	)
Oxford Theater Co. — Oxford, MS		5,175,000		281,378		6,825,611		281,378		6,825,611		7,106,989		(65,472	)
Advance Auto — Duluth, MN		—		283,999		1,049,951		283,999		1,049,951		1,333,950		(9,293	)
Walgreens — Picayune, MS		3,404,000		1,212,126		2,547,455		1,212,126		2,547,455		3,759,581		(19,816	)
Kohl’s — Wichita, KS		5,200,000		1,798,355		6,199,319		1,798,355		6,199,319		7,997,674		(49,931	)
Lowe’s — Lubbock, TX		7,475,000		4,580,834		6,562,023		4,580,834		6,562,023		11,142,857		(54,814	)
Lowe’s — Midland, TX		7,150,000		3,524,571		7,330,791		3,524,571		7,330,791		10,855,362		(60,524	)
Advance Auto — Grand Bay, AL		—		255,650		769,738		255,650		769,738		1,025,388		(7,259	)
Advance Auto — Hurley, MS		—		171,442		811,166		171,442		811,166		982,608		(7,607	)
Advance Auto — Rainsville, AL		—		383,035		823,287		383,035		823,287		1,206,322		(7,675	)
Golds Gym — O’Fallon, IL		5,840,000		1,406,558		5,251,148		1,406,558		5,251,148		6,657,706		(45,964	)
Rite Aid — Glassport, PA		2,325,000		673,691		3,111,915		673,691		3,111,915		3,785,606		(16,556	)
David’s Bridal & Radio Shack — Topeka, KS		—		568,818		2,193,734		568,818		2,193,734		2,762,552		(15,596	)
Rite Aid — Hanover, PA		4,115,000		1,924,176		3,804,197		1,924,176		3,804,197		5,728,373		(20,050	)
American TV and Appliance — Peoria, IL		7,358,971		2,028,344		8,171,391		2,028,344		8,171,391		10,199,735		(47,160	)
Tractor Supply — LaGrange, TX		1,405,000		255,831		2,090,959		255,831		2,090,959		2,346,790		(7,748	)
Staples — Peru, IL		1,930,000		1,284,858		1,958,593		1,284,858		1,958,593		3,243,451		(7,858	)
FedEx — Council Bluffs, IA		2,185,000		529,813		1,844,850		529,813		1,844,850		2,374,663		(6,299	)
FedEx — Edwardsville, KS		12,880,000		1,692,923		15,438,264		1,692,923		15,438,264		17,131,187		(51,934	)
CVS — Glenville Scotia, NY		4,200,000		1,600,660		2,927,958		1,600,660		2,927,958		4,528,618		(9,649	)

S-2

COLE CREDIT PROPERTY TRUST II, INC.

SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)

							Gross Amount at Which Carried at
	Initial Costs to Company						December 31, 2006
					Buildings and				Buildings and				Accumulated
Description	Encumbrances		Land		Improvements		Land		Improvements		Total		Depreciation
Advance Auto — Ashland, KY		—		640,697		826,863		640,697		826,863		1,467,560		(3,481	)
Advance Auto — Jackson, OH		—		449,448		755,072		449,448		755,072		1,204,520		(3,219	)
Advance Auto — New Boston, OH		—		477,296		846,287		477,296		846,287		1,323,583		(3,614	)
Advance Auto — Scottsburg, IN		—		263,641		843,653		263,641		843,653		1,107,294		(3,563	)
Tractor Supply — Livingston, TX		—		429,905		2,359,595		429,905		2,359,595		2,789,500		(8,644	)
Tractor Supply — New Braunfels, TX		—		510,964		2,350,433		510,964		2,350,433		2,861,397		(8,669	)
Office Depot — Benton, AR		2,130,000		559,519		2,504,655		559,519		2,504,655		3,064,174		(8,197	)
Old Time Pottery — Fairview Heights, IL		3,424,000		1,043,902		2,943,316		1,043,902		2,943,316		3,987,218		(17,702	)
Infiniti — Davie, FL		—		3,075,608		5,397,764		3,075,608		5,397,764		8,473,372		(19,092	)
Office Depot — Oxford, MS		2,295,000		916,139		2,141,228		916,139		2,141,228		3,057,367		(2,638	)
Tractor Supply — Crockett, TX		1,325,000		290,764		1,957,095		290,764		1,957,095		2,247,859		(3,579	)
Mercedes Benz — Atlanta, GA		—		2,623,201		7,202,674		2,623,201		7,202,674		9,825,875		(7,642	)
Dick’s Sporting Goods — Amherst, NY		—		3,146,987		6,077,279		3,146,987		6,077,279		9,224,266		(8,892	)
Chili’s — Paris, TX		1,790,000		600,098		1,851,435		600,098		1,851,435		2,451,533		(2,096	)
Staples — Clarksville, IN		2,900,000		938,994		3,079,951		938,994		3,079,951		4,018,945		(3,871	)
Total	$	253,273,048	$	109,414,901	$	287,001,474	$	109,414,901	$	287,104,615	$	396,519,516	$	(4,547,864	)

			Date		Depreciation is
Description	Date Acquired		Constructed		Computed(a)
Tractor Supply — Parkersburg, WV		9/26/2005		2005		0 to 40 years
Walgreens — Brainerd, MN		10/6/2005		2000		0 to 40 years
Rite Aid — Alliance, OH		10/25/2005		1996		0 to 40 years
La-Z-Boy — Glendale, AZ		10/25/2005		2001		0 to 40 years
Walgreens — Florissant, MO		11/2/2005		2001		0 to 40 years
Walgreens (Telegraph Rd) — St. Louis, MO		11/2/2005		2001		0 to 40 years
Walgreens (Gravois Rd) — St. Louis, MO		11/2/2005		2001		0 to 40 years
Walgreens — Columbia, MO		11/22/2005		2002		0 to 40 years
Walgreens — Olivette, MO		11/22/2005		2001		0 to 40 years
CVS — Alpharetta, GA		12/1/2005		1998		0 to 40 years
Lowe’s — Enterprise, AL		12/1/2005		1995		0 to 40 years
CVS — Richland Hills, TX		12/8/2005		1997		0 to 40 years
FedEx Package Distribution Center — Rockford, IL		12/9/2005		1994		0 to 40 years
Plastech — Auburn Hills, MI		12/1/2005		1995		0 to 40 years
Academy Sports — Macon, Georgia		1/6/2006		2005		0 to 40 years
David’s Bridal Lenexa, KS		1/11/2006		2006		0 to 40 years
Rite Aid — Enterprise, AL		1/26/2006		2005		0 to 40 years
Rite Aid — Wauseon, OH		1/26/2006		2005		0 to 40 years
Staples — Crossville, TN		1/26/2006		2001		0 to 40 years
Rite Aid — Saco, ME		1/27/2006		1997		0 to 40 years

S-3

COLE CREDIT PROPERTY TRUST II, INC.

SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)

			Date		Depreciation is
Description	Date Acquired		Constructed		Computed(a)
Wadsworth Boulevard — Denver, CO		2/8/2006		1991		0 to 40 years
Mountainside Fitness — Chandler, AZ		2/10/2006		2001		0 to 40 years
Drexel Heritage — Hickory, NC		2/24/2006		1963		0 to 40 years
Rayford Square — Spring, TX		3/2/2006		1973		0 to 40 years
CVS — Scioto Trail, OH		3/8/2006		1997		0 to 40 years
Wawa — Hockessin, DE		3/29/2006		2001		0 to 40 years
Wawa — Manahawkin, NJ		3/29/2006		2001		0 to 40 years
Wawa — Narberth, PA		3/29/2006		2001		0 to 40 years
CVS — Lakewood, OH		4/20/2006		1996		0 to 40 years
Rite Aid — Cleveland, OH		4/27/2006		1997		0 to 40 years
Rite Aid — Fremont, OH		4/27/2006		1997		0 to 40 years
Walgreens — Knoxville, TN		5/8/2006		2000		0 to 40 years
Conns — San Antonio, TX		5/26/2006		2002		0 to 40 years
CVS — Madison, MS		5/26/2006		2004		0 to 40 years
Rite Aid — Defiance, OH		5/26/2006		2005		0 to 40 years
Dollar General — Crossville, TN		6/2/2006		2006		0 to 40 years
Dollar General — Ardmore, TN		6/9/2006		2005		0 to 40 years
Dollar General — Livingston, TN		6/12/2006		2006		0 to 40 years
Wehrenberg Theatre — Arnold, MO		6/14/2006		1998		0 to 40 years
Sportsmans Warehouse — Wichita, KS		6/27/2006		2006		0 to 40 years
CVS — Portsmouth, OH		6/28/2006		1997		0 to 40 years
Advance Auto — Greenfield, IN		6/29/2006		2003		0 to 40 years
Advance Auto — Trenton, OH		6/29/2006		2003		0 to 40 years
Rite Aid — Lansing, MI		6/29/2006		1996		0 to 40 years
Advance Auto — Columbia Heights, MN		7/6/2006		2005		0 to 40 years
Advance Auto — Fergus Falls, MN		7/6/2006		2005		0 to 40 years
CVS — Okeechobee, FL		7/7/2006		2001		0 to 40 years
Office Depot — Dayton, OH		7/7/2006		2005		0 to 40 years
Advance Auto — Holland Township, MI		7/12/2006		2006		0 to 40 years
Advance Auto — Holland, MI		7/12/2006		2006		0 to 40 years
Advance Auto — Zeeland, MI		7/12/2006		2005		0 to 40 years
CVS — Lake Pickett, Florida		7/12/2006		2005		0 to 40 years
Office Depot — Greenville, MS		7/12/2006		2000		0 to 40 years
Office Depot — Warrensburg, MO		7/19/2006		2001		0 to 40 years
CVS — Gulfport, MS		8/10/2006		2000		0 to 40 years
Advance Auto — Grand Forks, ND		8/15/2006		2005		0 to 40 years
CVS — Clinton, NY		8/24/2006		2006		0 to 40 years
Oxford Theater Co. — Oxford, MS		8/31/2006		2006		0 to 40 years
Advance Auto — Duluth, MN		9/8/2006		2006		0 to 40 years
Walgreens — Picayune, MS		9/15/2006		2006		0 to 40 years
Kohl’s — Wichita, KS		9/27/2006		1996		0 to 40 years

S-4

COLE CREDIT PROPERTY TRUST II, INC.

SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)

			Date		Depreciation is
Description	Date Acquired		Constructed		Computed(a)
Lowe’s — Lubbock, TX		9/27/2006		1996		0 to 40 years
Lowe’s — Midland, TX		9/27/2006		1996		0 to 40 years
Advance Auto — Grand Bay, AL		9/29/2006		2005		0 to 40 years
Advance Auto — Hurley, MS		9/29/2006		2006		0 to 40 years
Advance Auto — Rainsville, AL		9/29/2006		2005		0 to 40 years
Golds Gym — O’Fallon, IL		9/29/2006		2005		0 to 40 years
Rite Aid — Glassport, PA		10/4/2006		2006		0 to 40 years
David’s Bridal & Radio Shack — Topeka, KS		10/13/2006		2006		0 to 40 years
Rite Aid — Hanover, PA		10/17/2006		2006		0 to 40 years
American TV and Appliance — Peoria, IL		10/23/2006		2003		0 to 40 years
Tractor Supply — LaGrange, TX		11/6/2006		2006		0 to 40 years
Staples — Peru, IL		11/10/2006		1998		0 to 40 years
FedEx — Council Bluffs, IA		11/15/2006		1999		0 to 40 years
FedEx — Edwardsville, KS		11/15/2006		1999		0 to 40 years
CVS — Glenville Scotia, NY		11/16/2006		2006		0 to 40 years
Advance Auto — Ashland, KY		11/17/2006		2006		0 to 40 years
Advance Auto — Jackson, OH		11/17/2006		2005		0 to 40 years
Advance Auto — New Boston, OH		11/17/2006		2005		0 to 40 years
Advance Auto — Scottsburg, IN		11/17/2006		2006		0 to 40 years
Tractor Supply — Livingston, TX		11/22/2006		2006		0 to 40 years
Tractor Supply — New Braunfels, TX		11/22/2006		2006		0 to 40 years
Office Depot — Benton, AR		11/21/2006		2001		0 to 40 years
Old Time Pottery — Fairview Heights, IL		11/21/2006		1979		0 to 40 years
Infiniti — Davie, FL		11/30/2006		2006		0 to 40 years
Office Depot — Oxford, MS		12/1/2006		2006		0 to 40 years
Tractor Supply — Crockett, TX		12/1/2006		2006		0 to 40 years
Mercedes Benz — Atlanta, GA		12/15/2006		2000		0 to 40 years
Dick’s Sporting Goods — Amherst, NY		12/20/2006		1993		0 to 40 years
Chili’s — Paris, TX		12/28/2006		1999		0 to 40 years
Staples — Clarksville, IN		12/29/2006		2006		0 to 40 years

(a) The Company’s assets are depreciated or amortized using the straight-lined method over the useful lives of the assets by class. Generally, tenant improvements and lease intangibles are amortized over the respective lease term and buildings are depreciated over 40 years.

			Accumulated
	Cost		Depreciation
Balance at December 31, 2005	$	81,344,139	$	151,472
2006 Additions		315,175,380		(2,825,742	)
2006 Dispositions		—		—
Balance at December 31, 2006	$	396,519,519	$	(2,674,270	)

S-5

EXHIBIT INDEX

The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2006 (and are numbered in accordance with Item 601 of Regulation S-K).

Exhibit No.			Description
	3	.1	Fifth Articles of Amendment and Restatement. as corrected. (Incorporated by reference to Exhibit 3.1 of the Company’s Form 10-K (File No. 333-121094), filed on March 23, 2006).
	3	.2	Amended and Restated Bylaws. (Incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K (File No. 333-121094), filed on September 6, 2005).
	3	.3	Articles of Amendment to Fifth Articles of Amendment and Restatement. (Incorporated by reference to Exhibit 3.3 of the Company’s Form S-11 (File No. 333-138444), filed on November 3, 2006).
	4	.1	Form of Subscription Agreement and Subscription Agreement Signature Page. (Incorporated by reference to Exhibit 4.1 to the Company’s Form S-11/A (File No. 333-121094), filed on June 16, 2005).
	4	.2	Form of Additional Investment Subscription Agreement. (Incorporated by reference to Exhibit 10.64 to the Company’s POS AM (File No. 333-121094), filed on December 20, 2006).
	10	.1	2004 Independent Directors’ Stock Option Plan. (Incorporated by reference to Exhibit 10.5 to the Company’s Form S-11 (File No. 333-121094), filed on December 9, 2004).
	10	.2	Form of Stock Option Agreement under 2004 Independent Directors’ Stock Option Plan. (Incorporated by reference to Exhibit 10.6 to the Company’s Form S-11/A (File No. 333-121094), filed on April 11, 2005).
	10	.3	Amended and Restated Property Management and Leasing Agreement, dated September 16, 2005, by and among Cole Credit Property Trust II, Inc., Cole Operating Partnership II, LP and Fund Realty Advisors, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (File No. 333-121094), filed on September 23, 2005).
	10	.4	Amended and Restated Advisory Agreement, dated September 16, 2005, by and between Cole Credit Property Trust II, Inc. and Cole REIT Advisors II, LLC. (Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K (File No. 333-121094), filed on September 23, 2005).
	10	.5	Amended and Restated Agreement of Limited Partnership of Cole Operating Partnership II, LP, dated September 16, 2005, by and between Cole Credit Property Trust II, Inc. and the limited partners thereto. (Incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K (File No. 333-121094), filed on September 23, 2005).
	10	.6	Amended and Restated Distribution Reinvestment Plan (included as Appendix C to prospectus). (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (File No. 333-121094), filed on December 22, 2005).
	10	.7	First Amendment to Amended and Restated Advisory Agreement, dated April 17, 2006, between Cole Credit Property Trust II, Inc. and Cole REIT Advisors II, LLC. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q (File No. 000-51963), filed on May 12, 2006).
	10	.8	Form of Dealer Manager Agreement. (Incorporated by reference to Exhibit 1.1 to the Company’s Form 10-Q (File No. 333-121094), filed on August 12, 2005).
	10	.9*	Purchase Agreement between Cole AS Katy TX, LP and 44.385 Acres, Ltd. and Mason MSG, Ltd. pursuant to an Assignment of Agreement of Purchase and Sale Agreement dated January 17, 2007.
	10	.10*	Promissory Note between Cole AS Katy TX, LP and Bear Stearns Commercial Mortgage, Inc. dated January 18, 2007.
	21	.1	List of Subsidiaries. (Incorporated by reference to Exhibit 21.1 to the Company’s POS AM (File No. 333-121094), filed on December 20, 2006).
	31	.1*	Certification of the Chief Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2*	Certification of the Chief Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1*	Certification of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

EX-10.9

Exhibit 10.9

CONTRACT OF SALE

44.385 ACRES, LTD.

and

MASON MSG, LTD.

collectively, as “Seller”

with

SERIES D, LLC

as “Purchaser”

PROPERTY:

Academy Distribution Center and Warehouse, Katy, Texas

Table of Contents

ARTICLE	TITLE	PAGE
1.	Sale of Parcel and Acceptable Title		1
2.	Purchase Price		2
3.	Closing Due Diligence, Net Lease		3
4.	Representations and Warranties of Seller		7
5.	Representations and Warranties of Academy		10
6.	Representations and Warranties of Purchaser		14
7.	Covenants of Academy; Indemnity for Inspections and Repairs		16
8.	Destruction, Damage or Condemnation		16
9.	Conditions Precedent		17
10.	Seller’s and Academy’s Closing Obligations		18
11.	Purchaser’s Closing Obligations		21
12.	Apportionments and Other Payments		22
13.	Termination and Remedies		23
14.	Broker		23
15.	Notices		24
16.	Miscellaneous		24
EXHIBITS
1-A – Description of 44+ Acres Land
1-B – Description of Mason Land
2 – Lease
3 – SEC Filing Letter

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     THIS CONTRACT OF SALE (this “Contract”) dated as of December ___, 2006 between 44.385 ACRES, LTD., a Texas limited partnership (“44+ Acres”) and MASON MSG, LTD., a Texas limited partnership (“Mason,” together with 44+ Acres, collectively, “Seller”), each having an office at 1800 North Mason Road, Katy, Texas 77449; SERIES D, LLC, an Arizona limited liability company, having an office at c/o Cole Companies, 2555 E. Camelback Road, Suite 400, Phoenix, AZ 85016, and its permitted assigns (“Purchaser”); and ACADEMY, LTD., a Texas limited partnership having an office at 1800 North Mason Road, Katy, Texas 77449 (“Academy” or “Lessee”).

     Seller, Purchaser and Lessee hereby covenant and agree as follows:

ARTICLE 1. Sale of Parcel and Acceptable Title.

     Section 1.01 Each Seller, as to its interest only, shall sell to Purchaser, and Purchaser shall purchase from Seller, at the price and upon the terms and conditions set forth in this Contract: (i) the approximately 44.385 acre tract of real property listed and described on Exhibit 1-A owned by 44+ Acres (the “44+ Acres Land”) attached hereto and made a part hereof; (ii) the tracts of real property containing approximately 49.3616 acres listed and described on Exhibit 1-B owned by Mason (the “Mason Land,” together with the 44+ Acres Land, collectively, the “Land”) attached hereto and made a part hereof; (iii) the buildings and Seller’s interest in all improvements situated on the Land (collectively, the “Buildings”); (iv) all right, title and interest of Seller, if any, in and to the land lying in the bed of any street or highway in front of or adjoining the Land to the center line thereof and to any unpaid award for any taking of any portion of the Land or Buildings by condemnation, or any damage to the Land or Buildings by reason of a change of grade of any street or highway; (v) all the estate and rights of Seller in and to the Land, the Buildings, and all appurtenances thereto; (vi) all right, title and interest of Seller, if any, in and to the fixtures and equipment attached to the Land and/or the Buildings, excluding, however, trade fixtures used in the operation of the business conducted at the property (the “Personal Property”); and (vii) all of Seller’s interest, to the extent transferable, in all permits, licenses, warranties, contracts and intangibles with respect to the construction, operation, maintenance or repair of the Buildings and other improvements on the Land

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(collectively, the “Permits”). The Land, Buildings and other interests being sold and purchased as provided in this Section 1.01 are referred to herein collectively as the “Parcel.”

     Section 1.02 Seller shall convey and Purchaser shall accept fee simple title to the Parcel in accordance with the terms of this Contract, free and clear of all liens, claims, easements, and encumbrances whatsoever except for the Permitted Exceptions (hereinafter defined). Academy shall convey and Purchaser shall accept all of Academy’s interest in the leasehold improvements constructed and installed by Academy on the Land (“Academy Leasehold Improvements”), as further described in Exhibit 4 attached hereto.

     Section 1.03 Each Seller and Purchaser acknowledge that 44+ Acres and Mason, acting collectively as Seller, have elected to enter into a single contract for the sale of the 44+ Acres Land and the Mason Land as a matter of convenience to Seller and Purchaser, and, accordingly, Seller and Purchaser agree that, notwithstanding anything in this Contract to the contrary, the terms and provisions of this Contract shall apply to and be binding on each Seller only with respect to the property actually owned by such Seller that is subject to this Contract as indicated on Exhibit 1-A and Exhibit 1-B. Notwithstanding the foregoing, in the event that either 44+ Acres or Mason breaches or defaults in its obligations under this Contract, makes a material misrepresentation under this Contract or fails to satisfy any closing conditions applicable to it, Purchaser shall not be obligated to purchase any portion of the Land.

ARTICLE 2. Purchase Price.

     Section 2.01 The purchase price (“Purchase Price”) to be paid by Purchaser to Seller for the Parcel is ONE HUNDRED TWO MILLION and No/100 Dollars ($102,000,000.00), payable as follows:

          (a) Five Hundred Thousand and No/100 Dollars ($500,000.00) by immediately available federal funds transferred to the escrow account of the Title Company (sometimes hereinafter referred to herein as the “Escrow Agent”), within three (3) business days after the full execution and delivery of this Contract (the “First Downpayment”).

          (b) One Million, Five Hundred Thousand and No/100 Dollars ($1,500,000.00) by immediately available federal funds transferred to the escrow account of the Escrow Agent, within

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three (3) business days after the full execution and delivery of this Contract (the “Second Downpayment”).

          The First Downpayment, the Second Downpayment and, if deposited, the Extension Downpayment (as hereinafter defined) are referred to in this Contract as the “Downpayment”. Escrow Agent shall hold and disburse the Downpayment and interest earned thereon, in accordance with the standard escrow provisions of the Escrow Agent, and

          (c) Balance of the Purchase Price (i.e., Purchase Price less Downpayment and interest earned thereon) for the Parcel at the Closing by immediately available federal funds transferred to such account in such bank as Seller shall designate.

     Section 2.02 During the Due Diligence Period (as hereinafter defined), Seller and Purchaser shall use reasonable efforts to agree on the proper allocations of the Purchase Price, but failure to reach such agreement shall not result in a default under or termination of this Contract.

ARTICLE 3. Closing; Due Diligence; Net Lease.

     Section 3.01 Except as otherwise provided in this Contract, the closing of title pursuant to this Contract (the “Closing”) shall take place no later than January 16, 2007 (the “Closing Date”). The time and place of closing shall be 10:00 a.m. at the offices of LandAmerica Financial Services/Lawyers Title Insurance Corporation, Phoenix National Division (“Title Company”), or such other location as the parties may agree upon or, at the option of either Purchaser or Seller, in escrow through the Title Company. Purchaser acknowledges that Title Company shall use Veritas Title Partners, L.P. as its local agent.

     Notwithstanding the foregoing, Purchaser shall have the right to extend the Closing Date to no later than January 26, 2007 by delivering written notice to Seller prior to January 10, 2007 and by depositing an additional earnest money deposit of Five Hundred Thousand and no/100 Dollars ($500,000.00) (the “Extension Downpayment”) with Title Company.

     Section 3.02 (a) Purchaser shall have from the date of the execution of this Contract until January 2, 2007 (the “Due Diligence Period”) to conduct a due diligence review of the Parcel (including, without limitation, the physical condition of the Parcel and the state of title to the Parcel) and to secure approval of any financing Purchaser may require or desire in connection with its acquisition of the Parcel (including, without limitation, such lender’s approval of the form and substance of the Lease, as defined in Section 3.03 below). During the Due Diligence Period, Seller

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and Academy will reasonably cooperate with Purchaser to have any existing environmental reports and studies updated and certified to Purchaser and its lender, if any, at Purchaser’s sole cost and expense. After such examination and inspection, if for any reason Purchaser decides to withdraw from this transaction, Purchaser shall send notification of its withdrawal to Seller and Lessee. If Purchaser notifies Seller and Lessee of its withdrawal, neither party under this Contract shall have any obligation to the other and the Downpayment, together with accrued interest, shall be remitted by Escrow Agent as follows:

The Second Downpayment, together with accrued interest thereon, shall be remitted to Purchaser; and

The First Downpayment, together with accrued interest thereon, shall be remitted to Seller, except that, if any third party reports obtained by Purchaser during the Due Diligence Period (including any updates obtained by Purchaser to any of the existing third party reports provided to Purchaser by Seller as referenced in Section 3.02(d) hereof) reveal information about the Parcel that is adversely different in any material respect from the information about the Parcel contained in the documents and other items referenced in Section 3.02(d) hereof, then the First Downpayment, together with accrued interest thereon (less the Independent Consideration, as hereinafter defined), shall be remitted to Purchaser.

     Time is of the essence with respect to Purchaser’s withdrawal option. Purchaser shall not have the right to withdraw from this transaction, or to alter or modify the terms, provisions or conditions of this Contract or the form of the Lease, after the expiration of the Due Diligence Period, and any such notice given after the expiration of the Due Diligence Period shall have no force and effect; provided that the foregoing shall not prevent Purchaser from terminating this Contract pursuant to Section 13.01. Seller shall allow Purchaser and/or Purchaser’s representatives full access to the Parcel and to Seller’s books and records for the purposes of inspection of, including, but not limited to, sales reports and environmental reports in the possession of Seller. The “Independent Consideration” shall be the sum of $100.00 from the First Downpayment which sum shall be retained by Seller in any event hereunder as consideration for Seller’s grant of the “Due Diligence Period” option to Purchaser.

          (b) If Purchaser notifies Seller and Lessee of its withdrawal as set forth in Section 3.02(a) above or if this Contract is terminated for any other reason, any and all records and other information and copies of work sheets and other documents and materials obtained by

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Purchaser, including, without limitation, documents and/or materials obtained by Purchaser from third parties, shall be delivered to Seller and Purchaser shall not retain any copy or reproduction of any such written document or information, and all of such information shall continue to be held in confidence by Purchaser as set forth in Section 3.02(c) below.

          (c) Purchaser agrees that Purchaser and Purchaser’s agents and representatives shall hold the terms of this Contract and all information obtained with respect to the Parcel or Academy in confidence and shall not disclose its content to others, except to Purchaser’s principals, advisors, investors, consultants and lender and those parties approved by Seller and Academy or as may be required by law, subpoena or other legal process. Notwithstanding any provision of this Contract, the provisions of this Section 3.02(c) and Section 3.02(b) above shall survive any termination of this Contract and the limitations on Seller’s remedies under Section 13.02 shall not in any way limit Seller’s or Academy’s enforcement of the provisions of this Section 3.02(c) or Section 3.02(b) above.

          (d) Prior to the execution of this Contract, Academy has provided to Purchaser (i) copies of any and all documents and instruments affecting the Parcel in Academy’s or Seller’s possession, including, but not limited to, site plans, surveys, soil and substrata studies, environmental site assessments, architectural renderings, plans and specifications, engineering plans and studies, landscape plans, and other plans, diagrams, or studies of any kind, if any, plus all other related items, if any, relating to the Parcel; (ii) a title commitment for the issuance of the Owner Title Policy described in Section 10.02 below, together with copies of all documents referenced therein (the “Title Commitment”); and (iii) a copy of Seller’s existing survey of the Land, Building and the appurtenances thereto of the Parcel (the “Existing Survey”).

          (e) Purchaser shall have until December 12, 2006 (the “Title Review Period”) to examine the Title Commitment and the Existing Survey (collectively the “Title Materials”) and to object in writing to any matters reflected thereby (the “Objections”). If an update or endorsement to the Title Commitment delivered to Purchaser or an updated or revised survey for the Parcel (each, a “Title/Survey Update”) discloses a title or survey matter that was not disclosed in the Title Materials, the Existing Survey or in a previous Title/Survey Update, Purchaser may deliver to Seller, within four (4) business days following Purchaser’s receipt of the Title/Survey Update (“Title Update Review Period”) a written Objection to such defect first disclosed on the Title/Survey

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Update accompanied by a copy of the Title/Survey Update. Purchaser shall be deemed to have agreed to accept title subject to all matters reflected in the Title Commitment and any Title/Survey Update and to the state of facts shown on the Existing Survey, other than Objections that have been timely given and provided that, in no event shall Purchaser be deemed to have agreed to accept title subject to (i) monetary liens, encumbrances or security interests against Seller and/or the Parcel, (ii) encumbrances that have been voluntarily placed against the Parcel by Seller or Academy after the date of the Title Commitment without Purchaser’s prior written consent and that will not otherwise be satisfied on or before the Closing, (iii) exceptions for any repurchase options of record with respect to the Parcel or any portion thereof, (iv) exceptions for any leases or other occupancy agreements affecting the Parcel or any portion thereof (other than the Lease), or (v) exceptions that can be removed from the Title Commitment by Seller’s delivery of a customary owner’s title affidavit or gap indemnity (all of the foregoing hereinafter collectively referred to as the “Seller’s Required Removal Items”). All title matters and exceptions set forth in the Title Commitment and any Title/Survey Update and the state of facts shown on Seller’s existing survey which are not Objections, or which are thereafter deemed to be accepted or waived by Purchaser as hereinafter provided, other than the Seller’s Required Removal Items, are hereafter referred to as the “Permitted Exceptions”. If Purchaser notifies Seller within the Title Review Period or the Title Update Review Period, as applicable, of Objections, then within four (4) business days after Seller’s receipt of Purchaser’s notice, Seller shall notify Purchaser in writing (“Seller’s Title Response Notice”) of the Objections which Seller agrees to satisfy on or prior to the Closing, at Seller’s sole cost and expense, and of the Objections that Seller cannot or will not satisfy. Failure by Seller to respond to Purchaser by the expiration of said four (4) business day response period shall be deemed as Seller’s election not to cure the Objections raised by Purchaser. Notwithstanding the foregoing, Seller shall, in any event, be obligated to satisfy Seller’s Required Title Removal Items. If Seller chooses not to satisfy all or any of the Objections that Seller is not obligated to satisfy, Seller shall notify Purchaser thereof within the allowed four (4) business day period, then Purchaser shall have the option, to be exercised by the later of the expiration of the Due Diligence Period or four (4) business days following Purchaser’s receipt of the Seller’s Title Response Notice, of either (i) terminating this Contract by giving written notice of termination to Seller or (ii) electing to consummate the purchase of the Parcel, in which case Purchaser shall be deemed to have waived such Objections and such

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Objections shall become “Permitted Exceptions” for all purposes hereunder. Failure by Purchaser to respond to Seller by the expiration of said four (4) business day response period shall be deemed its election to waive the applicable Objection(s), which shall become “Permitted Exceptions”. If Purchaser terminates this Contract pursuant to clause (i) above, neither party under this Contract shall have any obligation to the other and the Downpayment, together with accrued interest, shall be remitted by Escrow Agent as follows:

The Second Downpayment, together with accrued interest thereon, shall be remitted to Purchaser; and

The First Downpayment, together with accrued interest thereon, shall be remitted to Seller, except that, if any Title/Survey Update obtained by Purchaser during the Due Diligence Period reveals information that is adversely different in any material respect from the information contained in the Title Commitment and Existing Survey provided to Purchaser by Seller, then the First Downpayment, together with accrued interest thereon (less the Independent Consideration), shall be remitted to Purchaser.

     Section 3.03 At the Closing, Purchaser and Lessee shall (i) execute and, as applicable, acknowledge (a) four (4) counterparts of a lease between Purchaser, as landlord, and Academy, as tenant, for the Parcel, such lease to be in form and substance as the lease annexed hereto as Exhibit 2 (the “Lease”), and (b) a lease memorandum for the Parcel in recordable form (“Lease Memorandum”), and (ii) deliver to the other, two (2) fully-executed and acknowledged counterparts of the Lease and Lease Memorandum. The initial annual rental for the Lease of the Parcel shall be $7,038,000.00 (with 1.50% annual increases thereafter). The Lease Memorandum shall be recorded at Closing in the appropriate real property records.

ARTICLE 4. Representations and Warranties of Seller.

     Section 4.01 As an inducement to Purchaser to purchase the Parcel and intending that the warranties and representations contained in this Section shall be true on the Closing Date, each Seller warrants and represents to Purchaser as follows solely with respect to (i) that portion of the Parcel owned by each Seller and (ii) the business affairs of each Seller, and except as disclosed in writing to Purchaser to the contrary prior to the date of this Contract:

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          (i) The Parcel is not subject to any agreements of sale, or any options, or other rights of third parties to acquire any interest therein (except as contained in this Contract) of which either Seller has knowledge or is a party (and neither Seller will enter into any such agreement without Purchaser’s prior written consent), and neither Seller has any current, actual knowledge of any condemnation proceedings, eminent domain proceedings or similar actions or proceedings currently pending or threatened against the Parcel.

          (ii) Each Seller is duly organized, validly existing and in good standing as a limited partnership under the laws of the State of Texas. The foregoing representation and warranty shall be effective as of the date hereof and as of the Closing Date, and the applicable Seller’s liability with regard to the accuracy of such representation and warranty shall survive indefinitely, subject to any applicable statutes of limitations.

          (iii) Each Seller has all requisite power and authority, has taken all actions required by its organizational documents and applicable law, and has obtained all consents which are necessary to authorize or enable it to execute and deliver this Contract. Each Seller has such power and authority and has obtained such consents and approvals that are necessary to consummate the transactions contemplated in this Contract. The individual(s) executing this Contract on each Seller’s behalf have been duly authorized and are empowered to bind such Seller to this Contract. The foregoing representation and warranty shall be effective as of the date hereof and as of the Closing Date, and the applicable Seller’s liability with regard to the accuracy of such representation and warranty shall survive indefinitely, subject to any applicable statutes of limitations.

          (iv) Neither Seller is a party to any litigation, arbitration or proceeding (i) in which either Seller is adverse to any past tenant or present tenant of the Parcel with respect to such tenancy, (ii) in which either Seller is adverse to any person or entity having or claiming any interest in the Parcel with respect to such interest or claim, or (iii) which affects or questions either Seller’s title to its respective portion of the Parcel or either Seller’s ability to perform its obligations under this Contract. Neither Seller knows of any presently pending litigation, arbitration, governmental investigation or proceeding, and, to the actual knowledge of each of Seller, no litigation, arbitration or proceeding has been threatened against either Seller, in either case, affecting or questioning either Seller’s title to, or use of, the portion of the Mason Land or the 44+ Acres Land or any portion thereof.

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          (v) Neither the execution of this Contract, nor the consummation by either Seller of the transactions contemplated by this Contract, will (a) result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in a termination of, any agreement or instrument to which either Seller is a party (other than a termination of the current ground leases and/or facilities leases between each Seller and Academy concerning the Mason Land or the 44+ Acres Land), (b) violate any restriction to which either Seller is subject, (c) constitute a violation of any applicable code, resolution, law, statute, regulation, ordinance, judgment, rule, decree or order of which either Seller is aware, or (d) except as expressly contemplated hereby, result in the creation of any lien, charge or encumbrance upon the Parcel or any part thereof. Neither Seller is in default under any agreement or instrument where the liability thereunder might adversely affect either Seller’s ability to perform its obligations under this Contract.

          (vi) At Closing, there will be no unrecorded leases (other than the Lease), liens or encumbrances which may affect title to the Parcel (other than Permitted Exceptions).

          (vii) No consent of any third party is required in order for either Seller to enter into this Contract and perform its obligations hereunder.

     Section 4.02 If, at or before the Closing, Seller becomes aware of any fact or circumstance which would change a representation or warranty, then Seller will immediately give notice of such changed fact or circumstance to Purchaser. In the event Purchaser has current actual knowledge as of the Closing Date of any breach of the foregoing representations and warranties and Purchaser proceeds with the Closing, then Purchaser shall be deemed to have waived and forever released Seller from any and all claims arising out of such breach.

     Section 4.03 ALL OF SELLER’S REPRESENTATIONS AND COVENANTS IN THIS AGREEMENT AND ALL EXHIBITS ATTACHED TO THIS AGREEMENT ARE LIMITED AS SET FORTH IN THIS SECTION. Seller’s covenants to provide information and documentation and all of Seller’s representations are limited to Seller’s period of ownership of the Parcel and the actual knowledge gained by Seller with respect to the Parcel during such period of ownership, without any duty of investigation nor the implication of any such duty as to same during such period of ownership or otherwise. Accordingly, Purchaser must rely solely on Purchaser’s inspection to verify the accuracy thereof. As to the period prior to Seller’s ownership, Seller can make no representation, however, Seller shall provide such information and documentation as described in

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this Contract as is in Seller’s possession. Seller shall not be a warrantor or guarantor of any studies or tests conducted by any person other than Seller and their employees and provided to Purchaser pursuant to this Contract, if any. Except as otherwise set forth in Section 4.04 hereof, Seller’s representations and covenants shall merge into the deeds delivered hereunder and such representations and covenants shall not, and shall not be deemed to, survive the Closing.

     Section 4.04 Subject to Section 4.02, the representations and warranties in subparagraphs (ii) and (iii) of Section 4.01 hereof shall survive the Closing as provided for therein. Each Seller shall and does hereby indemnify against and hold Purchaser harmless from any loss, damage, liability and expense, together with all court costs and attorneys’ fees which Purchaser may incur, by reason of any material misrepresentation by such Seller or any material breach of any of such Seller’s warranties contained in subparagraphs (ii) and (iii) of Section 4.01 hereof.

ARTICLE 5. Representations and Warranties of Academy.

     Section 5.01 As an inducement to Purchaser to purchase the Parcel and intending that the warranties and representations contained in this Section shall be true on the Closing Date and shall survive the Closing as hereinafter provided, Academy warrants and represents to Purchaser as follows (except as disclosed in writing to Purchaser to the contrary prior to the date of this Contract):

          (i) The Parcel is not subject to any agreements of sale, or any options, or other rights of third parties to acquire any interest therein (except as contained in this Contract) of which Academy has knowledge or is a party (and Academy will not enter into any such agreement without Purchaser’s prior written consent).

          (ii) To the actual knowledge of Academy, no condemnation proceedings, eminent domain proceedings or similar actions or proceedings are now pending or threatened against the Parcel.

          (iii) (a) Academy is not a party to any litigation, arbitration or proceeding (1) in which Academy is adverse to any past tenant or present tenant of the Parcel with respect to such tenancy, (2) in which Academy is adverse to any person or entity having or claiming any interest in the Parcel with respect to such interest or claim, or (3) which affects or questions Academy’s rights in the Parcel or Academy’s ability to perform its obligations under this Contract or the Lease.

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               (b) Academy knows of no presently pending or threatened litigation, arbitration, governmental investigation or proceeding prohibiting Academy’s use of the Parcel or any part thereof.

          (iv) Neither the execution of this Contract or the Lease, nor the consummation by Academy of the transactions contemplated by this Contract or the Lease, will (a) result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in a termination of, any agreement or instrument to which Academy is a party, (b) violate any restriction to which Academy is subject, (c) constitute a violation of any applicable code, resolution, law, statute, regulation, ordinance, judgment, rule, decree or order of which Academy is aware, or (d) except as expressly contemplated hereby, result in the creation of any lien, charge or encumbrance upon the Parcel or any part thereof. To the actual knowledge of Academy, Academy is not in default under any agreement or instrument where the liability thereunder might adversely affect Academy’s ability to perform its obligations under this Contract or the Lease.

          (v) Academy is duly organized and validly existing as a limited partnership under the laws of the State of Texas. The foregoing representation and warranty shall be effective as of the date hereof and as of the Closing Date, and Academy’s liability with regard to the accuracy of such representation and warranty shall survive indefinitely, subject to any applicable statutes of limitations.

          (vi) Academy has all requisite power and authority, has taken all actions required by its organizational documents and applicable law, and has obtained all consents which are necessary to authorize or enable it to execute and deliver this Contract and the Lease. Academy has such power and authority and has obtained such consents and approvals that are necessary to consummate the transactions contemplated in this Contract, including the execution of the Lease. The individuals executing this Contract on Academy’s behalf have been duly authorized and are empowered to bind Academy to this Contract and to the Lease. The foregoing representation and warranty shall be effective as of the date hereof and as of the Closing Date, and Academy’s liability with regard to the accuracy of such representation and warranty shall survive indefinitely, subject to any applicable statutes of limitations.

          (vii) To the actual knowledge of Academy, the Buildings are not, and on the Closing Date will not be, in violation of any applicable building and zoning laws, rules, codes or regulations, except to a de minimis extent not affecting the use or operation of the Parcel.

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          (viii) To the actual knowledge of Academy, the Parcel and the use thereof does not, and on the Closing Date will not, violate, in any material respect, any (a) applicable federal, state, county, municipal and/or other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of any court, board, agency, commission, office or authority of any nature whatsoever for any governmental unit, or (b) covenants, agreements, restrictions and encumbrances contained in any instrument, either of record or known to Academy, affecting the Parcel or any part thereof which may (A) require repairs, modifications or alterations in or to the Parcel or any part thereof, or (B) in any way limit the use and enjoyment thereof.

          (ix) Academy has not received written notice nor does Academy have any knowledge of any pending improvements, liens or special assessments to be made against the Parcel by any governmental authority.

          (x) Academy has not and will not, without the prior written consent of Purchaser, take any action before any governmental authority having jurisdiction thereover, the object of which would be to change the present zoning of or other land-use limitations, upon the Land, or any portion thereof, or its potential use, and, to Academy’s knowledge, there are no pending proceedings, the object of which would be to change the present zoning or other land-use limitations.

          (xi) No consent of any third party is required in order for Academy to enter into this Contract and the Lease and perform its obligations hereunder and thereunder.

          (xii) Academy has provided Purchaser with a copy of a Phase I Environmental Site Assessment report prepared by Terracon Consulting Engineers & Scientists dated August 2, 2006 and a Limited Site Investigation report prepared by them dated August 22, 2006 (collectively, the “Environmental Site Assessment”).Other than the information contained in the Environmental Site Assessment, Academy has no actual knowledge that there exists or has existed, and Academy has not caused any generation, production, location, transportation, storage, treatment, discharge, disposal, release or threatened release upon, under or about the Parcel of any Hazardous Materials. “Hazardous Materials” shall mean any flammables, explosives, radioactive materials, hazardous wastes, hazardous and toxic substances or related materials, asbestos or any material containing asbestos (including, without limitation, vinyl asbestos tile), or any other substance or material, defined as a “hazardous substance” by any federal, state, or local environmental law, ordinance, rule or regulation including, without limitation, the Federal Comprehensive Environmental Response

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Compensation and Liability Act of 1980, as amended, the Federal Hazardous Materials Transportation Act, as amended, the Federal Resource Conservation and Recovery Act, as amended, and the rules and regulations adopted and promulgated pursuant to each of the foregoing.

          (xiii) Other than the information contained in the Environmental Site Assessment, to Academy’s current, actual knowledge, there is not now, nor has there ever been, on or in the Parcel underground storage tanks, any asbestos-containing materials or any polychlorinated biphenyls, including those used in hydraulic oils, electric transformers, or other equipment. Academy hereby assigns to Purchaser, effective as of the Closing Date, all claims, counterclaims, defenses, or actions, whether at common law, or pursuant to any other applicable federal or state or other laws which Academy may have against any third parties relating to the existence of any Hazardous Materials in, at, on, under or about the Parcel (including Hazardous Materials released on the Parcel prior to the Closing Date and continuing in existence on the Parcel at the Closing Date).

     Section 5.02 ALL OF ACADEMY’S REPRESENTATIONS AND COVENANTS IN THIS AGREEMENT AND ALL EXHIBITS ATTACHED TO THIS AGREEMENT ARE LIMITED AS SET FORTH IN THIS SECTION. Academy’s covenants to provide information and documentation and all of Academy’s representations are limited to the term of Academy’s tenancy on the Parcel (including its tenancy in existence on the date of this Contract) (“Academy’s Tenancy”) and the actual knowledge gained by Academy with respect to the Parcel during such period, without any duty of investigation nor the implication of any such duty as to same during such period or otherwise. Purchaser acknowledges that Academy’s “actual knowledge” is limited to that of Rodney Faldyn, Chief Financial Officer of Academy, an individual who does not reside at the Parcel, and who has not undertaken any investigation with respect to such representations. Accordingly, Purchaser must rely solely on Purchaser’s inspection to verify the accuracy thereof. As to the period prior to Academy’s Tenancy, Academy can make no representation, however, Academy shall provide such information and documentation as described in this Contract as is in Academy’s possession. Academy shall not be a warrantor or guarantor of any studies or tests conducted by any person other than Academy and their employees and provided to Purchaser pursuant to this Contract, if any.

     Section 5.03 If, at or before the Closing, Academy becomes aware of any fact or circumstance which would change a representation or warranty, then Academy will immediately

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give notice of such changed fact or circumstance to Purchaser. In the event Purchaser has current actual knowledge as of the Closing Date of any breach of the foregoing representations and warranties and Purchaser proceeds with the Closing, then Purchaser shall be deemed to have waived and forever released Academy from any and all claims arising out of such breach, but subject to the provisions of the Lease.

     Section 5.04 Subject to Section 5.03, the representations and warranties in Section 5.01 shall survive the Closing for a period of one (1) year (except to the extent expressly provided to the contrary hereinabove). Academy shall and does hereby indemnify against and hold Purchaser harmless from any loss, damage, liability and expense, together with all court costs and attorneys’ fees which Purchaser may incur, by reason of any material misrepresentation by Academy or any material breach of any of Academy’s warranties. To the extent Purchaser shall fail to assert a claim under the foregoing indemnification within thirty (30) days after the expiration of said one (1) year period following the Closing with respect to those representations and warranties that survive only for a period of one (1) year, then such claim shall be deemed to be waived and forever released by Purchaser, but subject to the provisions of the Lease.

ARTICLE 6. Representations and Warranties of Purchaser.

     Section 6.01 As an inducement to Seller to sell the Parcel and intending that the warranties and representations contained in this Section shall be true on the Closing Date and shall survive the Closing, Purchaser warrants and represents to Seller that as of the date hereof:

          (i) Neither the execution of this Contract nor the consummation by Purchaser of the transactions contemplated by this Contract will (i) conflict with, or result in a breach of, the terms, conditions or provisions of, or constitute a default, or result in a termination of, any agreement or instrument to which Purchaser is a party, (ii) violate any restriction to which Purchaser is subject or (iii) constitute a violation of any applicable code, resolution, law, statute, regulation, ordinance, judgment, rule, decree or order, of which Purchaser is aware.

          (ii) Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Arizona.

          (iii) Purchaser has all requisite power and authority, has taken all actions required by its organizational documents and applicable laws and has obtained all consents which are

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necessary to authorize or enable it to execute and deliver this Contract and to consummate the transactions contemplated in this Contract. The individual(s) executing this Contract on Purchaser’s behalf have been duly authorized and are empowered to bind Purchaser to this Contract.

     Section 6.02 Purchaser acknowledges that in entering into this Contract, Purchaser has not been induced by and has not relied upon any representations, warranties or statements, whether express or implied, made by Seller or any agent, employee or other representative of Seller or by any broker or any other person representing or purporting to represent Seller, which are not expressly set forth in this Contract, whether or not any such representations, warranties or statements were made in writing or orally.

     Section 6.03 PURCHASER ACKNOWLEDGES AND AGREES THAT PURCHASER IS EXPERIENCED IN THE OWNERSHIP AND OPERATION OF PROPERTIES SIMILAR TO THE PARCEL AND THAT PURCHASER PRIOR TO THE CLOSING DATE WILL HAVE INSPECTED THE PARCEL TO ITS SATISFACTION AND IS QUALIFIED TO MAKE SUCH INSPECTION. PURCHASER ACKNOWLEDGES THAT PURCHASER, PRIOR TO THE CLOSING DATE, WILL HAVE THOROUGHLY INSPECTED AND EXAMINED THE PARCEL TO THE EXTENT DEEMED NECESSARY BY PURCHASER IN ORDER TO ENABLE PURCHASER TO EVALUATE THE CONDITION OF THE PARCEL AND ALL OTHER ASPECTS OF THE PARCEL (INCLUDING, BUT NOT LIMITED TO, THE ENVIRONMENTAL CONDITION OF THE PARCEL), AND PURCHASER ACKNOWLEDGES THAT PURCHASER IS RELYING SOLELY UPON ITS OWN (OR ITS REPRESENTATIVES’) INSPECTION, EXAMINATION AND EVALUATION OF THE PARCEL AND NOT UPON ANY STATEMENTS (ORAL OR WRITTEN) WHICH MAY HAVE BEEN MADE OR MAY BE MADE (OR PURPORTEDLY MADE) BY SELLER OR ANY OF ITS REPRESENTATIVES OTHER THAN THE REPRESENTATIONS AND WARRANTIES OF SELLER AND ACADEMY CONTAINED IN THIS CONTRACT, THE LEASE AND THE CLOSING DOCUMENTS. AS A MATERIAL PART OF THE CONSIDERATION FOR THIS AGREEMENT AND THE PURCHASE PRICE, PURCHASER HEREBY AGREES TO ACCEPT THE PARCEL ON THE CLOSING DATE IN ITS “AS-IS, WHERE IS” CONDITION AND WITH ALL FAULTS, AND WITHOUT REPRESENTATIONS AND WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, OR ARISING BY OPERATION OF LAW, EXCEPT ONLY THE TITLE

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WARRANTIES EXPRESSLY SET FORTH IN THE DEEDS DELIVERED BY SELLER TO PURCHASER ON THE CLOSING DATE AND THE REPRESENTATIONS AND WARRANTIES OF SELLER AND ACADEMY CONTAINED IN THIS AGREEMENT AND IN THE LEASE. THE PURCHASER HEREBY EXPRESSLY ASSUMES ALL RISKS, LIABILITIES, CLAIMS, DAMAGES, AND COSTS (AND AGREES THAT SELLER SHALL NOT BE LIABLE FOR ANY SPECIAL, DIRECT, INDIRECT, CONSEQUENTIAL, OR OTHER DAMAGES) RESULTING OR ARISING FROM OR RELATED TO THE OWNERSHIP, USE, CONDITION, LOCATION, MAINTENANCE, REPAIR OR OPERATION OF THE PARCEL. THE PROVISIONS OF THIS SECTION 6.03 ARE A MATERIAL INDUCEMENT FOR SELLER ENTERING INTO THIS CONTRACT AND SHALL SURVIVE THE CLOSING.

ARTICLE 7. Covenants of Academy; Indemnity for Inspections and Repairs. Section 7.01 Prior to the Closing, Academy shall allow Purchaser and Purchaser’s representatives access to the Parcel for the purposes of inspection, upon reasonable prior notice at reasonable times during business hours. All inspections shall be at the sole risk of Purchaser. Purchaser shall indemnify and hold Seller and Academy harmless from and against any and all claims, demands, injuries, damages, costs, expenses (including reasonable attorney’s fees) or liability incurred by or asserted against Seller or Academy resulting from any of those inspections. If this Contract is terminated for any reason, then within thirty (30) days after termination Purchaser shall repair any damage caused by any of those inspections so as to restore the Parcel to its same condition before the damage. Notwithstanding any provision of this Contract, the indemnity and repair provisions of this Section 7.01 shall survive any termination of this Contract and the limitations on Seller’s remedies under Section 13.02 shall not in any way limit Seller’s or Academy’s enforcement of the provisions of this Section 7.01.

ARTICLE 8. Destruction, Damage or Condemnation.

     Section 8.01 Risk of loss due to damage or destruction or condemnation of the Parcel or any part thereof, shall remain with Seller until legal title passes to Purchaser. In the event of any damage, destruction or condemnation of the Parcel or any portion thereof, Purchaser shall have the option of (i) terminating this Contract, or (ii) accepting title in its damaged or destroyed condition

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whereupon such damage or destruction shall be deemed to have occurred for purposes of the Lease during the term of such Lease (in which event it shall be the obligation of Academy to restore after the closing of title). If Purchaser terminates this Contract pursuant to clause (i) above, neither party under this Contract shall have any obligation to the other and the Downpayment, together with accrued interest (less the Independent Consideration), shall be promptly returned to Purchaser by the Escrow Agent. Notwithstanding the foregoing, in the event of an immaterial damage to the Parcel prior to the Closing, Purchaser shall be required to accept title in accordance with the provisions of clause (ii) of this Section 8.01. For purposes hereof, damage to the Parcel shall be deemed to be “immaterial” if the cost to repair or restore such damage does not exceed $500,000.00 in the aggregate, the estimated time to repair or restore such damage does not exceed 90 days, and Academy cannot abate or offset any payments under the Lease or terminate the Lease.

ARTICLE 9. Conditions Precedent.

     Section 9.01 Purchaser’s obligation to consummate the acquisition of the Parcel pursuant to the terms of this Contract is subject to and conditioned upon the following:

          (a) Each of the representations and warranties made by Seller and Academy in this Contract being true and complete on the Closing Date in all material respects. At the Closing, Seller and Academy shall deliver to Purchaser a certification to this effect, which certificate shall be subject to the survival provisions and other limitations contained in this Contract.

          (b) Seller and Academy shall have performed all obligations that each is required to perform pursuant to the provisions of this Contract.

          (c) The execution and delivery of the Lease and Lease Memorandum for the Parcel.

          (d) No material adverse change shall have occurred between the date hereof and the Closing Date in the financial condition of Academy.

     Section 9.02 Seller’s obligation to consummate the sale of the Parcel pursuant to the terms of this Contract is subject to and conditioned upon the following:

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          (a) Each of the representations and warranties made by Purchaser in this Contract being true and complete on the Closing Date. At the Closing, Purchaser shall deliver to Seller a certification to this effect, which certificate shall provide that it survives the Closing Date.

          (b) Purchaser shall have performed all obligations that it is required to perform pursuant to the provisions of this Contract.

          (c) The execution and delivery of the Lease and Lease Memorandum for the Parcel.

ARTICLE 10. Seller’s and Academy’s Closing Obligations.

     At the Closing, Seller and/or Academy, as applicable, shall deliver the following to Purchaser or to Purchaser’s designee or assignee as directed by Purchaser with respect to the Parcel:

     Section 10.01

          (a) A Special Warranty Deed (or its equivalent) from 44+ Acres in recordable form, conveying to Purchaser indefeasible fee simple title to the 44+ Acres Land, subject only to the Lease and the Permitted Exceptions.

          (b) A Special Warranty Deed (or its equivalent) from Mason in recordable form, conveying to Purchaser indefeasible fee simple title to the Mason Land, subject only to the Lease and the Permitted Exceptions.

     Section 10.02

     An owner policy of title insurance (the “Owner Title Policy”), which Owner Title Policy shall (i) be issued by the Title Company in the form prescribed for use in the State of Texas, (ii) insure good and indefeasible fee simple title to the Parcel in Purchaser in a face amount equal to the Purchase Price, (iii) insure any easements, rights-of-way, licenses or other similar rights or interests appurtenant to or otherwise benefiting the Land to the extent insurable, and (iv) contain no exceptions other than the Lease and Permitted Exceptions. The Owner Title Policy shall, to the extent possible, (A) provide affirmative insurance against mechanics liens by reason of work performed upon or materials delivered to the Parcel prior to Closing or by reason of any other act or omission of Seller, Academy or its agents prior to Closing from which a mechanics lien may arise, and (B) insure access to the Parcel as shown on the survey referred to in Section 10.03 hereof.

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Purchaser may, at Purchaser’s option and expense, cause the Title Company to delete the “survey exception” from the Owner Title Policy without qualification or condition, except as to “any shortages in area.” Purchaser may, at Purchaser’s option and expense, cause the Title Company to provide any endorsements and coverages not contemplated above that Purchaser may desire, to the extent available in the state where the Parcel is located.

     Section 10.03 To the extent not previously provided, six (6) copies of a current ALTA as-built survey of the Land, Building and the appurtenances thereto of the Parcel, to be approved by and certified to Purchaser, Purchaser’s lender and the Title Company and which has been prepared by a Texas registered professional land surveyor reasonably acceptable to Purchaser in accordance with 2005 Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys (the “Survey”). The Survey shall show the location on the Parcel of all improvements, building and set-back lines, fences, evidence of abandoned fences, ponds, creeks, streams, rivers, flood plains and flood prone areas, canals, watercourses, easements, roads, rights-of-way, encroachments and such other exceptions, located on the Parcel or described in the commitment for the Parcel and shall contain a surveyor’s certification in form and substance reasonably acceptable to Purchaser and its lender.

     Section 10.04 A report of searches made of the local and centralized Uniform Commercial Code records where the Parcel is located to a date which is not more than ten (10) days prior to the Closing Date, showing no filings against, or with respect to, the Parcel or any portion thereof, other than those to be released or provided for at Closing.

     Section 10.05 Unless required to be posted at the Parcel, to the extent in Seller’s or Academy’s possession, the original, or a complete and accurate copy, of the current certificate of occupancy or its legal equivalent for the Parcel with all amendments thereto (unless the municipality where the Parcel is located does not issue such certificate or its legal equivalent).

     Section 10.06 The Lease duly executed by Academy, as tenant.

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     Section 10.07 The Lease Memorandum duly executed and acknowledged by Academy, as tenant.

     Section 10.09 A Non-foreign affidavit with respect to Seller as required by IRC Section 1445(b)(2) and the regulations issued thereunder.

     Section 10.09 A certified copy of the Resolutions of the general partner of each Seller, or such other reasonable documentation, evidencing that those officers acting for each of Seller have full authority to consummate the transactions in accordance with the terms of this Contract as modified through the Closing.

     Section 10.10 A certified copy of the Resolutions of the general partner of Academy, or such other reasonable documentation, evidencing that those officers acting for Academy have full authority to consummate the transactions in accordance with the terms of this Contract as modified through the Closing.

     Section 10.11 Such other documents and affidavits as may be reasonably required by this Contract or by the Title Company in order to consummate this transaction and issue the Owner Title Policy to Purchaser, including, without limitation, (a) any satisfactions or like instruments necessary to discharge any of Seller’s Required Removal Items, (b) any lease terminations or like instruments necessary to remove or terminate any leases that encumber the Parcel, and (c) any title affidavits or gap indemnity required by Title Company.

     Section 10.12 Such other instruments, affidavits and documents as are customarily executed by the seller of an interest in real property in connection with the recording of a deed.

     Section 10.13 The certification referred to in Section 9.01(a) for each Seller and Academy.

     Section 10.14 A Bill of Sale from each Seller conveying to Purchaser the Personal Property of each Seller, if any, without warranty of title with respect thereto, and assigning to Purchaser,

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without recourse or warranty, the Permits and all warranties, guaranties, indemnities and other rights which each Seller may have against any manufacturer, seller, engineer, contractor or builder with respect to the Parcel, and the delivery of originals, to the extent available, or copies (to the extent originals are not available) of such documents.

     Section 10.15 A Bill of Sale from Academy conveying to Purchaser the Academy Leasehold Improvements.

     Section 10.16 A subordination, nondisturbance and attornment agreement executed by Academy in a form acceptable to Academy and Purchaser’s lender (the “SNDA”).

     Section 10.17 Copies of any final “as-built” record drawings for the Parcel in the control or possession of Seller or Academy.

ARTICLE 11. Purchaser’s Closing Obligations.

     At the Closing, Purchaser shall deliver the following to Seller or Academy with respect to the Parcel:

     Section 11.01 The Balance of the Purchase Price, as specified in Section 2.01(b).

     Section 11.02 The Lease, duly executed by Purchaser, as landlord.

     Section 11.03 The Lease Memorandum, duly executed and acknowledged by Purchaser.

     Section 11.04 Purchaser’s certification referred to in Section 9.02(a).

     Section 11.05 Such other documents as may be reasonably required by this Contract or by the Title Company.

     Section 11.06 The SNDA executed by Purchaser’s lender and Purchaser.

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ARTICLE 12. Apportionments and Other Payments.

     Section 12.01 There shall be no prorations or apportionments hereunder insofar as Academy, pursuant to the Lease, shall be required to pay all items usually prorated in transactions of the type described herein, including all real property taxes applicable to any period prior to the Closing Date. Rent for the remainder of the month of Closing shall be paid at the Closing pursuant to the Lease. Academy hereby acknowledges that, from and after Closing, it shall continue to be liable for all taxes, construction costs and all other expenses and charges relating to the operation of the Parcel accruing prior to Closing, and, as the tenant under the Lease, will assume all such payment obligations commencing at Closing and for items accruing on and after the Closing in accordance with the terms of the Lease.

     Section 12.02 Except as otherwise provided by the last two sentences of this Section 12.02, Seller shall pay the cost of (i) all documents to be delivered to Purchaser pursuant to this Contract and (ii) all Closing costs, including, without limitation, the title insurance premium and the services provided by the Title Company (except as otherwise set forth herein and excluding endorsements required by Purchaser pursuant to the last sentence of Section 10.02, but including any endorsements obtained by Seller to cure a title objection or to provide coverages otherwise contemplated by Section 10.02), survey charges, stamp taxes, transfer taxes, and all other fees relating to the granting, executing and recording of the deed described in Section 10.01 above. Purchaser shall pay the expenses incident to obtaining financing for the acquisition of the Parcel, including the premium for the mortgagee title policies and the cost of endorsements to the Owner Title Policy required by Purchaser pursuant to the last sentence of Section 10.02 (but excluding any endorsements obtained by Seller to cure a title objection or to provide coverages otherwise contemplated by Section 10.02). Each party shall pay its own legal fees incidental to the execution of this Contract and the consummation of the transactions contemplated hereby.

     Section 12.03 The provisions of this Article 12 shall survive the Closing or earlier termination of this Contract in accordance with the terms hereof.

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ARTICLE 13. Termination and Remedies.

     Section 13.01 In the event that any of Seller’s or Academy’s representations or warranties contained herein are untrue at Closing or if Seller or Academy shall have failed to have performed any of the covenants and/or agreements contained herein which are to be performed by Seller or Academy, or if any of the conditions precedent to Purchaser’s obligation to consummate the transactions contemplated hereby shall have failed to occur, Purchaser may, as its sole and exclusive remedies, (i) terminate this Contract in its entirety by giving written notice of termination to Seller, in which event the Downpayment, together with accrued interest (less the Independent Consideration), shall be promptly returned to Purchaser by the Escrow Agent, neither party shall have any further rights or liabilities under this Contract except that Purchaser and Seller shall continue to remain liable under the indemnification provisions of Section 14.01 or (ii) seek to enforce specific performance of this Contract. Notwithstanding the foregoing, if specific performance is unavailable as a remedy to Purchaser because of Seller’s or Academy’s affirmative acts, Purchaser shall be entitled to pursue all rights and remedies available at law or in equity. The foregoing provisions shall not limit any rights or remedies that Purchaser may have after Closing under any provisions of this Contract that survive Closing.

     Section 13.02 In the event Purchaser shall default in the performance of its obligations to purchase the Parcel and to make all payments to Seller required hereunder, Seller, as Seller’s sole remedy, shall have the right to receive and retain the Downpayment and all interest and other sums earned thereon as liquidated damages for all loss, damage and expense suffered by Seller, including, without limitation, the loss of its bargain, and neither party shall have any further rights or liabilities under this Contract except that Purchaser and Seller shall continue to remain liable under the indemnification provisions of Section 14.01 and Purchaser shall continue to remain liable under the provisions of Section 3.02(b), Section 3.02(c) and Section 7.01.

ARTICLE 14. Broker.

     Section 14.01 Seller and Purchaser represent and warrant to each other that they know of no broker who has claimed or may have the right to claim a commission in connection with this transaction, except (i) Jeff Hughes of Stan Johnson Company (the “Seller Broker”) to which Seller

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agrees to pay a commission pursuant to a separate agreement between Seller and the Seller Broker and (ii) Gill Warner of Stan Johnson Company (the “ Purchaser Broker”) to which Purchaser agrees to pay a commission pursuant to a separate agreement between Purchaser and the Purchaser Broker. Each party hereby indemnifies and agrees to save the other harmless of and from all loss, cost, liability and expense, including reasonable attorney’s fees, arising out of the breach by the other of the representations and warranties contained in this Section 14.01. The provisions of this Section 14.01 shall survive the Closing or, if the Closing does not occur for any reason, shall survive the termination of this Contract.

ARTICLE 15. Notices.

     Section 15.01 All notices required or desired to be given under this Contract shall be in writing and shall be sent by Federal Express (or other national or regional overnight courier which provides evidence of delivery), addressed to the other party at its address set forth on page 1 of this Contract, with a copy thereof to be sent in the manner herein provided, addressed to the attorneys for the other party, or at such other addresses as shall be designated by Seller or Purchaser by notice given in the manner herein provided. Any notice executed by Drenner & Golden Stuart Wolff LLP 301 Congress Avenue, Suite 1200, Austin, Texas 78701, attorneys for Academy, shall have the same force and effect as though signed by the principal. A copy of all notices given to Seller or Academy shall be given to Drenner & Golden Stuart Wolff LLP, Attn: David A. Wolff, at the foregoing address. Any notice executed by Kutak Rock LLP, 8601 N. Scottsdale Road, Suite 300, Scottsdale, Arizona 85253, attorneys for Purchaser, shall have the same force and effect as though signed by the principal. A copy of all notices given to Purchaser shall be given to Kutak Rock LLP, Attn: Mitch Padover, at the foregoing address. Any such notice shall be deemed given on the date it is delivered to the correct address.

ARTICLE 16. Miscellaneous.

     Section 16.01 This Contract may be executed in any number of counterparts which together shall constitute the agreement of the parties. Further, a photographic, photostatic, facsimile or other reproduction of a signature to this Contract, when delivered to evidence the actual execution of this Contract by a party hereto, shall be deemed to be the execution of this Contract by such party. The

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section headings herein contained are for purposes of identification only and shall not be considered in construing this Contract.

     Section 16.02 This Contract embodies and constitutes the entire understanding between the parties with respect to the transaction contemplated herein, and all prior agreements, understandings, representations and statements, oral or written, are merged into this Contract. Neither this Contract nor any provisions hereof may be waived, modified, amended, discharged or terminated except by an instrument signed by the party against whom the enforcement of such waiver, modification, amendment, discharge or termination is sought, and then only to the extent set forth in such instrument.

     Section 16.03 This Contract shall be governed by Texas law.

     Section 16.04 This Contract and the terms and provisions hereof shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, personal representatives, successors and permitted assigns. Purchaser cannot assign this Contract to any other person or entity (other than to an affiliate of Purchaser or a real state investment trust sponsored by an affiliate of Purchaser) without the prior written consent of Seller, and in the event of such permitted assignment by Purchaser, Purchaser shall remain liable for all of Purchaser’s obligations under this Contract. The representations and warranties of Seller and Academy in this Contract shall inure to the benefit of and be binding upon the parties hereto, the Purchaser, any subsequent owners of the Parcel and Purchaser’s lender.

     Section 16.05 This Contract is executed by the authorized representatives of the parties, not individually, but solely on behalf of such parties. All persons dealing with any party must look solely to the assets of such party for the enforcement of any claim against it. The obligations hereunder are not binding upon, nor shall resort be had to the private property of any of the directors, officers, partners, shareholders, advisors, employees or agents of Purchaser or Seller. Any Trustee executing this Contract in a trust capacity shall be liable hereunder solely in such capacity.

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     Section 16.06 In the event any portion of this Contract shall be declared by any court of competent jurisdiction to be invalid, illegal or unenforceable, such portion shall be deemed severed from this Contract and the remaining parts hereof shall remain in full force and effect, as fully as though such invalid, illegal or unenforceable portion had never been part of this Contract.

     Section 16.07 If it shall be necessary for either Purchaser or Seller (or Academy) to employ an attorney to enforce its rights pursuant to this Contract (or defend any such enforcement), the non-prevailing party shall reimburse the prevailing party for reasonable attorneys fees.

     Section 16.08 Time is important to each of Seller, Purchaser and Academy in the performance of this Contract, and each party has agreed that strict compliance is required as to any date set out herein. If the final date of any period which is set out in any paragraph of this Contract falls upon a Saturday, Sunday or legal holiday under the laws of the United States or the State of Texas, then, and in such event, the time of such period shall be extended to the next day which is not a Saturday, Sunday or legal holiday.

     Section 16.09 Whenever the term or phrase “effective date hereof” or “date hereof” (or other similar phrases describing the date this Contract becomes binding on Seller, Purchaser and Academy) are used in this Contract, such terms or phrases shall mean and refer to the date on which a counterpart or counterparts of this agreement executed by Seller, Purchaser and Academy are deposited with the Title Company.

     Section 16.10 All exhibits attached hereto are incorporated herein by this reference for all purposes.

     Section 16.11 Seller and Academy acknowledge that Purchaser may elect to assign all of its right, title and interest in and to this Contract to a company that is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (“Registered Company”), promoted by the Purchaser or to an affiliate of a Registered Company (a “Registered Company Affiliate”). In the event Purchaser’s assignee under this Contract is a Registered Company or a Registered Company Affiliate, the Registered Company will be required to make certain filings with

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the U.S. Securities and Exchange Commission required under SEC Rule 3-14 of Regulation S-X (the “SEC Filings”) that relate to the most recent pre-acquisition fiscal year (the “Applicable Fiscal Year”) for the Parcel. In such event, to assist the Registered Company with the preparation of the SEC Filings, Seller and Academy agree to reasonably cooperate with Purchaser and the Registered Company in providing or otherwise making available non-proprietary financial information in Seller’s or Academy’s possession or control regarding the operation of the Parcel for the Applicable Fiscal Year requested by Purchaser, the Registered Company, and/or Purchaser’s or the Registered Company’s auditors (“SEC Filing Information”), it being agreed however, that the delivery of such information shall not be deemed a condition to Closing. Such information may include, but is not limited to, bank statements in Seller’s or Academy’s possession or control, operating statements, general ledgers, cash receipts schedules, invoices for expenses and capital improvements, insurance documentation, and accounts receivable aging related to the Parcel, but shall not include any information concerning the operation of Academy’s retail business. Upon receipt of written notice from Purchaser prior to the expiration of the Due Diligence Period, Seller and Academy shall use good faith efforts to promptly deliver the SEC Filing Information requested by Purchaser, the Registered Company and/or Purchaser’s or Registered Company’s auditors, and Seller and Academy agree to cooperate with Purchaser, the Registered Company and Purchaser’s or the Registered Company’s auditors regarding any reasonable inquiries by Purchaser, the Registered Company and Purchaser’s or the Registered Company’s auditors concerning any SEC Filing Information, including delivery by Seller and Academy of an executed representation letter prior to the Closing Date in form and substance requested by Purchaser’s or the Registered Company’s auditors and reasonably acceptable to Seller and Academy and their respective counsel (“SEC Filings Letter”). A sample SEC Filings Letter is attached to the Contract as Exhibit 3; however, Purchaser’s and/or the Registered Company’s auditors may require additions and/or revisions to such letter following review of the SEC Filing Information provided by Seller and Academy. The SEC Filing Information provided by Seller and Academy shall be subject to a confidentiality agreement; however, Seller and Academy consent to the disclosure of such SEC Filing Information that is required to be disclosed in any SEC Filings by the Registered Company. Purchaser shall reimburse Seller and Academy for the reasonable costs of Seller and Academy associated with providing SEC Filing Information. The provisions of this Section 16.11 shall survive the Closing for a period of one (1) year.

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(Signatures to Follow)

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     IN WITNESS WHEREOF, the parties hereto have executed this Contract as of the date first above written.

PURCHASER:
	SERIES D, LLC, an Arizona limited liability company
		By:
			Name: John M. Pons
			Its: Authorized Officer

(Signatures Continue on Next Page)

(Signatures Continued from Previous Page)

SELLER:
	44.385 ACRES, LTD., a Texas limited partnership
	By:	44.385 GP, L.L.C. a Delaware limited liability company, its general partner
		By:
			Name:
			Its:
	MASON MSG, LTD., a Texas limited partnership
	By:	FRANZ MSG, INC., a Texas corporation, its general partner
		By:
			Name:
			Its:
	LESSEE:
	ACADEMY, LTD., a Texas limited partnership
	By:	Academy Managing Co., L.L.C., a Texas limited liability company, its General Partner
		By:
			Name:
			Its:

EXHIBIT 1-A

Legal Description of 44+ Acres Land

All of Restricted Reserve “A”, in Block One (1) of ACADEMY WAREHOUSE AND DISTRIBUTION CENTER, a SUBDIVISION in Harris County, Texas, according to the map or plat thereof recorded under Film Code No. 505041 of the Map Records of Harris County, Texas.

EXHIBIT 1-B

Legal Description of Mason Land

     The tracts or parcels containing (i) approximately 19.046 acres, as described in that certain instrument filed in the Official Public Records of Harris County under Clerk’s File Number S238325, (ii) approximately 14.489 acres, as described in that certain instrument filed in the Official Public Records of Harris County under Clerk’s File Number U165826, (iii) approximately 10.739 acres, as described in that certain instrument filed in the Official Public Records of Harris County under Clerk’s File Number U979888, and (iv) approximately 5.0876 acres, as described in that certain instrument filed in the Official Public Records of Harris County under Clerk’s File Number X953121.

EXHIBIT 2

Form of Lease

EXHIBIT 3

FORM of SEC Compliance Letter

     We are providing this letter in connection with your audit of the historical records of certain revenues and certain expenses of [property name], located at [property address] (the “Property”) for the purpose of expressing an opinion as to whether the historical records presents fairly, in all material respects, certain revenues and certain expenses for the year ended December 31, ___ of the Property on the basis of cash receipts and disbursements.

     We confirm, to the best of our knowledge and belief, the following representations made to you during your audit:

i.	We have made available to you all requested financial records and corresponding data relating to the use and operation of the Property.
ii.	[We have no knowledge of any fraud or suspected fraud affecting the use or operation of the Property involving (1) management, (2) employees or (3) others where the fraud could have a material effect on the financial statements.]
iii.	We have no knowledge of any allegations of fraud or suspected fraud affecting the use or operation of the Property received in communications from employees, former employees, analysts, regulators, short sellers, or others.
iv.	There are no unasserted claims or assessments relating to the use or operation of the Property that legal counsel has advised us are probable of assertion and must be disclosed in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies.
v.	No events relating to the use or operation of the Property have occurred subsequent to December 31, ___ that require consideration as adjustments to or disclosures in the financial records.

MASON MSG, LTD., a Texas limited partnership			44.385 ACRES, LTD., a Texas limited partnership
By:	FRANZ MSG, INC., a Texas corporation, its general partner		By:	44.385 GP, L.L.C. a Delaware limited liability company, its general partner
	By:			By:
		Name:			Name:
		Its:			Its:
ACADEMY, LTD., a Texas limited partnership
By:	Academy Managing Co., L.L.C., a Texas limited liability company, its General Partner
	By:
		Name:
		Its:

EXHIBIT 4

Academy Leasehold Improvements

Academy distribution center and office leasehold improvements relating to the Leased Premises such as, but not limited to, the following:

Bathroom fixtures
Carpeting
Ceiling assets
Concrete
Curbs
Dock doors
Doors
Drainage systems
Ductwork
Electrical assets
Elevators
Fencing
HVAC
Kitchen fixtures
Lighting
Mezzanines
Pavement
Plumbing assets
Roofing assets
Sheetrock
Signage
Sprinkler systems
Stairs
Water heaters
Windows

Ex 3 - 1

EX-10.10

Exhibit 10.10

MERS MIN: 8000101-0000004477-5

LOAN AGREEMENT

Dated as of January 18, 2007

Between

COLE AS KATY TX, LP,
as Borrower

and

BEAR STEARNS COMMERCIAL MORTGAGE, INC.,
as Lender

TABLE OF CONTENTS

	Page
I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION		1
Section 1.1 Definitions		1
Section 1.2 Principles of Construction		24
II. GENERAL TERMS		24
Section 2.1 Loan Commitment; Disbursement to Borrower		24
Section 2.2 Interest Rate		25
Section 2.3 Loan Payment		26
Section 2.4 Prepayments		27
Section 2.5 Defeasance		28
Section 2.6 Release of Property		31
Section 2.7 Cash Management		32
Section 2.8 Release of Out Parcel		34
III. CONDITIONS PRECEDENT		34
Section 3.1 Conditions Precedent to Closing		34
IV. REPRESENTATIONS AND WARRANTIES		38
Section 4.1 Borrower Representations		38
Section 4.2 Survival of Representations		46
V. BORROWER COVENANTS		46
Section 5.1 Affirmative Covenants		46
Section 5.2 Negative Covenants		55
VI. INSURANCE; CASUALTY; CONDEMNATION; REQUIRED REPAIRS		61
Section 6.1 Insurance		61
Section 6.2 Casualty		65
Section 6.3 Condemnation		65
Section 6.4 Restoration		66
VII. RESERVE FUNDS		70
Section 7.1 Required Repairs		70
Section 7.2 Tax and Insurance Escrow Fund		71
Section 7.3 Replacements and Replacement Reserve		72
Section 7.4 Excess Cash Reserve Fund		76
Section 7.5 Reserve Funds, Generally		77
VIII. DEFAULTS		78
Section 8.1 Event of Default		78
Section 8.2 Remedies		80
Section 8.3 Remedies Cumulative; Waivers		81
IX. SPECIAL PROVISIONS		81
Section 9.1 Securitization		81
Section 9.2 Securitization		82
Section 9.3 Exculpation		83
Section 9.4 Matters Concerning Manager		85
Section 9.5 Servicer		85
Section 9.6 Splitting the Loan		85
X. MISCELLANEOUS		86
Section 10.1 Survival		86

	Page
Section 10.2 Lender’s Discretion		86
Section 10.3 Governing Law		86
Section 10.4 Modification, Waiver in Writing		86
Section 10.5 Delay Not a Waiver		86
Section 10.6 Notices		87
Section 10.7 Trial by Jury		87
Section 10.8 Headings		88
Section 10.9 Severability		88
Section 10.10 Schedules Incorporated		90
Section 10.11 Offsets, Counterclaims and Defenses		90
Section 10.12 No Joint Venture or Partnership; No Third Party Beneficiaries		90
Section 10.13 Publicity		90
Section 10.14 Waiver of Marshalling of Assets		91
Section 10.15 Waiver of Counterclaim		91
Section 10.16 Conflict; Construction of Documents; Reliance		91
Section 10.17 Brokers and Financial Advisors		91
Section 10.18 Prior Agreements		91
Section 10.19 Joint and Several Liability		92
Section 10.20 Certain Additional Rights of Lender (VCOC)		92

SCHEDULES

Schedule I	–	Rent Roll
Schedule II	–	Required Repairs — Deadlines for Completion
Schedule III	–	Intentionally Deleted
Schedule IV	–	Tenant Direction Letter
Schedule V	–	Identified Affiliates
Schedule VI	–	Out Parcel Release Conditions

LOAN AGREEMENT

     THIS LOAN AGREEMENT, dated as of January 18, 2007 (as amended, restated, replaced, supplemented or otherwise modified from time to time, this “Agreement”), between BEAR STEARNS COMMERCIAL MORTGAGE, INC., a New York corporation, having an address at 383 Madison Avenue, New York, New York 10179 (“Lender”) and COLE AS KATY TX, LP, a Delaware limited partnership, having its principal place of business at 2555 E. Camelback Road, Ste. 400, Phoenix, Arizona 85016 (“Borrower”).

W I T N E S S E T H:

     WHEREAS, Borrower desires to obtain the Loan (as hereinafter defined) from Lender; and

     WHEREAS, Lender is willing to make the Loan to Borrower, subject to and in accordance with the terms of this Agreement and the other Loan Documents (as hereinafter defined).

     NOW THEREFORE, in consideration of the making of the Loan by Lender and the covenants, agreements, representations and warranties set forth in this Agreement, the parties hereto hereby covenant, agree, represent and warrant as follows:

     I. DEFINITIONS; PRINCIPLES OF CONSTRUCTION.

     Section 1.1 Definitions.

     For all purposes of this Agreement, except as otherwise expressly required or unless the context clearly indicates a contrary intent:

     “Academy” shall mean Academy, LTD., a Texas limited partnership.

     “Academy Lease” shall mean that certain Lease, dated January 18, 2007, between Borrower, as landlord, and Academy, as tenant, as the same has been previously amended and may be further amended, substituted or replaced (but only to the extent permitted under this Agreement).

     “Accrued Interest” shall have the meaning set forth in Section 2.3.2 hereof.

     “actual knowledge” shall mean, with respect to Borrower, the conscious awareness of facts or other information by Borrower after inquiry reasonable for an institutional owner of properties similar to the Property.

     “Additional Insolvency Opinion” shall mean any subsequent Insolvency Opinion.

     “Affiliate” shall mean, as to any Person, any other Person that, directly or indirectly, is in Control of, is Controlled by or is under common Control with such Person.

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     “Affiliated Loans” shall mean a loan made by Lender to an Affiliate of Borrower or Guarantor.

     “Affiliated Manager” shall mean any Manager that is an Affiliate of Borrower or Guarantor.

     “Agent” shall have the meaning set forth in Section 2.7.2 hereof.

     “Agreement” shall mean this Loan Agreement, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

     “ALTA” shall mean American Land Title Association, or any successor thereto.

     “Annual Budget” shall mean the operating budget, including all planned Capital Expenditures, for the Property prepared by Borrower in accordance with Section 5.1.11 hereof for the applicable Fiscal Year or other period.

     “Anticipated Repayment Date” shall mean February 1, 2017.

     “Applicable Interest Rate” shall mean (i) prior to the Anticipated Repayment Date, the Initial Interest Rate and (ii) on and after the Anticipated Repayment Date, the Revised Interest Rate.

     “Approved Annual Budget” shall have the meaning set forth in Section 5.1.11 hereof.

     “Assignment of Leases” shall mean that certain first priority Assignment of Leases and Rents, dated as of the date hereof, from Borrower, as assignor, to Mortgage Electronic Registration Systems, Inc., as nominee of Lender, as assignee, assigning to Lender all of Borrower’s interest in and to the Leases and Rents of the Property as security for the Loan, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

     “Award” shall mean any compensation paid or payable to Borrower by any Governmental Authority in connection with a Condemnation in respect of all or any part of the Property.

     “Bankruptcy Action” shall mean with respect to any Person (a) such Person filing a voluntary petition under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law; (b) the filing of an involuntary petition against such Person under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law, in which such Person colludes with, or otherwise assists such Person, or cause to be solicited petitioning creditors for any involuntary petition against such Person; (c) such Person filing an answer consenting to or otherwise acquiescing in or joining in any involuntary petition filed against it, by any other Person under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law; (d) such Person consenting to or acquiescing in or joining in an application for the appointment of a custodian, receiver, trustee, or examiner for such Person or any portion of the Property; (e) such Person making an assignment for the benefit of creditors, or admitting, in writing or in any legal proceeding, its insolvency or inability to pay its debts as they become due.

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     “Bankruptcy Code” shall mean Title 11 of the United States Code, 11 U.S.C. §101, et seq., as the same may be amended from time to time, and any successor statute or statutes and all rules and regulations from time to time promulgated thereunder, and any comparable foreign laws relating to bankruptcy, insolvency or creditors’ rights or any other Federal or state bankruptcy or insolvency law.

     “Basic Carrying Costs” shall mean the sum of the following costs associated with the Property for the relevant Fiscal Year or payment period: (a) Taxes, (b) Other Charges and (c) Insurance Premiums.

     “Borrower” shall have the meaning set forth in the introductory paragraph hereto, together with its successors and permitted assigns.

     “Business Day” shall mean any day other than a Saturday, Sunday or any other day on which national banks in New York, New York, or the place of business of any Servicer are not open for business.

     “Capital Expenditures” shall mean, for any period, the amount expended for items capitalized under GAAP (or another basis of accounting acceptable to Lender and consistently applied)(including expenditures for building improvements or major repairs, leasing commissions and tenant improvements).

     “Cash Management Account” shall have the meaning set forth in Section 2.7.2 hereof.

     “Cash Management Termination Event” shall mean (a) in the event the Cash Management Trigger is caused by (ii) of the Cash Management Trigger definition, Borrower has cured such Event of Default to the reasonable satisfaction of Lender, or (b) in the event the Cash Management Trigger is caused by (iv) of the Cash Management Trigger definition, (x) if the Tenant resumes operating its business at the Property or (y) Lender’s receipt of (a) one or more new leases entered into in accordance with the terms of this Agreement (the “New Leases”) with one or more tenants reasonably acceptable to Lender (the “New Tenants”) pursuant to which the New Tenants have leased space for a term which is at least as long as the remaining term of the Academy Lease if the Academy Lease was then in effect, on similar terms and at a similar rent as provided for in the Academy Lease and (b) tenant estoppels reasonably acceptable to Lender from the New Tenants confirming that (i) the New Leases are in full force and effect, (ii) to the New Tenants’ knowledge, neither Borrower nor the New Tenants are in default under the New Leases, (iii) the New Tenants are in occupancy of substantially all of the premises demised under the New Leases, and (iv) the New Tenants are open for business in substantially all of the premises demised under the New Leases and are paying rent without any right to offset or credit, provided, however, there shall not be more than two (2) Cash Management Termination Events during the term of the Loan.

     “Cash Management Trigger” shall mean (i) if the Loan has not been repaid on or before the Payment Date that is one (1) calendar month prior to the Anticipated Repayment Date (ii) an Event of Default has occurred, (iii) the bankruptcy or insolvency of Borrower, the Property Manager or Tenant, or (iv) Tenant ceases to operate its business at the Property.

     “Casualty” shall have the meaning set forth in Section 6.2 hereof.

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     “Casualty Consultant” shall have the meaning set forth in Section 6.4(b)(iii) hereof.

     “Casualty Retainage” shall have the meaning set forth in Section 6.4(b)(iv) hereof.

     “Clearing Account” shall have the meaning set forth in Section 2.7.1 hereof.

     “Clearing Bank” shall have the meaning set forth in Section 2.7.1 hereof.

     “Clearing Bank Agreement” shall have the meaning set forth in Section 2.7.1 hereof.

     “Closing Date” shall mean the date of the funding of the Loan.

     “Code” shall mean the Internal Revenue Code of 1986, as amended, as it may be further amended from time to time, and any successor statutes thereto, and applicable U.S. Department of Treasury regulations issued pursuant thereto in temporary or final form.

     “Condemnation” shall mean a temporary or permanent taking by any Governmental Authority as the result or in lieu or in anticipation of the exercise of the right of condemnation or eminent domain, of all or any part of the Property, or any interest therein or right accruing thereto, including any right of access thereto or any change of grade affecting the Property or any part thereof.

     “Condemnation Proceeds” shall have the meaning set forth in Section 6.4(b).

     “Consent Regarding Management Agreement” shall mean that certain Consent and Agreement, dated as of the date hereof, among Lender, Borrower and Manager, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

     “Control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management, policies or activities of a Person, whether through ownership of voting securities, by contract or otherwise. “Controlled” and “Controlling” shall have correlative meanings.

     “Debt” shall mean the outstanding principal amount set forth in, and evidenced by, this Agreement and the Note together with all interest accrued and unpaid thereon and all other sums (including the Defeasance Payment Amount, any Yield Maintenance Premium and any Yield Maintenance Default Premium) due to Lender in respect of the Loan under the Note, this Agreement, the Mortgage or any other Loan Document.

     “Debt Service” shall mean, with respect to any particular period of time, scheduled principal and interest payments due under this Agreement and the Note.

     “Debt Service Coverage Ratio” shall mean a ratio for the applicable period in which:

          (a) the numerator is the Net Operating Income (excluding interest on credit accounts and using annualized operating expenses for any recurring expenses not paid monthly (e.g., Taxes and Insurance Premiums)) for such period as set forth in the statements required hereunder, without deduction for (i) actual management fees incurred in connection with the

4

operation of the Property, or (ii) amounts paid to the Reserve Funds, less (A) management fees equal to the greater of (1) assumed management fees of three percent (3.0%) of Gross Income from Operations or (2) the actual management fees incurred, and (B) assumed annual Replacement Reserve Fund contributions equal to $0.10 per square foot of gross leasable area at the Property and (C) Rollover Reserve Fund contributions equal to $0.16 per square foot of gross leaseable area; and

          (b) the denominator is the aggregate amount of principal and interest due and payable on the then outstanding principal balance of the Note for such period.

     “Debt Service Coverage Ratio Determination Date” shall mean the date that Lender determines the Debt Service Coverage Ratio in accordance with this Agreement.

     “Default” shall mean the occurrence of any event hereunder or under any other Loan Document which, but for the giving of notice or passage of time, or both, would be an Event of Default.

     “Default Rate” shall mean, with respect to the Loan, a rate per annum equal to the lesser of (a) the maximum rate permitted by applicable law or (b) four percent (4%) above the Applicable Interest Rate.

     “Defeasance Date” shall have the meaning set forth in Section 2.5.1(a)(i) hereof.

     “Defeasance Deposit” shall mean an amount equal to the remaining principal amount of the Note, the Defeasance Payment Amount, and any costs and expenses incurred or to be incurred in the purchase of U.S. Obligations necessary to meet the Scheduled Defeasance Payments and any revenue, documentary stamp or intangible taxes or any other tax or charge due in connection with the transfer of the Note or otherwise required to accomplish the agreements of Sections 2.4 and 2.5 hereof (including, without limitation, any fees and expenses of accountants, attorneys and the Rating Agencies incurred in connection therewith).

     “Defeasance Event” shall have the meaning set forth in Section 2.5.1(a) hereof.

     “Defeasance Expiration Date” shall mean the date that is two (2) years from the “startup day” within the meaning of Section 860G(a)(9) of the Code for the REMIC Trust.

     “Defeasance Payment Amount” shall mean the amount (if any) which, when added to the remaining principal amount of the Note, will be sufficient to purchase U.S. Obligations providing the required Scheduled Defeasance Payments.

     “Disclosure Document” shall have the meaning set forth in Section 9.2 hereof.

     “Eligible Account” shall mean a separate and identifiable account from all other funds held by the holding institution that is either (a) an account or accounts maintained with a federal or state-chartered depository institution or trust company which complies with the definition of Eligible Institution or (b) a segregated trust account or accounts maintained with a federal or state chartered depository institution or trust company acting in its fiduciary capacity which, in the case of a state chartered depository institution or trust company, is subject to regulations

5

substantially similar to 12 C.F.R. §9.10(b), having in either case a combined capital and surplus of at least Fifty Million and 00/100 Dollars ($50,000,000.00) and subject to supervision or examination by federal and state authority. An Eligible Account will not be evidenced by a certificate of deposit, passbook or other instrument.

     “Eligible Institution” shall mean a depository institution or trust company insured by the Federal Deposit Insurance Corporation, the short term unsecured debt obligations or commercial paper of which are rated at least “A-1+” by S&P, “P-1” by Moody’s and “F-1+” by Fitch in the case of accounts in which funds are held for thirty (30) days or less (or, in the case of accounts in which funds are held for more than thirty (30) days, the long-term unsecured debt obligations of which are rated at least “AA” by Fitch and S&P and “Aa2” by Moody’s).

     “Embargoed Person” shall have the meaning set forth in Section 5.1.23 hereof.

     “Environmental Indemnity” shall mean that certain Environmental Indemnity Agreement, dated as of the date hereof, executed by Borrower in connection with the Loan for the benefit of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and the rulings issued thereunder.

     “Event of Default” shall have the meaning set forth in Section 8.1(a) hereof.

     “Excess Cash Flow” shall have the meaning set forth in Section 2.7.2 hereof.

     “Excess Cash Reserve Account” shall have the meaning set forth in Section 7.4 hereof.

     “Excess Cash Reserve Fund” shall have the meaning set forth in Section 7.4 hereof.

     “Exchange Act” shall have the meaning set forth in Section 9.2 hereof.

     “Extraordinary Expense” shall have the meaning set forth in Section 5.1.11 hereof.

     “Fiscal Year” shall mean each twelve (12) month period commencing on January 1 and ending on December 31 during each year of the term of the Loan.

     “Fitch” shall mean Fitch, Inc.

     “GAAP” shall mean generally accepted accounting principles in the United States of America as of the date of the applicable financial report.

     “Governmental Authority” shall mean any court, board, agency, commission, office or other authority of any nature whatsoever for any governmental unit (foreign, federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence.

     “Gross Income from Operations” shall mean, for any period, all income, computed in accordance with the GAAP (or another basis of accounting acceptable to Lender and consistently

6

applied), derived from the ownership and operation of the Property from whatever source during such period, including, but not limited to, Rents from Tenants in occupancy, open for business and paying full contractual rent without right of offset or credit, utility charges, escalations, forfeited security deposits, interest on credit accounts, service fees or charges, license fees, parking fees, rent concessions or credits, business interruption or other loss of income or rental insurance proceeds or other required pass-throughs and interest on Reserve Accounts, if any, but excluding Rents from month-to-month Tenants or Tenants that are included in any Bankruptcy Action, sales, use and occupancy or other taxes on receipts required to be accounted for by Borrower to any Governmental Authority, refunds and uncollectible accounts, sales of furniture, fixtures and equipment, Insurance Proceeds (other than business interruption or other loss of income or rental insurance), Awards, unforfeited security deposits, utility and other similar deposits and any disbursements to Borrower from the Reserve Funds, if any. Gross income shall not be diminished as a result of the Mortgage or the creation of any intervening estate or interest in the Property or any part thereof.

     “Guarantor” shall mean Cole Operating Partnership II, LP, a Delaware limited partnership.

     “Identified Affiliates” shall have the meaning set forth on Schedule V hereof.

     “Improvements” shall have the meaning set forth in the granting clause of the Mortgage.

     “Indebtedness” of a Person, at a particular date, means the sum (without duplication) at such date of (a) all indebtedness or liability of such Person (including, without limitation, amounts for borrowed money and indebtedness in the form of mezzanine debt or preferred equity); (b) obligations evidenced by bonds, debentures, notes, or other similar instruments; (c) obligations for the deferred purchase price of property or services (including trade obligations); (d) obligations under letters of credit; (e) obligations under acceptance facilities; (f) all guaranties, endorsements (other than for collection or deposit in the ordinary course of business) and other contingent obligations to purchase, to provide funds for payment, to supply funds, to invest in any Person or entity, or otherwise to assure a creditor against loss; and (g) obligations secured by any Liens, whether or not the obligations have been assumed (other than the Permitted Encumbrances).

     “Indemnity” shall mean that certain Indemnity Agreement, dated as of the date hereof, executed and delivered by Borrower and Guarantor in connection with the Loan to and for the benefit of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

     “Independent Director” shall mean a director of a corporation or limited liability company who is not at the time of initial appointment, or at any time while serving as an independent director of such an entity, and has not been at any time during the preceding five (5) years: (a) a stockholder, director (with the exception of serving as the independent director), officer, employee, partner, attorney or counsel of the Borrower or any Affiliate of either of them; (b) a customer, supplier or other person who derives any of its purchases or revenues from its activities with the Borrower or any Affiliate of either of them; (c) a Person controlling or under common control with any such stockholder, director, officer, partner, customer, supplier or other

7

Person; or (d) a member of the immediate family of any such stockholder, director, officer, employee, partner, customer, supplier or other person. As used in this definition, the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of management, policies or activities of a Person, whether through ownership of voting securities, by contract or otherwise.

     “Independent Manager” shall mean a manager of a limited liability company who is not at the time of initial appointment, or at any time while serving as an independent manager of such an entity, and has not been at any time during the preceding five (5) years: (a) a stockholder, director (with the exception of serving as an independent director), manager (with the exception of serving as an independent manager), officer, employee, partner, attorney or counsel of the Borrower or any Affiliate of either of them; (b) a customer, supplier or other person who derives any of its purchases or revenues from its activities with the Borrower or any Affiliate of either of them; (c) a Person controlling or under common control with any such stockholder, director, manager, officer, partner, customer, supplier or other Person; or (d) a member of the immediate family of any such stockholder, director, manager, officer, employee, partner, customer, supplier or other person. As used in this definition, the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of management, policies or activities of a Person, whether through ownership of voting securities, by contract or otherwise.

     “Initial Interest Rate” shall mean a rate of five and 606/1000 percent (5.6060%) per annum.

     “Insolvency Opinion” shall mean a non-consolidation opinion letter to be delivered by Greenberg Traurig, LLP in connection with the Loan and pursuant to the terms of this Agreement.

     “Insurance Premiums” shall have the meaning set forth in Section 6.1(b) hereof.

     “Insurance Proceeds” shall have the meaning set forth in Section 6.4(b) hereof.

     “Lease” shall mean any lease, sublease or subsublease, letting, license, concession or other agreement (whether written or oral and whether now or hereafter in effect) pursuant to which any Person is granted a possessory interest in, or right to use or occupy all or any portion of any space in the Property, and every modification, amendment or other agreement relating to such lease, sublease, subsublease, or other agreement entered into in connection with such lease, sublease, subsublease, or other agreement and every guarantee of the performance and observance of the covenants, conditions and agreements to be performed and observed by the other party thereto.

     “Legal Requirements” shall mean, all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities affecting the Property or any part thereof, or the construction, use, alteration or operation thereof, or any part thereof, whether now or hereafter enacted and in force, and all permits, licenses and authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments,

8

either of record or known to Borrower, at any time in force affecting the Property or any part thereof, including, without limitation, any which may (a) require repairs, modifications or alterations in or to the Property or any part thereof, or (b) in any way limit the use and enjoyment thereof.

     “Lender” shall have the meaning set forth in the introductory paragraph hereto, together with its successors and assigns.

     “Licenses” shall have the meaning set forth in Section 4.1.22 hereof.

     “Lien” shall mean, any mortgage, deed of trust, lien, pledge, hypothecation, assignment for security, security interest, or any other encumbrance, charge or transfer of, on or affecting Borrower, the Property, any portion thereof or any interest therein, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, the filing of any financing statement, and mechanic’s, materialmen’s and other similar liens and encumbrances.

     “Loan” shall mean the loan made by Lender to Borrower pursuant to this Agreement.

     “Loan Documents” shall mean, collectively, this Agreement, the Note, the Mortgage, the Assignment of Leases, the Environmental Indemnity, the Consent Regarding Management Agreement, the Indemnity, and all other documents executed and/or delivered in connection with the Loan.

     “Management Agreement” shall mean the management agreement entered into among Manager, Cole Operating Partnership II, L.P., and Cole Credit Property Trust II, Inc. pursuant to which Manager is to provide management and other services with respect to the Property and certain other properties, or, if the context requires, the Replacement Management Agreement.

     “Manager” shall mean Cole Realty Advisors, Inc. (f/k/a Fund Realty Advisors, Inc.) an Arizona corporation, or, if the context requires, a Qualified Manager who is managing the Property in accordance with the terms and provisions of this Agreement pursuant to a Replacement Management Agreement.

     “Material Action” means, with respect to any Person, to file any insolvency or reorganization case or proceeding, to institute proceedings to have such Person be adjudicated bankrupt or insolvent, to institute proceedings under any applicable insolvency law, to seek any relief under any law relating to relief from debts or the protection of debtors, to consent to the filing or institution of bankruptcy or insolvency proceedings against such Person, to file a petition seeking, or consent to, reorganization or relief with respect to such Person under any applicable federal or state law relating to bankruptcy or insolvency, to seek or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian, or any similar official of or for such Person or a substantial part of its property, to make any assignment for the benefit of creditors of such Person, to admit in writing such Person’s inability to pay its debts generally as they become due, or to take action in furtherance of any of the foregoing.

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     “Maturity Date” shall mean February 1, 2037, or such other date on which the final payment of principal of the Note becomes due and payable as therein or herein provided, whether at such stated maturity date, by declaration of acceleration, or otherwise.

     “Maximum Legal Rate” shall mean the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the indebtedness evidenced by the Note and as provided for herein or the other Loan Documents, under the laws of such state or states whose laws are held by any court of competent jurisdiction to govern the interest rate provisions of the Loan.

     “Monthly Debt Service Payment Amount” shall mean a payment of interest only at the Initial Interest Rate for the calendar month preceding the related Payment Date.

     “Moody’s” shall mean Moody’s Investors Service, Inc.

     “Mortgage” shall mean that certain first priority Deed of Trust, Security Agreement and Fixture Filing, dated the date hereof, executed and delivered by Borrower to Daniel S. Huffenus, as trustee for the benefit of Mortgage Electronic Registration Systems, Inc., as nominee of Lender as security for the Loan and encumbering the Property, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

     “Net Operating Income” shall mean, for any period, the amount obtained by subtracting Operating Expenses for such period from Gross Income from Operations for such period.

     “Net Proceeds” shall have the meaning set forth in Section 6.4(b) hereof.

     “Net Proceeds Deficiency” shall have the meaning set forth in Section 6.4(b)(vi) hereof.

     “Note” shall mean that certain Promissory Note, dated the date hereof, in the principal amount of SIXTY EIGHT MILLION TWO HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS ($68,250,000.00), made by Borrower in favor of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

     “Officer’s Certificate” shall mean a certificate delivered to Lender by Borrower which is signed by an authorized officer of the general partner or managing member of Borrower.

     “Operating Expenses” shall mean the total of all expenditures incurred by or on behalf of Borrower, computed in accordance with the GAAP (or another basis of accounting acceptable to Lender and consistently applied), of whatever kind relating to the operation, maintenance and management of the Property that are incurred on a regular monthly or other periodic basis, including without limitation, utilities, ordinary repairs and maintenance, insurance, license fees, property taxes and assessments, advertising expenses, management fees, payroll and related taxes, computer processing charges, operational equipment or other lease payments as approved by Lender, and other similar costs, but excluding depreciation, Debt Service, Capital Expenditures (including any reserves therefore maintained by Borrower but not required hereunder), contributions to the Reserve Funds, tenant expenditures related to the operation and maintenance of the Property to the extent such items are the responsibility of Tenant under its Lease.

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     “Other Charges” shall mean all ground rents, maintenance charges, impositions other than Taxes, and any other charges, including, without limitation, vault charges and license fees for the use of vaults, chutes and similar areas adjoining the Property, now or hereafter levied or assessed or imposed against the Property or any part thereof.

     “Other Obligations” shall have the meaning as set forth in the Mortgage.

     “Out Parcel” shall have the meaning set forth in Section 2.8 hereof.

     “Out Parcel Release Amount” shall mean for Tract 3 and Tract 4 the amount set forth on Schedule VII hereto.

     “Out Parcel Release Conditions” shall have the meaning set forth on Schedule VI hereof.

     “Payment Date” shall mean the first (1st) day of each calendar month during the term of the Loan or, if such day is not a Business Day, the immediately preceding Business Day.

     “Permitted Encumbrances” shall mean, with respect to the Property, collectively, (a) the Liens and security interests created by the Loan Documents, (b) all Liens, encumbrances and other matters disclosed in the Title Insurance Policy, (c) Liens, if any, for Taxes imposed by any Governmental Authority not yet due or delinquent, (d) the Leases existing as of the date hereof and any Leases entered into after the date hereof in accordance with Section 5.1.20, and (e) such other title and survey exceptions as Lender has approved or may approve in writing in Lender’s sole discretion, which Permitted Encumbrances in the aggregate do not materially adversely affect the value or use of the Property (as currently used) or Borrower ’s ability to repay the Loan.

     “Permitted Investments” shall mean any one or more of the following obligations or securities acquired at a purchase price of not greater than par, including those issued by Servicer, the trustee under any Securitization or any of their respective Affiliates, payable on demand or having a maturity date not later than the Business Day immediately prior to the first Payment Date following the date of acquiring such investment and meeting one of the appropriate standards set forth below:

     (i) obligations of, or obligations fully guaranteed as to payment of principal and interest by, the United States or any agency or instrumentality thereof provided such obligations are backed by the full faith and credit of the United States of America including, without limitation, obligations of: the U.S. Treasury (all direct or fully guaranteed obligations), the Farmers Home Administration (certificates of beneficial ownership), the General Services Administration (participation certificates), the U.S. Maritime Administration (guaranteed Title XI financing), the Small Business Administration (guaranteed participation certificates and guaranteed pool certificates), the U.S. Department of Housing and Urban Development (local authority bonds) and the Washington Metropolitan Area Transit Authority (guaranteed transit bonds); provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if rated by S&P, must not have an “r” highlighter affixed to their rating, (C) if such investments have a

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variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index, and (D) such investments must not be subject to liquidation prior to their maturity;

     (ii) Federal Housing Administration debentures;

     (iii) obligations of the following United States government sponsored agencies: Federal Home Loan Mortgage Corp. (debt obligations), the Farm Credit System (consolidated systemwide bonds and notes), the Federal Home Loan Banks (consolidated debt obligations), the Federal National Mortgage Association (debt obligations), the Student Loan Marketing Association (debt obligations), the Financing Corp. (debt obligations), and the Resolution Funding Corp. (debt obligations); provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if rated by S&P, must not have an “r” highlighter affixed to their rating, (C) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index, and (D) such investments must not be subject to liquidation prior to their maturity;

     (iv) federal funds, unsecured certificates of deposit, time deposits, bankers’ acceptances and repurchase agreements with maturities of not more than 365 days of any bank, the short term obligations of which at all times are rated in the highest short term rating category by each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one Rating Agency in the highest short term rating category and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the initial, or, if higher, then current ratings assigned to the Securities); provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if rated by S&P, must not have an “r” highlighter affixed to their rating, (C) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index, and (D) such investments must not be subject to liquidation prior to their maturity;

     (v) fully Federal Deposit Insurance Corporation-insured demand and time deposits in, or certificates of deposit of, or bankers’ acceptances issued by, any bank or trust company, savings and loan association or savings bank, the short term obligations of which at all times are rated in the highest short term rating category by each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one Rating Agency in the highest short term rating category and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the initial, or, if higher, then current ratings assigned to the Securities); provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if rated by S&P, must not have an “r” highlighter affixed to their rating, (C) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move

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proportionately with that index, and (D) such investments must not be subject to liquidation prior to their maturity;

     (vi) debt obligations with maturities of not more than 365 days and at all times rated by each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one Rating Agency and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the initial, or, if higher, then current ratings assigned to the Securities) in its highest long-term unsecured rating category; provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if rated by S&P, must not have an “r” highlighter affixed to their rating, (C) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index, and (D) such investments must not be subject to liquidation prior to their maturity;

     (vii) commercial paper (including both non-interest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not more than one year after the date of issuance thereof) with maturities of not more than 365 days and that at all times is rated by each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one Rating Agency and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the initial, or, if higher, then current ratings assigned to the Securities) in its highest short-term unsecured debt rating; provided, however, that the investments described in this clause must (A) have a predetermined fixed dollar of principal due at maturity that cannot vary or change, (B) if rated by S&P, must not have an “r” highlighter affixed to their rating, (C) if such investments have a variable rate of interest, such interest rate must be tied to a single interest rate index plus a fixed spread (if any) and must move proportionately with that index, and (D) such investments must not be subject to liquidation prior to their maturity;

     (viii) units of taxable money market funds, which funds are regulated investment companies, seek to maintain a constant net asset value per share and invest solely in obligations backed by the full faith and credit of the United States, which funds have the highest rating available from each Rating Agency (or, if not rated by all Rating Agencies, rated by at least one Rating Agency and otherwise acceptable to each other Rating Agency, as confirmed in writing that such investment would not, in and of itself, result in a downgrade, qualification or withdrawal of the initial, or, if higher, then current ratings assigned to the Securities) for money market funds; and

     (ix) any other security, obligation or investment which has been approved as a Permitted Investment in writing by (a) Lender and (b) each Rating Agency, as evidenced by a written confirmation that the designation of such security, obligation or investment as a Permitted Investment will not, in and of itself, result in a downgrade, qualification or withdrawal of the initial, or, if higher, then current ratings assigned to the Securities by such Rating Agency;

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     provided, however, that no obligation or security shall be a Permitted Investment if (A) such obligation or security evidences a right to receive only interest payments or (B) the right to receive principal and interest payments on such obligation or security are derived from an underlying investment that provides a yield to maturity in excess of 120% of the yield to maturity at par of such underlying investment.

     “Permitted Release Date” shall mean the date that is the fourth (4th) anniversary of the first Payment Date.

     “Permitted Transfer” shall have the meaning set forth in Section 5.2.10(d) hereof.

     “Person” shall mean any individual, corporation, partnership, joint venture, limited liability company, estate, trust, unincorporated association, any federal, state, county or municipal government or any bureau, department or agency thereof and any fiduciary acting in such capacity on behalf of any of the foregoing.

     “Personal Property” shall have the meaning set forth in the granting clause of the Mortgage.

     “Physical Conditions Report” shall mean that certain Property Conditions Report for Mortgage Financing Purposes dated December 14, 2006 from IVI International, Inc.

     “Policies” shall have the meaning specified in Section 6.1(b) hereof.

     “Policy” shall have the meaning specified in Section 6.1(b) hereof.

     “Prepayment Rate” shall mean the bond equivalent yield (in the secondary market) on the United States Treasury Security that as of the Prepayment Rate Determination Date has a remaining term to maturity closest to, but not exceeding, the remaining term to the Anticipated Repayment Date as most recently published in the “Treasury Bonds, Notes and Bills” section in The Wall Street Journal as of such Prepayment Rate Determination Date. If more than one issue of United States Treasury Securities has the remaining term to the Anticipated Repayment Date, the “Prepayment Rate” shall be the yield on such United States Treasury Security most recently issued as of the Prepayment Rate Determination Date. The rate so published shall control absent manifest error. If the publication of the Prepayment Rate in The Wall Street Journal is discontinued, Lender shall determine the Prepayment Rate on the basis of “Statistical Release H.15 (519), Selected Interest Rates,” or any successor publication, published by the Board of Governors of the Federal Reserve System, or on the basis of such other publication or statistical guide as Lender may reasonably select.

     “Prepayment Rate Determination Date” shall mean the date which is five (5) Business Days prior to the date that such prepayment shall be applied in accordance with the terms and provisions of Section 2.4.1 hereof.

     “Property” shall mean the parcel of real property, the Improvements thereon and all personal property owned by Borrower and encumbered by the Mortgage, together with all rights pertaining to such property and Improvements, as more particularly described in the granting clauses of the Mortgage and referred to therein as the “Property”.

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     “Provided Information” shall mean any and all financial and other information provided at any time by, or on behalf of, Borrower, Guarantor and/or Manager.

     “Qualified Manager” shall mean either (a) Manager; (b) [reserved]; or (c) in the reasonable judgment of Lender, a reputable and experienced management organization (which may be an Affiliate of Borrower) possessing experience in managing properties similar in size, scope, use and value as the Property, provided, that Borrower shall have obtained prior written confirmation from the applicable Rating Agencies that management of the Property by such Person will not cause a downgrade, withdrawal or qualification of the then current ratings of the Securities or any class thereof.

     “Rating Agencies” shall mean each of S&P, Moody’s and Fitch, or any other nationally recognized statistical rating agency which has been approved by Lender.

     “Related Entities” shall have the meaning set forth in Section 5.2.10(e)(v) hereof.

     “Related Parties” shall have the meaning set forth in the definition of Special Purpose Entity.

     “Related Party” shall have the meaning set forth in the definition of Special Purpose Entity.

     “REMIC Trust” shall mean a “real estate mortgage investment conduit” within the meaning of Section 860D of the Code that holds the Note.

     “Rents” shall mean, all rents (including percentage rents), rent equivalents, moneys payable as damages or in lieu of rent or rent equivalents, royalties (including, without limitation, all oil and gas or other mineral royalties and bonuses), income, receivables, receipts, revenues, deposits (including, without limitation, security, utility and other deposits), accounts, cash, issues, profits, charges for services rendered, all other amounts payable as rent under any Lease or other agreement relating to the Property, including, without limitation, charges for electricity, oil, gas, water, steam, heat, ventilation, air-conditioning and any other energy, telecommunication, telephone, utility or similar items or time use charges, HVAC equipment charges, sprinkler charges, escalation charges, license fees, maintenance fees, charges for Taxes, Operating Expenses or other reimbursables payable to Borrower (or to the Manager for the account of Borrower) under any Lease, and other consideration of whatever form or nature received by or paid to or for the account of or benefit of Borrower or its agents or employees from any and all sources arising from or attributable to the Property.

     “Replacement Management Agreement” shall mean, collectively, (a) either (i) a management agreement for the Property with a Qualified Manager substantially in the same form and substance as the Management Agreement, or (ii) a management agreement for the Property with a Qualified Manager, which management agreement shall be reasonably acceptable to Lender in form and substance, provided, with respect to this subclause (ii), Lender, at its option, may require that Borrower shall have obtained prior written confirmation from the applicable Rating Agencies that such management agreement will not cause a downgrade, withdrawal or qualification of the then current rating of the Securities or any class thereof and (b) an assignment of management agreement and subordination of management fees substantially in the

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form then used by Lender (or of such other form and substance reasonably acceptable to Lender), executed and delivered to Lender by Borrower and such Qualified Manager at Borrower’s expense.

     “Replacement Reserve Account” shall have the meaning set forth in Section 7.3.1 hereof.

     “Replacement Reserve Fund” shall have the meaning set forth in Section 7.3.1 hereof.

     “Replacement Reserve Monthly Deposit” shall have the meaning set forth in Section 7.3.1 hereof.

     “Replacements” shall have the meaning set forth in Section 7.3.1 hereof.

     “Required Repair Account” shall have the meaning set forth in Section 7.1.1 hereof.

     “Required Repair Fund” shall have the meaning set forth in Section 7.1.1 hereof.

     “Required Repairs” shall have the meaning set forth in Section 7.1.1 hereof.

     “Reserve Funds” shall mean, collectively, the Tax and Insurance Escrow Fund, the Replacement Reserve Fund, the Required Repair Fund and any other escrow fund established by the Loan Documents.

     “Restoration” shall mean the repair and restoration of the Property after a Casualty or Condemnation as nearly as possible to the condition the Property was in immediately prior to such Casualty or Condemnation, with such alterations as may be reasonably approved by Lender.

     “Restricted Party” shall mean collectively, Borrower, Guarantor, and any direct members or general partners of Borrower or Guarantor.

     “Revised Interest Rate” shall mean the greater of (i) the Initial Interest Rate plus two percent (2%) per annum, and (ii) the then current Ten Year Treasury Yield plus two percent (2%) per annum, provided, however, the Revised Interest Rate shall not exceed the Initial Interest Rate plus five percent (5%) per annum.

     “S&P” shall mean Standard & Poor’s Ratings Group, a division of the McGraw-Hill Companies.

     “Sale or Pledge” shall mean a voluntary or involuntary sale, conveyance, assignment, transfer, encumbrance, pledge, grant of option or other transfer or disposal of a legal or beneficial interest, whether direct or indirect.

     “Scheduled Defeasance Payments” shall have the meaning set forth in Section 2.5.1(b) hereof.

     “Securities” shall have the meaning set forth in Section 9.1 hereof.

     “Securities Act” shall have the meaning set forth in Section 9.2 hereof.

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     “Securitization” shall have the meaning set forth in Section 9.1 hereof.

     “Security Agreement” shall have the meaning set forth in Section 2.5.1(a)(vi) hereof.

     “Servicer” shall have the meaning set forth in Section 9.5 hereof.

     “Servicing Agreement” shall have the meaning set forth in Section 9.5 hereof.

     “Severed Loan Documents” shall have the meaning set forth in Section 8.2(c) hereof.

     “Special Purpose Entity” shall mean a corporation, limited partnership or limited liability company that, since the date of its formation and at all times on and after the date thereof, has complied with and shall at all times comply with the following requirements unless it has received either prior consent to do otherwise from Lender or a permitted administrative agent thereof, or, while the Loan is securitized, confirmation from each of the applicable Rating Agencies that such noncompliance would not result in the qualification, withdrawal, or downgrade of the ratings of any Securities or any class thereof:

     (i) is and shall be organized solely for the purpose of (A) in the case of Borrower, acquiring, developing, owning, holding, selling, leasing, transferring, exchanging, managing, operating and disposing of the Property, entering into and performing its obligations under the Loan Documents with Lender, refinancing the Property in connection with a permitted repayment of the Loan, and transacting lawful business that is incident, necessary and appropriate to accomplish the foregoing; and (B) in the case of a Special Purpose Entity that is a general partner or member in accordance with clauses (vii) and (ix) below (a “General Partner”), holding a partnership or membership interest in Borrower, acting as the General Partner of Borrower, entering into and performing its obligations under the Loan Documents, causing Borrower to comply with its respective organizational documents and otherwise dealing with its interests in Borrower;

     (ii) has not engaged and shall not engage in any business unrelated to (A) in the case of Borrower, the acquisition, development, ownership, management or operation of the Property and (B) in the case of the General Partner, the acquisition, ownership, sale, financing, conveyance and disposition of its interests in Borrower;

     (iii) has not owned and shall not own any real property other than, in the case of Borrower, the Property;

     (iv) does not have, shall not have and at no time had any assets other than (A) in the case of Borrower, the Property and personal property necessary or incidental to its ownership and operation of the Property; and (B) in the case of General Partner, its interests in the Borrower;

     (v) to the fullest extent permitted by applicable law, has not engaged in, sought, consented or permitted to and shall not engage in, seek, consent to or permit (A) any dissolution, winding up, liquidation, consolidation or merger, or (B) any sale or other

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transfer of all or substantially all of its assets or any sale of assets outside the ordinary course of its business, except as permitted by the Loan Documents;

     (vi) except as permitted under the Loan Documents or unless required by applicable law, shall not cause, consent to or permit any amendment of its limited partnership agreement, articles of incorporation, articles of organization, certificate of formation, operating agreement or other formation document or organizational document (as applicable) with respect to the matters set forth in this definition without the consent of Lender;

     (vii) if such entity is a limited partnership, has and shall have at least one general partner and has and shall have, as its only general partner, a Special Purpose Entity, which (A) is a corporation or single-member Delaware limited liability company, (B) has at least two (2) Independent Directors or Independent Managers, and (C) holds a direct interest as general partner in the limited partnership of not less than 0.5% (or 0.1%, if the limited partnership is a Delaware entity);

     (viii) if such entity is a corporation, has and shall have at least two (2) Independent Directors, and shall not cause or permit the board of directors of such entity to take any Material Action without the unanimous vote of one hundred percent (100%) of the members of its board of directors including the Independent Directors;

     (ix) if such entity is a limited liability company (other than a limited liability company meeting all of the requirements applicable to a single-member limited liability company set forth in this definition of “Special Purpose Entity”), has and shall have at least one (1) member that is a Special Purpose Entity, that is a corporation or a single-member Delaware limited liability company, that has at least two (2) Independent Managers and that directly owns at least one-half-of-one percent (0.5%) of the equity of the limited liability company (or 0.1% if the limited liability company is a Delaware entity);

     (x) if such entity is a single-member limited liability company, (A) is and shall be a Delaware limited liability company, (B) has and shall have at least two (2) Independent Directors or Independent Managers serving as a manager, (C) shall not take any Material Action and shall not cause or permit the members or managers of such entity to take any Material Action, either with respect to itself or, if the company is a principal, with respect to Borrower, in each case unless the Independent Directors or Independent Managers then serving as manager of the company shall have consented in writing to such action, and (D) has and shall have either (1) a member which owns no economic interest in the company, has signed the company’s limited liability company agreement and has no obligation to make capital contributions to the company, or (2) two natural persons or one entity that is not a member of the company, that has signed its limited liability company agreement and that, under the terms of such limited liability company agreement becomes a member of the company immediately prior to the withdrawal or dissolution of the last remaining member of the company;

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     (xi) has not and shall not (and, if such entity is (a) a limited liability company, has and shall have a limited liability company agreement or an operating agreement, as applicable, (b) a limited partnership, has a limited partnership agreement, or (c) a corporation, has a certificate of incorporation or articles that, in each case, provide that such entity shall not) (1) to the fullest extent permitted by applicable law, dissolve, merge, liquidate, consolidate; (2) except as permitted under the Loan Documents, sell all or substantially all of its assets; (3) unless required by applicable law, amend its organizational documents with respect to the matters set forth in this definition without the consent of Lender; or (4) without the consent of its General Partner (which consent shall, pursuant to the General Partner’s organizational documents, require the affirmative vote of the Independent Directors or the Independent Managers): (A) file or consent to the filing of any bankruptcy, insolvency or reorganization case or proceeding, institute any proceedings under any applicable insolvency law or otherwise seek relief under any laws relating to the relief from debts or the protection of debtors generally, file a bankruptcy or insolvency petition or otherwise institute insolvency proceedings; (B) seek or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian or any similar official for the entity or a substantial portion of its property; (C) make an assignment for the benefit of the creditors of the entity; or (D) take any action in furtherance of any of the foregoing clauses (A) through (C);

     (xii) has at all times been and shall at all times intend to remain solvent and has paid and shall pay its debts and liabilities (including, a fairly-allocated portion of any personnel and overhead expenses that it shares with any Affiliate) from its assets as the same shall become due, and has maintained and shall intend to maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations;

     (xiii) has not failed and shall not fail to correct any known misunderstanding regarding the separate identity of such entity and has not identified and shall not identify itself as a division of any other Person;

     (xiv) has maintained and shall maintain its bank accounts, books of account, books and records separate from those of any other Person and, to the extent that it is required to file tax returns under applicable law, has filed and shall file its own tax returns, except to the extent that it is required by law to file consolidated tax returns and, if it is a corporation, has not filed and shall not file a consolidated federal income tax return with any other corporation, except to the extent that it is required by law to file consolidated tax returns;

     (xv) has maintained and shall maintain its own records, books, resolutions and agreements;

     (xvi) has not commingled and shall not commingle its funds or assets with those of any other Person and has not participated and shall not participate in any cash management system with any other Person, other than as contemplated herein;

     (xvii) has held and shall hold its assets in its own name;

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     (xviii) has conducted and shall conduct its business in its name or in a name franchised or licensed to it by an entity other than an Affiliate of itself or of Borrower, except for business conducted on behalf of itself by another Person under a business management services agreement that is on commercially-reasonable terms, so long as the manager, or equivalent thereof, under such business management services agreement holds itself out as an agent of Borrower or General Partner, as applicable;

     (xix) (A) has maintained and shall maintain its financial statements, accounting records and other entity documents separate from those of any other Person; (B) has shown and shall show, in its financial statements, its assets and liabilities separate and apart from those of any other Person; and (C) has not permitted and shall not permit its assets to be listed as assets on the financial statement of any of its Affiliates except as required by GAAP (or another basis of accounting acceptable to Lender and consistently applied); provided, however, that any such consolidated financial statement contains a note indicating that the Special Purpose Entity’s separate assets and credit are not available to pay the debts of such Affiliate and that the Special Purpose Entity’s liabilities do not constitute obligations of the consolidated entity;

     (xx) has paid and shall pay its own liabilities and expenses, including the salaries of its own employees, out of its own funds and assets, and has maintained and shall maintain a sufficient number of employees in light of its contemplated business operations;

     (xxi) has observed and shall observe all partnership, corporate or limited liability company formalities, as applicable;

     (xxii) has not incurred any Indebtedness other than (i) with respect to Borrower, acquisition financing with respect to the Property; construction financing with respect to the Improvements and certain off-site improvements required by municipal and other authorities as conditions to the construction of the Improvements; and first mortgage financings secured by the Property; and Indebtedness pursuant to letters of credit, guaranties, interest rate protection agreements and other similar instruments executed and delivered in connection with such financings, (ii) unsecured trade payables and operational debt not evidenced by a note, (iii) Indebtedness incurred in the financing of equipment and other personal property used on the Property, and (iv) unsecured loans from Affiliates used to acquire the Property, which loans shall be repaid in full on or before the date hereof;

     (xxiii) shall have no Indebtedness other than (A) with respect to Borrower (i) the Loan, (ii) liabilities incurred in the ordinary course of business relating to the ownership and operation of the Property and the routine administration of Borrower, in amounts not to exceed 2% of the outstanding principal balance of the Loan which liabilities are not more than sixty (60) days past the date incurred, are not evidenced by a note and are paid when due, and which amounts are normal and reasonable under the circumstances, and (iii) such other liabilities that are permitted pursuant to this Agreement and (B) with respect to General Partner, liabilities incurred in the ordinary course of business relating to its partnership interests in Borrower, in amounts not to

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exceed 2% of the outstanding principal balance of the Loan which liabilities are not more than sixty (60) days past the date incurred, are not evidenced by a note and are paid when due, and which amounts are normal and reasonable under the circumstances;

     (xxiv) has not assumed, guaranteed or become obligated and shall not assume or guarantee or become obligated for the debts of any other Person, has not held out and shall not hold out its credit or assets as being available to satisfy the obligations of any other Person or has not pledged and shall not pledge its assets for the benefit of any other Person, in each case except as permitted pursuant to this Agreement, and, with respect to General Partner only, except as it may be liable for the obligations of Borrower as the General Partner thereof;

     (xxv) has not acquired and shall not acquire obligations or securities of its partners, members or shareholders or any other owner or Affiliate;

     (xxvi) has allocated and shall allocate fairly and reasonably any overhead expenses that are shared with any of its Affiliates, constituents, or owners, or any guarantors of any of their respective obligations, or any Affiliate of any of the foregoing (individually, a “Related Party” and collectively, the “Related Parties”), including, but not limited to, paying for shared office space and for services performed by any employee of an Affiliate;

     (xxvii) has maintained and used and shall maintain and use separate invoices and checks bearing its name and not bearing the name of any other entity unless such entity is clearly designated as being the Special Purpose Entity’s agent;

     (xxviii) has not pledged and shall not pledge its assets to or for the benefit of any other Person other than with respect to loans secured by the Property and no such pledge remains outstanding except to Lender to secure the Loan;

     (xxix) has conducted and shall conduct its business so that each of the assumptions made about it and each of the facts stated about it in the Insolvency Opinion are true;

     (xxx) has not permitted and shall not permit any Affiliate or constituent party independent access to its bank accounts;

     (xxxi) has held itself out and identified itself and shall hold itself out and identify itself as a separate and distinct entity under its own name or in a name franchised or licensed to it by an entity other than an Affiliate of Borrower and not as a division or part of any other Person,

     (xxxii) has maintained and shall maintain its assets in such a manner that it shall not be costly or difficult to segregate, ascertain or identify its individual assets from those of any other Person;

     (xxxiii) has not made and shall not make loans to any Person and has not held and shall not hold evidence of indebtedness issued by any other Person or entity (other

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than cash and investment-grade securities issued by an entity that is not an Affiliate of or subject to common ownership with such entity);

     (xxxiv) has not identified and shall not identify its partners, members or shareholders, or any Affiliate of any of them, as a division or part of it, and has not identified itself and shall not identify itself as a division of any other Person;

     (xxxv) other than capital contributions and distributions permitted under the terms of its organizational documents, has not entered into or been a party to, and shall not enter into or be a party to, any transaction with any of its partners, members, shareholders or Affiliates except in the ordinary course of its business and on terms which are commercially reasonable terms comparable to those of an arm’s-length transaction with an unrelated third party;

     (xxxvi) has not had and shall not have any obligation to, and has not indemnified and shall not indemnify its partners, officers, directors or members, as the case may be, in each case unless such an obligation or indemnification is fully subordinated to the Debt and shall not constitute a claim against it in the event that its cash flow is insufficient to pay the Debt;

     (xxxvii) if such entity is a corporation, has considered and shall consider the interests of its creditors in connection with all corporate actions;

     (xxxviii) has not had and shall not have any of its obligations guaranteed by any Affiliate except as provided by the Loan Documents;

     (xxxix) has not formed, acquired or held and shall not form, acquire or hold any subsidiary, except that General Partner of Borrower may acquire and hold its interest in Borrower;

     (xl) has complied and shall comply with all of the terms and provisions contained in its organizational documents;

     (xli) is, has always been and shall continue to be duly formed, validly existing, and in good standing in the state of its incorporation or formation and in all other jurisdictions where it is qualified to do business;

     (xlii) has paid all taxes that it owes and is not currently involved in any dispute with any taxing authority;

     (xliii) is not now, nor has ever been, party to any lawsuit, arbitration, summons, or legal proceeding that resulted in a judgment against it that has not been paid in full;

     (xliv) has no judgments or Liens of any nature against it except for tax liens not yet due and the Permitted Encumbrances;

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     (xlv) has provided Lender with complete financial statements that reflect a fair and accurate view of the entity’s financial condition; and

     (xlvi) has no material contingent or actual obligations except with respect to Borrower’s obligations related to the Property, and with respect to General Partner, its obligations incurred as a result of holding its partnership interest in Borrower as the General Partner thereof.

     “State” shall mean, the State or Commonwealth in which the Property or any part thereof is located.

     “Successor Borrower” shall have the meaning set forth in Section 2.5.3 hereof.

     “Survey” shall mean a survey of the Property prepared by a surveyor licensed in the State and satisfactory to Lender and the company or companies issuing the Title Insurance Policy, and containing a certification of such surveyor satisfactory to Lender.

     “Tax and Insurance Escrow Fund” shall have the meaning set forth in Section 7.2 hereof.

     “Taxes” shall mean all real estate and personal property taxes, assessments, water rates or sewer rents, now or hereafter levied or assessed or imposed against the Property or part thereof.

     “Tenant” shall mean any person or entity with a possessory right to all or any part of the Property pursuant to a Lease or other written agreement.

     “Tenant Direction Letter” shall mean a letter in the form of Schedule IV attached hereto, or such other form approved by Lender, from Borrower to the Tenant under each Lease (whether such Lease is presently effective or executed after the Closing Date) directing such Tenant to send directly to the Clearing Account all payments of Rent payable to Borrower under such Lease.

     “Ten Year Treasury Yield” shall mean the yield, calculated by linear interpolation (rounded to three decimal places), of the yields of United States Treasury Constant Maturities with the terms (one longer and one shorter) most nearly approximating those of U.S. Obligations having maturities as close as possible to February 1, 2027, as determined by Lender on the basis of Federal Reserve Statistical Release H.15-Selected Interest Rates under the heading U.S. Governmental Security/Treasury Constant Maturities, or other recognized source of financial market information selected by the Lender on the last Business Day of the week immediately prior to the Anticipated Repayment Date.

     “Threshold Amount” shall have the meaning set forth in Section 5.1.21 hereof.

     “Title Insurance Policy” shall mean an ALTA mortgagee title insurance policy in the form acceptable to Lender (or, if the Property is in a State which does not permit the issuance of such ALTA policy, such form as shall be permitted in such State and acceptable to Lender) issued with respect to the Property and insuring the lien of the Mortgage.

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     “Transfer” shall have the meaning set forth in Section 5.2.10(b) hereof.

     “Transferee” shall have the meaning set forth in Section 5.2.10(e)(iii) hereof.

     “Transferee’s Principals” shall mean collectively, (A) Transferee’s managing members, general partners or principal shareholders and (B) such other members, partners or shareholders which directly or indirectly shall own a fifty-one percent (51%) or greater economic and voting interest in Transferee.

     “UCC” or “Uniform Commercial Code” shall mean the Uniform Commercial Code as in effect in the State in which the Property is located.

     “U.S. Obligations” shall mean non-redeemable securities evidencing an obligation to timely pay principal and/or interest in a full and timely manner that are (a) direct obligations of the United States of America for the payment of which its full faith and credit is pledged, or (b) to the extent acceptable to the Rating Agencies, other “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, as amended.

     “Yield Maintenance Default Premium” shall mean an amount equal to the greater of (a) two percent (2%) of the outstanding principal balance of the Loan to be prepaid or satisfied and (b) the Defeasance Payment Amount that would be required if a Defeasance Event were to occur at such time (whether or not then permitted) in an amount equal to the outstanding principal amount of the Loan to be prepaid or satisfied.

     “Yield Maintenance Premium” shall mean an amount equal to the greater of (a) one percent (1%) of the outstanding principal of the Loan to be prepaid or satisfied and (b) the excess, if any, of (i) the sum of the present values of all then-scheduled payments of principal and interest under the Note assuming that all outstanding principal and interest on the Loan is paid on the Anticipated Repayment Date (with each such payment and assumed payment discounted to its present value at the date of prepayment at the rate which, when compounded monthly, is equivalent to the Prepayment Rate when compounded semi-annually and deducting from the sum of such present values any short-term interest paid from the date of prepayment to the next succeeding Payment Date in the event such payment is not made on a Payment Date), over (ii) the principal amount being prepaid.

     Section 1.2 Principles of Construction. All references to sections and schedules are to sections and schedules in or to this Agreement unless otherwise specified. All uses of the word “including” shall mean “including, without limitation” unless the context shall indicate otherwise. Unless otherwise specified, the words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined.

     II. GENERAL TERMS

     Section 2.1 Loan Commitment; Disbursement to Borrower.

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          2.1.1 Agreement to Lend and Borrow. Subject to and upon the terms and conditions set forth herein, Lender hereby agrees to make and Borrower hereby agrees to accept the Loan on the Closing Date.

          2.1.2 Single Disbursement to Borrower. Borrower may request and receive only one (1) borrowing hereunder in respect of the Loan and any amount borrowed and repaid hereunder in respect of the Loan may not be reborrowed.

          2.1.3 The Note, Mortgage and Loan Documents. The Loan shall be evidenced by the Note and secured by the Mortgage, the Assignment of Leases and the other Loan Documents.

          2.1.4 Use of Proceeds. Borrower shall use the proceeds of the Loan to (a)acquire the Property or repay and discharge any existing loans relating to the Property, (b) pay all past-due Basic Carrying Costs, if any, with respect to the Property, (c) make deposits into the Reserve Funds on the Closing Date in the amounts provided herein, (d) pay costs and expenses incurred in connection with the closing of the Loan and the acquisition of the Property, as approved by Lender, (e) fund any working capital requirements of the Property and (f) distribute the balance, if any, to Borrower.

     Section 2.2 Interest Rate.

          2.2.1 Interest Rate. Interest on the outstanding principal balance of the Loan shall accrue from (and including) the Closing Date to but excluding the Anticipated Repayment Date at the Initial Interest Rate. Interest on the outstanding principal balance of the Loan shall accrue from and including the Anticipated Repayment Date to but excluding the Maturity Date at the Revised Interest Rate.

          2.2.2 Interest Calculation. Interest on the outstanding principal balance of the Loan shall be calculated by multiplying (a) the actual number of days elapsed in the period for which the calculation is being made by (b) a daily rate based on a three hundred sixty (360) day year by (c) the outstanding principal balance.

          2.2.3 Default Rate. In the event that, and for so long as, any Event of Default shall have occurred and be continuing, the outstanding principal balance of the Loan and, to the extent permitted by law, all accrued and unpaid interest in respect of the Loan and any other amounts due pursuant to the Loan Documents, shall accrue interest at the Default Rate, calculated from the date such payment was due without regard to any grace or cure periods contained herein.

          2.2.4 Usury Savings. This Agreement, the Note and the other Loan Documents are subject to the express condition that at no time shall Borrower be obligated or required to pay interest on the principal balance of the Loan at a rate which could subject Lender to either civil or criminal liability as a result of being in excess of the Maximum Legal Rate. If, by the terms of this Agreement or the other Loan Documents, Borrower is at any time required or obligated to pay interest on the principal balance due hereunder at a rate in excess of the Maximum Legal Rate, the Applicable Interest Rate or the Default Rate, as the case may be, shall be deemed to be immediately reduced to the Maximum Legal Rate and all previous payments in excess of the

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Maximum Legal Rate shall be deemed to have been payments in reduction of principal (without any Yield Maintenance Premium or prepayment penalty or premium) and not on account of the interest due hereunder. All sums paid or agreed to be paid to Lender for the use, forbearance, or detention of the sums due under the Loan, shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Loan until payment in full so that the rate or amount of interest on account of the Loan does not exceed the Maximum Legal Rate of interest from time to time in effect and applicable to the Loan for so long as the Loan is outstanding.

     Section 2.3 Loan Payment.

          2.3.1 Monthly Debt Service Payments Prior to the Anticipated Repayment Date. (a) Borrower shall pay to Lender on the Closing Date, an amount equal to interest only on the outstanding principal balance of the Loan from the Closing Date up to and including January 31, 2007, and (b) on March 1, 2007 and on each Payment Date thereafter up to and including the Anticipated Repayment Date, Borrower shall make a payment to Lender of interest only in an amount equal to the Monthly Debt Service Payment Amount, which shall be applied to interest on the outstanding principal amount of the Loan for the prior calendar month at the Initial Interest Rate.

          2.3.2 Payments After Anticipated Repayment Date. From and after the Anticipated Repayment Date, interest shall accrue on the unpaid principal balance from time to time at the Revised Interest Rate. On each Payment Date occurring after the Anticipated Repayment Date Borrower shall (a) make a payment to Lender of interest only calculated at the Initial Interest Rate, such payment to be applied to interest in an amount equal to interest that would have accrued on the outstanding principal balance of the Loan (without adjustment for Accrued Interest) at the Initial Interest Rate, and (b) pay to Lender the other amounts required to be paid in accordance with the terms hereof. Interest accrued at the Revised Interest Rate and not paid pursuant to the preceding sentence shall be added to the outstanding principal balance on the first day following such Payment Date and shall earn interest at the Revised Interest Rate to the extent permitted by law (such accrued interest referred to as, “Accrued Interest”).

          2.3.3 Payments Generally. The first (1^st) interest accrual period hereunder shall commence on and include the Closing Date and shall end on and include January 31, 2007. Each interest accrual period thereafter shall commence on the first (1st) day of each calendar month during the term of this Agreement and shall end on and include the final calendar date of such calendar month. For purposes of making payments hereunder, but not for purposes of calculating interest accrual periods, if the day on which such payment is due is not a Business Day, then amounts due on such date shall be due on the immediately preceding Business Day and with respect to payments of principal due on the Maturity Date, interest shall be payable at the Applicable Interest Rate or the Default Rate, as the case may be, through and including the day immediately preceding such Maturity Date. All amounts due under this Agreement and the other Loan Documents shall be payable without setoff, counterclaim, defense or any other deduction whatsoever.

          2.3.4 Payment on Maturity Date. Borrower shall pay to Lender on the Maturity Date the outstanding principal balance of the Loan, all accrued and unpaid interest and

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all other amounts due hereunder and under the Note, the Mortgage and the other Loan Documents.

          2.3.5 Late Payment Charge. If any principal, interest or any other sums due under the Loan Documents (including the amounts due on the Maturity Date) are not paid by Borrower on or prior to the date on which it is due, Borrower shall pay to Lender upon demand an amount equal to the lesser of five percent (5%) of such unpaid sum or the Maximum Legal Rate in order to defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment. Any such amount shall be secured by the Mortgage and the other Loan Documents to the extent permitted by applicable law.

          2.3.6 Method and Place of Payment. Except as otherwise specifically provided herein, all payments and prepayments under this Agreement and the Note shall be made to Lender not later than 2:00 P.M., New York City time, on the date when due and shall be made in lawful money of the United States of America in immediately available funds at Lender’s office or as otherwise directed by Lender, and any funds received by Lender after such time shall, for all purposes hereof, be deemed to have been paid on the next succeeding Business Day.

     Section 2.4 Prepayments.

          2.4.1 Voluntary Prepayments. Except as otherwise provided in this Section 2.4 and in Section 2.8, Borrower shall not have the right to prepay the Loan in whole or in part prior to the Anticipated Repayment Date. On the Payment Date three (3) months prior to the Anticipated Repayment Date, or on any Payment Date thereafter, Borrower may, at its option and upon thirty (30) days prior written notice to Lender, prepay the Debt in whole or in part without payment of the Yield Maintenance Premium or any other prepayment premium or penalty, provided, however, if for any reason Borrower prepays the Loan on a date other than a Payment Date, Borrower shall pay Lender, in addition to the Debt, all interest which would have accrued on the amount of the Loan through and including the Payment Date next occurring following the date of such prepayment.

          2.4.2 Mandatory Prepayments

          (a) On the next occurring Payment Date following the date on which Lender actually receives any Net Proceeds, if Lender is not obligated to make such Net Proceeds available to Borrower for the Restoration of the Property or otherwise remit such Net Proceeds to Borrower pursuant to Section 6.4 hereof, Borrower shall prepay or authorize Lender to apply Net Proceeds as a prepayment of all or a portion of the outstanding principal balance of the Loan together with accrued interest and any other sums due hereunder in an amount equal to one hundred percent (100%) of such Net Proceeds; provided, however, if an Event of Default has occurred and is continuing, Lender may apply such Net Proceeds to the Debt (until paid in full) in any order or priority in its sole discretion. Other than during the continuance of an Event of Default, no Yield Maintenance Premium shall be due in connection with any prepayment made pursuant to this Section 2.4.2(a).

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          (b) In the event there is a Condemnation and Academy presents an offer to purchase the Property pursuant to Section 12(c) of the Academy Lease and Borrower accepts Academy’s offer to purchase, Borrower shall have the right to prepay the outstanding principal balance of the Note (a “Condemnation Prepayment”) in accordance with this Section 2.4.2(b) hereof upon satisfaction of the following conditions: Borrower shall provide Lender with thirty (30) days written notice of Borrower’s intention to pay the Note in full. Notwithstanding anything in Section 6.3 to the contrary, Borrower shall have no obligation to commence Restoration of the Property upon delivery of the written notice set forth in the preceding sentence (unless Borrower subsequently shall fail to pay all amounts due under this Section 2.4.2(b)). On the date on which Borrower tenders a Condemnation Prepayment, such tender shall include (a) all accrued and unpaid interest and the principal indebtedness being prepaid, including interest on the outstanding principal amount of the Note through the last day of the month within which such tender occurs, and (b) any other sums due hereunder relating to the applicable Note, including an amount equal to the Yield Maintenance Premium attributable to the Condemnation Prepayment, provided, however, so long as no Event of Default shall exist on the date of the Condemnation Prepayment, (i) no Yield Maintenance Premium shall be due with respect to that portion of the Condemnation Prepayment equal to the amount of the Award, and (ii) if the Award shall be equal to or greater than FORTY ONE MILLION and 00/100 Dollars ($41,000,000.00), no Yield Maintenance Premium shall be due in connection with any portion of the Condemnation Prepayment.

          2.4.3 Prepayments After Default. If during the continuance of an Event of Default, payment of all or any part of the Debt is tendered by Borrower or otherwise recovered by Lender, such tender or recovery shall be (a) made on the next occurring Payment Date together with the Monthly Debt Service Payment and (b) deemed a voluntary prepayment by Borrower in violation of the prohibition against prepayment set forth in Section 2.4.1 hereof and Borrower shall pay, in addition to the Debt, an amount equal to the Yield Maintenance Default Premium.

          2.4.4 Prepayment Prior to Defeasance Expiration Date. If the Permitted Release Date has occurred but the Defeasance Expiration Date has not occurred, the Debt may be prepaid in whole (but not in part) prior to the date permitted under Section 2.4.1 hereof upon not less than thirty (30) days prior written notice to Lender specifying the Payment Date on which prepayment is to be made (a “Prepayment Date”) provided no Event of Default exists and upon payment of an amount equal to the Yield Maintenance Premium. Lender shall notify Borrower of the amount and the basis of determination of the required prepayment consideration. If any notice of prepayment is given, the Debt shall be due and payable on the Prepayment Date. Lender shall not be obligated to accept any prepayment of the Debt unless it is accompanied by the prepayment consideration due in connection therewith. If for any reason Borrower prepays the Loan on a date other than a Payment Date, Borrower shall pay Lender, in addition to the Debt, all interest which would have accrued on the amount of the Loan through and including the Payment Date next occurring following the date of such prepayment.

     Section 2.5 Defeasance.

          2.5.1 Voluntary Defeasance.

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          (a) Provided no Event of Default shall then exist, Borrower shall have the right at any time after the Defeasance Expiration Date and prior to the date voluntary prepayments are permitted under Section 2.4.1 hereof to voluntarily defease all, but not part, of the Loan by and upon satisfaction of the following conditions (such event being a “Defeasance Event”):

     (i) Borrower shall provide not less than thirty (30) days prior written notice to Lender specifying the Payment Date (the “Defeasance Date”) on which the Defeasance Event is to occur;

     (ii) Borrower shall pay to Lender all accrued and unpaid interest on the principal balance of the Loan to and including the Defeasance Date. If for any reason the Defeasance Date is not a Payment Date, the Borrower shall also pay interest that would have accrued on the Note through and including the Payment Date immediately preceding the next Payment Date, provided, however, if the Defeasance Deposit shall include short-term interest computed from the date of such prepayment through to the next succeeding Payment Date, Borrower shall not be required to pay such short term interest pursuant to this sentence;

     (iii) Borrower shall pay to Lender all other sums, not including scheduled interest or principal payments, then due under the Note, this Agreement, the Mortgage and the other Loan Documents;

     (iv) Borrower shall pay to Lender the required Defeasance Deposit for the Defeasance Event;

     (v) Intentionally omitted;

     (vi) Borrower shall execute and deliver a pledge and security agreement, in form and substance that would be reasonably satisfactory to a prudent lender creating a first priority lien on the Defeasance Deposit and the U.S. Obligations purchased with the Defeasance Deposit in accordance with the provisions of this Section 2.5 (the “Security Agreement”);

     (vii) Borrower shall deliver an opinion of counsel for Borrower that is standard in commercial lending transactions and subject only to customary qualifications, assumptions and exceptions opining, among other things, that Borrower has legally and validly transferred and assigned the U.S. Obligations and all obligations, rights and duties under and to the Note to the Successor Borrower, that Lender has a perfected first priority security interest in the Defeasance Deposit and the U.S. Obligations delivered by Borrower and that any REMIC Trust formed pursuant to a Securitization will not fail to maintain its status as a “real estate mortgage investment conduit” within the meaning of Section 860D of the Code as a result of such Defeasance Event;

     (viii) Borrower shall deliver confirmation in writing from each of the applicable Rating Agencies to the effect that such release will not result in a downgrade, withdrawal or qualification of the respective ratings in effect immediately prior to such

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Defeasance Event for the Securities issued in connection with the Securitization which are then outstanding. If required by the applicable Rating Agencies, Borrower shall also deliver or cause to be delivered an Additional Insolvency Opinion with respect to the Successor Borrower in form and substance satisfactory to Lender and the applicable Rating Agencies;

     (ix) Borrower shall deliver an Officer’s Certificate certifying that the requirements set forth in this Section 2.5.1(a) have been satisfied;

     (x) Borrower shall deliver a certificate of Borrower’s independent certified public accountant certifying that the U.S. Obligations purchased with the Defeasance Deposit will generate monthly amounts equal to or greater than the Scheduled Defeasance Payments;

     (xi) Borrower shall deliver such other certificates, documents or instruments as Lender may reasonably request; and

     (xii) Borrower shall pay all reasonable costs and expenses of Lender incurred in connection with the Defeasance Event, including (A) any reasonable costs and expenses associated with a release of the Lien of the Mortgage as provided in Section 2.6 hereof, (B) reasonable attorneys’ fees and expenses incurred in connection with the Defeasance Event, (C) the reasonable costs and expenses of the Rating Agencies, (D) any revenue, documentary stamp or intangible taxes or any other tax or charge due in connection with the transfer of the Note, or otherwise required to accomplish the defeasance and (E) the reasonable costs and expenses of Servicer and any trustee, including reasonable attorneys’ fees.

          (b) In connection with the Defeasance Event, Borrower shall use the Defeasance Deposit to purchase U.S. Obligations which provide payments on or prior to, but as close as possible to, all successive scheduled Payment Dates after the Defeasance Date upon which interest and principal payments are required under this Agreement and the Note and in amounts equal to the scheduled payments due on such dates under this Agreement and the Note, (including, without limitation, scheduled payments of principal, interest, servicing fees (if any), and any other amounts due under the Loan Documents on such Payment Dates) and assuming the Note is prepaid in full on the Anticipated Repayment Date (the “Scheduled Defeasance Payments”). Borrower, pursuant to the Security Agreement or other appropriate document, shall authorize and direct that the payments received from the U.S. Obligations may be made directly to Lender (or its designee) and applied to satisfy the Debt Service obligations of Borrower under this Agreement and the Note. Any portion of the Defeasance Deposit in excess of the amount necessary to purchase the U.S. Obligations required by this Section 2.5 and satisfy Borrower’s other obligations under this Section 2.5 and Section 2.6 shall be remitted to Borrower.

          2.5.2 Collateral. Each of the U.S. Obligations that are part of the defeasance collateral shall be duly endorsed by the holder thereof as directed by Lender or accompanied by a written instrument of transfer in form and substance that would be satisfactory to a prudent lender (including, without limitation, such instruments as may be required by the depository institution holding such securities or by the issuer thereof, as the case may be, to effectuate

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book-entry transfers and pledges through the book-entry facilities of such institution) in order to perfect upon the delivery of the defeasance collateral a first priority security interest therein in favor of Lender in conformity with all applicable state and federal laws governing the granting of such security interests.

          2.5.3 Successor Borrower. In connection with any Defeasance Event, Borrower may at its option, or if so required by the applicable Rating Agencies shall, establish or designate a successor entity (the “Successor Borrower”) acceptable to Lender, which shall be a Special Purpose Entity and Borrower shall transfer and assign all obligations, rights and duties under and to the Note, together with the pledged U.S. Obligations to such Successor Borrower. Such Successor Borrower shall assume the obligations under the Note and the Security Agreement and Borrower shall be relieved of its obligations under such documents. Borrower shall pay One Thousand and 00/100 Dollars ($1,000) to any such Successor Borrower as consideration for assuming the obligations under the Note and the Security Agreement. Notwithstanding anything in this Agreement to the contrary, no other assumption fee shall be payable upon a transfer of the Note in accordance with this Section 2.5.3, but Borrower shall pay all reasonable costs and expenses incurred by Lender, including Lender’s reasonable attorneys’ fees and expenses and any reasonable fees and expenses of any Rating Agencies, incurred in connection therewith.

     Section 2.6 Release of Property. Except as set forth in this Section 2.6, no repayment, prepayment or defeasance of all or any portion of the Loan shall cause, give rise to a right to require, or otherwise result in, the release of the Lien of the Mortgage on the Property.

          2.6.1 Release of Property.

          (a) If Borrower has elected to defease the entire Loan and the requirements of Section 2.5 and this Section 2.6 have been satisfied, all of the Property shall be released from the Lien of the Mortgage and the U.S. Obligations, pledged pursuant to the Security Agreement, shall be the sole source of collateral securing the Note.

          (b) In connection with a defeasance of the Loan, Borrower shall submit to Lender, not less than thirty (30) days prior to the Defeasance Date, a release of Lien (and related Loan Documents) for the Property for execution by Lender. Such release shall be in a form appropriate in the jurisdiction in which the Property is located and that would be satisfactory to a prudent lender and contains standard provisions, if any, protecting the rights of the releasing lender. In addition, Borrower shall provide all other documentation Lender reasonably requires to be delivered by Borrower in connection with such release, together with an Officer’s Certificate certifying that such documentation (i) is in compliance with all Legal Requirements, and (ii) will effect such releases in accordance with the terms of this Agreement.

          2.6.2 Release on Payment in Full. Lender shall, upon the written request and at the expense of Borrower, upon payment in full of all principal and interest due on the Loan and all other amounts due and payable under the Loan Documents in accordance with the terms and provisions of the Note and this Agreement, release the Lien of the Mortgage on the Property.

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          2.6.3 Out Parcel Release. Lender shall, upon the written request and at the expense of Borrower, upon satisfaction of the Out Parcel Release Conditions and Section 2.8 of this Loan Agreement, release the Lien of the Mortgage and the other Loan Documents against the applicable Out Parcel.

     Section 2.7 Cash Management.

          2.7.1 Clearing Bank. At Closing, Borrower shall establish an account (the “Clearing Account”) at a bank acceptable to Lender in its reasonable discretion (the “Clearing Bank”). In addition, Borrower shall deliver to each Tenant at the Property a Tenant Direction Letter instructing each such Tenant to deliver all Rents due under their respective Leases directly to the Clearing Account. Borrower covenants and agrees to execute and deliver to Lender a Tenant Direction Letter for each new tenant at the Property within thirty (30) days after the execution of each new Lease for premises at the Property. Lender, Borrower and Clearing Bank shall execute an agreement in form and substance acceptable to Lender in its reasonable discretion (the “Clearing Bank Agreement”) whereby Clearing Bank agrees, among other things, that upon its receipt from Lender of a notice that a Cash Management Trigger has occurred, all funds on deposit in the Clearing Account shall be swept on a daily basis to the Cash Management Account. Prior to the occurrence of a Cash Management Trigger, the Clearing Account shall be under Borrower’s sole dominion and control, provided, however, Lender shall have a first priority security interest in the Clearing Account and all deposits at any time contained therein and the proceeds thereof and will take all actions necessary to maintain in favor of Lender a perfected first priority security interest in the Clearing Account, including, without limitation, executing and filing UCC-1 Financing Statements and continuations thereof. Borrower shall be responsible for all fees, including fees charged by Clearing Bank, in connection with the Clearing Account.

          2.7.2 Cash Management Account.

     (a) Upon Lender’s delivery to the Clearing Bank of written notice that a Cash Management Trigger has occurred, all funds on deposit in the Clearing Account shall be swept on a daily basis to Lender or Servicer (on behalf of Lender), and shall be held by Lender or Servicer (on behalf of Lender) in an escrow account (the “Cash Management Account”) owned and controlled by Lender or Servicer (on behalf of Lender) (the “Agent”). Lender shall have a first priority security interest in the Cash Management Account and all deposits at any time contained therein and the proceeds thereof and will take all actions necessary to maintain in favor of Lender a perfected first priority security interest in the Cash Management Account, including, without limitation, executing and filing UCC-1 Financing Statements and continuations thereof. Such Cash Management Account shall bear interest for the benefit of Borrower, and shall, at Lender’s option, be an Eligible Account.

     (b) Borrower shall be responsible for all fees, including fees charged by Agent, in connection with the Cash Management Account.

     (c) Following a Cash Management Trigger, and provided no Event of Default shall then exist, on each Payment Date (or, if such Payment Date is not a Business Day, on the

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immediately preceding Business Day) all funds on deposit in the Cash Management Account shall be applied by Lender to the payment of the following items in the order indicated:

     (i) First, payments to the Tax and Insurance Escrow Fund in accordance with the terms and conditions of Section 7.2 hereof;

     (ii) Second, payment of the Monthly Debt Service Payment Amount, applied to the payment of interest computed at the Initial Interest Rate;

     (iii) Third, required payments to the Replacement Reserve Fund in accordance with the terms and conditions hereof;

     (iv) Fourth, payment to the Lender of any other amounts then due and payable under the Loan Documents (other than Accrued Interest);

     (v) Fifth, payments for monthly Operating Expenses incurred in accordance with the related Approved Annual Budget pursuant to a written request for payment submitted by Borrower to Lender specifying the individual Operating Expenses in a form acceptable to Lender;

     (vi) Sixth, payments for Extraordinary Expenses approved by Lender, if any, pursuant to a written request for payment submitted by Borrower to Lender specifying the individual Extraordinary Expenses in a form acceptable to Lender;

     (vii) Seventh, on or after the Anticipated Repayment Date, payments to Lender in reduction of the outstanding principal balance of the Loan;

     (viii) Eighth, on or after the Anticipated Repayment Date, payments to Lender for Accrued Interest; and

     (ix) Lastly, payments of all remaining funds in the Cash Management Account after disbursements of funds pursuant to clauses (i) through (viii) above (“Excess Cash”) to the Excess Cash Escrow Fund in accordance with the provisions of Section 7.4 of this Agreement.

     (d) The insufficiency of funds on deposit in the Cash Management Account shall not relieve Borrower from the obligation to make any payments, as and when due pursuant to this Agreement and the other Loan Documents, and such obligations shall be separate and independent, and not conditioned on any event or circumstance whatsoever.

     (e) All funds on deposit in the Cash Management Account following the occurrence of an Event of Default may be applied by Lender in such order and priority as Lender shall determine.

          2.7.3 Payments Received Under the Cash Management Arrangement. Notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, and provided no Event of Default has occurred and is continuing, Borrower’s obligations with respect to the payment of the Monthly Debt Service Payment Amount and

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amounts required to be deposited into the Reserve Funds, if any, shall be deemed satisfied to the extent sufficient amounts are deposited in the Cash Management Account to satisfy such obligations on the dates each such payment is required, regardless of whether any of such amounts are so applied by Lender.

     Section 2.8 Release of Out Parcel

     (a) Lender acknowledges that Borrower has requested the right to obtain the future releases of either or both of two (2) currently unimproved portions of the Property identified as Tract 3 (“Tract 3”) and Tract 4 (“Tract 4”) on that certain ALTA/ASCM Survey of the Property prepared by South West Land Surveying Co., dated December 11, 2006, (Tract 3 and Tract, individually or collectively as the context may require, the “Out Parcel”). Lender hereby agrees that, subject to the terms and conditions set forth in this Section 2.8, Borrower may obtain a release of the Out Parcel from the Lien of the Mortgage (and the related Loan Documents), provided that (a) no Event of Default shall then exist and remain uncured, (b) Borrower provides Lender with a written request for release of (i) Tract 3 no later than September 29, 2011 or (ii) Tract 4 no later than April 10, 2008, (c) the Debt Service Coverage Ratio immediately following such release is not less than the greater of 1.62 to 1.0 or the Debt Service Coverage Ratio immediately prior to such release (the “Release DSCR”), (d) the loan to value percentage immediately following such release is not greater than the lesser of sixty six percent (66%) or the loan to value percentage immediately prior to such release (the “Release LTV”), and (e) Borrower satisfies within ninety (90) days of the date Lender receives such written request each of the conditions listed on Schedule VI hereof (the “Out Parcel Release Conditions”).

     (b) In the event the Debt Service Coverage Ratio immediately following the Out Parcel Release will be less than the Release DSCR as determined by Lender, Borrower covenants and agrees to pay as additional consideration for the Out Parcel Release an amount equal to the amount by which the outstanding loan would need to be reduced to achieve a Debt Service Coverage Ratio greater than or equal to the Release DSCR.

     (c) In the event the loan to value percentage immediately following the Out Parcel Release will be greater than the Release LTV as determined by Lender, Borrower covenants and agrees to pay as additional consideration for the Out Parcel Release an amount equal to the amount by which the outstanding loan would need to be reduced to achieve a loan to value percentage equal to or less than the Release LTV.

     III. CONDITIONS PRECEDENT

     Section 3.1 Conditions Precedent to Closing. The obligation of Lender to make the Loan hereunder is subject to the fulfillment by Borrower or waiver by Lender of the following conditions precedent no later than the Closing Date:

          3.1.1 Representations and Warranties; Compliance with Conditions. The representations and warranties of Borrower contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the Closing Date with the same effect as if made on and as of such date, and no Default or Event of Default shall have occurred and be continuing; and Borrower shall be in compliance in all material respects with all

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terms and conditions set forth in this Agreement and in each other Loan Document on its part to be observed or performed.

          3.1.2 Loan Agreement and Note. Lender shall have received a copy of this Agreement and the Note, in each case, duly executed and delivered on behalf of Borrower.

          3.1.3 Delivery of Loan Documents; Title Insurance; Reports; Leases .

          (a) Mortgage, Assignment of Leases. Lender shall have received from Borrower fully executed and acknowledged counterparts of the Mortgage and the Assignment of Leases and evidence that counterparts of the Mortgage and Assignment of Leases have been delivered to the title company for recording, in the reasonable judgment of Lender, so as to effectively create upon such recording valid and enforceable Liens upon the Property, of the requisite priority, in favor of Lender (or such other trustee as may be required or desired under local law), subject only to the Permitted Encumbrances and such other Liens as are permitted pursuant to the Loan Documents. Lender shall have also received from Borrower fully executed counterparts of the other Loan Documents.

          (b) Title Insurance. Lender shall have received the Title Insurance Policy issued by a title company acceptable to Lender and dated as of the Closing Date, with, to the extent reasonably required by Lender, reinsurance and direct access agreements acceptable to Lender. Such Title Insurance Policy shall (i) provide coverage in an amount satisfactory to Lender, (ii) insure Lender that the Mortgage creates a valid lien on the Property of the requisite priority, free and clear of all exceptions from coverage other than Permitted Encumbrances and standard exceptions and exclusions from coverage (as modified by the terms of any endorsements), (iii) contain such endorsements and affirmative coverages as Lender may reasonably request, and (iv) name Lender as the insured. The Title Insurance Policy shall be assignable. Lender also shall have received evidence that all premiums in respect of such Title Insurance Policy have been paid.

          (c) Survey. Lender shall have received a current survey for the Property, certified to the title company and Lender and their successors and assigns, in form and content satisfactory to Lender and prepared by a professional and properly licensed land surveyor satisfactory to Lender in accordance with the Accuracy Standards for ALTA/ACSM Land Title Surveys as adopted by American Land Title Association, American Congress on Surveying & Mapping and National Society of Professional Surveyors in 2005. The survey shall reflect the same legal description contained in the Title Insurance Policy referred to in clause (b) above and shall include, among other things, a metes and bounds description of the real property comprising part of the Property reasonably satisfactory to Lender. The surveyor’s seal shall be affixed to each survey and the surveyor shall provide a certification for each survey in form and substance acceptable to Lender.

          (d) Insurance. Lender shall have received valid certificates of insurance for the policies of insurance required hereunder, satisfactory to Lender in its sole discretion, and evidence of the payment of all premiums payable for the existing policy period.

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          (e) Environmental Reports. Lender shall have received a Phase I environmental report (and, if recommended by the Phase I environmental report, a Phase II environmental report) in respect of the Property, in each case satisfactory in form and substance to Lender.

          (f) Zoning. Lender shall have received, at Lender’s option, (i) letters or other evidence with respect to the Property from the appropriate municipal authorities (or other Persons) concerning applicable zoning and building laws, and (ii) either (A) an ALTA 3.1 zoning endorsement for the applicable Title Insurance Policy or (B) a zoning opinion letter, in each case in substance reasonably satisfactory to Lender.

          (g) Encumbrances. Borrower shall have taken or caused to be taken such actions in such a manner so that Lender has a valid and perfected first priority Lien as of the Closing Date with respect to the Mortgage, subject only to applicable Permitted Encumbrances and such other Liens as are permitted pursuant to the Loan Documents, and Lender shall have received satisfactory evidence thereof.

          3.1.4 Related Documents. Each additional document not specifically referenced herein, but relating to the transactions contemplated herein, shall be in form and substance reasonably satisfactory to Lender, and shall have been duly authorized, executed and delivered by all parties thereto and Lender shall have received and approved copies thereof.

          3.1.5 Delivery of Organizational Documents. On or before the Closing Date, Borrower shall deliver or cause to be delivered to Lender copies certified by Borrower of all organizational documentation related to Borrower and/or the formation, structure, existence, good standing and/or qualification to do business, as Lender may request in its sole discretion, including, without limitation, amendments (as requested by Lender), good standing certificates, qualifications to do business in the appropriate jurisdictions, resolutions authorizing the entering into of the Loan and incumbency certificates as may be requested by Lender.

          3.1.6 Opinions of Borrower’s Counsel. Lender shall have received opinions from Borrower’s counsel (a) with respect to due execution, authority, enforceability of the Loan Documents and such other matters as Lender may require, and (b) an Insolvency Opinion, all such opinions in form, scope and substance satisfactory to Lender and Lender’s counsel in their reasonable discretion.

          3.1.7 Budgets. Borrower shall have delivered, and Lender shall have approved, the Annual Budget for the current Fiscal Year.

          3.1.8 Basic Carrying Costs. Borrower shall have paid or cause to be paid all Basic Carrying Costs relating to the Property which are in arrears, including without limitation, (a) accrued but unpaid Insurance Premiums due pursuant to the Policies, (b) currently due Taxes (including any in arrears) relating to the Property, and (c) currently due Other Charges relating to the Property, which amounts shall be funded with proceeds of the Loan.

          3.1.9 Completion of Proceedings. All organizational and other proceedings taken or to be taken in connection with the transactions contemplated by this Agreement and other Loan Documents and all documents incidental thereto shall be satisfactory in form and

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substance to Lender, and Lender shall have received all such counterpart originals or certified copies of such documents as Lender may reasonably request.

          3.1.10 Payments. All payments, deposits or escrows required to be made or established by Borrower under this Agreement, the Note and the other Loan Documents on or before the Closing Date shall have been paid or will be paid out of the proceeds of the Loan.

          3.1.11 Tenant Estoppels. Lender shall have received an executed tenant estoppel letter, which shall be in form and substance satisfactory to Lender, from each Tenant.

          3.1.12 Transaction Costs. Borrower shall have paid or reimbursed Lender for all title insurance premiums, recording and filing fees, costs of environmental reports, Physical Conditions Report, appraisals and other reports, the reasonable fees and costs of Lender’s counsel and all other reasonable third party out-of-pocket expenses incurred in connection with the origination and closing of the Loan.

          3.1.13 Material Adverse Change. There shall have been no material adverse change in the financial condition or business condition of Borrower, Guarantor or the Property since the date of the most recent financial statements delivered to Lender. The income and expenses of the Property, the occupancy thereof, and all other features of the transaction shall be as represented to Lender without material adverse change. Neither Borrower nor Guarantor shall be the subject of any bankruptcy, reorganization, or insolvency proceeding.

          3.1.14 Leases and Rent Roll. Lender shall have received copies of all Leases, which Leases shall be certified by Borrower as being true, correct and complete and certified copies of all ground leases affecting the Property, if any. Lender shall have received a current certified rent roll of the Property, reasonably satisfactory in form and substance to Lender.

          3.1.15 Subordination, Nondisturbance and Attornment. Lender shall have received an appropriate instrument acceptable to Lender in its reasonable discretion subordinating the Academy Lease to the Mortgage and including an agreement from Academy to attorn to Lender in the event of a foreclosure or delivery of a deed in lieu thereof. Lender shall agree in any such agreement to provide the applicable Tenant non-disturbance protection provided the applicable Lease is not in default beyond applicable notice and grace periods.

          3.1.16 Tax Lot. Lender shall have received evidence that the Property constitutes one (1) or more separate tax lots, which evidence shall be reasonably satisfactory in form and substance to Lender.

          3.1.17 Physical Conditions Reports. Lender shall have received a Physical Conditions Report with respect to the Property, which report shall be issued by an engineer selected by Lender and shall be reasonably satisfactory in form and substance to Lender.

          3.1.18 Management Agreement. Lender shall have received a copy of the Management Agreement with respect to the Property which shall be satisfactory in form and substance to Lender.

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          3.1.19 Appraisal. Lender shall have received an appraisal of the Property, from an appraiser selected by Lender, which appraisal shall be satisfactory in form and substance to Lender.

          3.1.20 Financial Statements. To the extent available to Borrower, Lender shall have received a balance sheet with respect to the Property for the two (2) most recent Fiscal Years and statements of income and statements of cash flows with respect to the Property for the three (3) most recent Fiscal Years, each in form and substance satisfactory to Lender.

          3.1.21 Further Documents. Lender or its counsel shall have received such other documents and further approvals, opinions, documents and information as Lender or its counsel may have reasonably requested including the Loan Documents in form and substance satisfactory to Lender and its counsel.

     IV. REPRESENTATIONS AND WARRANTIES

     Section 4.1 Borrower Representations. Borrower represents and warrants as of the date hereof and as of the Closing Date that:

          4.1.1 Organization. Borrower has been duly organized and is validly existing and in good standing with requisite power and authority to own its properties and to transact the businesses in which it is now engaged. Borrower is duly qualified to do business and is in good standing in each jurisdiction where it is required to be so qualified in connection with its properties, businesses and operations. Borrower possesses all rights, licenses, permits and authorizations, governmental or otherwise, necessary to entitle it to own its properties and to transact the businesses in which it is now engaged, and the sole business of Borrower is the ownership, management and operation of the Property.

          4.1.2 Proceedings. Borrower has taken all necessary action to authorize the execution, delivery and performance of this Agreement and the other Loan Documents. This Agreement and such other Loan Documents have been duly executed and delivered by or on behalf of Borrower and constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms, subject only to applicable bankruptcy, insolvency and similar laws affecting rights of creditors generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

          4.1.3 No Conflicts. The execution, delivery and performance of this Agreement and the other Loan Documents by Borrower will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance (other than pursuant to the Loan Documents) upon any of the property or assets of Borrower pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, partnership agreement, management agreement or other agreement or instrument to which Borrower is a party or by which any of Borrower’s property or assets is subject, nor will such action result in any violation of the provisions of any statute or any order, rule or regulation of any Governmental Authority having jurisdiction over Borrower or any of Borrower’s properties or assets, and any consent, approval, authorization, order, registration or

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qualification of or with any court or any such Governmental Authority required for the execution, delivery and performance by Borrower of this Agreement or any other Loan Documents has been obtained and is in full force and effect.

          4.1.4 Litigation. There are no actions, suits or proceedings at law or in equity by or before any Governmental Authority or other agency now pending or threatened against or affecting Borrower, Guarantor or, to Borrower’s actual knowledge, the Property, which actions, suits or proceedings, if determined against Borrower, Guarantor or the Property, might materially adversely affect the condition (financial or otherwise) or business of Borrower, Guarantor or the condition or ownership of the Property.

          4.1.5 Agreements. Borrower is not a party to any agreement or instrument or subject to any restriction which might materially and adversely affect Borrower or the Property, or Borrower’s business, properties or assets, operations or condition, financial or otherwise. Borrower is not in default in any material respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party or by which Borrower or the Property is bound. Borrower has no material financial obligation under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which Borrower is a party or by which Borrower or the Property is otherwise bound, other than (a) obligations incurred in the ordinary course of the operation of the Property as permitted pursuant to clause (xxiii) of the definition of “Special Purpose Entity” set forth in Section 1.1 hereof and (b) obligations under the Loan Documents.

          4.1.6 Title. Borrower has good and marketable fee simple title to the real property comprising part of the Property and good title to the balance of the Property, free and clear of all Liens whatsoever except the Permitted Encumbrances, such other Liens as are permitted pursuant to the Loan Documents and the Liens created by the Loan Documents. To Borrower’s actual knowledge, the Permitted Encumbrances in the aggregate do not materially and adversely affect the value, operation or use of the Property (as currently used) or Borrower’s ability to repay the Loan. To Borrower’s actual knowledge, the Mortgage, when properly recorded in the appropriate records, together with any Uniform Commercial Code financing statements required to be filed in connection therewith, will create (a) a valid, perfected first priority lien on the Property, subject only to Permitted Encumbrances and the Liens created by the Loan Documents and (b) perfected security interests in and to, and perfected collateral assignments of, all personalty owned by Borrower (including the Leases), all in accordance with the terms thereof, in each case subject only to any applicable Permitted Encumbrances, such other Liens as are permitted pursuant to the Loan Documents and the Liens created by the Loan Documents. To Borrower’s actual knowledge and except as set forth in the Title Insurance Policy or previously disclosed to Lender and which the title company has accepted a bond and/or indemnity to remove from the Title Insurance Policy, there are no claims for payment for work, labor or materials affecting the Property which are or may become a Lien prior to, or of equal priority with, the Liens created by the Loan Documents.

          4.1.7 Solvency. Borrower has (a) not entered into this transaction or executed the Note, this Agreement or any other Loan Documents with the actual intent to hinder, delay or defraud any creditor and (b) received reasonably equivalent value in exchange for its obligations under such Loan Documents. Giving effect to the Loan, the fair saleable value of Borrower’s

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assets exceeds and will, immediately following the making of the Loan, exceed Borrower’s total liabilities, including, without limitation, subordinated, unliquidated, disputed and contingent liabilities. The fair saleable value of Borrower’s assets is and will, immediately following the making of the Loan, be greater than Borrower’s probable liabilities, including the maximum amount of its contingent liabilities on its debts as such debts become absolute and matured. Borrower’s assets do not and, immediately following the making of the Loan will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Borrower does not intend to, and does not believe that it will, incur debt and liabilities (including contingent liabilities and other commitments) beyond its ability to pay such debt and liabilities as they mature (taking into account the timing and amounts of cash to be received by Borrower and the amounts to be payable on or in respect of obligations of Borrower). No petition in bankruptcy has been filed against Borrower or Guarantor in the last seven (7) years, and neither Borrower nor Guarantor in the last seven (7) years has ever made an assignment for the benefit of creditors or taken advantage of any insolvency act for the benefit of debtors. Neither Borrower nor Guarantor are contemplating either the filing of a petition by it under any state or federal bankruptcy or insolvency laws or the liquidation of all or a major portion of Borrower’s assets or property, and Borrower has no actual knowledge of any Person contemplating the filing of any such petition against it or Guarantor.

          4.1.8 Full and Accurate Disclosure. No statement of fact made by Borrower in this Agreement or in any of the other Loan Documents contains any untrue statement of a material fact or omits to state any material fact necessary to make statements contained herein or therein not misleading. There is no material fact presently known to Borrower which has not been disclosed to Lender which adversely affects, nor as far as Borrower can foresee, might adversely affect, the Property or the business, operations or condition (financial or otherwise) of Borrower.

          4.1.9 No Plan Assets. Borrower does not sponsor, is not obligated to contribute to, and is not itself an “employee benefit plan,” as defined in Section 3(3) of ERISA, subject to Title I of ERISA or Section 4975 of the Code, and none of the assets of Borrower constitutes or will constitute “plan assets” of one or more such plans within the meaning of 29 C.F.R. Section 2510.3-101. In addition, (a) Borrower is not a “governmental plan” within the meaning of Section 3(32) of ERISA and (b) transactions by or with Borrower are not subject to any state or other statute, regulation or other restriction regulating investments of, or fiduciary obligations with respect to, governmental plans within the meaning of Section 3(32) of ERISA which is similar to the provisions of Section 406 of ERISA or Section 4975 of the Code and which prohibit or otherwise restrict the transactions contemplated by this Agreement, including but not limited to the exercise by Lender of any of its rights under the Loan Documents.

          4.1.10 Compliance. To Borrower’s actual knowledge, Borrower and the Property and the use thereof comply in all material respects with all applicable Legal Requirements, including, without limitation, building and zoning ordinances and codes. Borrower is not in default or violation of any order, writ, injunction, decree or demand of any Governmental Authority. To Borrower’s actual knowledge, there has not been committed by Borrower or any other Person in occupancy of or involved with the operation or use of the Property any act or omission affording the federal government or any other Governmental

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Authority the right of forfeiture as against the Property or any part thereof or any monies paid in performance of Borrower’s obligations under any of the Loan Documents.

          4.1.11 Financial Information. All financial data, including, without limitation, the statements of cash flow and income and operating expense, that have been delivered to Lender in connection with the Loan (i) are true, complete and correct in all material respects, (ii) accurately represent the financial condition of Borrower and the Property, as applicable, as of the date of such reports, and (iii) to the extent prepared or audited by an independent certified public accounting firm, have been prepared in accordance with GAAP (or another basis of accounting acceptable to Lender and consistently applied), throughout the periods covered, except as disclosed therein. Except for Permitted Encumbrances, Borrower does not have any contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments that are known to Borrower and reasonably likely to have a materially adverse effect on the Property or the operation thereof as offices and a warehouse, except as referred to or reflected in said financial statements. Since the date of such financial statements, there has been no materially adverse change in the financial condition, operations or business of Borrower from that set forth in said financial statements.

          4.1.12 Condemnation. No Condemnation or other proceeding has been commenced or, to Borrower’s actual knowledge, is threatened or contemplated with respect to all or any portion of the Property or for the relocation of roadways providing access to the Property.

          4.1.13 Federal Reserve Regulations. No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any “margin stock” within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or for any other purpose which would be inconsistent with such Regulation U or any other Regulations of such Board of Governors, or for any purposes prohibited by Legal Requirements or by the terms and conditions of this Agreement or the other Loan Documents.

          4.1.14 Utilities and Public Access. The Property has rights of access to public ways and is served by water, sewer, sanitary sewer and storm drain facilities adequate to service the Property for its intended uses. All public utilities necessary or convenient to the full use and enjoyment of the Property are located either in the public right-of-way abutting the Property (which are connected so as to serve the Property without passing over other property) or in recorded easements serving the Property and such easements are set forth in the Title Insurance Policy. All roads necessary for the use of the Property for its current purposes have been completed and dedicated to public use and accepted by all Governmental Authorities.

          4.1.15 Not a Foreign Person. Borrower is not a “foreign person” within the meaning of §1445(f)(3) of the Code.

          4.1.16 Separate Lots. To Borrower’s actual knowledge, the Property is comprised of one (1) or more parcels which constitute a separate tax lot or lots and does not constitute a portion of any other tax lot not a part of the Property.

          4.1.17 Assessments. To Borrower’s actual knowledge and except as set forth in the Title Insurance Policy, there are no pending or proposed special or other assessments for

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public improvements or otherwise affecting the Property nor are there any contemplated improvements to the Property that may result in such special or other assessments.

          4.1.18 Enforceability. To Borrower’s actual knowledge, the Loan Documents are not subject to any right of rescission, set-off, counterclaim or defense by Borrower or Guarantor, including the defense of usury, nor would the operation of any of the terms of the Loan Documents, or the exercise of any right thereunder, render the Loan Documents unenforceable (subject to principles of equity and bankruptcy, insolvency and other laws generally affecting creditors’ rights and the enforcement of debtors’ obligations), and neither Borrower nor Guarantor have asserted any right of rescission, set-off, counterclaim or defense with respect thereto.

          4.1.19 No Prior Assignment. There are no prior assignments as security of the landlord’s interest in the Leases or any portion of the Rents due and payable or to become due and payable which are presently outstanding.

          4.1.20 Insurance. Borrower has obtained and has delivered to Lender certified copies of the Policies, or insurance certificates in form reasonably acceptable to Lender, reflecting the insurance coverages, amounts and other requirements set forth in this Agreement. To Borrower’s actual knowledge, no claims have been made or are currently pending, outstanding or otherwise remain unsatisfied under any of the Policies and neither Borrower nor any other Person, has done, by act or omission, anything which would impair the coverage of any such Policy.

          4.1.21 Use of Property. The Property is used exclusively for office and warehouse purposes and other appurtenant and related uses.

          4.1.22 Certificate of Occupancy; Licenses. All certifications, permits, licenses and approvals, including without limitation, certificates of completion and occupancy permits required for the legal use, occupancy and operation of the Property as offices and a warehouse (collectively, the “Licenses”), have been obtained and are in full force and effect. Borrower shall keep and maintain (or cause to be kept and maintained) all Licenses necessary for the operation of the Property as offices and a warehouse. The use being made of the Property is in conformity with the certificate of occupancy issued for the Property, if any.

          4.1.23 Flood Zone. Except as may be set forth in any flood certificate delivered to Lender in connection with the Loan, none of the Improvements on the Property are located in an area as identified by the Federal Emergency Management Agency as an area having special flood hazards or, if so located, the flood insurance required pursuant to Section 6.1(a)(i) is in full force and effect with respect to the Property.

          4.1.24 Physical Condition. To Borrower’s actual knowledge and except as set forth in the Physical Conditions Report, the Property, including, without limitation, all buildings, improvements, parking facilities, sidewalks, storm drainage systems, roofs, plumbing systems, HVAC systems, fire protection systems, electrical systems, equipment, elevators, exterior sidings and doors, landscaping, irrigation systems and all structural components, are in good condition, order and repair in all material respects; To Borrower’s actual knowledge, there exists no

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structural or other material defects or damages in the Property, whether latent or otherwise, and Borrower has not received notice from any insurance company or bonding company of any defects or inadequacies in the Property, or any part thereof, which would adversely affect the insurability of the same or cause the imposition of extraordinary premiums or charges thereon or of any termination or threatened termination of any policy of insurance or bond.

          4.1.25 Boundaries. To Borrower’s actual knowledge and except as set forth on the Survey, all of the improvements which were included in determining the appraised value of the Property lie wholly within the boundaries and building restriction lines of the Property, and no improvements on adjoining properties encroach upon the Property, and no easements or other encumbrances upon the Property encroach upon any of the Improvements, so as to affect the value or marketability of the Property except those which are insured against by the Title Insurance Policy.

          4.1.26 Leases. The Property is not subject to any leases other than the Leases described in the rent roll attached hereto as Schedule I and made a part hereof. Borrower is the owner and lessor of landlord’s interest in the Leases. No Person has any possessory interest in the Property or right to occupy the same except under and pursuant to the provisions of the Leases. The current Leases are in full force and effect and, to Borrower’s actual knowledge and except as may be disclosed in any tenant estoppel certificates delivered to Lender, there are no material defaults thereunder by either party and there are no conditions that, with the passage of time or the giving of notice, or both, would constitute material defaults thereunder. No Rent (including security deposits) has been paid more than one (1) month in advance of its due date. To Borrower’s actual knowledge and except as may be disclosed in any tenant estoppel certificates delivered to Lender, all work to be performed by Borrower under each Lease has been performed as required and has been accepted by the applicable Tenant , and any payments, free rent, partial rent, rebate of rent or other payments, credits, allowances or abatements required to be given by Borrower to any Tenant has already been received by such Tenant. There has been no prior sale, transfer or assignment (other than to Borrower), hypothecation or pledge of any Lease or of the Rents received therein (other than sales, transfers, assignments, hypothecations or pledges which may have been made by the Tenants under the Leases). To Borrower’s actual knowledge and except as indicated on Schedule I, no Tenant listed on Schedule I has assigned its Lease or sublet all or any portion of the premises demised thereby, no such Tenant holds its leased premises under assignment or sublease, nor does anyone except such Tenant and its employees occupy such leased premises. No Tenant under any Lease has a right or option pursuant to such Lease or otherwise to purchase all or any part of the leased premises or the building of which the leased premises are a part, other than rights of first refusal or rights of first offer described in any Leases delivered to Lender prior to the date hereof. No Tenant under any Lease has any right or option for additional space in the Improvements. To Borrower’s actual knowledge and except as disclosed in any environmental reports delivered to Lender in connection with the Loan, no hazardous wastes or toxic substances, as defined by applicable federal, state or local statutes, rules and regulations, have been disposed, stored or treated by any Tenant under any Lease on or about the leased premises nor does Borrower have any actual knowledge of any Tenant ’s intention to use its leased premises for any activity which, directly or indirectly, involves the use, generation, treatment, storage, disposal or transportation of any petroleum product or any toxic or hazardous chemical, material, substance or waste, other than substances of kinds and in amounts ordinarily and customarily used or stored for the

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purposes of cleaning or other maintenance or operations and otherwise in compliance with applicable environmental laws.

          4.1.27 Survey. To Borrower’s actual knowledge, the Survey does not fail to reflect any material matter affecting the Property or the title thereto.

          4.1.28 Inventory. Borrower is the owner of all of the Equipment, Fixtures and Personal Property (as such terms are defined in the Mortgage) located on or at the Property, other than Equipment, Fixtures and Personal Property owned by the Tenants under the Leases and shall not lease any Equipment, Fixtures or Personal Property other than pursuant to the Leases or as permitted hereunder. All of the Equipment, Fixtures and Personal Property are sufficient to operate the Property in the manner required hereunder and in the manner in which it is currently operated.

          4.1.29 Filing and Recording Taxes. To Borrower’s actual knowledge, all transfer taxes, deed stamps, intangible taxes or other amounts in the nature of transfer taxes required to be paid by any Person under applicable Legal Requirements currently in effect in connection with the transfer of the Property to Borrower have been paid. All mortgage, mortgage recording, stamp, intangible or other similar tax required to be paid by any Person under applicable Legal Requirements currently in effect in connection with the execution, delivery, recordation, filing, registration, perfection or enforcement of any of the Loan Documents, including, without limitation, the Mortgage, have been paid, and, under current Legal Requirements, the Mortgage is enforceable in accordance with its terms by Lender (or any subsequent holder thereof), subject to principles of equity and bankruptcy, insolvency and other laws generally applicable to creditors’ rights and the enforcement of debtors’ obligations.

          4.1.30 Special Purpose Entity/Separateness.

          (a) Until the Debt has been paid in full, Borrower hereby represents, warrants and covenants that Borrower is, shall be and shall continue to be a Special Purpose Entity.

          (b) The representations, warranties and covenants set forth in Section 4.1.30(a) shall survive for so long as any amount remains payable to Lender under this Agreement or any other Loan Document.

          (c) Any and all of the assumptions made in any Insolvency Opinion, including, but not limited to, any exhibits attached hereto, will have been and shall be true and correct in all respects, and Borrower will have complied and will comply with all of the assumptions made with respect to it in any Insolvency Opinion. Each entity other than Borrower with respect to which an assumption is made in any Insolvency Opinion will have complied and will comply with all of the assumptions made with respect to it in any such Insolvency Opinion.

          4.1.31 Management Agreement. The Management Agreement is in full force and effect and there is no default thereunder by any party thereto and no event has occurred that, with the passage of time and/or the giving of notice would constitute a default thereunder.

          4.1.32 Illegal Activity. No portion of the Property has been or will be purchased by Borrower with proceeds of any illegal activity.

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          4.1.33 No Change in Facts or Circumstances; Disclosure. All information submitted by and on behalf of Borrower to Lender and in all financial statements, rent rolls (including the rent roll attached hereto as Schedule I), reports, certificates and other documents submitted in connection with the Loan or in satisfaction of the terms thereof and all statements of fact made by Borrower in this Agreement or in any other Loan Document, are, to Borrower’s actual knowledge, accurate, complete and correct in all material respects. There has been no material adverse change in any condition, fact, circumstance or event that would make any such information inaccurate, incomplete or otherwise misleading in any material respect or that otherwise materially and adversely affects or might materially and adversely affect the use, operation or value of the Property or the business operations or the financial condition of Borrower. Borrower has disclosed to Lender all material facts and has not failed to disclose any material fact that could cause any Provided Information or representation or warranty made herein to be materially misleading.

          4.1.34 Investment Company Act. Borrower is not (a) an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended; (b) a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of either a “holding company” or a “subsidiary company” within the meaning of the Public Utility Holding Company Act of 1935, as amended; or (c) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money.

          4.1.35 Embargoed Person. As of the Closing Date, to Borrower’s knowledge, (a) none of the funds or other assets of Borrower constitute property of, or are beneficially owned, directly or indirectly, by any Embargoed Person; (b) no Embargoed Person has any interest of any nature whatsoever in Borrower with the result that the investment in Borrower (whether directly or indirectly), is prohibited by law or the Loan is in violation of law; and (c) none of the funds of Borrower have been derived from any unlawful activity with the result that the investment in Borrower (whether directly or indirectly), is prohibited by law or the Loan is in violation of law, provided, however, with respect to direct or indirect interests in Cole Credit Property Trust, Inc. or Cole Credit Property Trust II, Inc., Lender acknowledges that Borrower has relied exclusively on its U.S. broker-dealer network to implement the normal and customary investor screening practices mandated by applicable law and NASD regulations in making the foregoing representation.

          4.1.36 Principal Place of Business; State of Organization. Borrower’s principal place of business as of the date hereof is the address set forth in the introductory paragraph of this Agreement. The Borrower is organized under the laws of the State of Delaware.

          4.1.37 Loan to Value. Based on the appraisal delivered pursuant to Section 3.1.19, the maximum principal amount of the Loan does not exceed 125% of the fair market value of the Property.

          4.1.38 Cash Management Account. Borrower hereby represents and warrants to Lender that:

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     (a) Upon the establishment of the Cash Management Account, this Agreement, together with the other Loan Documents, will create a valid and continuing security interest (as defined in the Uniform Commercial Code of the state in which such account is located) in the Cash Management Account in favor of Lender, which security interest is prior to all other Liens, other than Permitted Encumbrances, and is enforceable as such against creditors of and purchasers from Borrower;

     (b) Upon its establishment, the Cash Management Account will constitute a “deposit account” and/or “securities account” within the meaning of the Uniform Commercial Code of the state in which such account is located; and

     (c) Upon its establishment, the Cash Management Account will not be in the name of any Person other than Borrower, as pledgor, or Lender, as pledgee. Borrower has not consented to Agent complying with instructions with respect to the Cash Management Account from any Person other than Lender.

     Section 4.2 Survival of Representations. Borrower agrees that all of the representations and warranties of Borrower set forth in Section 4.1 hereof and elsewhere in this Agreement and in the other Loan Documents shall survive for so long as any amount remains owing to Lender under this Agreement or any of the other Loan Documents by Borrower. All representations, warranties, covenants and agreements made in this Agreement or in the other Loan Documents by Borrower shall be deemed to have been relied upon by Lender notwithstanding any investigation heretofore or hereafter made by Lender or on its behalf.

     V. BORROWER COVENANTS

     Section 5.1 Affirmative Covenants. From the date hereof and until payment and performance in full of all obligations of Borrower under the Loan Documents or the earlier release of the Lien of the Mortgage encumbering the Property (and all related obligations) in accordance with the terms of this Agreement and the other Loan Documents, Borrower hereby covenants and agrees with Lender that:

          5.1.1 Existence; Compliance with Legal Requirements. Borrower shall do or cause to be done all things necessary to preserve, renew and keep in full force and effect its existence, rights, licenses, permits and franchises and comply with all Legal Requirements applicable to it and the Property. There shall never be committed by Borrower, and Borrower shall never permit any other Person in occupancy of or involved with the operation or use of the Property to commit any act or omission affording the federal government or any state or local government the right of forfeiture against the Property or any part thereof or any monies paid in performance of Borrower’s obligations under any of the Loan Documents. Borrower hereby covenants and agrees not to commit, permit or suffer to exist any act or omission affording such right of forfeiture. Borrower shall at all times maintain, preserve and protect all franchises and trade names and preserve all the remainder of its property used or useful in the conduct of its business and shall keep the Property in good working order and repair, and from time to time make, or cause to be made, all reasonably necessary repairs, renewals, replacements, betterments and improvements thereto, all as more fully provided in the Mortgage. Borrower shall cause the Property to be insured at all times by financially sound and reputable insurers, to such extent and

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against such risks, and cause to be maintained liability and such other insurance, as is more fully provided in this Agreement. After prior written notice to Lender, Borrower, at its own expense, may contest by appropriate legal proceeding promptly initiated and conducted in good faith and with due diligence, the validity of any Legal Requirement, the applicability of any Legal Requirement to Borrower or the Property or any alleged violation of any Legal Requirement, provided that (i) no Event of Default has occurred and remains uncured; (ii) Borrower is permitted to do so under the provisions of any mortgage or deed of trust superior in lien to the Mortgage; (iii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any instrument to which Borrower is subject and shall not constitute a default thereunder and such proceeding shall be conducted in accordance with all applicable statutes, laws and ordinances; (iv) neither the Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, cancelled or lost; (v) Borrower shall promptly upon final determination thereof comply with any such Legal Requirement determined to be valid or applicable or cure any violation of any Legal Requirement; (vi) such proceeding shall suspend the enforcement of the contested Legal Requirement against Borrower or the Property; and (vii) Borrower shall furnish such security as may be required in the proceeding, or as may be requested by Lender, to insure compliance with such Legal Requirement, together with all interest and penalties payable in connection therewith. Lender may apply any such security, as necessary to cause compliance with such Legal Requirement at any time when, in the reasonable judgment of Lender, the validity, applicability or violation of such Legal Requirement is finally established or the Property (or any part thereof or interest therein) shall be in danger of being sold, forfeited, terminated, cancelled or lost.

          5.1.2 Taxes and Other Charges. Borrower shall pay or cause to be paid all Taxes and Other Charges now or hereafter levied or assessed or imposed against the Property or any part thereof as the same become due and payable; provided, however, Borrower’s obligation to directly pay (or cause to be paid) Taxes shall be suspended for so long as Borrower complies with the terms and provisions of Section 7.2 hereof. Borrower will deliver to Lender receipts for payment or other evidence satisfactory to Lender that the Taxes and Other Charges have been so paid or are not then delinquent no later than ten (10) days prior to the date on which the Taxes and/or Other Charges would otherwise be delinquent if not paid, provided, however, if the Tenant under a Lease pays such Taxes or Other Charges directly to the applicable authority and Borrower timely requests and diligently pursues evidence of payment, and further provided that no enforcement action has been commenced by the applicable authority resulting from such Tenant’s failure to pay Taxes or Other Charges, Borrower shall have an additional thirty (30) day period to provide such evidence to Lender. Borrower shall not suffer and shall promptly cause to be paid and discharged any Lien or charge whatsoever which may be or become a Lien or charge against the Property (other than Permitted Encumbrances), and shall promptly pay for or cause to be paid all utility services provided to the Property. After prior written notice to Lender, Borrower, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the amount or validity or application in whole or in part of any Taxes or Other Charges, provided that (i) no Event of Default has occurred and remains uncured; (ii) Borrower is permitted to do so under the provisions of any mortgage or deed of trust superior in lien to the Mortgage; (iii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Borrower is subject and shall not constitute a default thereunder and such proceeding shall be conducted in accordance with all applicable statutes, laws and ordinances; (iv) neither the

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Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, cancelled or lost; (v) Borrower shall promptly upon final determination thereof pay the amount of any such Taxes or Other Charges, together with all costs, interest and penalties which may be payable in connection therewith; (vi) such proceeding shall suspend the collection of such contested Taxes or Other Charges from the Property; and (vii) Borrower shall furnish such security as may be required in the proceeding, or as may be requested by Lender, to insure the payment of any such Taxes or Other Charges, together with all interest and penalties thereon. Lender may pay over any such cash deposit or part thereof held by Lender to the claimant entitled thereto at any time when, in the judgment of Lender, the entitlement of such claimant is established or the Property (or part thereof or interest therein) shall be in danger of being sold, forfeited, terminated, cancelled or lost or there shall be any danger of the Lien of the Mortgage being primed by any related Lien (other than Permitted Encumbrances).

     Notwithstanding the foregoing provisions of this Section 5.1.2, to the extent the Academy Lease remains in effect and Academy remains liable for the obligations under the Academy Lease, the right to contest the validity, applicability or amount of any asserted tax or assessment shall be governed by the Academy Lease.

          5.1.3 Litigation. Borrower shall give prompt written notice to Lender of any litigation or governmental proceedings pending or threatened against Borrower and/or Guarantor which might materially adversely affect Borrower’s or Guarantor’s condition (financial or otherwise) or business or the Property.

          5.1.4 Access to Property. Subject to the rights of Tenants under the Leases, Borrower shall permit agents, representatives and employees of Lender to inspect the Property or any part thereof at reasonable hours upon reasonable advance notice.

          5.1.5 Notice of Default. Borrower shall promptly advise Lender of any material adverse change in Borrower’s condition, financial or otherwise, or of the occurrence of any Event of Default of which Borrower has actual knowledge.

          5.1.6 Cooperate in Legal Proceedings. Borrower shall cooperate fully with Lender with respect to any proceedings before any court, board or other Governmental Authority which may in any way affect the rights of Lender hereunder or any rights obtained by Lender under any of the other Loan Documents and, in connection therewith, permit Lender, at its election, to participate in any such proceedings.

          5.1.7 Perform Loan Documents. Borrower shall observe, perform and satisfy all the terms, provisions, covenants and conditions of, and shall pay when due all costs, fees and expenses to the extent required under the Loan Documents executed and delivered by, or applicable to, Borrower.

          5.1.8 Award and Insurance Benefits. Borrower shall cooperate with Lender in obtaining for Lender the benefits of any Awards or Insurance Proceeds lawfully or equitably payable in connection with the Property, and Lender shall be reimbursed for any reasonable expenses incurred in connection therewith (including reasonable attorneys’ fees and disbursements, and the payment by Borrower of the reasonable expense of an appraisal on behalf

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of Lender in case of Casualty or Condemnation affecting the Property or any part thereof) out of such Insurance Proceeds.

          5.1.9 Further Assurances. Borrower shall, at Borrower’s sole cost and expense:

          (a) furnish to Lender all instruments, documents, boundary surveys, footing or foundation surveys, certificates, plans and specifications, appraisals, title and other insurance reports and agreements, and each and every other document, certificate, agreement and instrument required to be furnished by Borrower pursuant to the terms of the Loan Documents or which are reasonably requested by Lender in connection therewith;

          (b) execute and deliver to Lender such documents, instruments, certificates, assignments and other writings, and do such other acts necessary or desirable, to evidence, preserve and/or protect the collateral at any time securing or intended to secure the obligations of Borrower under the Loan Documents, as Lender may reasonably require; and

          (c) do and execute all and such further lawful and reasonable acts, conveyances and assurances for the better and more effective carrying out of the intents and purposes of this Agreement and the other Loan Documents, as Lender shall reasonably require from time to time.

          5.1.10 Principal Place of Business, State of Organization. Borrower will not cause or permit any change to be made in its name, identity (including its trade name or names), place of organization or formation (as set forth in Section 4.1.36 hereof) or, except for Transfers permitted under the Loan Documents, Borrower’s corporate or partnership structure unless Borrower shall have first notified Lender in writing of such change at least thirty (30) days prior to the effective date of such change, and shall have first taken all action required by Lender for the purpose of perfecting or protecting the lien and security interests of Lender pursuant to this Agreement and the other Loan Documents and, in the case of a change in Borrower’s structure which is not permitted under the Loan Documents, without first obtaining the prior consent of Lender. Upon Lender’s request, Borrower shall execute and deliver additional financing statements, security agreements and other instruments which may be necessary to effectively evidence or perfect Lender’s security interest in the Property as a result of such change of principal place of business or place of organization. Borrower’s principal place of business and chief executive office, and the place where Borrower keeps its books and records, including recorded data of any kind or nature, regardless of the medium or recording, including software, writings, plans, specifications and schematics, has been for the preceding four months (or, if less, the entire period of the existence of Borrower) and will continue to be the address of Borrower set forth at the introductory paragraph of this Agreement (unless Borrower notifies Lender in writing at least thirty (30) days prior to the date of such change). Borrower’s organizational identification number, if any, assigned by the state of incorporation or organization is correctly set forth in the introductory paragraph of this Agreement. Borrower shall promptly notify Lender of any change in its organizational identification number. If Borrower does not now have an organizational identification number and later obtains one, Borrower promptly shall notify Lender of such organizational identification number.

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          5.1.11 Financial Reporting. Borrower shall keep accurate books and records of account of the Property and its own financial affairs sufficient to permit the preparation of financial statements therefrom on the income tax basis of accounting. Lender and its duly authorized representatives shall have the right to examine, copy and audit Borrower’s records and books of account at all reasonable times. So long as this Agreement continues in effect, Borrower shall provide to Lender, in addition to any other financial statements required hereunder or under any of the other Loan Documents, the following financial statements and information, all of which must be certified to Lender as being true and correct by Borrower or the person or entity to which they pertain, as applicable, and be prepared in accordance with the income tax basis of accounting and be in form and substance reasonably acceptable to Lender:

     (a) copies of any tax returns filed by Borrower, within thirty (30) days after the date of filing;

     (b) [reserved]; and

     (c) quarterly operating statements for the Property, within forty-five (45) days after the end of each March, June, September and December commencing with March, 2007;

     (d) annual balance sheets for the Property and annual financial statements for Borrower, each principal or general partner in Borrower, and each Guarantor, within ninety (90) days after the end of each calendar year; and

     (e) such other information with respect to the Property, Borrower, the principals or general partners in Borrower, and each Guarantor, which may be reasonably requested from time to time by Lender, within a reasonable time after the applicable request.

If any of the aforementioned materials are not furnished to Lender within the applicable time periods or Lender is dissatisfied with the contents of any of the foregoing and has notified Borrower of its dissatisfaction, in addition to any other rights and remedies of Lender contained herein, (i) Borrower shall pay to Lender upon demand, at Lender’s option and in its sole discretion, an amount equal to $1,000 for each of the aforementioned materials that is not delivered in accordance with the income tax basis of accounting, provided Lender has given Borrower at least 30 days prior written notice of such failure, and (ii) Lender shall have the right, but not the obligation, to obtain the same by means of an audit by an independent certified public accountant selected by Lender, in which event Borrower agrees to pay, or to reimburse Lender for, any reasonable expense of such audit and further agrees to provide all reasonably necessary information to said accountant and to otherwise cooperate in the making of such audit.

Within sixty (60) days after the occurrence of a Cash Management Trigger, and not later than sixty (60) days prior to the commencement of each Fiscal Year thereafter, Borrower shall submit to Lender an Annual Budget in form reasonably satisfactory to Lender. The Annual Budget shall be subject to Lender’s written approval (each such approved Annual Budget, an “Approved Annual Budget”). In the event that Lender objects to a proposed Annual Budget submitted by Borrower, Lender shall advise Borrower of such objections within fifteen (15) days after receipt thereof (and deliver to Borrower a reasonably detailed description of such objections) and Borrower shall promptly revise such Annual Budget and resubmit the same to Lender. Lender

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shall advise Borrower of any objections to such revised Annual Budget within ten (10) days after receipt thereof (and deliver to Borrower a reasonably detailed description of such objections) and Borrower shall promptly revise the same in accordance with the process described in this subsection until Lender approves the Annual Budget. Until such time that Lender approves a proposed Annual Budget, the most recently Approved Annual Budget shall apply; provided that, such Approved Annual Budget shall be adjusted to reflect actual increases in Taxes, Insurance Premiums and Other Charges. In the event that, Borrower must incur an extraordinary operating expense or capital expense not set forth in the Approved Annual Budget (each an “Extraordinary Expense”), then Borrower shall promptly deliver to Lender a reasonably detailed explanation of such proposed Extraordinary Expense for Lender’s approval.

          5.1.12 Business and Operations. Borrower will continue to engage in the businesses presently conducted by it as and to the extent the same are necessary for the ownership, maintenance, management and operation of the Property. Borrower will qualify to do business and will remain in good standing under the laws of the jurisdiction of its formation as and to the extent the same are required for the ownership, maintenance, management and operation of the Property. Borrower shall at all times during the term of the Loan, continue to own all of Equipment, Fixtures and Personal Property which are necessary to operate the Property in the manner required hereunder and in the manner in which it is currently operated, other than Equipment, Fixtures and Personal Property owned by the Tenants under the Leases.

          5.1.13 Title to the Property. Borrower will warrant and defend (a) the title to the Property and every part thereof, subject only to Liens permitted hereunder (including Permitted Encumbrances) and (b) the validity and priority of the Lien of the Mortgage and the Assignment of Leases on the Property, subject only to Liens permitted hereunder (including Permitted Encumbrances), in each case against the claims of all Persons whomsoever. Borrower shall reimburse Lender for any losses, costs, damages or expenses (including reasonable attorneys’ fees and court costs) incurred by Lender if an interest in the Property, other than as permitted hereunder, is claimed by another Person.

          5.1.14 Costs of Enforcement. In the event (a) that the Mortgage encumbering the Property is foreclosed in whole or in part or that the Mortgage is put into the hands of an attorney for collection, suit, action or foreclosure, (b) of the foreclosure of any mortgage encumbering the Property prior to or subsequent to the Mortgage in which proceeding Lender is made a party, or (c) of the bankruptcy, insolvency, rehabilitation or other similar proceeding in respect of Borrower or Guarantor or an assignment by Borrower or Guarantor for the benefit of its creditors, Borrower, its successors or assigns, shall be chargeable with and agrees to pay all costs of collection and defense, including reasonable attorneys’ fees and costs, incurred by Lender or Borrower in connection therewith and in connection with any appellate proceeding or post judgment action involved therein, together with all required service or use taxes.

          5.1.15 Estoppel Statement.

          (a) After request by Lender, Borrower shall within ten (10) days furnish Lender with a statement, duly acknowledged and certified, setting forth (i) the original principal amount of the Note, (ii) the unpaid principal amount of the Note, (iii) the Applicable Interest Rate of the Note, (iv) the date installments of interest and/or principal were last paid, (v) any

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offsets or defenses to the payment of the Debt, if any, and (vi) that the Note, this Agreement, the Mortgage and the other Loan Documents are valid, legal and binding obligations and have not been modified or if modified, giving particulars of such modification.

          (b) Borrower shall use commercially reasonable efforts to deliver to Lender upon request, tenant estoppel certificates from each commercial Tenant leasing space at the Property in form and substance reasonably satisfactory to Lender provided that Borrower shall not be required to deliver such certificates more frequently than two (2) times in any calendar year.

          5.1.16 Loan Proceeds. Borrower shall use the proceeds of the Loan received by it on the Closing Date only for the purposes set forth in Section 2.1.4 hereof.

          5.1.17 Performance by Borrower. Borrower shall in a timely manner observe, perform and fulfill each and every covenant, term and provision of each Loan Document executed and delivered by, or applicable to, Borrower, and shall not enter into or otherwise suffer or permit any amendment, waiver, supplement, termination or other modification of any Loan Document executed and delivered by, or applicable to, Borrower without the prior written consent of Lender.

          5.1.18 Confirmation of Representations. Borrower shall deliver, in connection with any Securitization, (a) one (1) or more Officer’s Certificates certifying as to the accuracy of all representations made by Borrower in the Loan Documents as of the date of the closing of such Securitization in all relevant jurisdictions, and (b) certificates of the relevant Governmental Authorities in all relevant jurisdictions indicating the good standing and qualification of Borrower and Guarantor as of the date of the Securitization.

          5.1.19 No Joint Assessment. Borrower shall not suffer, permit or initiate the joint assessment of the Property (a) with any other real property constituting a tax lot separate from the Property, and (b) which constitutes real property with any portion of the Property which may be deemed to constitute personal property, or any other procedure whereby the lien of any taxes which may be levied against such personal property shall be assessed or levied or charged to such real property portion of the Property.

          5.1.20 Leasing Matters. Any Leases with respect to the Property written after the date hereof shall be approved by Lender, which approval shall not be unreasonably withheld, conditioned or delayed. Upon request, Borrower shall furnish Lender with executed copies of all Leases. All renewals of Leases and all proposed Leases shall provide for rental rates comparable to existing local market rates. All proposed Leases shall be on commercially reasonable terms and shall not contain any terms which would materially affect Lender’s rights under the Loan Documents. All Leases executed after the date hereof shall provide that they are subordinate to the Mortgage and that the lessee agrees to attorn to Lender or any purchaser at a sale by foreclosure or power of sale. Borrower (i) shall observe and perform the obligations imposed upon the lessor under the Leases in a commercially reasonable manner; (ii) shall enforce and may amend or terminate the terms, covenants and conditions contained in the Leases upon the part of the lessee thereunder to be observed or performed in a commercially reasonable manner and in a manner not to impair the value of the Property involved except that no termination by

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Borrower or acceptance of surrender by a Tenant of any Leases shall be permitted unless by reason of a tenant default and then only in a commercially reasonable manner to preserve and protect the Property; provided, however, that no such termination or surrender of any Lease covering more than 5,000 square feet will be permitted without the written consent of Lender; (iii) shall not collect any of the rents more than one (1) month in advance (other than security deposits); (iv) shall not execute any other assignment of lessor’s interest in the Leases or the Rents (except as contemplated by the Loan Documents); (v) shall not alter, modify or change the terms of the Leases in a manner inconsistent with the provisions of the Loan Documents; and (vi) shall execute and deliver at the request of Lender all such further assurances, confirmations and assignments in connection with the Leases as Lender shall from time to time reasonably require. Borrower shall provide Lender, at least ten (10) Business Days prior notice for the approval or rejection of any proposed Lease. Each such request shall include the notation “IMMEDIATE RESPONSE REQUIRED” prominently displayed in bold, all caps and fourteen (14) point or larger font at the top of the first page of the Lease approval request and the envelope containing such request. In the event that Lender fails to respond within such time period, Borrower shall submit a second approval request to which Lender shall respond within five (5) Business Days. If Lender fails to respond to such second notice within such period, such failure shall be deemed to be the consent and approval of the Lease by Lender if (I) Borrower has delivered to Lender all required documents and information necessary to adequately and completely evaluate the Lease, (II) Borrower has resubmitted the Lease with the notation “IMMEDIATE RESPONSE REQUIRED, FAILURE TO RESPOND TO THIS LEASE APPROVAL REQUEST WITHIN FIVE (5) BUSINESS DAYS FROM RECEIPT SHALL BE DEEMED TO BE LENDER’S APPROVAL OF THE LEASE” prominently displayed in bold, all caps and fourteen (14) point or larger font at the top of the first page of the Lease approval request and the envelope containing such request, and (III) the proposed tenant (or its parent if such parent guarantees the tenant’s obligations under such proposed Lease) shall have a credit rating issued by Standard and Poor’s of BB or better (or an equivalent rating issued by another nationally recognized rating agency reasonably acceptable to Lender).

          5.1.21 Alterations

          (a) Borrower shall obtain Lender’s prior written consent to any alterations to any Improvements, which consent shall not be unreasonably withheld or delayed except with respect to alterations that may have a material adverse effect on Borrower’s financial condition, the value of the Property or the Net Operating Income. Notwithstanding the foregoing, Lender’s consent shall not be required in connection with (a) tenant improvement work performed pursuant to the terms of any Lease executed on or before the date hereof, (b) tenant improvement work performed pursuant to the terms of any Lease executed after the date hereof, provided that such Lease shall satisfy the requirements of Section 5.1.20, or (c) alterations performed in connection with the Restoration of the Property after the occurrence of a Casualty or Condemnation in accordance with the terms and provisions of this Agreement, and in the case of clause (c), provided such alterations will not have a material adverse effect on Borrower’s financial condition, the value of the Property or the Net Operating Income. If the total unpaid amounts due and payable with respect to alterations to the Improvements at the Property (other than such amounts to be paid or reimbursed by Tenants under the Leases) shall at any time exceed One Hundred Thousand and 00/100 Dollars ($100,000.00) (the “Threshold Amount”), Borrower shall promptly deliver to Lender as security for the payment of such amounts and as

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additional security for Borrower’s obligations under the Loan Documents any of the following: (A) cash, (B) U.S. Obligations, (C) other securities having a rating acceptable to Lender and that the applicable Rating Agencies have confirmed in writing will not, in and of itself, result in a downgrade, withdrawal or qualification of the initial, or, if higher, then current ratings assigned to any Securities or any class thereof in connection with any Securitization or (D) a completion and performance bond or an irrevocable letter of credit (payable on sight draft only) issued by a financial institution having a rating by S&P of not less than “A-1+” if the term of such bond or letter of credit is no longer than three (3) months or, if such term is in excess of three (3) months, issued by a financial institution having a rating that is acceptable to Lender and that the applicable Rating Agencies have confirmed in writing will not, in and of itself, result in a downgrade, withdrawal or qualification of the initial, or, if higher, then current ratings assigned to any Securities or class thereof in connection with any Securitization. Such security shall be in an amount equal to the excess of the total unpaid amounts with respect to alterations to the Improvements on the Property (other than such amounts to be paid or reimbursed by Tenants under the Leases) over the Threshold Amount and Lender may apply such security from time to time at the option of Lender to pay for such alterations.

          (b) Lender acknowledges that Academy has the right under Section 11(b) of the Academy Lease to perform one or more expansions or renovations of the Improvements (the “Modification”) during the first ten (10) years of the Academy Lease and Borrower is required to reimburse Academy for such Modification in an amount not to exceed $5,000,000 pursuant to Section 11(b) of the Academy Lease. Borrower covenants and agrees to reimburse Academy for such Modification, in an amount not to exceed $5,000,000, pursuant to the terms of Section 11(b) of the Academy Lease. If Academy exercises its right to perform a Modification and fails to complete such Modification with reasonable diligence in a reasonable time, Borrower covenants and agrees to (i) restore or cause to be restored the Property to a condition reasonably acceptable to Lender, which restoration may include razing structures not completed in the course of such Modification, and (ii) discharge or cause to be discharged (by payment, bonding or otherwise) all liens filed against the Property in connection with such Modification.

          5.1.22 Operation of Property.

          (a) Borrower shall cause the Property to be operated, in all material respects, in accordance with the Leases and Management Agreement (or Replacement Management Agreement) as applicable. In the event that the Management Agreement expires or the Property is removed from the application of the Management Agreement (without limiting any obligation of Borrower to obtain Lender’s consent to any removal of the Property from the application of the Management Agreement or modification of the Management Agreement as it relates to the Property if required in accordance with the terms and provisions of this Agreement), Borrower shall promptly enter into a Replacement Management Agreement with Manager or another Qualified Manager, as applicable.

          (b) Borrower shall: (i) promptly perform and/or observe, in all material respects, all of the covenants and agreements required to be performed and observed by it under the Management Agreement and do all things necessary to preserve and to keep unimpaired its material rights thereunder; (ii) promptly notify Lender of any material default under the Management Agreement of which it is aware; (iii) promptly deliver to Lender a copy of each

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financial statement, business plan, capital expenditures plan, notice, report and estimate received by it with respect to the Property under the Management Agreement; and (iv) enforce the performance and observance of all of the covenants and agreements required to be performed and/or observed by Manager under the Management Agreement, in a commercially reasonable manner.

          5.1.23 Completion of Work in Progress. Lender acknowledges that there is currently on-going construction at the Property being performed by Academy. Borrower hereby covenants and agrees that if Academy fails to timely complete such on-going construction, Borrower shall complete or cause Academy to complete such construction. If Borrower fails to complete or cause Academy to complete such construction within sixty (60) days of Lender’s written request, or fails to diligently continue or cause Academy to diligently continue such construction to completion in accordance with Applicable Laws, then Lender shall have the right to complete such construction on Borrower’s behalf and at Borrower’s cost and expense, subject to the rights of Academy under the Academy Lease.

          5.1.24 Embargoed Person. Borrower has performed and shall perform reasonable due diligence to insure that at all times throughout the term of the Loan, including after giving effect to any Transfers permitted pursuant to the Loan Documents, (a) none of the funds or other assets of Borrower and Guarantor constitute property of, or are beneficially owned, directly or indirectly, by any person, entity or government subject to trade restrictions under U.S. law, including, but not limited to, The USA PATRIOT Act (including the anti-terrorism provisions thereof), the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701, et seq., The Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Orders or regulations promulgated thereunder including those related to Specially Designated Nationals and Specially Designated Global Terrorists, with the result that the investment in Borrower or Guarantor, as applicable (whether directly or indirectly), is prohibited by law or the Loan made by the Lender is in violation of law (“Embargoed Person”); (b) no Embargoed Person has any interest of any nature whatsoever in Borrower or Guarantor, as applicable, with the result that the investment in Borrower or Guarantor, as applicable (whether directly or indirectly), is prohibited by law or the Loan is in violation of law; and (c) none of the funds of Borrower or Guarantor, as applicable, have been derived from, or are the proceeds of, any unlawful activity, including money laundering, terrorism or terrorism activities, with the result that the investment in Borrower or Guarantor, as applicable (whether directly or indirectly), is prohibited by law or the Loan is in violation of law, or may cause the Property to be subject to forfeiture or seizure. Notwithstanding the foregoing, with respect to the direct and indirect interests in Cole Credit Property Trust, Inc. or Cole Credit Property Trust II, Inc., Borrower shall be permitted to rely exclusively on the implementation by its U.S. broker-dealer network of the normal and customary investor screening practices mandated by applicable law and NASD regulations in satisfaction of the foregoing covenant.

     Section 5.2 Negative Covenants. From the date hereof until payment and performance in full of all obligations of Borrower under the Loan Documents or the earlier release of the Lien of the Mortgage encumbering the Property (and all related obligations) in accordance with the terms of this Agreement and the other Loan Documents, Borrower covenants and agrees with Lender that it will not do, directly or indirectly, any of the following:

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          5.2.1 Operation of Property.

          (a) Borrower shall not, without Lender’s prior written consent (which consent shall not be unreasonably withheld): (i) surrender, terminate, cancel, amend or modify the Management Agreement as it relates to the Property; provided, that Borrower may, without Lender’s consent, replace the Manager so long as the replacement manager is a Qualified Manager pursuant to a Replacement Management Agreement and remove the Property from the application of the Management Agreement in connection with such replacement; (ii) reduce or consent to the reduction of the term of the Management Agreement as it relates to the Property; (iii) increase or consent to the increase of the amount of any charges under the Management Agreement as it relates to the Property; or (iv) otherwise modify, change, supplement, alter or amend, or waive or release any of its rights and remedies under, the Management Agreement as it relates to the Property in any material respect.

          (b) Following the occurrence and during the continuance of an Event of Default, Borrower shall not exercise any rights, make any decisions, grant any approvals or otherwise take any action under the Management Agreement as it relates to the Property without the prior written consent of Lender, which consent may be granted, conditioned or withheld in Lender’s sole discretion.

          5.2.2 Liens. Borrower shall not create, incur, assume or suffer to exist any Lien on any portion of the Property or permit any such action to be taken, except:

          (a) Permitted Encumbrances;

          (b) Liens created by or permitted pursuant to the Loan Documents; and

          (c) Liens for Taxes or Other Charges not yet due.

          5.2.3 Dissolution. Borrower shall not, without obtaining the prior written consent of Lender or Lender’s designee (a) to the fullest extent permitted by law, engage in any dissolution, liquidation or consolidation or merger with or into any other business entity, (b) engage in any business activity not related to the ownership and operation of the Property, (c) transfer, lease or sell, in one transaction or any combination of transactions, the assets or all or substantially all of the properties or assets of Borrower except to the extent permitted by the Loan Documents, or (d) unless required by applicable law, modify, amend, waive or terminate its organizational documents (other than to evidence transfers permitted under this Agreement) or its qualification and good standing in any jurisdiction.

          5.2.4 Change In Business. Borrower shall not enter into any line of business other than the ownership and operation of the Property, or make any material change in the scope or nature of its business objectives, purposes or operations, or undertake or participate in activities other than the continuance of its present business. Nothing contained in this Section 5.2.4 is intended to expand the rights of Borrower contained in Section 5.2.10(d) hereof.

          5.2.5 Debt Cancellation. Borrower shall not cancel or otherwise forgive or release any claim or debt (other than termination of Leases in accordance herewith) owed to

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Borrower by any Person, except for adequate consideration and in the ordinary course of Borrower’s business.

          5.2.6 Zoning. Borrower shall not initiate or consent to any zoning reclassification of any portion of the Property or seek any variance under any existing zoning ordinance or use or permit the use of any portion of the Property in any manner that could result in such use becoming a non conforming use under any zoning ordinance or any other applicable land use law, rule or regulation, without the prior consent of Lender.

          5.2.7 Intentionally Omitted.

          5.2.8 Intentionally Omitted.

          5.2.9 ERISA.

          (a) Borrower shall not engage in any transaction which would cause any obligation, or action taken or to be taken, hereunder (or the exercise by Lender of any of its rights under the Note, this Agreement or the other Loan Documents) to be a non-exempt (under a statutory or administrative class exemption) prohibited transaction under ERISA.

          (b) Borrower further covenants and agrees to deliver to Lender such certifications or other evidence from time to time throughout the term of the Loan, as requested by Lender in its sole discretion, that (A) Borrower is not and does not maintain an “employee benefit plan” as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, or a “governmental plan” within the meaning of Section 3(32) of ERISA; (B) Borrower is not subject to any state statute regulating investment of, or fiduciary obligations with respect to governmental plans and (C) one or more of the following circumstances is true:

     (i) Equity interests in Borrower are publicly offered securities, within the meaning of 29 C.F.R. §2510.3-101(b)(2);

     (ii) Less than twenty-five percent (25%) of each outstanding class of equity interests in Borrower are held by “benefit plan investors” within the meaning of 29 C.F.R. §2510.3-101(f)(2); or

     (iii) Borrower qualifies as an “operating company” or a “real estate operating company” within the meaning of 29 C.F.R. §2510.3-101(c) or (e).

          5.2.10 Transfers.

          (a) Borrower acknowledges that Lender has examined and relied on the experience of Borrower and its stockholders, general partners, members, principals and (if Borrower is a trust) beneficial owners in owning and operating properties such as the Property in agreeing to make the Loan, and will continue to rely on Borrower’s ownership of the Property as a means of maintaining the value of the Property as security for repayment of the Debt and the performance of the Other Obligations. Borrower acknowledges that Lender has a valid interest in maintaining the value of the Property so as to ensure that, should Borrower default in the

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repayment of the Debt or the performance of the Other Obligations, Lender can recover the Debt by a sale of the Property.

          (b) Without the prior written consent of Lender, and except to the extent otherwise set forth in this Section 5.2.10, Borrower shall not, and shall not permit any Restricted Party do any of the following (collectively, a “Transfer”): (i) sell, convey, mortgage, grant, bargain, encumber, pledge, assign, grant options with respect to, or otherwise transfer or dispose of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration or of record) the Property or any part thereof or any legal or beneficial interest therein or (ii) permit a Sale or Pledge of an interest in any Restricted Party, other than (A) pursuant to Leases of space in the Improvements to Tenants in accordance with the provisions of Section 5.1.20 and (B) Permitted Transfers.

          (c) A Transfer shall include, but not be limited to, (i) an installment sales agreement wherein Borrower agrees to sell the Property or any part thereof for a price to be paid in installments; (ii) an agreement by Borrower leasing all or a substantial part of the Property for other than actual occupancy by a space Tenant thereunder or a sale, assignment or other transfer of, or the grant of a security interest in, Borrower’s right, title and interest in and to any Leases or any Rents; (iii) if a Restricted Party is a corporation or trust, the sale, conveyance, transfer, disposition, alienation, hypothecation or encumbering of more than 10% of the issued and outstanding capital stock of such Restricted Party (or the issuance of new shares of capital stock in such Restricted Party so that immediately after such issuance (in one or a series of transactions) the total capital stock then issued and outstanding is more than 110% of the total immediately prior to such issuance); (iv) if a Restricted Party is a limited or general partnership or joint venture, a change in the ownership interests in any general partner or any joint venturer, either voluntarily, involuntarily or otherwise, or the sale, conveyance, transfer, disposition, alienation, hypothecation or encumbering of all or any portion of the interest of any such general partner or joint venturer (whether in the form of a beneficial, membership or partnership interest or in the form of a power of direction, control or management, or otherwise); or (v) if a Restricted Party is a limited liability company, a change in the ownership interests in any managing member, either voluntarily, involuntarily or otherwise, or the sale, conveyance, transfer, disposition, alienation, hypothecation or encumbering of all or any portion of the interest of any such managing member (whether in the form of a beneficial, membership or partnership interest or in the form of a power of direction, control or management, or otherwise).

          (d) Notwithstanding the foregoing, however, (i) limited partnership interests in any Restricted Party shall be freely transferable without the consent of Lender, (ii) any involuntary transfer caused by the death of any Restricted Party or any general partner, shareholder, joint venturer, manager, member or beneficial owner of a trust shall not be an Event of Default so long as Borrower is reconstituted, if required, following such death and so long as those persons responsible for the management of the Property and Borrower remain unchanged as a result of such death or any replacement management is approved by Lender, (iii) gifts for estate planning purposes of any individual’s interests in any Restricted Party to the spouse or any lineal descendant of such individual, or to a trust for the benefit of any one or more of such individual, spouse or lineal descendant, shall not be an Event of Default so long as Borrower is reconstituted, if required, following such gift and so long as those persons responsible for the management of the Property and Borrower remain unchanged following such gift or any

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replacement management is approved by Lender, and (iv) membership interests or limited partnership interests in any Restricted Party and interests in any member of any Restricted Party (collectively, “Permitted Transfers”) may be transferred to any Affiliate of a Restricted Party without the consent of Lender, provided that, at all times, Christopher H. Cole or Cole Credit Property Trust II, Inc. must continue to Control Borrower and Guarantor.

          (e) Notwithstanding the foregoing provisions of this Section, at any time other than the period commencing thirty (30) days prior to a Securitization and ending thirty (30) days after such Securitization, Lender shall not withhold its consent to a Transfer of the Property provided that Lender receives not less than sixty (60) days prior written notice of such Transfer and no Event of Default has occurred and is continuing, and further provided that the following additional requirements are satisfied:

     (i) Borrower shall pay or cause to be paid Lender an administrative fee of not more than $4,000 and an assumption fee equal to one percent (1.0%) of the outstanding principal balance of the Loan at the time of such Transfer, provided, however, that (A) no administrative fee or assumption fee shall be payable in connection with (1) a Transfer by the initial Borrower to an Identified Affiliate or (2) an initial Transfer by the initial Borrower or an Identified Affiliate to an unrelated party prior to Securitization, and (B) an administrative fee of not more than $4,000 and no assumption fee, shall be payable in connection with an initial Transfer by the initial Borrower or an Identified Affiliate to an unrelated party after Securitization;

     (ii) Borrower shall pay or cause to be paid any and all reasonable out-of-pocket costs incurred in connection with such Transfer (including, without limitation, Lender’s reasonable counsel fees and disbursements and all recording fees, title insurance premiums and mortgage and intangible taxes and the reasonable fees and expenses of the Rating Agencies pursuant to clause (x) below);

     (iii) The proposed transferee (the “Transferee”) or Transferee’s Principals must have demonstrated expertise in owning and operating properties similar in location, size, class and operation to the Property, which expertise shall be reasonably determined by Lender;

     (iv) Transferee and Transferee’s Principals shall, as of the date of such transfer, have an aggregate net worth and liquidity reasonably acceptable to Lender;

     (v) Transferee, Transferee’s Principals and all other entities which may be owned or Controlled directly or indirectly by Transferee’s Principals (“Related Entities”) must not have been party to any bankruptcy proceedings, voluntary or involuntary, made an assignment for the benefit of creditors or taken advantage of any insolvency act, or any act for the benefit of debtors within seven (7) years prior to the date of the proposed Transfer;

     (vi) Transferee shall assume (subject to Section 9.3) all of the obligations of Borrower under the Loan Documents in a manner satisfactory to Lender in all respects,

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including, without limitation, by entering into an assumption agreement in form and substance satisfactory to Lender;

     (vii) There shall be no material litigation or regulatory action pending or threatened against Transferee, Transferee’s Principals or Related Entities which is not reasonably acceptable to Lender;

     (viii) Transferee, Transferee’s Principals and Related Entities shall not have defaulted under its or their obligations with respect to any other Indebtedness in a manner which is not reasonably acceptable to Lender;

     (ix) Transferee and Transferee’s Principals must be able to satisfy all the representations and covenants set forth in Sections 4.1.30 and 5.2.9 of this Agreement, no Event of Default shall otherwise occur as a result of such Transfer, and Transferee and Transferee’s Principals shall deliver (A) all organizational documentation reasonably requested by Lender, which shall be reasonably satisfactory to Lender and (B) all certificates, agreements and covenants reasonably required by Lender, provided that such certificates, agreements and covenants shall not materially increase the obligations of Borrower under the Loan Documents or materially decrease the rights of Borrower under the Loan Documents;

     (x) If required by Lender, Transferee shall be approved by the Rating Agencies selected by Lender, which approval, if required by Lender, shall take the form of a confirmation in writing from such Rating Agencies to the effect that such Transfer will not result in a qualification, reduction, downgrade or withdrawal of the ratings in effect immediately prior to such assumption or transfer for the Securities or any class thereof issued in connection with a Securitization which are then outstanding;

     (xi) Intentionally omitted;

     (xii) Prior to any release of Guarantor, one (1) or more substitute guarantors reasonably acceptable to Lender shall have assumed all of the liabilities and obligations of Guarantor under the Indemnity executed by Guarantor or execute a replacement Indemnity reasonably satisfactory to Lender;

     (xiii) Borrower shall deliver, at its sole cost and expense, an endorsement to the Title Insurance Policy which endorsement shall insure the lien of the Mortgage, as modified by the assumption agreement, as a valid first lien on the Property, shall name the Transferee as owner of the Property, and shall insure that, as of the date of the recording of the assumption agreement, the Property shall not be subject to any additional exceptions or liens other than those contained in the Title Insurance Policy issued on the date hereof and the Permitted Encumbrances; and

     (xiv) The Property shall be managed by a Qualified Manager pursuant to a Replacement Management Agreement.

Immediately upon a Transfer to such Transferee and the satisfaction of all of the above requirements, the named Borrower and Guarantor herein shall be released from all liability under

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this Agreement, the Note, the Mortgage and the other Loan Documents accruing after such Transfer. The foregoing release shall be effective upon the date of such Transfer, but Lender agrees to provide written evidence thereof reasonably requested by Borrower.

          (f) Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default hereunder in order to declare the Debt immediately due and payable upon Borrower’s Transfer without Lender’s consent. This provision shall apply to every Transfer regardless of whether voluntary or not, or whether or not Lender has consented to any previous Transfer.

     VI. INSURANCE; CASUALTY; CONDEMNATION; REQUIRED REPAIRS

     Section 6.1 Insurance.

          (a) From the date hereof until payment and performance in full of all obligations of Borrower under the Loan Documents or the earlier release of the Lien of the Mortgage encumbering the Property (and all related obligations) in accordance with the terms of this Agreement and the other Loan Documents, Borrower shall obtain and maintain, or cause to be maintained, insurance for Borrower and the Property providing at least the following coverages:

     (i) comprehensive all risk insurance (“Special Form”) including, but not limited to, loss caused by any type of windstorm or hail on the Improvements and the Personal Property, (A) in an amount equal to one hundred percent (100%) of the “Full Replacement Cost,” which for purposes of this Agreement shall mean actual replacement value (exclusive of costs of excavations, foundations, underground utilities and footings) with a waiver of depreciation, but the amount shall in no event be less than the outstanding principal balance of the Loan; (B) containing an agreed amount endorsement with respect to the Improvements and Personal Property waiving all co-insurance provisions or to be written on a no co-insurance form; (C) providing for no deductible in excess of Ten Thousand and 00/100 Dollars ($10,000.00) for all such insurance coverage excluding windstorm and earthquake and (D) if any of the Improvements or the use of the Property shall at any time constitute legal non-conforming structures or uses, coverage for loss due to operation of law in an amount equal to the full Replacement Cost, coverage for demolition costs and coverage for increased costs of construction. In addition, Borrower shall obtain: (x) if any portion of the Improvements is currently or at any time in the future located in a federally designated “special flood hazard area”, flood hazard insurance in an amount equal to the lesser of (1) the outstanding principal balance of the Note or (2) the maximum amount of such insurance available under the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the National Flood Insurance Reform Act of 1994, as each may be amended or such greater amount as Lender shall reasonably require and (y) earthquake insurance in amounts and in form and substance reasonably satisfactory to Lender in the event the Property is located in an area with a high degree of seismic activity;

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     (ii) business income insurance (A) with loss payable to Lender; (B) covering all risks required to be covered by the insurance provided for in subsection (i) above; (C) in an amount equal to one hundred percent (100%) of the projected gross revenues from the operation of the Property (as reduced to reflect expenses not incurred during a period of Restoration) for a period of at least eighteen (18) months after the date of the Casualty; and (D) containing an extended period of indemnity endorsement which provides that after the physical loss to the Improvements and Personal Property has been repaired, the continued loss of income will be insured until such income either returns to the same level it was at prior to the loss, or the expiration of six (6) months from the date that the Property is repaired or replaced and operations are resumed, whichever first occurs, and notwithstanding that the policy may expire prior to the end of such period. The amount of such business income insurance shall be determined prior to the date hereof and at least once each year thereafter based on Borrower’s reasonable estimate of the gross revenues from the Property for the succeeding twelve (12) month period. Notwithstanding the provisions of Section 2.7.1 hereof, all proceeds payable to Lender pursuant to this subsection shall be held by Lender and shall be applied to the obligations secured by the Loan Documents from time to time due and payable hereunder and under the Note; provided, however, that nothing herein contained shall be deemed to relieve Borrower of its obligations to pay the obligations secured by the Loan Documents on the respective dates of payment provided for in this Agreement and the other Loan Documents except to the extent such amounts are actually paid out of the proceeds of such business income insurance;

     (iii) at all times during which structural construction, repairs or alterations are being made with respect to the Improvements, and only if the Property coverage form does not otherwise apply, (A) owner’s contingent or protective liability insurance, otherwise known as Owner Contractor’s Protective Liability, covering claims not covered by or under the terms or provisions of the below mentioned commercial general liability insurance policy and (B) the insurance provided for in subsection (i) above written in a so-called builder’s risk completed value form (1) on a non-reporting basis, (2) against all risks insured against pursuant to subsection (i) above, (3) including permission to occupy the Property and (4) with an agreed amount endorsement waiving co-insurance provisions;

     (iv) comprehensive boiler and machinery insurance, if steam boilers or other pressure-fixed vessels are in operation, in amounts as shall be reasonably required by Lender on terms consistent with the commercial property insurance policy required under subsection (i) above;

     (v) commercial general liability insurance against claims for personal injury, bodily injury, death or property damage occurring upon, in or about the Property, such insurance (A) to be on the so-called “occurrence” form with a combined limit of not less than Two Million and 00/100 Dollars ($2,000,000.00) in the aggregate and One Million Seven Hundred Fifty Thousand and 00/100 Dollars ($1,750,000.00) per occurrence; (B) to continue at not less than the aforesaid limit until required to be changed by Lender in writing by reason of changed economic conditions making such protection inadequate and (C) to cover at least the following hazards: (1) premises and

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operations; (2) products and completed operations on an “if any” basis; (3) independent contractors; (4) blanket contractual liability for all written contracts and (5) contractual liability covering the indemnities contained in Article 9 of the Mortgage to the extent the same is available;

     (vi) automobile liability coverage for all owned and non-owned vehicles, including rented and leased vehicles containing minimum limits per occurrence of One Million Dollars and 00/100 Dollars ($1,000,000.00);

     (vii) worker’s compensation and employer’s liability subject to the worker’s compensation laws of the applicable state;

     (viii) umbrella and excess liability insurance in an amount not less than Sixteen Million and 00/100 Dollars ($16,000,000.00) per occurrence on terms consistent with the commercial general liability insurance policy required under subsection (v) above, including, but not limited to, supplemental coverage for employer liability and automobile liability, which umbrella liability coverage shall apply in excess of the automobile liability coverage in clause (vi) above;

     (ix) If the policy or policies of insurance covering the risks required to be covered under Section 6.1(a) do not provide coverage for acts of terrorism, Borrower shall make commercially reasonable efforts to obtain and maintain a separate policy providing such coverages in the event of any act of terrorism, provided such coverage is available for properties similar to the Property and located in or around the region in which the Property is located; and

     (x) upon sixty (60) days written notice, such other reasonable insurance, including, but not limited to, sinkhole or land subsidence insurance, and in such reasonable amounts as Lender from time to time may reasonably request against such other insurable hazards which at the time are commonly insured against for property similar to the Property located in or around the region in which the Property is located.

          (b) All insurance provided for in Section 6.1(a) hereof, shall be obtained under valid and enforceable policies (collectively, the “Policies” or in the singular, the “Policy”), and shall be subject to the approval of Lender as to insurance companies, amounts, deductibles, loss payees and insureds. The Policies shall be issued by financially sound and responsible insurance companies authorized to do business in the State and having a claims paying ability rating of “A-” or better (and the equivalent thereof) by at least two (2) of the Rating Agencies rating the Securities (one (1) of which shall be S&P if they are rating the Securities and one (1) of which will be Moody’s if they are rating the Securities), or if only one (1) Rating Agency is rating the Securities, then only by such Rating Agency. The Policies described in Section 6.1 hereof (other than those strictly limited to liability protection) shall designate Lender as loss payee. Not less than ten (10) days prior to the expiration dates of the Policies theretofore furnished to Lender, certificates of insurance evidencing the Policies accompanied by evidence satisfactory to Lender of payment of the premiums due thereunder (the “Insurance Premiums”), shall be delivered by Borrower to Lender.

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          (c) Any blanket insurance Policy shall specifically allocate to the Property the amount of coverage from time to time required hereunder and shall otherwise provide the same protection as would a separate Policy insuring only the Property in compliance with the provisions of Section 6.1(a) hereof.

          (d) All Policies provided for or contemplated by Section 6.1(a) hereof, except for the Policy referenced in Section 6.1(a)(vii) of this Agreement, shall name Borrower as the insured and Lender as the additional insured, as its interests may appear, and in the case of property damage, boiler and machinery, flood and earthquake insurance, shall contain a so-called New York standard non-contributing mortgagee clause in favor of Lender providing that the loss thereunder shall be payable to Lender.

          (e) All Policies shall contain clauses or endorsements to the effect that:

     (i) no act or negligence of Borrower, or anyone acting for Borrower, or of any Tenant or other occupant, or failure to comply with the provisions of any Policy, which might otherwise result in a forfeiture of the insurance or any part thereof, shall in any way affect the validity or enforceability of the insurance insofar as Lender is concerned;

     (ii) the Policy shall not be materially changed (other than to increase the coverage provided thereby) or canceled without at least thirty (30) days written notice to Lender and any other party named therein as an additional insured;

     (iii) the issuers thereof shall give written notice to Lender if the Policy has not been renewed thirty (30) days prior to its expiration; and

     (iv) Lender shall not be liable for any Insurance Premiums thereon or subject to any assessments thereunder.

          (f) If at any time Lender is not in receipt of written evidence that all insurance required hereunder is in full force and effect, Lender shall have the right, without notice to Borrower, to take such action as Lender deems necessary to protect its interest in the Property, including, without limitation, the obtaining of such insurance coverage as Lender in its sole discretion deems appropriate after three (3) Business Days notice to Borrower if prior to the date upon which any such coverage will lapse or at any time Lender deems necessary (regardless of prior notice to Borrower) to avoid the lapse of any such coverage. All premiums incurred by Lender in connection with such action or in obtaining such insurance and keeping it in effect shall be paid by Borrower to Lender upon demand and, until paid, shall be secured by the Mortgage and shall bear interest at the Default Rate.

          (g) To the extent that any portion of the Improvements consisting of an entire building separate in all respects from any other building comprising part of the Improvements is occupied by a single Tenant, and such Tenant provides insurance satisfying the requirements hereof with respect to such Improvements (including, without limitation, naming Lender as an additional insured or loss payee, as applicable), such insurance shall satisfy Borrower’s obligations hereunder. In addition, provided no default shall exist under such Tenant’s Lease, and further provided that such Tenant (or the corporate guarantor of such Tenant’s Lease) shall

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either maintain a credit rating issued by Standard and Poor’s of BB or better (or an equivalent rating issued by another nationally recognized rating agency reasonably acceptable to Lender) or have an audited net worth in excess of $100,000,000, such Tenant shall be permitted to self-insure in accordance with its Lease with respect to the coverage required hereunder, and such self-insurance shall be deemed to satisfy the requirements hereof. Lender acknowledges that the insurance in place as of the date hereof, as evidenced by the certificates of insurance provided by Borrower and each Tenant in connection with the closing of the Loan, other than with respect to business income insurance coverage required under Section 6.1(a)(ii), shall be deemed to satisfy the foregoing requirements as in effect on the date hereof.

          (h) Borrower hereby agrees to pay to Lender following a Casualty any amounts Lender would be entitled to receive under a business income insurance policy that satisfies the requirements of Section 6.1(a)(ii). In consideration for such agreement, Lender agrees that, so long as the Academy Lease is in effect, Borrower’s failure to provide the business income insurance coverage required under Section 6.1(a)(ii) shall not be an Event of Default hereunder.

     Section 6.2 Casualty. If the Property shall be damaged or destroyed, in whole or in part, by fire or other casualty (a “Casualty”), Borrower shall give prompt notice of such damage to Lender and shall promptly commence and diligently prosecute the completion of the Restoration of the Property pursuant to Section 6.4 hereof as nearly as possible to the condition the Property was in immediately prior to such Casualty, with such alterations as may be reasonably approved by Lender and otherwise in accordance with Section 6.4 hereof. Borrower shall pay (or cause to be paid) all costs of such Restoration whether or not such costs are covered by insurance. Lender may, but shall not be obligated to make proof of loss if not made promptly by Borrower. In addition, Lender may participate in any settlement discussions with any insurance companies (and shall approve the final settlement, which approval shall not be unreasonably withheld or delayed) with respect to any Casualty in which the Net Proceeds or the costs of completing the Restoration are equal to or greater than One Hundred Thousand and 00/100 Dollars ($100,000.00) and Borrower shall deliver to Lender all instruments required by Lender to permit such participation.

     Section 6.3 Condemnation. Borrower shall promptly give Lender notice of the actual or threatened commencement of any proceeding for the Condemnation of the Property and shall deliver to Lender copies of any and all papers served in connection with such proceedings. Lender may participate in any such proceedings, and Borrower shall from time to time deliver to Lender all instruments requested by it to permit such participation. Borrower shall, at its expense, diligently prosecute any such proceedings, and shall consult with Lender, its attorneys and experts, and cooperate with them in the carrying on or defense of any such proceedings. Notwithstanding any taking by any public or quasi-public authority through Condemnation or otherwise (including, but not limited to, any transfer made in lieu of or in anticipation of the exercise of such taking), Borrower shall continue to pay the Debt at the time and in the manner provided for its payment in the Note and in this Agreement and the Debt shall not be reduced until any Award shall have been actually received and applied by Lender, after the deduction of expenses of collection, to the reduction or discharge of the Debt. Lender shall not be limited to the interest paid on the Award by the condemning authority but shall be entitled to receive out of

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the Award interest at the rate or rates provided herein or in the Note. If any portion of the Property is taken by a condemning authority, Borrower shall promptly commence and diligently prosecute the Restoration of the Property pursuant to Section 6.4 hereof and otherwise comply with the provisions of Section 6.4 hereof. If the Property is sold, through foreclosure or otherwise, prior to the receipt by Lender of the Award, Lender shall have the right, whether or not a deficiency judgment on the Note shall have been sought, recovered or denied, to receive the Award, or a portion thereof sufficient to pay the Debt.

     Section 6.4 Restoration. The following provisions shall apply in connection with the Restoration of the Property:

          (a) If the Net Proceeds shall be less than Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00) and the costs of completing the Restoration shall be less than Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00), the Net Proceeds will be disbursed by Lender to Borrower upon receipt, provided that all of the conditions set forth in Section 6.4(b)(i) hereof are met and Borrower delivers to Lender a written undertaking to expeditiously commence and to satisfactorily complete with due diligence the Restoration in accordance with the terms of this Agreement.

          (b) If the Net Proceeds are equal to or greater than Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00) or the costs of completing the Restoration are equal to or greater than Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00) Lender shall make the Net Proceeds available for the Restoration in accordance with the provisions of this Section 6.4. The term “Net Proceeds” for purposes of this Section 6.4 shall mean: (i) the net amount of all insurance proceeds received by Lender pursuant to Section 6.1 (a)(i), (iv), (ix) and (x) as a result of such damage or destruction, after deduction of its reasonable costs and expenses (including, but not limited to, reasonable counsel fees), if any, in collecting same (“Insurance Proceeds”), or (ii) the net amount of the Award, after deduction of its reasonable costs and expenses (including, but not limited to, reasonable counsel fees), if any, in collecting same (“Condemnation Proceeds”), whichever the case may be.

          (c) The Net Proceeds shall be made available to Borrower for Restoration provided that each of the following conditions are met:

          (i) no Event of Default shall have occurred and be continuing;

          (ii) (1) in the event the Net Proceeds are Insurance Proceeds, less than forty percent (40%) of the total floor area of the Improvements on the Property has been damaged, destroyed or rendered unusable as a result of such Casualty or (2) in the event the Net Proceeds are Condemnation Proceeds, less than twenty five percent (25%) of the land constituting the Property is taken, and such land is located along the perimeter or periphery of the Property, and no material portion of the Improvements is located on such land;

          (iii) Intentionally omitted;

          (iv) Borrower shall commence the Restoration as soon as reasonably practicable (but in no event later than sixty (60) days after such Casualty or

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Condemnation, whichever the case may be, occurs) and shall diligently pursue the same to satisfactory completion;

          (v) Lender shall be satisfied that any operating deficits, including all scheduled payments of principal and interest under the Note, which will be incurred with respect to the Property as a result of the occurrence of any such Casualty or Condemnation, whichever the case may be, will be covered out of (1) the Net Proceeds, (2) the insurance coverage referred to in Section 6.1(a)(ii) hereof, if applicable, or (3) by other funds of Borrower;

          (vi) Lender shall be satisfied that the Restoration will be completed on or before the earliest to occur of (1) six (6) months prior to the Maturity Date, (2) the earliest date required for such completion under the terms of any Leases, (3) such time as may be required under all applicable Legal Requirements in order to repair and restore the Property to the condition it was in immediately prior to such Casualty or to as nearly as possible the condition it was in immediately prior to such Condemnation, as applicable, or (4) the expiration of the insurance coverage referred to in Section 6.1(a)(ii) hereof;

          (vii) the Property and the use thereof after the Restoration will be in material compliance with and permitted under all applicable Legal Requirements;

          (viii) the Restoration shall be done and completed by Borrower in a reasonably expeditious and diligent fashion and in material compliance with all applicable Legal Requirements;

          (ix) such Casualty or Condemnation, as applicable, does not result in the loss of access to the Property or the Improvements;

          (x) the Debt Service Coverage Ratio for the Property, after giving effect to the Restoration shall be equal to or greater than .94 to 1.0 as determined by Lender;

          (xi) Borrower shall deliver, or cause to be delivered, to Lender a signed detailed budget approved in writing by Borrower’s architect or engineer stating the entire cost of completing the Restoration, which budget shall be acceptable to Lender; and

          (xii) the Net Proceeds together with any cash or cash equivalent deposited by Borrower with Lender are sufficient in Lender’s discretion to cover the cost of the Restoration (provided that Borrower shall not be required to deposit any cash or cash equivalent with Lender if the Net Proceeds and the costs of completing the Restoration are each less than One Hundred Thousand and 00/100 Dollars ($100,000.00) and the conditions in the preceding subsections (A) through (K) shall be satisfied).

          (xiii) The Net Proceeds shall be held by Lender in an interest-bearing account and, until disbursed in accordance with the provisions of this Section 6.4(b), shall constitute additional security for the Debt and Other Obligations under the Loan Documents. The Net Proceeds shall be disbursed by Lender to, or as directed by,

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Borrower from time to time during the course of the Restoration, upon receipt of evidence satisfactory to Lender that (A) all materials installed and work and labor performed (except to the extent that they are to be paid for out of the requested disbursement) in connection with the Restoration have been paid for in full, and (B) there exist no notices of pendency, stop orders, mechanic’s or materialman’s liens or notices of intention to file same, or any other liens or encumbrances of any nature whatsoever on the Property which have not either been fully bonded to the satisfaction of Lender or discharged of record or in the alternative fully insured to the satisfaction of Lender by the title company issuing the Title Insurance Policy.

          (xiv) All plans and specifications required in connection with the Restoration shall be subject to prior review and acceptance in all respects by Lender and by an independent consulting engineer selected by Lender (the “Casualty Consultant”), such acceptance not to be unreasonably withheld, conditioned or delayed. Lender shall have the use of the plans and specifications and all permits, licenses and approvals required or obtained in connection with the Restoration. The identity of the contractors, subcontractors and materialmen engaged in the Restoration, as well as the contracts under which they have been engaged, shall be subject to prior review and acceptance by Lender and the Casualty Consultant, such acceptance not to be unreasonably withheld, conditioned or delayed. All reasonable costs and expenses incurred by Lender in connection with making the Net Proceeds available for the Restoration including, without limitation, reasonable counsel fees and disbursements and the Casualty Consultant’s reasonable fees, shall be paid by Borrower.

          (xv) In no event shall Lender be obligated to make disbursements of the Net Proceeds in excess of an amount equal to the costs actually incurred from time to time for work in place as part of the Restoration, as certified by the Casualty Consultant, minus the Casualty Retainage. The term “Casualty Retainage” shall mean an amount equal to ten percent (10%) of the costs actually incurred for work in place as part of the Restoration, as certified by the Casualty Consultant, until the Restoration has been completed. The Casualty Retainage shall in no event, and notwithstanding anything to the contrary set forth above in this Section 6.4(b), be less than the amount actually held back by Borrower from contractors, subcontractors and materialmen engaged in the Restoration. The Casualty Retainage shall not be released until the Casualty Consultant certifies to Lender that the Restoration has been completed in accordance with the provisions of this Section 6.4(b) and that all approvals necessary for the re-occupancy and use of the Property have been obtained from all appropriate governmental and quasi-governmental authorities, and Lender receives evidence satisfactory to Lender that the costs of the Restoration have been paid in full or will be paid in full out of the Casualty Retainage; provided, however, that Lender will release the portion of the Casualty Retainage being held with respect to any contractor, subcontractor or materialman engaged in the Restoration as of the date upon which the Casualty Consultant certifies to Lender that the contractor, subcontractor or materialman has satisfactorily completed all work and has supplied all materials in accordance with the provisions of the contractor’s, subcontractor’s or materialman’s contract, the contractor, subcontractor or materialman delivers the lien waivers and evidence of payment in full of all sums due to the contractor, subcontractor or materialman as may be reasonably requested by Lender or by

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the title company issuing the Title Insurance Policy, and Lender receives an endorsement to the Title Insurance Policy insuring the continued priority of the lien of the Mortgage and evidence of payment of any premium payable for such endorsement. If required by Lender, the release of any such portion of the Casualty Retainage shall be approved by the surety company, if any, which has issued a payment or performance bond with respect to the contractor, subcontractor or materialman.

          (xvi) Lender shall not be obligated to make disbursements of the Net Proceeds more frequently than once every calendar month.

          (xvii) If at any time the Net Proceeds or the undisbursed balance thereof shall not, in the opinion of Lender in consultation with the Casualty Consultant, be sufficient to pay in full the balance of the costs which are estimated by the Casualty Consultant to be incurred in connection with the completion of the Restoration, Borrower shall deposit the deficiency (the “Net Proceeds Deficiency”) with Lender before any further disbursement of the Net Proceeds shall be made. The Net Proceeds Deficiency deposited with Lender shall be held by Lender and shall be disbursed for costs actually incurred in connection with the Restoration on the same conditions applicable to the disbursement of the Net Proceeds, and until so disbursed pursuant to this Section 6.4(b) shall constitute additional security for the Debt and Other Obligations under the Loan Documents.

          (xviii) The excess, if any, of the Net Proceeds (and the remaining balance, if any, of the Net Proceeds Deficiency) deposited with Lender after the Casualty Consultant certifies to Lender that the Restoration has been completed in accordance with the provisions of this Section 6.4(b), and the receipt by Lender of evidence satisfactory to Lender that all costs incurred in connection with the Restoration have been paid in full, shall be delivered to Borrower; provided that, if a Cash Management Trigger has occurred, the excess shall be deposited into the Cash Management Account and shall be disbursed in accordance with the terms hereof, provided no Event of Default shall have occurred and shall be continuing under the Note, this Agreement or any of the other Loan Documents.

          (d) All Net Proceeds not required (i) to be made available for the Restoration or (ii) to be deposited into the Cash Management Account as excess Net Proceeds pursuant to Section 6.4(b)(vii) hereof may be retained and applied by Lender toward the payment of the Debt in accordance with Section 2.4.2 hereof, or, at the discretion of Lender, the same may be paid, either in whole or in part, to Borrower for such purposes as Lender shall approve, in its discretion.

          (e) In the event of foreclosure of the Mortgage with respect to the Property, or other transfer of title to the Property in extinguishment in whole or in part of the Debt all right, title and interest of Borrower in and to the Policies that are not blanket Policies then in force concerning the Property (other than to the extent those Policies provide liability coverages to Borrower) and all proceeds payable thereunder shall thereupon vest in the purchaser at such foreclosure or Lender or other transferee in the event of such other transfer of title.

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          (f) Notwithstanding the foregoing provisions of this Section 6.4, to the extent the Academy Lease remains in effect and Acadmey remains liable for the obligations under the Academy Lease, the disposition of any Casualty insurance proceeds and any Award shall be governed by the Academy Lease.

     VII. RESERVE FUNDS

     Section 7.1 Required Repairs.

          7.1.1 Deposits. Borrower shall perform or cause to be performed the repairs at the Property, as more particularly set forth on Schedule II hereto (such repairs hereinafter referred to as “Required Repairs”) within six (6) months from the Closing Date, or such earlier time as is specified on Schedule II. If Borrower has not delivered to Lender evidence reasonably satisfactory to Lender that it has completed or caused the completion of all Required Repairs on or before the date that is six (6) months from the Closing Date, or such earlier time as specified on Schedule II, Borrower shall deposit with Lender the amount for the Property set forth on such Schedule II hereto, if any (less the amount allocated to the performance of Required Repairs for which evidence of completion has been delivered to Lender), to perform the Required Repairs for the Property. Amounts so deposited with Lender, if any, shall be held by Lender in an interest bearing account. Amounts so deposited, if any, shall be referred to as Borrower’s “Required Repair Fund” and the account, if any, in which such amounts are held hereinafter shall be referred to as Borrower’s “Required Repair Account”. It shall be an Event of Default under this Agreement if Borrower does not either (i) deposit with Lender the Required Repair Fund as set forth above, or (ii) complete the Required Repairs at the Property within twelve (12) months from the Closing Date. Upon the occurrence of such an Event of Default, Lender, at its option, may withdraw all Required Repair Funds from the Required Repair Account and Lender may apply such funds either to completion of the Required Repairs at the Property or toward payment of the Debt in such order, proportion and priority as Lender may determine in its sole discretion. Lender’s right to withdraw and apply Required Repair Funds shall be in addition to all other rights and remedies provided to Lender under this Agreement and the other Loan Documents.

          7.1.2 Release of Required Repair Funds. Lender shall disburse to Borrower the Required Repair Funds from the Required Repair Account from time to time upon satisfaction by Borrower of each of the following conditions: (a) Borrower shall submit a written request for payment to Lender at least fifteen (15) days prior to the date on which Borrower requests such payment be made and specifies the Required Repairs to be paid, (b) on the date such payment is to be made, no Event of Default shall exist and remain uncured, (c) Lender shall have received an Officers’ Certificate (i) stating that all Required Repairs to be funded by the requested disbursement have been completed in good and workmanlike manner and in accordance with all applicable federal, state and local laws, rules and regulations, such certificate to be accompanied by a copy of any license, permit or other approval by any Governmental Authority required to commence and/or complete the Required Repairs, (ii) identifying each Person that supplied materials or labor in connection with the Required Repairs to be funded by the requested disbursement, and (iii) stating that each such Person has been paid in full or will be paid in full upon such disbursement, such Officers’ Certificate to be accompanied by lien waivers or other evidence of payment satisfactory to Lender, (d) at Lender’s option, a title search for the Property indicating that the Property is free from all liens,

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claims and other encumbrances other than Permitted Encumbrances and those previously approved by Lender, and (e) Lender shall have received such other evidence as Lender shall reasonably request that the Required Repairs to be funded by the requested disbursement have been completed and are paid for or will be paid upon such disbursement to Borrower. Lender shall not be required to make disbursements from the Required Repair Account with respect to the Property unless such requested disbursement is in an amount greater than Twenty-five Thousand and 00/100 Dollars ($25,000.00) (or a lesser amount if the total amount in the Required Repair Account is less than Twenty-five Thousand and 00/100 Dollars ($25,000.00), in which case only one disbursement of the amount remaining in the account shall be made) and such disbursement shall be made only upon satisfaction of each condition contained in this Section 7.1.2.

     Section 7.2 Tax and Insurance Escrow Fund. Borrower shall pay to Lender on each Payment Date (a) one-twelfth (1/12) of the Taxes and Other Charges that Lender estimates will be payable during the next ensuing twelve (12) months in order to accumulate with Lender sufficient funds to pay all such Taxes and Other Charges at least thirty (30) days prior to their respective due dates, and (b) one-twelfth (1/12) of the Insurance Premiums that Lender estimates will be payable for the renewal of the coverage afforded by the Policies upon the expiration thereof in order to accumulate with Lender sufficient funds to pay all such Insurance Premiums at least thirty (30) days prior to the expiration of the Policies (said amounts in (a) and (b) above hereinafter called the “Tax and Insurance Escrow Fund”). The Tax and Insurance Escrow Fund and the Monthly Debt Service Payment Amount, shall be added together and shall be paid as an aggregate sum by Borrower to Lender. Lender will apply the Tax and Insurance Escrow Fund to payments of Taxes and Insurance Premiums required to be made by Borrower pursuant to Sections 5.1.2 and 6.1 hereof and under the Mortgage. In making any payment relating to the Tax and Insurance Escrow Fund, Lender may do so according to any bill, statement or estimate procured from the appropriate public office (with respect to Taxes) or insurer or agent (with respect to Insurance Premiums), without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof. If the amount of the Tax and Insurance Escrow Fund shall exceed the amounts due for Taxes, Other Charges and Insurance Premiums pursuant to Sections 5.1.2 and 6.1 hereof, Lender shall, in its sole discretion, return any excess to Borrower or credit such excess against future payments to be made to the Tax and Insurance Escrow Fund. Any amount remaining in the Tax and Insurance Escrow Fund after the Debt has been paid in full shall be returned to Borrower. If at any time Lender reasonably determines that the Tax and Insurance Escrow Fund is not or will not be sufficient to pay Taxes, Other Charges and Insurance Premiums by the dates set forth in (a) and (b) above, Lender shall notify Borrower of such determination and Borrower shall increase its monthly payments to Lender by the amount that Lender estimates is sufficient to make up the deficiency at least thirty (30) days prior to the due date of the Taxes and Other Charges and/or thirty (30) days prior to expiration of the Policies, as the case may be.

     Notwithstanding the foregoing, provided no Event of Default shall exist, in the event that Borrower provides (1) evidence satisfactory to Lender that the Property is insured in accordance with Section 6.1 of this Agreement, and (2) evidence satisfactory to Lender that the Taxes and Other Charges for the Property have been paid in accordance with the requirements set forth in this Agreement, Lender waives the requirement set forth herein for Borrower to make deposits into the Tax and Insurance Escrow Fund for the payment of Insurance Premiums and for

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payment of Taxes and Other Charges, provided, however, Lender expressly reserves the right to require Borrower to make deposits to the Tax and Insurance Escrow Fund for the payment of Insurance Premiums and/or for payment of Taxes and Other Charges if an Event of Default shall exist, or Borrower fails to provide to Lender evidence that the Property is insured in accordance with Section 6.1 of this Agreement or that Taxes and Other Charges have been paid in accordance with the requirements of this Agreement, in either case, within ten (10) days of Lender’s request.

     Section 7.3 Replacements and Replacement Reserve.

          7.3.1 Replacement Reserve Fund. Borrower shall pay to Lender on each Payment Date one-twelfth (1/12) of an annualized amount equal to $0.15 per gross leasable square foot at the Property (the “Replacement Reserve Monthly Deposit”) reasonably estimated by Lender in its sole discretion to be due for replacements and repairs required to be made to the Property during the calendar year (collectively, the “Replacements”). Amounts so deposited shall hereinafter be referred to as Borrower’s “Replacement Reserve Fund” and the account in which such amounts are held shall hereinafter be referred to as Borrower’s “Replacement Reserve Account”. Lender may reassess its estimate of the amount necessary for the Replacement Reserve Fund from time to time, and may increase the monthly amounts required to be deposited into the Replacement Reserve Fund upon thirty (30) days notice to Borrower if Lender determines in its reasonable discretion that an increase is necessary to maintain the proper maintenance and operation of the Property. Notwithstanding the foregoing, provided no Event of Default shall exist, in the event that Lender determines, in its reasonable discretion, that the Property is being maintained at a standard required under any applicable Lease and consistent with similar properties owned by other national office and warehouse property owners operating in the market in which the Property is located, Lender waives the requirement set forth herein for Borrower to make the Replacement Reserve Monthly Deposit, provided, however, Lender expressly reserves the right to require Borrower to make the Replacement Reserve Monthly Deposit if an Event of Default shall exist, or Lender determines that the Property is not being so maintained.

          7.3.2 Disbursements from Replacement Reserve Account.

          (a) Lender shall make disbursements from the Replacement Reserve Account to pay Borrower only for the costs of the Replacements. Lender shall not be obligated to make disbursements from the Replacement Reserve Account to reimburse Borrower for the costs of routine maintenance to the Property, replacements of inventory or for costs which are to be reimbursed from the Required Repair Fund.

          (b) Lender shall, upon written request from Borrower and satisfaction of the requirements set forth in this Section 7.3.2, disburse to Borrower amounts from the Replacement Reserve Account necessary to pay for the actual approved costs of Replacements or to reimburse Borrower therefor, upon completion of such Replacements (or, upon partial completion in the case of Replacements made pursuant to Section 7.3.2(e) hereof) as determined by Lender. In no event shall Lender be obligated to disburse funds from the Replacement Reserve Account if a Default or Event of Default exists.

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          (c) Each request for disbursement from the Replacement Reserve Account shall be in a form specified or approved by Lender and shall specify (i) the specific Replacements for which the disbursement is requested, (ii) the quantity and price of each item purchased, if the Replacement includes the purchase or replacement of specific items, (iii) the price of all materials (grouped by type or category) used in any Replacement other than the purchase or replacement of specific items, and (iv) the cost of all contracted labor or other services applicable to each Replacement for which such request for disbursement is made. With each request Borrower shall certify that all Replacements have been made in accordance with all applicable Legal Requirements of any Governmental Authority having jurisdiction over the Property. Each request for disbursement shall include copies of invoices for all items or materials purchased and all contracted labor or services provided and, unless Lender has agreed to issue joint checks as described below in connection with a particular Replacement, each request shall include evidence satisfactory to Lender of payment of all such amounts. Except as provided in Section 7.3.2(e) hereof, each request for disbursement from the Replacement Reserve Account shall be made only after completion of the Replacement for which disbursement is requested. Borrower shall provide Lender evidence of completion of the subject Replacement satisfactory to Lender in its reasonable judgment.

          (d) Borrower shall pay all invoices in connection with the Replacements with respect to which a disbursement is requested prior to submitting such request for disbursement from the Replacement Reserve Account or, at the request of Borrower, Lender will issue joint checks, payable to Borrower and the contractor, supplier, materialman, mechanic, subcontractor or other party to whom payment is due in connection with a Replacement. In the case of payments made by joint check, Lender may require a waiver of lien from each Person receiving payment prior to Lender’s disbursement from the Replacement Reserve Account. In addition, as a condition to any disbursement, Lender may require Borrower to obtain lien waivers from each contractor, supplier, materialman, mechanic or subcontractor who receives payment in an amount equal to or greater than Twenty-five Thousand and 00/100 Dollars ($25,000.00) for completion of its work or delivery of its materials. Any lien waiver delivered hereunder shall conform to the requirements of applicable law and shall cover all work performed and materials supplied (including equipment and fixtures) for the Property by that contractor, supplier, subcontractor, mechanic or materialman through the date covered by the current reimbursement request (or, in the event that payment to such contractor, supplier, subcontractor, mechanic or materialmen is to be made by a joint check, the release of lien shall be effective through the date covered by the previous release of funds request).

          (e) If (i) the cost of a Replacement exceeds Twenty-five Thousand and 00/100 Dollars ($25,000.00), (ii) the contractor performing such Replacement requires periodic payments pursuant to terms of a written contract, and (iii) Lender has approved in writing in advance such periodic payments (such approval not to be unreasonably, withheld, delayed or conditioned), a request for reimbursement from the Replacement Reserve Account may be made after completion of a portion of the work under such contract, provided (A) such contract requires payment upon completion of such portion of the work, (B) the materials for which the request is made are on site at the Property and are properly secured or have been installed in the Property, (C) all other conditions in this Agreement for disbursement have been satisfied, (D) funds remaining in the Replacement Reserve Account are, in Lender’s judgment, sufficient to complete such Replacement and other Replacements when required, and (E) if required by

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Lender, each contractor or subcontractor receiving payments under such contract shall provide a waiver of lien with respect to amounts which have been paid to that contractor or subcontractor.

          (f) Borrower shall not make a request for disbursement from the Replacement Reserve Account more frequently than once in any calendar month and (except in connection with the final disbursement) the total cost of all Replacements in any request shall not be less than Twenty-five Thousand and 00/100 Dollars ($25,000.00).

          7.3.3 Performance of Replacements.

          (a) Borrower shall make or cause to be made Replacements when required in order to keep the Property in condition and repair consistent with other first class offices and warehouses in the same market segment in the metropolitan area in which the Property is located, and to keep the Property or any portion thereof from deteriorating in any material respect. Borrower shall complete or cause to be completed all Replacements in a good and workmanlike manner as soon as practicable following the commencement of making each such Replacement.

          (b) Lender reserves the right, at its option, to approve all contracts or work orders with materialmen, mechanics, suppliers, subcontractors, contractors or other parties providing labor or materials in connection with the Replacements, such approval not to be unreasonably, withheld, delayed or conditioned. Upon Lender’s request, Borrower shall assign any contract or subcontract to Lender.

          (c) In the event Lender determines in its reasonable discretion that any Replacement is not being performed in a workmanlike or timely manner or that any Replacement has not been completed in a workmanlike or timely manner, Lender shall have the option, upon prior notice to Borrower, to withhold disbursement for such unsatisfactory Replacement and to proceed under existing contracts or to contract with third parties to complete such Replacement and to apply the Replacement Reserve Fund toward the labor and materials necessary to complete such Replacement.

          (d) In order to facilitate Lender’s completion or making of such Replacements pursuant to Section 7.3.3(c) above, Borrower grants Lender the right to enter onto the Property and perform any and all work and labor necessary to complete or make such Replacements and/or employ watchmen to protect the Property from damage. All sums so expended by Lender, to the extent not from the Replacement Reserve Fund, shall be deemed to have been advanced under the Loan to Borrower and secured by the Mortgage. For this purpose Borrower constitutes and appoints Lender its true and lawful attorney-in-fact with full power of substitution to complete or undertake such Replacements in the name of Borrower. Such power of attorney shall be deemed to be a power coupled with an interest and cannot be revoked. Borrower empowers said attorney-in-fact as follows: (i) to use any funds in the Replacement Reserve Account for the purpose of making or completing such Replacements; (ii) to make such additions, changes and corrections to such Replacements as shall be necessary or desirable to complete such Replacements; (iii) to employ such contractors, subcontractors, agents, architects and inspectors as shall be required for such purposes; (iv) to pay, settle or compromise all existing bills and claims which are or may become Liens against the Property, or as may be

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necessary or desirable for the completion of such Replacements, or for clearance of title; (v) to execute all applications and certificates in the name of Borrower which may be required by any of the contract documents; (vi) to prosecute and defend all actions or proceedings in connection with the Property or the rehabilitation and repair of the Property; and (vii) to do any and every act which Borrower might do in its own behalf to fulfill the terms of this Section 7.3.

          (e) Nothing in this Section 7.3.3 shall: (i) make Lender responsible for making or completing any Replacements; (ii) require Lender to expend funds in addition to the Replacement Reserve Fund to make or complete any Replacement; (iii) obligate Lender to proceed with any Replacements; or (iv) obligate Lender to demand from Borrower additional sums to make or complete any Replacement.

          (f) Borrower shall permit Lender and Lender’s agents and representatives (including, without limitation, Lender’s engineer, architect, or inspector) or third parties making Replacements pursuant to this Section 7.3.3 to enter onto the Property during normal business hours (subject to the rights of Tenants under their Leases) to inspect the progress of any Replacements and all materials being used in connection therewith, to examine all plans and shop drawings relating to such Replacements which are or may be kept at the Property, and to complete any Replacements made pursuant to this Section 7.3.3 if Borrower shall fail to do so. Borrower shall cause all contractors and subcontractors to cooperate with Lender or Lender’s representatives or such other persons described above in connection with inspections described in this Section 7.3.3(f) or the completion of Replacements pursuant to this Section 7.3.3.

          (g) Lender may require an inspection of the Property at Borrower’s expense prior to making a monthly disbursement from the Replacement Reserve Account in order to verify completion of the Replacements for which reimbursement is sought. Lender may require that such inspection be conducted by an appropriate independent qualified professional selected by Lender and/or may require a copy of a certificate of completion by an independent qualified professional acceptable to Lender prior to the disbursement of any amounts from the Replacement Reserve Account. Borrower shall pay the reasonable expense of the inspection as required hereunder, whether such inspection is conducted by Lender or by an independent qualified professional.

          (h) The Replacements and all materials, equipment, fixtures, or any other item comprising a part of any Replacement shall be constructed, installed or completed, as applicable, free and clear of all mechanic’s, materialmen’s or other liens (except for those Liens which constitute Permitted Encumbrances or which otherwise have been approved in writing by Lender).

          (i) Before each disbursement from the Replacement Reserve Account, Lender may require Borrower to provide Lender with a search of title to the Property effective to the date of the disbursement, which search shows that no mechanic’s or materialmen’s liens or other liens of any nature have been placed against the Property since the date of recordation of the related Mortgage and that title to the Property is free and clear of all Liens (other than the lien of the related Mortgage, Permitted Encumbrances and any other Liens previously approved in writing by Lender, if any).

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          (j) All Replacements shall comply with all applicable Legal Requirements of all Governmental Authorities having jurisdiction over the Property and applicable insurance requirements including, without limitation, applicable building codes, special use permits, environmental regulations, and requirements of insurance underwriters.

          (k) In addition to any insurance required under the Loan Documents, Borrower shall provide or cause to be provided workmen’s compensation insurance, builder’s risk, and public liability insurance and other insurance to the extent required under applicable law in connection with a particular Replacement. All such policies shall be in form and amount reasonably satisfactory to Lender. All such policies which can be endorsed with standard mortgagee clauses making loss payable to Lender or its assigns shall be so endorsed. Certified copies of such policies shall be delivered to Lender.

          7.3.4 Failure to Make Replacements.

          (a) It shall be an Event of Default under this Agreement if Borrower fails to comply with any provision of this Section 7.3 and such failure is not cured within thirty (30) days after notice from Lender. Upon the occurrence and during the continuance of such an Event of Default, Lender may use the Replacement Reserve Fund (or any portion thereof) for any purpose, including but not limited to completion of the Replacements as provided in Section 7.3.3, or for any other repair or replacement to the Property or toward payment of the Debt in such order, proportion and priority as Lender may determine in its sole discretion. Lender’s right to withdraw and apply the Replacement Reserve Fund shall be in addition to all other rights and remedies provided to Lender under this Agreement and the other Loan Documents.

          (b) Nothing in this Agreement shall obligate Lender to apply all or any portion of the Replacement Reserve Fund on account of an Event of Default to payment of the Debt or in any specific order or priority.

          7.3.5 Balance in the Replacement Reserve Account         . The insufficiency of any balance in the Replacement Reserve Account shall not relieve Borrower from its obligation to fulfill all preservation and maintenance covenants in the Loan Documents.

     Section 7.4 Excess Cash Reserve Fund. Following a Cash Management Trigger, on each Payment Date all Excess Cash remaining in the Cash Management Account following the required transfers of sums pursuant to Sections 2.7.2(c)(i) through (viii) of this Agreement shall be deposited with Lender, to be held as additional collateral for the Loan (amounts so deposited shall hereinafter be referred to as the “Excess Cash Reserve Fund” and the account to which such amounts are held shall hereinafter be referred to as the “Excess Cash Reserve Account”). Subject to the terms of this Agreement, sums from the Excess Cash Reserve Fund shall only be disbursed to Borrower upon payment in full of the Debt. Notwithstanding the foregoing, upon the occurrence of a Cash Management Termination Event, Lender shall disburse to Borrower all amounts in the Excess Cash Reserve Account.

     Anything herein to the contrary notwithstanding, in the event the Cash Management Trigger is caused by the events described in (iv) of the definition of Cash Management Trigger,

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Lender shall make disbursements from the Excess Cash Reserve Account for (i) the costs incurred by Borrower for market-rate tenant improvements required under (a) Leases or lease amendments approved by Lender in accordance with Section 5.1.20 of this Agreement or (b) Leases or lease amendments for which no approval is required under Section 5.1.20 of this Agreement and (ii) bona fide, market-rate leasing commissions incurred by Borrower (in favor of duly licensed real estate agents) payable in connection with (a) Leases or lease amendments approved by Lender in accordance with Section 5.1.20 of this Agreement or (b) Leases or lease amendments for which no approval is required under Section 5.1.20 of this Agreement (the foregoing categories of expenses hereinafter referred to as “Eligible Rollover Expenses”). Borrower shall (x) complete each tenant improvement required to be made by Borrower under the terms of such Leases in a good and workmanlike manner and in accordance with the terms of such Leases and (y) pay all Eligible Rollover Expenses before the same become delinquent. Provided no Event of Default has occurred, Lender shall make disbursements as requested by Borrower on a monthly basis in increments of no less than $5,000.00 upon delivery by Borrower of Lender’s standard form of draw request accompanied by copies of paid invoices for the amounts requested and, if required by Lender, lien waivers and releases from all parties furnishing materials and/or services in connection with the requested payment. Lender may require an inspection of the Property at Borrower’s expense prior to making a monthly disbursement in order to verify completion of improvements for which reimbursement is sought.

     Section 7.5 Reserve Funds, Generally. Borrower grants to Lender a first-priority perfected security interest in each of the Reserve Funds and any and all monies now or hereafter deposited in each Reserve Fund as additional security for payment of the Debt. Until expended or applied in accordance herewith, the Reserve Funds shall constitute additional security for the Debt. Upon the occurrence and during the continuance of an Event of Default, Lender may, in addition to any and all other rights and remedies available to Lender, apply any sums then present in any or all of the Reserve Funds to the payment of the Debt in any order in its sole discretion. The Reserve Funds shall not constitute trust funds and may be commingled with other monies held by Lender. The Reserve Funds shall be held in an Eligible Account in Permitted Investments in accordance with the terms and provisions hereof. All interest on a Reserve Fund shall not be added to or become a part thereof and shall be the sole property of and shall be paid to Lender. Borrower shall be responsible for payment of any federal, state or local income or other tax applicable to the interest earned on the Reserve Funds that is credited or paid to Borrower, if any. Borrower shall not, without obtaining the prior written consent of Lender, further pledge, assign or grant any security interest in any Reserve Fund or the monies deposited therein or permit any lien or encumbrance to attach thereto, or any levy to be made thereon, or any UCC-1 Financing Statements, except those naming Lender as the secured party, to be filed with respect thereto. Lender shall not be liable for any loss sustained on the investment of any funds constituting the Reserve Funds. Borrower shall indemnify Lender and hold Lender harmless from and against any and all actions, suits, claims, demands, liabilities, losses, damages, obligations and costs and expenses (including litigation costs and reasonable attorneys fees and expenses) arising from or in any way connected with the Reserve Funds or the performance of the obligations for which the Reserve Funds were established, unless arising from the gross negligence, willful misconduct or bad faith of Lender. Borrower shall assign to Lender all rights and claims Borrower may have against all persons or entities supplying labor, materials or other services which are to be paid from or secured by the Reserve Funds; provided,

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however, that Lender may not pursue any such right or claim unless an Event of Default has occurred and remains uncured.

     VIII. DEFAULTS

     Section 8.1 Event of Default.

          (a) Each of the following events shall constitute an event of default hereunder (an “Event of Default”):

     (i) if any payment of the Monthly Debt Service Payment Amount or any other payment required hereunder or under the other Loan Documents is not paid within five (5) days of the applicable due date, or the payment of all sums due hereunder and under the other Loan Documents on the Maturity Date is not paid when due;

     (ii) if any of the Taxes or Other Charges are not paid prior to the date when the same become delinquent, except to the extent that there are sufficient funds in the Tax and Insurance Escrow Fund to pay such Taxes or Other Charges and Lender fails to or refuses to release the same from the Tax and Insurance Escrow Fund;

     (iii) if the Policies are not kept in full force and effect, or if certified copies of the Policies are not delivered to Lender within fifteen (15) days after request;

     (iv) if Borrower Transfers or otherwise encumbers any portion of the Property without Lender’s prior written consent in violation of the provisions of this Agreement and Article 6 of the Mortgage;

     (v) if any representation or warranty made by Borrower herein or in any other Loan Document, or in any report, certificate, financial statement or other instrument, agreement or document furnished to Lender shall have been false or misleading in any material respect as of the date the representation or warranty was made;

     (vi) if Borrower, Guarantor or any other guarantor under any guaranty issued in connection with the Loan shall make an assignment for the benefit of creditors;

     (vii) if a receiver, liquidator or trustee shall be appointed for Borrower, Guarantor or any other guarantor under any guarantee issued in connection with the Loan or if Borrower, Guarantor or such other guarantor shall be adjudicated a bankrupt or insolvent, or if any petition for bankruptcy, reorganization or arrangement pursuant to federal bankruptcy law, or any similar federal or state law, shall be filed by or against, consented to, or acquiesced in by, Borrower, Guarantor or such other guarantor, or if any proceeding for the dissolution or liquidation of Borrower, Guarantor or such other guarantor shall be instituted; provided, however, if such appointment, adjudication, petition or proceeding was involuntary and not consented to by Borrower, Guarantor or such other guarantor, upon the same not being discharged, stayed or dismissed within one hundred eighty (180) days;

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     (viii) if Borrower attempts to assign its rights under this Agreement or any of the other Loan Documents or any interest herein or therein in contravention of the Loan Documents;

     (ix) if Borrower breaches any covenant contained in Section 4.1.30 hereof;

     (x) with respect to any term, covenant or provision set forth herein which specifically contains a notice requirement and grace period, if Borrower shall be in default under such term, covenant or condition after the giving of such notice and the expiration of such grace period;

     (xi) if a material default has occurred and continues beyond any applicable cure period under the Management Agreement as it relates to the Property (or any Replacement Management Agreement) and if such default permits the Manager thereunder to remove the Property from the application of the Management Agreement or terminate or cancel the Management Agreement (or any Replacement Management Agreement);

     (xii) if Borrower shall continue to be in Default under any of the terms, covenants or conditions of Section 9.1 hereof, or fails to cooperate with Lender in connection with a Securitization pursuant to the provisions of Section 9.1 hereof, for five (5) Business Days after notice to Borrower from Lender, provided, however, if such Default is susceptible of cure but cannot reasonably be cured within such period and provided further that Borrower shall have commenced to cure such Default within such period and thereafter diligently and expeditiously proceeds to cure the same, such five (5) Business Day period shall be extended for such time as is reasonably necessary for Borrower in the exercise of due diligence to cure such Default, such additional period not to exceed thirty (30) days;

     (xiii) if Borrower shall continue to be in default under any of the other terms, covenants or conditions of this Agreement not specified in subsections (i) to (xii) above, for ten (10) days after notice to Borrower from Lender, in the case of any Default which can be cured by the payment of a sum of money, or for thirty (30) days after notice from Lender in the case of any other Default; provided, however, that if such non-monetary Default is susceptible of cure but cannot reasonably be cured within such thirty (30) day period and provided further that Borrower shall have commenced to cure such Default within such thirty (30) day period and thereafter diligently and expeditiously proceeds to cure the same, such thirty (30) day period shall be extended for such time as is reasonably necessary for Borrower in the exercise of due diligence to cure such Default, such additional period not to exceed one hundred eighty (180) days; or

     (xiv) if there shall be default under any of the other Loan Documents beyond any applicable cure periods contained in such documents, whether as to Borrower or the Property, or if any other such event shall occur or condition shall exist, if the effect of such default, event or condition is to accelerate the maturity of any portion of the Debt or to permit Lender to accelerate the maturity of all or any portion of the Debt.

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          (b) Upon the occurrence of an Event of Default (other than an Event of Default described in clauses (vi), (vii) or (viii) above) and at any time thereafter while such Event of Default is continuing, in addition to any other rights or remedies available to it pursuant to this Agreement and the other Loan Documents or at law or in equity but subject to Section 9.3, Lender may take such action, without notice or demand, that Lender deems advisable to protect and enforce its rights against Borrower and the Property, including, without limitation, declaring the Debt to be immediately due and payable, and Lender may enforce or avail itself of any or all rights or remedies provided in the Loan Documents against Borrower and any or all of the Property, including, without limitation, all rights or remedies available at law or in equity; and upon any Event of Default described in clauses (vi), (vii) or (viii) above, the Debt and Other Obligations of Borrower hereunder and under the other Loan Documents shall immediately and automatically become due and payable, without notice or demand, and Borrower hereby expressly waives any such notice or demand, anything contained herein or in any other Loan Document to the contrary notwithstanding.

     Section 8.2 Remedies.

          (a) Upon the occurrence and during the continuance of an Event of Default, subject to Section 9.3, all or any one or more of the rights, powers, privileges and other remedies available to Lender against Borrower under this Agreement or any of the other Loan Documents executed and delivered by, or applicable to, Borrower or at law or in equity may be exercised by Lender at any time and from time to time, whether or not all or any of the Debt shall be declared due and payable, and whether or not Lender shall have commenced any foreclosure proceeding or other action for the enforcement of its rights and remedies under any of the Loan Documents with respect to all or any part of the Property. Subject to Section 9.3, any such actions taken by Lender shall be cumulative and concurrent and may be pursued independently, singularly, successively, together or otherwise, at such time and in such order as Lender may determine in its sole discretion, to the fullest extent permitted by law, without impairing or otherwise affecting the other rights and remedies of Lender permitted by law, equity or contract or as set forth herein or in the other Loan Documents. Without limiting the generality of the foregoing, Borrower agrees that if an Event of Default is continuing and to the fullest extent permitted by law (i) Lender is not subject to any “one action” or “election of remedies” law or rule, and (ii) all liens and other rights, remedies or privileges provided to Lender shall remain in full force and effect until Lender has exhausted all of its remedies against the Property and the Mortgage has been foreclosed, sold and/or otherwise realized upon in satisfaction of the Debt or the Debt has been paid in full.

          (b) With respect to Borrower and the Property, nothing contained herein or in any other Loan Document shall be construed as requiring Lender to resort to the Property for the satisfaction of any of the Debt in any preference or priority, and Lender may seek satisfaction out of the Property, or any part thereof, in its absolute discretion in respect of the Debt. In addition, to the fullest extent permitted by law, Lender shall have the right from time to time to partially foreclose the Mortgage in any manner and for any amounts secured by the Mortgage then due and payable as determined by Lender in its sole discretion including, without limitation, the following circumstances: (i) in the event Borrower defaults beyond any applicable grace period in the payment of one or more scheduled payments of principal and interest, Lender may foreclose the Mortgage to recover such delinquent payments or (ii) in the event Lender elects to

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accelerate less than the entire outstanding principal balance of the Loan, Lender may foreclose the Mortgage to recover so much of the principal balance of the Loan as Lender may accelerate and such other sums secured by the Mortgage as Lender may elect. Notwithstanding one or more partial foreclosures, the Property shall remain subject to the Mortgage to secure payment of sums secured by the Mortgage and not previously recovered, to the fullest extent permitted by law.

          (c) Lender shall have the right from time to time to sever the Note and the other Loan Documents into one or more separate notes, mortgages and other security documents (the “Severed Loan Documents”) in such denominations as Lender shall determine in its sole discretion for purposes of evidencing and enforcing its rights and remedies provided hereunder. Borrower shall execute and deliver to Lender from time to time, promptly after the request of Lender, a severance agreement and such other documents as Lender shall request in order to effect the severance described in the preceding sentence, all in form and substance reasonably satisfactory to Lender and provided that such severance agreement and other documents incorporate the provisions of Section 9.3. Borrower hereby absolutely and irrevocably appoints Lender as its true and lawful attorney, coupled with an interest, in its name and stead to make and execute all documents necessary or desirable to effect the aforesaid severance, Borrower ratifying all that its said attorney shall do by virtue thereof; provided, however, Lender shall not make or execute any such documents under such power until ten (10) days after notice has been given to Borrower by Lender of Lender’s intent to exercise its rights under such power. Borrower shall be obligated to pay any costs or expenses incurred in connection with the preparation, execution, recording or filing of the Severed Loan Documents and the Severed Loan Documents shall not contain any representations, warranties or covenants not contained in the Loan Documents and any such representations and warranties contained in the Severed Loan Documents will be given by Borrower only as of the Closing Date.

     Section 8.3 Remedies Cumulative; Waivers. The rights, powers and remedies of Lender under this Agreement shall be cumulative and, subject to Section 9.3, not exclusive of any other right, power or remedy which Lender may have against Borrower pursuant to this Agreement or the other Loan Documents, or existing at law or in equity or otherwise. Lender’s rights, powers and remedies may be pursued singularly, concurrently or otherwise, at such time and in such order as Lender may determine in Lender’s sole discretion. No delay or omission to exercise any remedy, right or power accruing upon an Event of Default shall impair any such remedy, right or power or shall be construed as a waiver thereof, but any such remedy, right or power may be exercised from time to time and as often as may be deemed expedient. A waiver of one Event of Default with respect to Borrower shall not be construed to be a waiver of any subsequent Event of Default by Borrower or to impair any remedy, right or power consequent thereon.

     IX. SPECIAL PROVISIONS

     Section 9.1 Securitization.

          9.1.1 Sale of Note and Securitization. Borrower acknowledges and agrees that Lender may sell all or any portion of the Loan and the Loan Documents, or issue one or more participations therein, or consummate one or more private or public securitizations of rated

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single- or multi-class securities (the “Securities”) secured by or evidencing ownership interests in all or any portion of the Loan and the Loan Documents or a pool of assets that include the Loan and the Loan Documents (such sales, participations and/or securitizations, collectively, a “Securitization”). At the request of Lender, and to the extent not already required to be provided by or on behalf of Borrower under this Agreement, Borrower shall use reasonable efforts to provide information not in the possession of Lender or which may be reasonably required by Lender or take other actions reasonably required by Lender, in each case in order to satisfy the market standards to which Lender customarily adheres or which may be reasonably required by prospective investors and/or the Rating Agencies in connection with any such Securitization including, without limitation, to:

          (a) provide additional and/or updated Provided Information;

          (b) assist in preparing descriptive materials for presentations to any or all of Lender’s prospective investors or the Rating Agencies;

          (c) if required by any prospective investor and/or any Rating Agency, use commercially reasonable efforts to deliver such additional tenant estoppel letters, subordination agreements or other agreements from parties to agreements that affect the Property, which estoppel letters, subordination agreements or other agreements shall be reasonably satisfactory to Lender, prospective investors and/or the Rating Agencies;

          (d) execute such certifications and/or amendments to the Loan Documents as may be requested by Lender, prospective investors and/or the Rating Agencies to effect the Securitization, provided that Borrower shall not be required to modify or amend any Loan Document if such modification or amendment would (i) initially change the weighted average interest rate on the Loan, the stated maturity or the amortization of principal set forth herein or in the Note, (ii) modify or amend any other material economic term of the Loan, or (iii) materially increase the obligations, or decrease the rights, of Borrower under the Loan Documents;

          (e) if requested by Lender, review any information regarding the Property, Borrower, Guarantor, Manager and the Loan which is contained in a preliminary or final private placement memorandum, prospectus, prospectus supplement (including any amendment or supplement to either thereof), or other disclosure document to be used by Lender or any affiliate thereof; and

          (f) supply to Lender such documentation, financial statements and reports regarding the Property, Borrower, Guarantor, Manager and the Loan in form and substance required in order to comply with any applicable securities laws.

          9.1.2 Securitization Costs. All reasonable third party costs and expenses incurred by Borrower in connection with Borrower’s complying with requests made under this Section 9.1 shall be paid by Borrower, provided, however, such costs and expenses shall not exceed $2,500.

     Section 9.2 Securitization. Borrower understands that certain of the Provided Information may be included in disclosure documents in connection with the Securitization, including, without limitation, a prospectus, prospectus supplement or private placement

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memorandum (each, a “Disclosure Document”) and may also be included in filings with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the “Securities Act”), or the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or provided or made available to investors or prospective investors in the Securities, the Rating Agencies, and service providers relating to the Securitization. In the event that the Disclosure Document is required to be revised prior to the sale of all Securities, Borrower will cooperate with the holder of the Note in updating the Disclosure Document by providing all current information necessary to keep the Disclosure Document accurate and complete in all material respects.

     Section 9.3 Exculpation. Notwithstanding anything to the contrary contained in this Agreement, the Note, the Mortgage or the other Loan Documents but subject to the qualifications below, Lender shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in the Note, this Agreement, the Mortgage or the other Loan Documents by any action or proceeding wherein a money judgment shall be sought against Borrower, except that Lender may bring a foreclosure action, an action for specific performance or any other appropriate action or proceeding to enable Lender to enforce and realize upon its interest under the Note, this Agreement, the Mortgage and the other Loan Documents, or in the Property, the Rents, or any other collateral given to Lender pursuant to the Loan Documents; provided, however, that, except as specifically provided herein, any judgment in any such action or proceeding shall be enforceable against Borrower only to the extent of Borrower’s interest in the Property, in the Rents and in any other collateral given to Lender, and Lender, by accepting the Note, this Agreement, the Mortgage and the other Loan Documents, agrees that it shall not sue for, seek or demand any deficiency judgment against Borrower in any such action or proceeding under or by reason of or under or in connection with the Note, this Agreement, the Mortgage or the other Loan Documents. The provisions of this Section shall not, however, (a) constitute a waiver, release or impairment of any obligation evidenced or secured by any of the Loan Documents; (b) impair the right of Lender to name Borrower as a party defendant in any action or suit for foreclosure and sale under the Mortgage as long as Lender shall not sue for, seek or demand any deficiency judgment against Borrower; (c) affect the validity or enforceability of or any guaranty made in connection with the Loan or any of the rights and remedies of Lender thereunder; (d) impair the right of Lender to obtain the appointment of a receiver; (e) impair the enforcement of any of the Assignment of Leases; (f) constitute a prohibition against Lender to seek a deficiency judgment against Borrower if necessary in order to fully realize the security granted by the Mortgage or to commence any other appropriate action or proceeding in order for Lender to exercise its remedies against the Property; or (g) constitute a waiver of the right of Lender to enforce the liability and obligation of Borrower, by money judgment or otherwise, to the extent of any loss, damage, cost, expense, liability, claim or other obligation incurred by Lender (including attorneys’ fees and costs reasonably incurred) arising out of or in connection with the following:

     (i) fraud or intentional misrepresentation by Borrower or Guarantor in connection with the Loan;

     (ii) the willful misconduct of Borrower;

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     (iii) the breach of any representation, warranty, covenant or indemnification provision in the Environmental Indemnity or in the Mortgage concerning environmental laws, hazardous substances and asbestos and any indemnification of Lender with respect thereto in either document;

     (iv) the removal or disposal by Borrower or any Affiliate of Borrower of any portion of the Property after an Event of Default (unless otherwise permitted under the Loan Documents);

     (v) the misapplication or conversion by Borrower of (A) any Insurance Proceeds paid by reason of any loss, damage or destruction to the Property, which are not applied by Borrower in accordance with this Agreement, (B) any Awards received in connection with a Condemnation of all or a portion of the Property, which are not applied by Borrower in accordance with this Agreement, (C) any Rents following an Event of Default, (D) any Rents paid more than one month in advance, or (E) any amounts paid to Borrower by Tenants of the Property specifically for Taxes and Other Charges, which are not applied by Borrower to pay such Taxes and Other Charges or in accordance with this Agreement;

     (vi) failure to pay charges incurred by Borrower or any Affiliate of Borrower for labor or materials that can create Liens on any portion of the Property, subject to any right to contest such charges pursuant to the terms of this Agreement; and

     (vii) any security deposits, advance deposits or any other deposits collected with respect to the Property which are not delivered to Lender upon a foreclosure of the Property or action in lieu thereof, except to the extent any such security deposits were applied in accordance with the terms and conditions of any of the Leases prior to the occurrence of the Event of Default that gave rise to such foreclosure or action in lieu thereof.

     Notwithstanding anything to the contrary in this Agreement, the Note or any of the Loan Documents, (A) Lender shall not be deemed to have waived any right which Lender may have under Section 506(a), 506(b), 1111(b) or any other provisions of the Bankruptcy Code to file a claim for the full amount of the Debt secured by the Mortgage or to require that all collateral shall continue to secure all of the Debt owing to Lender in accordance with the Loan Documents, and (B) the Debt shall be fully recourse to Borrower (i) in the event of: (a) Borrower filing a voluntary petition under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law; (b) the filing by any Person of an involuntary petition against Borrower under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law, in which Borrower colludes with, or otherwise assists such Person, or solicits or causes to be solicited petitioning creditors for any involuntary petition against Borrower from any Person; (c) Borrower filing an answer consenting to or otherwise acquiescing in or joining in any involuntary petition filed against it, by any other Person under the Bankruptcy Code or any other Federal or state bankruptcy or insolvency law; (d) Borrower consenting to or acquiescing in or joining in an application for the appointment of a custodian, receiver, trustee, or examiner for Borrower or any portion of the Property (other than a receiver requested by Lender in connection with enforcement of its rights under the Loan Documents); (e) Borrower making an assignment

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for the benefit of creditors, or admitting, in writing or in any legal proceeding, its insolvency or inability to pay its debts as they become due; (ii) if the first full monthly payment of interest on the Note is not paid within five (5) days of notice that such payment is late (provided, however, that such grace period relates only to the recourse trigger described in this paragraph); (iii) if Borrower fails to permit on-site inspections of the Property subject to the rights of Tenants and any applicable cure period set forth in the Loan Documents, fails to provide financial information as required under the Loan Documents subject to any applicable cure period (except for financial information required to be delivered by a Tenant pursuant to the applicable Lease that has not been delivered to Borrower, provided Borrower has requested such financial information from such Tenant), or fails to maintain its status as a Single Purpose Entity; (iv) if Borrower fails to obtain Lender’s prior written consent to any Indebtedness incurred by Borrower and not otherwise permitted by this Agreement or the Mortgage or voluntary Lien encumbering the Property created by Borrower and not otherwise permitted by this Agreement or the Mortgage; or (v) if Borrower fails to obtain Lender’s prior written consent to any Transfer as required by this Agreement or the Mortgage.

     Section 9.4 Matters Concerning Manager. If (a) the Debt has been accelerated pursuant to Section 8.1(b) hereof, (b) Manager shall become bankrupt or insolvent, or (c) a default occurs under the Management Agreement which is not cured within any applicable notice or grace period, or (d) the Debt Service Coverage Ratio falls below 1.25 to 1.0 Borrower shall, at the request of Lender, remove the Property from the application of the Management Agreement if permitted to do so by the terms of the Management Agreement and the Consent Regarding Management Agreement, and replace the Manager of the Property with a Qualified Manager pursuant to a Replacement Management Agreement, it being understood and agreed that the management fee for such Qualified Manager shall not exceed then prevailing market rates.

     Section 9.5 Servicer. At the option of Lender, the Loan may be serviced by a servicer/trustee (any such servicer/trustee, together with its agents, nominees or designees, are collectively referred to as “Servicer”) selected by Lender and Lender may delegate all or any portion of its responsibilities under this Agreement and the other Loan Documents to Servicer pursuant to a servicing agreement (the “Servicing Agreement”) between Lender and Servicer. Borrower shall not be responsible for payment of any set-up fees or any other initial costs relating to or arising under the Servicing Agreement or the monthly servicing fee due to Servicer under the Servicing Agreement.

     Section 9.6 Splitting the Loan. At the election of Lender in its sole discretion, the Loan or any individual Note making up the Loan shall be split and severed into two or more loans which, at Lender’s election, shall not be cross-collateralized or cross-defaulted with each other. Borrower hereby agrees to deliver to Lender to effectuate such severing of the Loan or any individual Note, as the case may be, as reasonably requested by Lender, (a) additional executed documents, or amendments and modifications to the applicable Loan Documents, (b) new opinions or updates to the opinions delivered to Lender in connection with the closing of the Loan, (c) endorsements and/or updates to the title insurance policies delivered to Lender in connection with the closing of the Loan, and (d) any other certificates, instruments and documentation reasonably determined by Lender as necessary or appropriate to such severance (the items described in subsections (a) through (d) collectively hereinafter shall be referred to as “Severing Documentation”), which Severing Documentation shall be acceptable to Lender in

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form and substance in its reasonable discretion. Lender hereby agrees to be responsible for all third-party expenses incurred in connection with the preparation and delivery of the Severing Documentation and the effectuation of the uncrossing of the Loan from the additional Loans. Borrower hereby acknowledges and agrees that upon such severing of the Loan, Lender may effect, in its sole discretion, one or more Securitizations of which the severed loans may be a part.

     X. MISCELLANEOUS

     Section 10.1 Survival. This Agreement and all covenants, agreements, representations and warranties made herein and in the certificates delivered pursuant hereto shall survive the making by Lender of the Loan and the execution and delivery to Lender of the Note, and shall continue in full force and effect so long as all or any of the Debt is outstanding and unpaid unless a longer period is expressly set forth herein or in the other Loan Documents. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the legal representatives, successors and assigns of such party. All covenants, promises and agreements in this Agreement, by or on behalf of each party, shall inure to the benefit of the legal representatives, successors and assigns of the other party.

     Section 10.2 Lender’s Discretion. Whenever pursuant to this Agreement, Lender exercises any right given to it to approve or disapprove, or any arrangement or term is to be satisfactory to Lender, the decision of Lender to approve or disapprove or to decide whether arrangements or terms are satisfactory or not satisfactory shall (except as is otherwise specifically herein provided) be in the reasonable discretion of Lender and shall be final and conclusive.

     Section 10.3 Governing Law.

THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT ENTERED INTO PURSUANT TO THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED AND SHALL IN ALL RESPECTS BE GOVERNED, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED AND APPLICABLE FEDERAL LAWS.

     Section 10.4 Modification, Waiver in Writing. No modification, amendment, extension, discharge, termination or waiver of any provision of this Agreement, or of the Note, or of any other Loan Document, nor consent to any departure by Borrower or Lender therefrom, shall in any event be effective unless the same shall be in a writing signed by the party against whom enforcement is sought, and then such waiver or consent shall be effective only in the specific instance, and for the purpose, for which given. Except as otherwise expressly provided herein, no notice to, or demand on Borrower, shall entitle Borrower to any other or future notice or demand in the same, similar or other circumstances (unless such future notice or demand is otherwise required to be given).

     Section 10.5 Delay Not a Waiver. Neither any failure nor any delay on the part of any party in insisting upon strict performance of any term, condition, covenant or agreement, or exercising any right, power, remedy or privilege hereunder, or under the Note or under any other Loan Document, or any other instrument given as security therefor, shall operate as or constitute

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a waiver thereof, nor shall a single or partial exercise thereof preclude any other future exercise, or the exercise of any other right, power, remedy or privilege. In particular, and not by way of limitation, by accepting payment after the due date of any amount payable under this Agreement, the Note or any other Loan Document, Lender shall not be deemed to have waived any right either to require prompt payment when due of all other amounts due under this Agreement, the Note or the other Loan Documents, or to declare a default for failure to effect prompt payment of any such other amount.

     Section 10.6 Notices. All notices, consents, approvals and requests required or permitted hereunder or under any other Loan Document shall be given in writing and shall be effective for all purposes if hand delivered or sent by (a) certified or registered United States mail, postage prepaid, return receipt requested or (b) expedited prepaid delivery service, either commercial or United States Postal Service, with proof of attempted delivery, and by telecopier (with answer back acknowledged), addressed as follows (or at such other address and Person as shall be designated from time to time by any party hereto, as the case may be, in a written notice to the other parties hereto in the manner provided for in this Section):

If to Lender:	Bear Stearns Commercial Mortgage, Inc.
	383 Madison Avenue
	New York, New York 10179
	Attention: J. Christopher Hoeffel
	Facsimile No.: (212) 272-7047
with a copy to:	Katten Muchin Rosenman LLP
	401 South Tryon Street, Ste. 2600
	Charlotte, North Carolina 28202
	Attention: Daniel S. Huffenus, Esq.
	Facsimile No.: (704) 344-3056
If to Borrower:	Cole AS Katy TX, LP
	2555 East Camelback Road, Ste. 400
	Phoenix, Arizona 85016
	Attention: General Counsel
	Facsimile No.: (602) 778-8780

A notice shall be deemed to have been given: in the case of hand delivery, at the time of delivery; in the case of registered or certified mail, when delivered or the first attempted delivery on a Business Day; or in the case of expedited prepaid delivery and telecopy, upon the first attempted delivery on a Business Day; or in the case of telecopy, upon sender’s receipt of a machine-generated confirmation of successful transmission after advice by telephone to recipient that a telecopy notice is forthcoming.

     Section 10.7 Trial by Jury. BORROWER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY BORROWER, AND IS INTENDED

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TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY BORROWER.

     Section 10.8 Headings. The Article and/or Section headings and the Table of Contents in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.

     Section 10.9 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

          10.9.1 Preferences. Lender shall have the continuing and exclusive right to apply or reverse and reapply any and all payments by Borrower to any portion of the obligations of Borrower hereunder, provided such reapplication is consistent with the provisions of this Agreement. To the extent Borrower makes a payment or payments to Lender, which payment or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the obligations hereunder or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment or proceeds had not been received by Lender.

          10.9.2 Waiver of Notice. Borrower shall not be entitled to any notices of any nature whatsoever from Lender except with respect to matters for which this Agreement or the other Loan Documents specifically and expressly provide for the giving of notice by Lender to Borrower and except with respect to matters for which Borrower is not, pursuant to applicable Legal Requirements, permitted to waive the giving of notice. Borrower hereby expressly waives the right to receive any notice from Lender with respect to any matter for which this Agreement or the other Loan Documents do not specifically and expressly provide for the giving of notice by Lender to Borrower.

          10.9.3 Remedies of Borrower. In the event that a claim or adjudication is made that Lender or its agents have acted unreasonably or unreasonably delayed acting in any case where by law or under this Agreement or the other Loan Documents, Lender or such agent, as the case may be, has an obligation to act reasonably or promptly, Borrower agrees that neither Lender nor its agents shall be liable for any monetary damages, and Borrower’s sole remedies shall be limited to commencing an action seeking injunctive relief or declaratory judgment. The parties hereto agree that any action or proceeding to determine whether Lender has acted reasonably shall be determined by an action seeking declaratory judgment.

          10.9.4 Expenses; Indemnity.

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          (a) Borrower covenants and agrees to pay or, if Borrower fails to pay, to reimburse, Lender upon receipt of written notice from Lender for all reasonable costs and expenses (including reasonable attorneys’ fees and disbursements) incurred by Lender in connection with (i) the preparation, negotiation, execution and delivery of this Agreement and the other Loan Documents and the consummation of the transactions contemplated hereby and thereby and all the costs of furnishing all opinions by counsel for Borrower (including without limitation any opinions reasonably requested by Lender as to any legal matters arising under this Agreement or the other Loan Documents with respect to the Property); (ii) Borrower’s ongoing performance of and compliance with Borrower’s respective agreements and covenants contained in this Agreement and the other Loan Documents on its part to be performed or complied with after the Closing Date, including, without limitation, confirming compliance with environmental and insurance requirements; (iii) the negotiation, preparation, execution, delivery and administration of any consents, amendments, waivers or other modifications to this Agreement and the other Loan Documents requested by Borrower or otherwise required hereunder, and any other documents or matters requested by Borrower or otherwise required hereunder; (iv) securing Borrower’s compliance with any requests made pursuant to the provisions of this Agreement; (v) the filing and recording fees and expenses, title insurance and reasonable fees and expenses of counsel for providing to Lender all reasonably required legal opinions, and other similar expenses incurred in creating and perfecting the Lien in favor of Lender pursuant to this Agreement and the other Loan Documents; (vi) subject to Section 9.3 hereof, enforcing or preserving any rights, in response to third party claims or the prosecuting or defending of any action or proceeding or other litigation, in each case against, under or affecting Borrower, this Agreement, the other Loan Documents, the Property, or any other security given for the Loan; and (vii) subject to Section 9.3 hereof, enforcing any obligations of or collecting any payments due from Borrower under this Agreement, the other Loan Documents or with respect to the Property (including any fees incurred by Servicer in connection with the transfer of the Loan to a special servicer upon an Event of Default) or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a “work-out” or of any insolvency or bankruptcy proceedings; provided, however, that Borrower shall not be liable for the payment of any such costs and expenses to the extent the same arise by reason of the gross negligence, illegal acts, fraud or willful misconduct of Lender. Any cost and expenses due and payable to Lender may be paid from any amounts in the Cash Management Account, if applicable.

          (b) Subject to Section 9.3 hereof, Borrower shall indemnify, defend and hold harmless Lender from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for Lender in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not Lender shall be designated a party thereto), that may be imposed on, incurred by, or asserted against Lender in any manner relating to or arising out of (i) any material breach by Borrower of its obligations under, or any material misrepresentation by Borrower contained in, this Agreement or the other Loan Documents, or (ii) the use or intended use of the proceeds of the Loan (collectively, the “Indemnified Liabilities”); provided, however, that Borrower shall not have any obligation to Lender hereunder to the extent that such Indemnified Liabilities arise from the gross negligence, illegal acts, fraud or willful misconduct of Lender. To the extent that the undertaking to indemnify, defend and hold harmless set forth in

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the preceding sentence may be unenforceable because it violates any law or public policy, Borrower shall pay the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Lender.

          (c) Borrower covenants and agrees to pay for or, if Borrower fails to pay, to reimburse Lender for, any reasonable fees and expenses incurred by any Rating Agency in connection with any consent, approval, waiver or confirmation obtained from such Rating Agency pursuant to the terms and conditions of this Agreement or any other Loan Document and Lender shall be entitled to require payment of such fees and expenses as a condition precedent to the obtaining of any such consent, approval, waiver or confirmation.

     Section 10.10 Schedules Incorporated. The Schedules annexed hereto are hereby incorporated herein as a part of this Agreement with the same effect as if set forth in the body hereof.

     Section 10.11 Offsets, Counterclaims and Defenses. Any assignee of Lender’s interest in and to this Agreement, the Note and the other Loan Documents shall take the same free and clear of all offsets, counterclaims or defenses which are unrelated to such documents which Borrower may otherwise have against any assignor of such documents, and no such unrelated counterclaim or defense shall be interposed or asserted by Borrower in any action or proceeding brought by any such assignee upon such documents and any such right to interpose or assert any such unrelated offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by Borrower.

     Section 10.12 No Joint Venture or Partnership; No Third Party Beneficiaries.

          (a) Borrower and Lender intend that the relationships created hereunder and under the other Loan Documents be solely that of borrower and lender. Nothing herein or therein is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between Borrower and Lender nor to grant Lender any interest in the Property other than that of mortgagee, beneficiary or lender.

          (b) This Agreement and the other Loan Documents are solely for the benefit of Lender and Borrower and nothing contained in this Agreement or the other Loan Documents shall be deemed to confer upon anyone other than Lender and Borrower any right to insist upon or to enforce the performance or observance of any of the obligations contained herein or therein. All conditions to the obligations of Lender to make the Loan hereunder are imposed solely and exclusively for the benefit of Lender and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that Lender will refuse to make the Loan in the absence of strict compliance with any or all thereof and no other Person shall under any circumstances be deemed to be a beneficiary of such conditions, any or all of which may be freely waived in whole or in part by Lender if, in Lender’s sole discretion, Lender deems it advisable or desirable to do so.

     Section 10.13 Publicity All news releases, publicity or advertising by Borrower or its Affiliates through any media intended to reach the general public which refers to the Loan

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Documents or the financing evidenced by the Loan Documents, to Lender, or any of their Affiliates shall be subject to the prior written approval of Lender.

     Section 10.14 Waiver of Marshalling of Assets. To the fullest extent permitted by law, Borrower, for itself and its successors and assigns, waives all rights to a marshalling of the assets of Borrower, Borrower’s partners and others with interests in Borrower, and of the Property, and agrees not to assert any right under any laws pertaining to the marshalling of assets, the sale in inverse order of alienation, homestead exemption, the administration of estates of decedents, or any other matters whatsoever to defeat, reduce or affect the right of Lender under the Loan Documents to a sale of the Property for the collection of the Debt without any prior or different resort for collection or of the right of Lender to the payment of the Debt out of the net proceeds of the Property in preference to every other claimant whatsoever.

     Section 10.15 Waiver of Counterclaim. Borrower hereby waives the right to assert a counterclaim, other than a compulsory counterclaim, in any action or proceeding brought against it by Lender or its agents.

     Section 10.16 Conflict; Construction of Documents; Reliance. In the event of any conflict between the provisions of this Agreement and any of the other Loan Documents, the provisions of this Agreement shall control. The parties hereto acknowledge that they were represented by competent counsel in connection with the negotiation, drafting and execution of the Loan Documents and that such Loan Documents shall not be subject to the principle of construing their meaning against the party which drafted same. Borrower acknowledges that, with respect to the Loan, Borrower shall rely solely on its own judgment and advisors in entering into the Loan without relying in any manner on any statements, representations or recommendations of Lender or any parent, subsidiary or Affiliate of Lender. Lender shall not be subject to any limitation whatsoever in the exercise of any rights or remedies available to it under any of the Loan Documents or any other agreements or instruments which govern the Loan by virtue of the ownership by it or any parent, subsidiary or Affiliate of Lender of any equity interest any of them may acquire in Borrower, and Borrower hereby irrevocably waives the right to raise any defense or take any action on the basis of the foregoing with respect to Lender’s exercise of any such rights or remedies. Borrower acknowledges that Lender engages in the business of real estate financings and other real estate transactions and investments which may be viewed as adverse to or competitive with the business of Borrower or its Affiliates.

     Section 10.17 Brokers and Financial Advisors. Each party hereby represents to the other that it has dealt with no financial advisors, brokers, underwriters, placement agents, agents or finders in connection with the transactions contemplated by this Agreement. Each party hereby agrees to indemnify, defend and hold the other harmless from and against any and all claims, liabilities, costs and expenses of any kind (including reasonable attorneys’ fees and expenses) in any way relating to or arising from a claim by any Person that such Person acted on behalf of such party in connection with the transactions contemplated herein. The provisions of this Section 10.17 shall survive the expiration and termination of this Agreement and the payment of the Debt.

     Section 10.18 Prior Agreements. This Agreement and the other Loan Documents contain the entire agreement of the parties hereto and thereto in respect of the transactions

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contemplated hereby and thereby, and all prior agreements among or between such parties, whether oral or written, are superseded by the terms of this Agreement and the other Loan Documents.

     Section 10.19 Joint and Several Liability. If Borrower consists of more than one (1) Person the obligations and liabilities of each Person shall be joint and several.

     Section 10.20 Certain Additional Rights of Lender (VCOC). Notwithstanding anything to the contrary contained in this Agreement, Lender shall have:

          (a) the right to routinely consult with and advise Borrower’s management regarding the significant business activities and business and financial developments of Borrower; provided, however, that such consultations shall not include discussions of environmental compliance programs or disposal of hazardous substances. Consultation meetings should occur on a regular basis (no less frequently than quarterly) with Lender having the right to call special meetings at any reasonable times and upon reasonable advance notice;

          (b) the right, in accordance with the terms of this Agreement, to examine the books and records of Borrower at any reasonable times upon reasonable notice;

          (c) the right, in accordance with the terms of this Agreement to receive the financial statements required to be delivered under Section 5.1.11 hereof; and

          (d) the right, without restricting any other rights of Lender under this Agreement (including any similar right), to approve any acquisition by Borrower of any other significant property (other than personal property required for the day to day operation of the Property).

The rights described above in this Section 10.20 may be exercised by any entity which owns and controls, directly or indirectly, substantially all of the interests in Lender.

[NO FURTHER TEXT ON THIS PAGE]

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized representatives, all as of the day and year first above written.

BORROWER:
COLE AS KATY TX, LP, a Delaware limited partnership
By:	Cole IM Katy TX, LLC, a Delaware limited liability company, its General Partner
By:	Cole REIT Advisors II, LLC, a Delaware limited liability company, its Manager
	By:
		John M. Pons
		Senior Vice President
LENDER:
BEAR STEARNS COMMERCIAL MORTGAGE, INC., a New York corporation
By:
	Michael A. Forastiere
	Managing Director

SCHEDULE I

(Rent Roll)

N/A

Schedule I-1

SCHEDULE II

(Required Repairs — Deadlines For Completion)

Required Repair	Cost		Deadline
1. Replace deteriorated and settled sections of asphalt pavement	$	3,750.00	Six (6) months from the date hereof
2. Concrete curb replacement	$	4,687.50	Six (6) months from the date hereof
3. Concrete parking lot repairs	$	1,875.00	Six (6) months from the date hereof
4. Repair and paint steel framed stairs	$	2,187.50	Six (6) months from the date hereof
5. Concrete slab crack grouting	$	2,187.50	Six (6) months from the date hereof
6. Repaint structural steel	$	4,375.00	Six (6) months from the date hereof
7. Repair loading dock canopy	$	4,500.00	Six (6) months from the date hereof
8. Replace damaged loading dock equipment	$	8,437.50	Six (6) months from the date hereof
9. Replace damaged or missing sections of roof leader	$	2,000.00	Six (6) months from the date hereof
10. Test existing fire safety equipment	$	0.00	Six (6) months from the date hereof
11. Insulate piping under lavatories	$	1,150.00	Six (6) months from the date hereof
TOTAL	$	35,150.00

Schedule II-1

SCHEDULE III

Intentionally Deleted

Schedule III-1

SCHEDULE IV

Tenant Direction Letter

                                         , 200     
(Tenant’s name and address)
                                        
                                        

Re: Lease, dated                                         , by and between                                          , as original landlord and predecessor-in-interest to                                         , as landlord, and                                          as tenant as the same has been amended, concerning premises at                                         

Ladies and Gentlemen:

The undersigned hereby requests that, commencing with the first Rent payment date occurring after the date hereof, you deliver all Rent to the following address:

Account Name:

Account No.

Attention:

ABA#

[Borrower]

Schedule IV-1

SCHEDULE V

Identified Affiliates

Each of the following entities shall be deemed to be an “Identified Affiliate” for purposes hereof:

Series A, LLC, an Arizona limited liability company;
Series B, LLC, an Arizona limited liability company;
Series C, LLC, an Arizona limited liability company;
Series D, LLC, an Arizona limited liability company;
Cole Acquisitions I, LLC, a Delaware limited liability company;
Cole Operating Partnership I, LP, a Delaware limited partnership;
Cole Operating Partnership II, LP, a Delaware limited partnership;
Cole Credit Property Trust, Inc., a Maryland corporation;
Cole Credit Property Trust II, Inc., a Maryland corporation; and
Any entity wholly-owned by one or more of the foregoing

Schedule V-1

SCHEDULE VI

OUT PARCEL RELEASE CONDITIONS

1.	Lender shall have received, together with the request for release, a current survey depicting the Out Parcel to be released and the Remaining Property (as defined below) and any appurtenant easements;
2.	Lender shall have received evidence that there are no subordinate liens, mortgages, deeds of trust or other security instruments, as the case may be, encumbering the Property remaining encumbered by the lien of the Mortgage (the “Remaining Property”), including without limitation, if available in the State where the Property is located, a “bring down” or “date down” of the title insurance policies insuring the lien of the Mortgage on such Property and an endorsement reflecting the Property remaining encumbered by the lien of the Mortgage includes the Remaining Property and any necessary easements or agreements in connection with the release of the Out Parcel;
3.	Lender shall have received from Borrower payment of all Lender’s costs and expenses, including reasonable counsel fees and disbursements incurred in connection with the release of the Out Parcel from the lien of the Mortgage and the review and approval of the documents and information required to be delivered in connection therewith (“Release Expenses”);
4.	Lender shall have received from Borrower payment of the applicable Release Amount together with (a) interest accrued and unpaid on the Release Amount to and including the date of prepayment, (b) unless prepayment is tendered on the first day of a calendar month, an amount equal to the interest that would have accrued on the amount being prepaid after the date of prepayment through and including the last day of the calendar month in which the prepayment occurs had the prepayment not been made (which amount shall constitute additional consideration for the prepayment), (c) all other sums then due under the Note, the Mortgage and the other Loan Documents, and (d) a prepayment consideration (the “Prepayment Consideration”) equal to the greater of (i) three percent (3%) of the Out Parcel Release Amount being prepaid and (ii) the excess, if any, of (A) the sum of the present values of all then-scheduled payments of interest under the Note with respect to the Out Parcel Release Amount including, but not limited to, principal and interest on the Anticipated Repayment Date with respect to the Out Parcel Release Amount (with each such payment discounted to its present value at the date of prepayment at the rate which, when compounded monthly, is equivalent to the Prepayment Rate (hereinafter defined) when compounded semi-annually and deducting from the sum of such present values any short-term interest paid from the date of prepayment to the next succeeding Payment Date in the event such payment is not made on a Payment Date), over (B) the principal amount of the Note being prepaid.
	The term “Prepayment Rate” means the bond equivalent yield (in the secondary market) on the United States Treasury Security that as of the Prepayment Rate Determination Date (hereinafter defined) has a remaining term to maturity closest to, but not exceeding, the remaining term to the Anticipated Repayment Date, as most recently published in the “Treasury Bonds, Notes and Bills” section in The Wall Street Journal as of such Prepayment Rate Determination Date. If more than one issue of United States Treasury Securities has the

Schedule VI

	remaining term to the Anticipated Repayment Date referred to above, the “Prepayment Rate” shall be the yield on the United States Treasury Security most recently issued as of the Prepayment Rate Determination Date. The rate so published shall control absent manifest error. The term “Prepayment Rate Determination Date” shall mean the date which is five (5) Business Days prior to the scheduled prepayment date. As used herein, “Business Day” shall mean any day other than Saturday, Sunday or any other day on which banks are required or authorized to close in New York, New York.
	Lender shall notify Borrower of the amount and the basis of determination of the required prepayment consideration. If the publication of the Prepayment Rate in The Wall Street Journal is discontinued, Lender shall determine the Prepayment Rate on the basis of “Statistical Release H.15 (519), Selected Interest Rates,” or any successor publication, published by the Board of Governors of the Federal Reserve System, or on the basis of such other publication or statistical guide as Lender may reasonably select.
5.	Lender shall have approved the deed and the legal description by which the Out Parcel shall be conveyed, including any appurtenant easements for access, parking or drainage comprising part of the Out Parcel, which approval shall not unreasonably be withheld or delayed;
6.	Lender shall have received evidence that Primewest 1996, Ltd., a Texas limited partnership or its successors and assigns is exercising its rights to re-purchase the Out Parcel pursuant to that certain Declaration of Covenants and Restrictions dated March 3, 1998, recorded March 5, 1998 in/under S892729 of the Real Property Records of Harris County, Texas, as amended.
7.	Lender shall have received evidence that title to the Out Parcel shall be transferred to an entity other than a Borrower;
8.	Lender shall have received evidence that the Remaining Property is or shall be (upon the completion of nondiscretionary acts of the relevant municipality) comprised of one or more legally created, subdivided and wholly independent tax lots and zoning lots, if applicable, separate from any adjoining land or improvements not constituting a part of such lot or lots, and no other land or improvements is assessed and taxed together with the Remaining Property or any portion thereof;
9.	Lender shall have received evidence that the Remaining Property has adequate access to a public road (a) for the use of the Remaining Property in connection with its permitted use, and (b) in accordance with applicable zoning laws, ordinances and regulations. A date down endorsement to the title policy delivered at the closing, which included endorsements for access and zoning, without exception for such matters, shall satisfy the foregoing; and
10.	Lender shall have received an estoppel from Academy or other evidence that the Remaining Property complies with the Academy Lease regarding parking and that the Out Parcel Release will not result in a default by Borrower, as landlord under such Lease.

Schedule VI

11. Lender shall received evidence that the Remaining Property has adequate parking (a) for the use of the Remaining Property in connection with its permitted use, and (b) in accordance with applicable zoning laws, ordinances and regulations.

Schedule VI

SCHEDULE VII

Out Parcel Release Amounts

Tract 3	$	379,500
Tract 4	$	796,950

Schedule VII

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Christopher H. Cole, certify that:

1.	I have reviewed this annual report on Form 10-K of Cole Credit Property Trust II, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Christopher H. Cole  

Christopher H. Cole 

Chief Executive Officer and President 

Date: March 20, 2007

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Blair D. Koblenz, certify that:

1.	I have reviewed this annual report on Form 10-K of Cole Credit Property Trust II, Inc.;
2.	Bzased on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Blair D. Koblenz  

Blair D. Koblenz 

Executive Vice President and Chief Financial Officer 

Date: March 20, 2007

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C 1350)

     Each of the undersigned officers of Cole Credit Property Trust II, Inc. (the “Company”) hereby certifies, for purposes of Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

     (i) the accompanying Annual Report on Form 10-K of the Company for the period ended December 31, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

     (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.

/s/ Christopher H. Cole  

Christopher H. Cole 

Chief Executive Officer and President 

/s/ Blair D. Koblenz  

Blair D. Koblenz 

Executive Vice President and Chief Financial Officer 

Date: March 20, 2007

     The foregoing certification is being furnished with the Company’s 10-K for the period ended December 31, 2006 pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general information language in such filing.

     A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.