10-K 1 pce-20121231x10k.htm 10-K PCE-2012.12.31-10K


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2012
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from               to

Commission file number: 1-9900
PACIFIC OFFICE PROPERTIES TRUST, INC.
(Exact name of registrant as specified in its charter)

Maryland
86-0602478
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
841 Bishop Street, Suite 1700
Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code): (808) 521-7444

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

Securities registered pursuant to Section 12(g) of the Act:
Senior Common Stock, par value $0.0001 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 Exchange Act.  Yes o     No þ

Indicate by check mark whether the registrant (1) has filed all reports required 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) 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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
(Do not check if a smaller reporting company)





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 Class A Common Stock held by non-affiliates of the registrant computed by reference to the last sale price of the registrant’s Class A Common Stock on the OTCQB tier of the OTC Markets on June 29, 2012 was $307,157.

As of March 14, 2013 there were issued and outstanding 3,941,142 shares of Class A Common Stock, par value $0.0001 per share; 100 shares of Class B Common Stock, par value $0.0001 per share; and 2,410,839 shares of Senior Common Stock, par value $0.0001 per share.

 
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be issued in conjunction with the registrant’s annual meeting of stockholders to be held in 2013 are incorporated by reference in Part III of this Annual Report on Form 10-K. The proxy statement will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s fiscal year ended December 31, 2012.





PACIFIC OFFICE PROPERTIES TRUST, INC.
TABLE OF CONTENTS
FORM 10-K

 
 
Page No.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
Item 15.
Signatures
 



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PART I


ITEM 1.  -  BUSINESS

Pacific Office Properties Trust, Inc. is a Maryland corporation which has elected to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, which we refer to as the Code.  We are a REIT that owns and operates primarily institutional-quality office properties in Hawaii. As of December 31, 2012, we owned four office properties comprising 1.2 million rentable square feet and interests (ranging from 5.0% to 32.2%) in 13 joint venture properties (including a sports club associated with our City Square property in Phoenix, Arizona), of which we have managing ownership interests in nine of the joint venture properties, comprising 2.1 million rentable square feet.

Following our formation transactions and through January 2011, we were externally advised by Pacific Office Management, Inc., referred to as Pacific Office Management, an entity that was owned and controlled by Jay H. Shidler, our Chairman of the Board, and certain of our current and former executive officers and James C. Reynolds, who beneficially owns 12% of our Class A Common Stock. Pacific Office Management was responsible for the day-to-day operation and management of the Company.  Effective as of February 1, 2011, we acquired all of the outstanding stock of Pacific Office Management for an aggregate purchase price of $25,000 and internalized management. From February 1, 2011 through March 31, 2012, we remained self-managed.

Effective April 1, 2012, we became externally advised once again. Our advisor is Shidler Pacific Advisors, LLC, referred to as Shidler Pacific Advisors, an entity that is owned and controlled by Mr. Shidler. Lawrence J. Taff, our President, Chief Executive Officer, Chief Financial Officer and Treasurer, also serves as President of Shidler Pacific Advisors. Shidler Pacific Advisors is responsible for the day-to-day operation and management of the Company. In addition, effective April 1, 2012, all of our wholly-owned properties are managed by Shidler Pacific Advisors and all of our joint venture properties are managed by Parallel Capital Partners, Inc., an entity owned by James R. Ingebritsen, our former Chief Executive Officer; Matthew J. Root, our former Chief Investment Officer; and Mr. Reynolds, all of whom combined beneficially own 22% of our Class A Common Stock.

We operate in a manner that permits us to satisfy the requirements for taxation as a REIT under the Code. As a REIT, we generally are not subject to federal income tax on our taxable income that is distributed to our stockholders and are required to distribute to our stockholders at least 90% of our annual REIT taxable income (excluding net capital gains).

Our Structure and Formation Transactions

We were formed on March 19, 2008 via a merger, and related transactions, of The Shidler Group’s western U.S. office portfolio and joint venture operations into Arizona Land Income Corporation, or AZL, a publicly-traded REIT.  We are the sole general partner of our Operating Partnership, Pacific Office Properties, L.P., a Delaware limited partnership.

As part of the formation transactions, POP Venture, LLC, a Delaware limited liability company controlled by Mr. Shidler, which we refer to as Venture, contributed to our Operating Partnership ownership interests in eight wholly-owned properties and one property in which it held a 7.5% managing ownership interest. We refer to these properties as the Contributed Properties.  In exchange for its contribution to the Operating Partnership of the Contributed Properties, Venture received 13,576,165 common units in our Operating Partnership, referred to as Common Units, together with 4,545,300 Class A convertible preferred units in our Operating Partnership, referred to as Preferred Units, and $16.7 million in promissory notes.

The Common Units held by Venture are redeemable by Venture on a one-for-one basis for shares of our Class A Common Stock, or a new class of common units without redemption rights, as elected by a majority of our independent directors. Each Preferred Unit is initially convertible into 7.1717 Common Units, but such conversion may not occur before the date we consummate an underwritten public offering (of at least $75 million) of our Class A Common Stock. Upon conversion of the Preferred Units to Common Units, such Common Units will be redeemable by Venture on a one-for-one basis for shares of our Class A Common Stock or a new class of common units without redemption rights, as elected by a majority of our independent directors, but no earlier than one year after the date of their conversion from Preferred Units to Common Units.

As part of our formation transactions, we issued to Pacific Office Management one share of Proportionate Voting Preferred Stock.  The Proportionate Voting Preferred Stock has no dividend rights and minimal rights to distributions in the event of liquidation, but it entitles its holder to vote on all matters for which the holders of Class A Common Stock are entitled to vote.  The Proportionate Voting Preferred Stock entitles its holder to cast a number of votes equal to the total number of shares of Class A Common Stock issuable upon redemption for shares of the Common Units and Preferred Units (representing 46,173,693 common share equivalents) issued in connection with the formation transactions, notwithstanding any restrictions on redemption of the

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Operating Partnership units. This number will decrease to the extent that these Operating Partnership units are redeemed in the future. The number will not increase in the event of subsequent unit issuances by our Operating Partnership. As of December 31, 2012, that share of Proportionate Voting Preferred Stock represented 88% of our voting power.  In connection with the internalization of our management, Pacific Office Management sold the share of Proportionate Voting Preferred Stock to Pacific Office Holding, Inc., a corporation owned by Mr. Shidler and certain of our current and former executive officers and other affiliates, for nominal consideration.  Pacific Office Holding, Inc. has agreed to cast its Proportionate Voting Preferred Stock votes on any matter in direct proportion to votes that are cast by limited partners of our Operating Partnership holding the Common Units and Preferred Units issued in the formation transactions.

In connection with our formation transactions, Venture also granted us options to acquire managing ownership interests in five additional office properties. We exercised these options in multiple transactions in 2008. The acquisition of our managing ownership interest in a joint venture, which we refer to as POP San Diego I, which held four office properties (Torrey Hills Corporate Center, Palomar Heights Plaza, Palomar Heights Corporate Center and Scripps Ranch Center) comprising 181,664 square feet located in San Diego, California was funded by issuing 396,526 Common Units on April 30, 2008 and 326,576 Common Units on June 19, 2008 that were valued at $6.5589 per unit and $6.8107 per unit, respectively. A total of 524,839 of these Common Units remain outstanding and are redeemable by the holders on a one-for-one basis for shares of our Class A Common Stock or cash, as elected by a majority of our independent directors.

Regulation

Our properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to common areas and fire and safety requirements. We believe that each of our properties has the necessary permits and approvals to operate its business.

Americans with Disabilities Act

Our properties must comply with Title III of the Americans with Disabilities Act of 1990, or the ADA, to the extent that such properties are “public accommodations” as defined by the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. The obligation to make readily achievable accommodations is an ongoing one, and continual assessment of the properties is required. Although we believe that our properties in the aggregate substantially comply with present requirements of the ADA, we have not conducted a comprehensive audit or investigation of all of our properties to determine compliance, and we are aware that some particular properties may currently not be in compliance with the ADA. If one or more of our currently owned properties or future properties is not in compliance with the ADA, then we would be required to incur additional costs to bring the property into compliance. Noncompliance could result in imposition of fines by the U.S. government or an award of damages and/or attorneys’ fees to private litigants, or both. Additional federal, state and local laws also may require us to modify properties or could restrict our ability to renovate properties. Complying with the ADA or other legislation at noncompliant properties could be very expensive.

Environmental Matters

Environmental laws regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under some of these laws, an owner or operator of real estate may be liable for costs related to soil or groundwater contamination on or migrating to or from its property. In addition, persons who arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at the disposal site. These laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of the hazardous or toxic substances that caused the contamination. The presence of, or contamination resulting from, any of these substances, or the failure to properly remediate them, may adversely affect our ability to sell or rent our property or to borrow funds using the property as collateral. In addition, persons exposed to hazardous or toxic substances may sue for personal injury damages. For example, some laws impose liability for release of or exposure to materials containing asbestos, a substance known to be present in a number of our buildings. In addition, some of our properties may have been affected by contamination from past operations or from off-site sources. As a result, we may be potentially liable for investigation and cleanup costs, penalties and damages under environmental laws.

Although most of our properties have been subjected to preliminary environmental assessments, known as Phase I assessments, by independent environmental consultants that identify conditions that could pose potential environmental liabilities, Phase I assessments are limited in scope, and may not include or identify all potential environmental liabilities or risks associated with the property. Unless required by applicable law or any of our lenders, we may decide not to further investigate, remedy or ameliorate the liabilities disclosed in the Phase I assessments. Further, these or other environmental studies may not identify all potential environmental liabilities or accurately assess whether we will incur material environmental liabilities in the future. If we do incur

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material environmental liabilities in the future, we may face significant remediation costs, and we may find it difficult to sell any affected properties.

Insurance

We carry comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of our properties under blanket insurance policies. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice; however, the insurance coverage may not be sufficient to fully cover losses.

Our business operations in Honolulu, Phoenix and southern California are susceptible to, and could be significantly affected by, adverse weather conditions and natural disasters such as earthquakes, tsunamis, hurricanes, volcanoes, wind, floods, landslides, drought and fires. These adverse weather conditions and natural disasters could cause significant damage to the properties in our portfolio, the risk of which is enhanced by the concentration of our properties’ locations. Our insurance may not be adequate to cover business interruption or losses resulting from adverse weather or natural disasters. In addition, our insurance policies include customary deductibles and limitations on recovery. As a result, we may be required to incur significant costs in the event of adverse weather conditions and natural disasters. We may discontinue earthquake or any other insurance coverage on some or all of our properties in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage discounted for the risk of loss.

Furthermore, we do not carry insurance for certain losses, including, but not limited to, losses caused by war or by certain environmental conditions, such as mold or asbestos. In addition, if a loss or damages are suffered at one or more of our properties, the insurer may attempt to limit or void coverage by arguing that the loss resulted from facts or circumstances not covered by our policy. Furthermore, our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our portfolio increases. As a result, we may not have sufficient coverage against all losses that we may experience, including from adverse title claims. If we experience a loss that is uninsured or that exceeds policy limits, we could incur significant costs and lose the capital invested in the damaged or otherwise adversely affected properties as well as the anticipated future cash flows from those properties.

In addition, our properties may not be able to be rebuilt to their existing height, size or utility at their existing location under current land-use laws and policies. In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications or operate it in accordance with its current use, or we may be required to upgrade such property in connection with any rebuilding to meet current code requirements.

Competition

We compete with a number of developers, owners and operators of office real estate, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire or to entice new tenants to lease space in our properties. In that case, our financial condition, results of operations, cash flow, market price of our Class A Common Stock and ability to satisfy our debt service obligations and to pay dividends may be adversely affected.

Employment

We internalized our management by acquiring Pacific Office Management along with its employees effective as of February 1, 2011 through March 31, 2012.  Effective April 1, 2012, we became externally advised by Shidler Pacific Advisors and once again have no employees of our own.

Available Information

Our website is located at http://www.pacificofficeproperties.com. We make available free of charge, on or through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. You can also read and copy any materials we file with the SEC at its Public Reference Room at 100 F Street, NE, Washington, DC 20549 (1-800-SEC-0330), on official business days during the hours of 10:00 am to 3:00 pm. The SEC maintains an Internet site (http://

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www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.


ITEM 1A.  -  RISK FACTORS

The following section sets forth material factors that may adversely affect our business and operations.  This is not an exhaustive list, and additional factors could adversely affect our business and financial performance.  Moreover, we operate in a very competitive and rapidly changing environment.  New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  This discussion of risk factors includes many forward-looking statements.  For cautions about relying on forward-looking statements, please refer to the section entitled “Note Regarding Forward-Looking Statements” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Risks Related to our Business and Properties

Our business is capital intensive and our ability to maintain our operations depends on our cash flow from operations and our ability to raise additional capital on acceptable terms.

We have not achieved positive cash flow from operations since our formation transactions were consummated in March 2008. Moreover, in February 2011, we terminated our registered continuous public offering of Senior Common Stock, so this offering is no longer a source of capital for us. We expect that our funds from operations will be insufficient to meet working capital requirements and to fund discretionary leasing capital and tenant improvements. Accordingly, we expect that we will need to sell existing properties, contribute existing properties to joint ventures with third parties or raise additional capital, either from debt or equity, to meet these needs.  In June 2012, we completed the sale of our First Insurance Center property, located in Honolulu, Hawaii, to an unaffiliated third party for aggregate consideration of approximately $70.5 million (including the assumption of $52 million in existing debt encumbering the property). We believe the net proceeds from the sale of this property, plus other cash on hand, should be sufficient to meet working capital requirements and fund required capital expenditures and leasing costs through 2013.  However, the rate at which we deplete our cash may be affected by changes in our business, whether or not initiated by us, or by other circumstances that may or may not be within our control, including the scheduled maturity of our fully-drawn $25 million unsecured credit facility on December 31, 2013. On February 28, 2013, we entered into an agreement to sell our Clifford Center property to an unaffiliated third party for cash consideration of $11.2 million, which, if completed, would result in expected cash proceeds to us of approximately $4.0 million after payment of the existing debt encumbering the property and before transaction expenses.  The completion of the sale of our Clifford Center is subject to customary closing conditions, and we cannot be certain that we will be able to complete the sale or to raise additional capital on acceptable terms or at all. If we are unable to raise needed capital, our ability to operate our properties may suffer and our ability to operate the company will be impaired.
 
We are restricted from disposing of or refinancing certain properties under certain circumstances until March 2018, which may further restrict our ability to raise additional capital.

A sale of any of the properties contributed by POP Venture, LLC, or Venture, in connection with our formation transactions in March 2008 (specifically, our Waterfront Plaza, Davies Pacific Center, Pan Am Building, First Insurance Center, Pacific Business News Building, Clifford Center, Sorrento Technology Center, City Square and Seville Plaza properties) that would not provide continued tax deferral to Venture is contractually restricted for ten years after the closing of the transactions related to such properties. These restrictions on the sale of such properties may prevent us from selling the properties or may adversely impact the terms available to us upon a disposition. In addition, we have agreed that, during such ten-year period, we will not prepay or defease any mortgage indebtedness of such properties, other than in connection with a concurrent refinancing with non-recourse mortgage debt of an equal or greater amount and subject to certain other restrictions. These restrictions limit our ability to refinance indebtedness on those properties and to manage our debt structure. As a result, we may be unable to access certain capital resources that would otherwise be available to us. Furthermore, if any such sale or defeasance is foreseeable, we are required to notify Venture and to cooperate with it in considering strategies to defer or mitigate the recognition of gain under the Code. These contractual obligations may limit our operating flexibility and compel us to take actions or enter into transactions that we otherwise would not undertake. If we fail to comply with any of these requirements, we may be liable for a make-whole cash payment to Venture, the cost of which could be material and could adversely affect our liquidity.

In May of 2011, we defaulted on our loan secured by the Sorrento Technology Center property. We ceased making the required debt service payments on the loan and on June 6, 2011, we received a notice of default. On January 5, 2012, the lender foreclosed on the loan and took back the property. As a result, certain contract parties may claim they are entitled to a make-whole cash

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payment under the tax protection agreements relating to the property. We do not believe that this foreclosure requires indemnity under the tax protection agreements. However, if the contract parties contest this interpretation and are successful, we believe that liability would not exceed $3.0 million, which is the estimated approximate built-in gain associated with the property multiplied by the highest applicable tax rate, plus a gross-up amount.

In June 2012, we completed the sale of our fee and leasehold interests in our First Insurance Center property, located in Honolulu, Hawaii, to an unaffiliated third party for aggregate consideration of $70.5 million (including the assumption of $52 million in existing debt encumbering the property). As a result of the sale, certain contract parties may claim they are entitled to a make-whole cash payment under tax protection agreements relating to the property. We do not believe that any potential liability under these agreements could exceed $9.1 million, which is the estimated approximate built-in gain associated with the property multiplied by the highest applicable tax rate, plus a gross-up amount. However, any requested payment could be challenged by us or significantly reduced.

We have a substantial amount of debt outstanding, which may affect our ability to pay dividends, may expose us to interest rate fluctuation risk and may expose us to the risk of additional default under our debt obligations.

As of December 31, 2012, our total consolidated indebtedness was $318.9 million. Our unconsolidated joint venture properties are also leveraged with an aggregate of $230.7 million in indebtedness as of December 31, 2012.

Payments of principal and interest on borrowings may leave our property-owning entities with insufficient cash resources to operate our properties and/or pay distributions to us so that we can make distributions to stockholders. Furthermore, any property-owning entity may default on its obligations and the lenders or mortgagees may foreclose on our properties and execute on any collateral that secures their loans. 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 we would not receive any cash proceeds.

Our substantial outstanding debt, and the limitations imposed on us by our debt agreements, could have significant other adverse consequences, including the following:

our cash flow may be insufficient to meet our required principal and interest payments;
we may be unable to borrow additional funds as needed or on favorable terms, which could adversely affect our liquidity;
we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms; and
we will be exposed to interest and future interest rate volatility with respect to indebtedness that is variable rate.

If any one of these events were to occur, our financial condition, results of operations, cash flow, the market price of our Class A Common Stock and ability to satisfy our debt service obligations and to pay dividends could be adversely affected. In addition, any foreclosure on our properties could create taxable income without accompanying cash proceeds, which could adversely affect our ability to meet the REIT distribution requirements imposed by the Code.

We may be unable to refinance, extend or repay our substantial indebtedness at maturity, including indebtedness of our unconsolidated joint venture properties that is matured and unpaid.

As of December 31, 2012, we had a fully-drawn $25 million unsecured credit facility scheduled to mature on December 31, 2013. We also had promissory notes payable to certain affiliates in the aggregate principal amount of $21.1 million, scheduled to mature on various dates commencing on March 19, 2013 through August 31, 2013, subject to our option to extend maturity for one additional year. We have extended the maturity of the promissory notes maturing on March 19, 2013 through May 31, 2013, and expect to extend the maturity of the remaining promissory notes, for the additional year. We cannot assure you that we will be able to refinance, extend or repay our substantial indebtedness on acceptable terms or at all.  The ability to refinance our indebtedness continues to be negatively affected by the ongoing tightness in the credit markets, which has significantly reduced the capacity levels of commercial lending, and may also be negatively affected by the real or perceived decline in the value of our properties based on general economic conditions.

In addition, as of December 31, 2012, our unconsolidated joint venture properties had, in the aggregate, $125.2 million of debt that was in default. Of the debt that was in default, $1.8 million and $123.4 million of debt is secured by the Palomar Heights Plaza and SoCal Portfolio properties, respectively. On January 31, 2013, the Palomar Heights Plaza property was sold in a foreclosure sale as discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments.” The SoCal Portfolio includes 13 office and flex buildings totaling 757,000 rentable square feet situated on five properties (Via Frontera Business Park, Savi Tech Center, Yorba Linda Business Park, South Coast Executive

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Center and Gateway Corporate Center) in Los Angeles, Orange and San Diego counties in southern California. If we or our joint venture partners are unable to service this debt, the lenders may foreclose on our joint venture properties or the joint ventures may have to deed properties back to the applicable lenders or otherwise dispose of properties, possibly on disadvantageous terms.  There can be no assurance that joint venture operations or contributions by us and/or our joint venture partners will be sufficient to repay these loans.
 
Our organizational documents have no limitation on the amount of indebtedness that we may incur. As a result, we may become more highly leveraged in the future, which could adversely affect our financial condition.

Our organizational documents contain no limitations regarding the maximum level of debt that we may incur nor do they restrict the form of our debt (including recourse, non-recourse and cross-collateralized debt). Accordingly, we could, without stockholder approval, become more highly leveraged, which could result in an increase in our debt service, could materially adversely affect our cash flow and our ability to make distributions to our stockholders and/or the distributions required to maintain our REIT qualification, and could harm our financial condition. Higher leverage will also increase the risk of default on our obligations.

All of our properties, including properties held in joint ventures, are located in Honolulu, Phoenix and southern California. We are dependent on the Honolulu, Phoenix and southern California office markets and economies, and are therefore susceptible to risks of events in those markets that could adversely affect our business, such as adverse market conditions, changes in local laws or regulations, and natural disasters.

Because all of our properties are concentrated in Honolulu, Phoenix and southern California, we are exposed to greater economic risks than if we owned a more geographically dispersed portfolio. All of our wholly-owned properties are located in Honolulu. We are susceptible to adverse developments in the Honolulu, Phoenix and southern California economic and regulatory environments (such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation and other factors) as well as natural disasters that occur in these areas (such as earthquakes, hurricanes, floods, wildfires and other events). In particular, California is regarded as more litigious and more highly regulated and taxed than many states, which may reduce demand for office space in California. Any adverse developments in the economy or real estate markets in Honolulu, Phoenix or southern California, or any decrease in demand for office space resulting from the Honolulu, Phoenix or southern California regulatory or business environments, could adversely impact our financial condition, results of operations and cash flow, the market price of our Class A Common Stock and our ability to satisfy our debt service obligations and to pay dividends to stockholders.

The illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Real estate investments, especially office properties like the properties we currently own, are relatively illiquid and may become even more illiquid during periods of economic downturn. In particular, these risks could arise from weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions and changes in laws, regulations or fiscal policies of jurisdictions in which the property is located. As a result, we may not be able to sell a property or properties quickly or on favorable terms and realize our investment objectives, or otherwise promptly modify our portfolio, in response to changing economic, financial and investment conditions when it otherwise may be prudent to do so. This inability to respond quickly to changes in the performance of our properties and sell an unprofitable property could adversely affect our cash flows and results of operations, thereby limiting our ability to make distributions to our stockholders. Our financial condition could also be adversely affected if we were, for example, unable to sell one or more of our properties in order to meet our debt obligations upon maturity.

The Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to vary our portfolio in response to economic or other conditions promptly or on favorable terms, which may adversely affect our cash flows, financial condition and results of operations, the market price of our Class A Common Stock and our ability to pay distributions to our stockholders.

In addition, our ability to dispose of some of our properties could be constrained by their tax attributes. Properties which we own for a significant period of time or which we acquire through tax deferred contribution transactions in exchange for units in our Operating Partnership may have low tax bases. If we dispose of these properties outright in taxable transactions, we may need to distribute a significant amount of the taxable gain to our stockholders under the requirements of the Code for REITs or pay federal income tax at regular corporate rates on the amount of any gain, which in turn would impact our cash flow and increase

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our leverage. To dispose of low basis or tax-protected properties efficiently, we may from time to time use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the property for which the disposed assets are exchanged inheriting their low tax bases and other tax attributes (including tax protection covenants).

Our operating performance is subject to risks associated with the real estate industry.

Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease cash available for dividends, as well as the value of our properties. These events include, but are not limited to:

adverse changes in economic and demographic conditions;
vacancies or our inability to rent space on favorable terms or at all;
adverse changes in financial conditions of buyers, sellers and tenants of properties;
inability to collect rent from tenants;
competition from other real estate investors with significant capital, including other real estate operating companies, publicly traded REITs and institutional investment funds;
reductions in the level of demand for office space, including trends such as telecommuting and flexible workplaces, and changes in the relative popularity of properties;
increases in the supply of office space;
declining real estate valuations and impairment charges;
fluctuations in interest rates, which could adversely affect our ability, or the ability of buyers and tenants of properties, to obtain financing on favorable terms or at all;
increases in expenses, including insurance costs, labor costs, energy prices, real estate assessments and other taxes and costs of compliance with laws, regulations and governmental policies, and our inability to pass on some or all of these increases to our tenants; and
changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies and the ADA.

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases without a corresponding decrease in expenses. Costs associated with real estate investments, such as real estate taxes, ground lease payments, insurance, loan payments and maintenance, generally will not be reduced even if the vacancy rate at a property increases or rental rates decrease. If we cannot operate our properties so as to meet our financial expectations, our financial condition, results of operations, cash flow, the market price of our Class A Common Stock and ability to satisfy our debt service obligations and to pay dividends to our stockholders could be adversely affected. There can be no assurance that we can achieve our economic objectives.
 
We may be adversely affected by trends in the office real estate industry.

Some businesses are rapidly evolving to make employee telecommuting, flexible work schedules, open workplaces and teleconferencing increasingly common. These practices enable businesses to reduce their space requirements. A continuation of the movement towards these practices could over time erode the overall demand for office space and, in turn, place downward pressure on occupancy, rental rates and property valuations, each of which could have an adverse effect on our financial position, results of operations, cash flows and ability to make distributions to our shareholders.

Our future success depends on the ability of Shidler Pacific Advisors to operate properties, and Shidler Pacific Advisors’ failure to operate our properties in a sufficient manner could have a material adverse effect on the value of our real estate investments and results of operations.

Effective April 1, 2012, we became externally advised by Shidler Pacific Advisors. We depend on the ability of Shidler Pacific Advisors to operate our properties and manage our other investments in a manner sufficient to maintain or increase revenues and to generate sufficient revenues in excess of our operating and other expenses. Shidler Pacific Advisors is not required to dedicate any particular number of employees or employee hours to our business in order to fulfill its obligations under our Advisory Agreement with them. We are subject to the risk that Shidler Pacific Advisors can terminate the Advisory Agreement and that no suitable replacement may be found to manage us. We believe that our success depends to a significant extent upon the experience of Shidler Pacific Advisors’ executive officers, whose continued service is not guaranteed. If Shidler Pacific Advisors terminates its Advisory Agreement with us, we may not be able to execute our business plan and may suffer losses, which could have a material adverse effect on our ability to make distributions to our stockholders. The failure of Shidler Pacific Advisors to operate

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our properties and manage our other investments may adversely affect the underlying value of our real estate investments, the results of our operations and our ability to make distributions to our stockholders and to pay amounts due on our indebtedness.

Our operating expenses may increase, causing our results of operations to be adversely affected.

As expected, following the externalization of our management on April 1, 2012, our general and administrative costs decreased as we no longer incur management-related services and costs such as salaries and wages, office rent, equipment costs, travel costs, insurance costs, telecommunications and supplies. Under our Advisory Agreement, these services and costs are the responsibility of Shidler Pacific Advisors, in exchange for corporate management fees that we pay to Shidler Pacific Advisors. Shidler Pacific Advisors has the right under our Advisory Agreement with it to renegotiate quarterly the amount of its corporate management fee, which may result in increased corporate management fees. Further, under the Advisory Agreement, we continue to be directly liable for certain direct costs, such as legal and accounting fees, that have been substantial in the past and are expected to be substantial in the future. Property management and related services for our wholly owned properties, for which we ceased paying fees upon our internalization of management in February 2011, are performed by Shidler Pacific Advisors following externalization for fees paid by us. Other factors that may adversely affect our ability to control operating costs include the need to pay for property insurance and other operating costs, including real estate taxes, which could increase over time, the need periodically to repair, renovate and re-lease space, the cost of compliance with governmental regulation, including zoning and tax laws, the potential for liability under applicable laws, interest rate levels and the availability of financing. If our operating costs increase as a result of any of the foregoing factors, our results of operations may be adversely affected.

We no longer receive property management and other services revenues following the externalization of our management effective April 1, 2012, causing our results of operations to be adversely affected.

Following the externalization of our management effective April 1, 2012, we no longer receive property management and other fees from our property management and related activities at our wholly-owned and joint venture properties. Shidler Pacific Advisors is responsible for the day-to-day operation and management of our wholly-owned properties and an affiliate of Messrs. Ingebritsen, Root and Reynolds is responsible for the day-to-day operation and management of our joint venture properties, both of which receive property management and other related fees for such services. Currently, the property management fees range from 2.5% to 4.5% of the rental cash receipts collected by the properties. There can be no assurance that such fees will not increase in the future since such property management and other related fees are required to be consistent with prevailing market rates for similar services provided on an arms-length basis in the area in which the subject property is located.

Shidler Pacific Advisors’ corporate management fee is payable regardless of our performance, which may reduce its incentive to devote time and resources to our portfolio.

Shidler Pacific Advisors is entitled to receive a corporate management fee of $213,300 per quarter, which may be adjusted upon agreement of the parties not later than 90 days prior to the beginning of any calendar quarter. Shidler Pacific Advisors’ entitlement to substantial non-performance based compensation might reduce its incentive to devote its time and effort to seeking profitable opportunities for our portfolio. This in turn could hurt our ability to make distributions to our stockholders.

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

We compete with a number of developers, owners and operators of office real estate, many of which own properties similar to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire or to entice new tenants to lease space in our properties. In that case, our financial condition, results of operations, cash flow, the market price of our Class A Common Stock and ability to satisfy our debt service obligations and to pay dividends to our stockholders may be adversely affected.

The actual rents we receive for the properties in our portfolio may be less than our asking rents, and we may experience lease roll down from time to time, which would negatively impact our ability to generate cash flow growth.

We may be unable to realize our asking rents across the properties in our portfolio because of:

competitive pricing pressure in our markets;
adverse conditions in the Honolulu, Phoenix or southern California real estate markets;
general economic downturn; and

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a lesser desirability of our properties compared to other properties in our markets.

In addition, the degree of discrepancy between our asking rents and the actual rents we are able to obtain may vary both from property to property and among different leased spaces within a single property. If we are unable to achieve our asking rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted. In addition, depending on asking rental rates at any given time as compared to expiring leases in our portfolio, rental rates for expiring leases may be higher than starting rental rates for new leases.

The expense of owning and operating a property is not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property. As a result, if revenues decline, we may not be able to reduce our expenses accordingly. If a property is mortgaged and we are unable to meet the mortgage payments, the lender could foreclose on the mortgage and take possession of the property, resulting in a further reduction in net income.

Leases representing 12.5% of the rentable square feet of our total portfolio are scheduled to expire in 2013.  We may be unable to renew leases or lease vacant space at favorable rates or at all, which would negatively impact our ability to generate cash flow.

As of December 31, 2012, leases representing 12.5% of the 3,304,192 rentable square feet of our total portfolio (including our consolidated properties and unconsolidated joint venture properties) are scheduled to expire in 2013, and an additional 22.9% of the square footage of our total portfolio was available for lease. These leases may not be renewed, or may be re-leased at rental rates equal to or below existing rental rates. In addition, some of our leases include early termination provisions that permit the lessee to terminate all or a portion of its lease with us after a specified date or upon the occurrence of certain events with little or no liability to us. Substantial rent abatements, tenant improvements, early termination rights or below-market renewal options may be offered to attract new tenants or retain existing tenants. Portions of our properties may remain vacant for extended periods of time. In addition, some existing leases currently provide tenants with options to renew the terms of their leases at rates that are less than the current market rate or to terminate their leases prior to the expiration date thereof. If we are unable to obtain rental rates that are on average comparable to our asking rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted.

We may be required to make significant capital expenditures to improve our properties in order to retain and attract tenants.  If we are unable to do so, this could cause a decline in operating revenues and a reduction in cash available for debt service and distributions to stockholders.

We expect that, upon expiration of leases at our properties, we may be required to make rent or other concessions to tenants, accommodate requests for renovations, build-to-suit remodeling and other improvements or provide additional services to our tenants. As a result, we may have to pay for significant leasing costs or tenant improvements in order to retain tenants whose leases expire and to attract new tenants in sufficient numbers. Additionally, we may need to raise capital to make such expenditures. If we are unable to do so or capital is otherwise unavailable, we may be unable to make the required expenditures. This could result in non-renewals by tenants upon expiration of their leases, which would result in declines in revenues from operations and reduce cash available for debt service and distributions to stockholders.

We depend on tenants for our revenue, and accordingly, lease terminations and/or tenant defaults, particularly by one of our larger tenants, could adversely affect the income produced by our properties, which may harm our operating performance.

The success of our investments materially depends on the financial stability of our tenants, any of whom may experience a change in their business at any time. As a result, our tenants may delay lease commencements, decline to extend or renew their leases upon expiration, fail to make rental payments when due or declare bankruptcy. Any of these actions could result in the termination of the tenants’ leases, expiration of existing leases without renewal and the loss of rental income attributable to the terminated or expired leases. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment and re-letting our property. It is unlikely that a bankrupt tenant will pay, in full, amounts owed to us under a lease. If significant leases are terminated or defaulted upon, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss. In addition, significant expenditures, such as mortgage payments, real estate taxes and insurance and maintenance costs, are generally fixed and do not decrease when revenues at the related property decrease, so tenant defaults or departures could decrease our cash from operations, liquidity and net income.

Our current and future joint venture investments could be adversely affected by a lack of sole decision-making authority and our reliance on joint venture partners’ financial condition and liquidity.


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We own properties through “joint venture” investments in which we co-invest with another investor. In the future, we may acquire office properties through joint ventures and/or sell to institutions partial ownership of properties that we wholly own. Joint venture investments involve certain risks, including:

joint venture partners may control or share certain approval rights over major decisions, such as decisions related to the development, financing, leasing, management and other aspects of the project, which may prevent us from taking actions that are opposed by our joint venture partners;
joint venture partners may fail to fund their share of any required capital commitments;
joint venture partners might have economic or other business interests or goals that are inconsistent with our business interests or goals that would affect our ability to operate the property;
joint venture partners may have the power to act contrary to our instructions and policies, including our current policy with respect to maintaining our REIT qualification;
joint venture agreements often restrict the transfer of a member’s or joint venture partner’s interest, provide for a buyout of a joint venture partner’s interest in certain instances or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms;
our relationships with our joint venture partners are contractual in nature and may be terminated or dissolved under the terms of the applicable joint venture agreements and, in such event, we may not continue to own or operate the interests or assets underlying such relationship or may need to purchase such interests or assets at a premium to the market price to continue ownership;
disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses and divert attention from other elements of our business and result in subjecting the properties owned by the applicable joint venture to additional risk; and
we may in certain circumstances be liable for the actions of our joint venture partners.

The occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flow and our ability to pay dividends.

Global market and economic conditions may adversely affect our liquidity and financial condition and those of our tenants, as well as the pricing of real estate assets.
In the United States, market and economic conditions continue to be challenging with stricter regulations and modest growth. While recent economic data reflects moderate economic growth in the United States, the cost and availability of credit may continue to be adversely affected by governmental budget and global economic factors. Concern about continued stability of the economy and credit markets generally, and the strength of counterparties specifically, has led many lenders and institutional investors to reduce and, in some cases, cease to provide funding to borrowers. Volatility in the U.S. and international capital markets and concern over a return to recessionary conditions in global economies may adversely affect our liquidity and financial condition and the liquidity and financial condition of our tenants. If these market conditions continue, they may limit our ability and the ability of our tenants to timely refinance maturing liabilities and access the capital markets to meet liquidity needs. Furthermore, any turmoil in the capital or credit markets could adversely impact the overall amount of capital and debt financing available to invest in real estate, which may result in decreases in price or value of real estate assets.

Adverse market and economic conditions could cause us to recognize additional impairment charges.

We review our real estate assets for impairment indicators, such as a decline in a property’s occupancy or the market price for our common stock, in accordance with accounting principles generally accepted in the United States, or GAAP. If we determine that indicators of impairment are present, we review the properties affected by these indicators to determine whether an impairment charge is required. We use considerable judgment in making determinations about impairments, from analyzing whether there are indicators of impairment to the assumptions used in calculating the fair value of the investment. Accordingly, our subjective estimates and evaluations may not be accurate, and such estimates and evaluations are subject to change or revision.

Ongoing adverse market and economic conditions and market volatility will likely continue to make it difficult to value the real estate assets owned by us as well as the value of our joint venture investments. There may be significant uncertainty in the valuation, or in the stability of the cash flows, discount rates and other factors related to such assets due to the adverse market and economic conditions that could result in a substantial decrease in their value. We may be required to recognize asset and goodwill impairment charges in the future, which could materially and adversely affect our business, financial condition and results of operations.

If we are deemed an “investment company” under the Investment Company Act of 1940, it could have a material adverse effect on our business.

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We do not expect to operate as an “investment company” under the Investment Company Act of 1940, as amended, or the Investment Company Act. However, the analysis relating to whether a company qualifies as an investment company can involve technical and complex rules and regulations. If we own assets that qualify as “investment securities” as such term is defined under the Investment Company Act and the value of such assets exceeds 40% of the value of our total assets, we could be deemed to be an investment company and be required to register under the Investment Company Act. Registered investment companies are subject to a variety of substantial requirements that could significantly impact our operations. The costs and expenses we would incur to register and operate as an investment company, as well as the limitations placed on our operations, could have a material adverse impact on our operations and your investment return. In order to operate in a manner to avoid being required to register as an investment company, we may be unable to sell assets we would otherwise want to sell or we may need to sell assets we would otherwise wish to retain. In addition, we may also have to forgo opportunities to acquire interests in companies or entities that we would otherwise want to acquire.

Potential losses may not be covered by insurance and we could incur significant costs and lose our equity in the damaged properties.

We carry comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of our properties under blanket insurance policies. The insurance coverage contains policy specifications and insured limits customarily carried for similar properties and business activities. However, we do not carry insurance for certain losses, including, but not limited to, losses caused by war or by certain environmental conditions, such as mold or asbestos. In addition, if a loss or damages are suffered at one or more of our properties, the insurer may attempt to limit or void coverage by arguing that the loss resulted from facts or circumstances not covered by our policy. Furthermore, our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our portfolio increases. As a result, we may not have sufficient coverage against all losses that we may experience, including from adverse title claims. If we experience a loss that is uninsured or that exceeds policy limits, we could incur significant costs and lose the capital invested in the damaged or otherwise adversely affected properties as well as the anticipated future cash flows from those properties.

Our business operations in Honolulu, Phoenix and southern California are susceptible to, and could be significantly affected by, adverse weather conditions and natural disasters such as earthquakes, tsunamis, hurricanes, volcanoes, wind, floods, landslides, drought and fires. These adverse weather conditions and natural disasters could cause significant damage to the properties in our portfolio, the risk of which is enhanced by the concentration of our properties’ locations. Our insurance may not be adequate to cover business interruption or losses resulting from adverse weather or natural disasters. In addition, our insurance policies include customary deductibles and limitations on recovery. As a result, we may be required to incur significant costs in the event of adverse weather conditions and natural disasters. We may discontinue earthquake or any other insurance coverage on some or all of our properties in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage discounted for the risk of loss.

In addition, our properties may not be able to be rebuilt to their existing height, size or utility at their existing location under current land-use laws and policies. In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications or operate it in accordance with its current use, or we may be required to upgrade such property in connection with any rebuilding to meet current code requirements.

We face possible risks associated with climate change.

We cannot predict with certainty whether global warming or cooling is occurring and, if so, at what rate. However, the physical effects of climate change could have a material adverse effect on our properties, operations and business. All of our properties are located in Honolulu, Phoenix and southern California. To the extent climate change causes changes in weather patterns, our markets could experience increases in storm intensity and rising sea-levels. Over time, these conditions could result in declining demand for office space in our buildings or the inability of us to operate the buildings at all. Climate change may also have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable and increasing the cost of energy at our properties. Moreover, compliance with new laws or regulations related to climate change, including compliance with “green” building codes, may require us to make improvements to our existing properties or increase taxes and fees assessed on us or our properties. There can be no assurance that climate change will not have a material adverse effect on our properties, operations or business.

Terrorism and other factors affecting demand for our properties could harm our operating results.


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The strength and profitability of our business depends on demand for and the value of our properties. Future terrorist attacks in the United States, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of terrorism or war may have a negative impact on our operations. Such terrorist attacks could have an adverse impact on our business even if they are not directed at our properties. In addition, the terrorist attacks of September 11, 2001 have substantially affected the availability and price of insurance coverage for certain types of damages or occurrences, and our insurance policies for terrorism include large deductibles and co-payments. Although we maintain terrorism insurance coverage on our portfolio, the lack of sufficient insurance for these types of acts could expose us to significant losses and could have a negative impact on our operations.

We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (“IT”) networks and related systems.
We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems), and, in some cases, may be critical to the operations of certain of our tenants. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.
A security breach or other significant disruption involving our IT networks and related systems could:
disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our tenants;
result in misstated financial reports, missed reporting deadlines and/or missed permitting deadlines;
result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space;
require significant management attention and resources to remedy any damages that result;
subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or
damage our reputation among our tenants and investors generally.

Any or all of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.

Because we own real property, we are subject to extensive environmental regulation which creates uncertainty regarding future environmental expenditures and liabilities.

Environmental laws regulate, and impose liability for, releases of hazardous or toxic substances into the environment. Under some of these laws, an owner or operator of real estate may be liable for costs related to soil or groundwater contamination on or migrating to or from its property. In addition, persons who arrange for the disposal or treatment of hazardous or toxic substances may be liable for the costs of cleaning up contamination at the disposal site. These laws often impose liability regardless of whether the person knew of, or was responsible for, the presence of the hazardous or toxic substances that caused the contamination. The presence of, or contamination resulting from, any of these substances, or the failure to properly remediate them, may adversely affect our ability to sell or rent our property or to borrow funds using the property as collateral. In addition, persons exposed to hazardous or toxic substances may sue for personal injury damages. For example, some laws impose liability for release of or exposure to materials containing asbestos, a substance known to be present in a number of our buildings. In addition, some of our

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properties may have been affected by contamination from past operations or from off-site sources. As a result, we may be potentially liable for investigation and cleanup costs, penalties and damages under environmental laws.

Although most of our properties have been subjected to preliminary environmental assessments, known as Phase I assessments, by independent environmental consultants that identify conditions that could pose potential environmental liabilities, Phase I assessments are limited in scope, and may not include or identify all potential environmental liabilities or risks associated with the property. Unless required by applicable law or any of our lenders, we may decide not to further investigate, remedy or ameliorate the liabilities disclosed in the Phase I assessments. Further, these or other environmental studies may not identify all potential environmental liabilities or accurately assess whether we will incur material environmental liabilities in the future. If we do incur material environmental liabilities in the future, we may face significant remediation costs, and we may find it difficult to sell any affected properties.

Compliance with ADA, fire, safety and other regulations may require us to make unanticipated expenditures that could significantly reduce the cash available for distribution to our stockholders.

Our properties must comply with Title III of the ADA to the extent that such properties are “public accommodations” as defined by the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. The obligation to make readily achievable accommodations is an ongoing one, and continual assessment of the properties is required. Although we believe that our properties in the aggregate substantially comply with present requirements of the ADA, we have not conducted a comprehensive audit or investigation of all of our properties to determine compliance, and we are aware that some particular properties may not be in compliance with the ADA. If one or more of our currently owned properties or future properties is not in compliance with the ADA, then we would be required to incur additional costs to bring the property into compliance. Noncompliance could result in the imposition of fines by the U.S. government or an award of damages and/or attorneys’ fees to private litigants, or both. Additional federal, state and local laws also may require us to modify properties or could restrict our ability to renovate properties. Complying with the ADA or other legislation at noncompliant properties could be very expensive. If we incur substantial costs to comply with such laws, our financial condition, results of operations, cash flow, the market price of our Class A Common Stock, our ability to satisfy our debt service obligations and our ability to pay distributions to our stockholders could be adversely affected. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation.

In addition, our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. Although we believe that our properties in the aggregate substantially comply with these regulatory requirements, we have not conducted a comprehensive review of all of our properties, and we are aware that some properties may not be in compliance with applicable regulatory requirements. If we were to fail to comply with these various requirements, we might incur governmental fines or private damage awards. If we incur substantial costs to comply with these regulatory requirements, our financial condition, results of operations, cash flow, market price of our Class A Common Stock and our ability to satisfy our debt service obligations and to pay distributions to our stockholders could be adversely affected. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties.

If we default on the ground lease to which one of our properties is subject, our business could be adversely affected.

We currently hold a long-term ground leasehold interest in our Waterfront Plaza property. For this property, instead of owning fee title to the land, we are the lessee under a long-term ground lease. If we default under the terms of this lease, we may be liable for damages and could lose our leasehold interest in the property. If any of these events were to occur, our business and results of operations would be adversely affected.

Our property taxes could increase due to property tax rate changes or reassessment, which would impact our cash flows.

We are required to pay state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially and we may be unable to fully recover these increased costs from our tenants. If the property taxes we pay increase and we are unable to fully recover these increased costs from our tenants, our cash flow would be impacted, and our ability to pay dividends to our stockholders could be adversely affected.

We may become subject to litigation, which could have a material adverse effect on our financial condition.

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In the future, we may become subject to litigation, including claims relating to our operations, the internalization of our management in 2011, the subsequent externalization of our management in 2012, securities offerings and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. Resolution of these types of matters against us may result in our having to pay significant fines, judgments or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby impacting our ability to service debt and make distributions to our stockholders. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows and/or expose us to increased risks that would be uninsured. Even if we are successful in defending ourselves, certain litigation may require significant attention from our external management team and distract them from the management of our operations, adversely affecting our financial condition and results of operations.

If we fail to satisfy the regulatory requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or if our disclosure controls or internal control over financial reporting is not effective, investors could lose confidence in our reported financial information, which could adversely affect the perception of our business and the market price of our Class A Common Stock.

As a public company, Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, requires that we evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in all annual reports. The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements, or misrepresentations. Although management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in the market price of our Class A Common Stock, or otherwise materially adversely affect our business, reputation, results of operations, financial condition, or liquidity.

Risks Related to Conflicts of Interest and Certain Relationships

There may be various conflicts of interest resulting from the relationships among us, our management and other parties.

There may be conflicts of interest among us, our management and other parties. These potential conflicts of interest include the following:

Certain of our directors and officers are also officers, managers and members of Shidler Pacific Advisors and may, therefore benefit from the compensation arrangements relating to Shidler Pacific Advisors under our Advisory Agreement with that entity, which were not the result of arm’s-length negotiations.
Certain of our former directors and officers, as well as a current shareholder who beneficially owns 12% of our Class A Common Stock, are also officers, directors and shareholders of Parallel Capital Partners, Inc., which manages all of our joint venture properties and may, therefore, benefit from the compensation arrangements relating to Parallel Capital Partners, Inc. under the asset management agreements relating to those properties.
Certain of our current and former directors and officers may engage in the management of other business entities and properties in other business entities, which may result in a potential conflict with respect to the allocation of time of such key personnel.
In the event that the sale by us of any of the Contributed Properties would be beneficial to us but would negatively impact the tax treatment of Venture, it is possible that any of our directors or officers with a financial interest in Venture may experience a conflict of interest.
Certain entities affiliated with us hold promissory notes payable by our Operating Partnership. Those entities have rights under the promissory notes, and their exercise of these rights and pursuit of remedies may be affected by their relationship with each other.
The debt we maintain for our consolidated properties and unconsolidated joint venture properties is typically property-specific debt that is non-recourse to our Operating Partnership, except for customary recourse carve-outs for borrower misconduct and environmental liabilities. The recourse liability for borrower misconduct and environmental liabilities is guaranteed by Mr. Reynolds, a current shareholder who beneficially owns 12% of our Class A Common Stock. The lender’s collateral for the Clifford Center note payable is secured, in part, by certain guaranty and indemnity obligations of Messrs. Shidler and Reynolds. Our Operating Partnership has entered into certain indemnity agreements with Messrs. Shidler and Reynolds in order to indemnify each of them under these guaranties and indemnities. Our Operating Partnership’s specific indemnity obligation in each of these indemnity agreements is basically to defend, indemnify and

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hold harmless Mr. Shidler or Mr. Reynolds from and against any and all demands, claims, causes of action, judgments, losses, costs, damages and expenses, including attorneys’ fees and costs of litigation arising from or relating to any or all of the guaranty or indemnity obligations of Mr. Shidler or Mr. Reynolds following formation.
An entity controlled by Mr. Shidler has pledged a certificate of deposit in the amount of $25 million as security for our Operating Partnership’s credit agreement with First Hawaiian Bank, for which the Operating Partnership has agreed to pay certain fees and provide certain indemnification rights.

These conflicts may result in terms that are more favorable to our management and/or our other affiliates than would have been obtained on an arm’s-length basis, and may operate to the detriment of our stockholders.

We are controlled by Jay H. Shidler.

Jay H. Shidler is the Chairman of our board of directors, controls Venture and is the sole owner and manager of Shidler Pacific Advisors, our external advisor. As part of our formation transactions, we issued one share of Proportionate Voting Preferred Stock, which is entitled to cast a number of votes equal to the total number of shares of Class A Common Stock issuable upon redemption for shares of the Common Units and Preferred Units that we issued in connection with the formation transactions. This share of Proportionate Voting Preferred Stock is held by Pacific Office Holding, Inc., a corporation owned by Mr. Shidler and certain of our current and former executive officers and other affiliates.  Pacific Office Holding, Inc. has agreed to cast its Proportionate Voting Preferred Stock votes on any matter in direct proportion to votes that are cast by limited partners of our Operating Partnership holding the Common Units and Preferred Units issued in the formation transactions. Venture holds those Common Units and Preferred Units and is controlled by Mr. Shidler. As of December 31, 2012, the one share of Proportionate Voting Preferred Stock represented 88% of our voting power. Therefore, because of his position with us, Shidler Pacific Advisors, Venture and Pacific Office Holding, Inc. and the additional shares of our Class A Common Stock that he holds, Mr. Shidler has the ability to effectively vote 91.5% of our currently outstanding voting securities and has significant influence over our policies and strategy and the operations and control of our business and the business of our Operating Partnership. The interests of Mr. Shidler in these matters may conflict with the interests of our other stockholders. As a result, Mr. Shidler could cause us or our Operating Partnership to take actions that our other stockholders do not support.

Messrs. Shidler, Ingebritsen and Root may compete with us and, therefore, may have conflicts of interest with us.

In connection with the externalization of management that we effectuated April 1, 2012, we released Mr. Shidler, who is the Chairman of our board of directors from a Noncompetition Agreement with us. Further, in connection with their resignations as our directors and officers, we released Messrs. Ingebritsen and Root from certain obligations of confidentiality that they have to us. As a result, Messrs. Shidler, Ingebritsen and Root may invest in office properties in Phoenix, southern California or Hawaii that are in markets in which we own an office property. It is therefore possible that a property in which any of Messrs. Shidler, Ingebritsen or Root or their affiliates have an interest may compete with us in the future.

Risks Related to our Capital Stock, our Corporate Structure and our Status as a REIT

Our Class A Common Stock is quoted on the OTCQB tier of the OTC Markets, which may have an unfavorable impact on our stock price and liquidity.
Our Class A Common Stock is currently quoted on the OTCQB tier of the OTC Markets, which is a significantly more limited trading market than the NYSE Amex (where it was listed until April 2012). We have no specialist or market maker that is obligated to maintain a market in our stock. Furthermore, brokers and dealers making quotations are not obligated to engage in transactions in our Class A Common Stock at quoted or any other prices. The quotation of our shares on the OTCQB has resulted in and will likely continue to result in a less liquid market available for existing and potential stockholders to trade shares of our Class A Common Stock than when our shares were listed on the NYSE Amex, could depress the trading price of our Class A Common Stock and could have a long-term adverse impact on our ability to raise capital in the future.
When fewer shares of a security are being traded on the OTCQB, volatility of prices may increase and price movement may outpace the ability to deliver accurate quote information. Due to lower trading volumes in shares of our Class A Common Stock, there may be a lower likelihood of orders for shares of our Class A Common Stock being executed, and current prices may differ significantly from the price that was quoted at the time of entering the order.
We expect that the volume of trading of our Class A Common Stock will remain low and the market for selling our shares will remain limited.
Our Class A Common Stock has historically been sporadically or thinly traded, and even more so following its delisting from

15



the NYSE Amex in April 2012. The trading volume of our Class A Common Stock may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in unlisted stocks, and certain major brokerage firms restrict their brokers from recommending unlisted stocks because they are considered speculative and volatile. The OTCQB is an inter-dealer market much less regulated than the major exchanges, and our Class A Common Stock is subject to abuses, volatility and shorting. As a result, the number of persons interested in purchasing our Class A Common Stock at or near ask prices at any given time may be relatively small or non-existent. There may be periods of several days or more when trading activity in our shares is low and a stockholder may be unable to sell his shares of Class A Common Stock at an acceptable price, or at all. We cannot give stockholders any assurance that a broader or more active public trading market for our Class A Common Stock will develop or be sustained, or that current trading levels will be sustained.
The trading volume of our Class A Common Stock has been and may continue to be limited and sporadic. As a result of such trading activity, the quoted price for our Class A Common Stock on the OTCQB may not necessarily be a reliable indicator of its fair market value. Further, we are not able to compel continued quotations on the OTCQB. If we cease to be quoted, holders would find it more difficult to dispose of our Class A Common Stock or to obtain accurate quotations as to the market value of our Class A Common Stock and as a result, the market value of our Class A Common Stock likely would decline.

Our Class A Common Stock may be governed by the “penny stock rules,” which impose additional requirements on broker-dealers who engage in transactions in our Class A Common Stock.

SEC rules require a broker-dealer to provide certain information to purchasers of securities traded at less than $5.00 which are not traded on a national securities exchange. Because our Class A Common Stock is no longer listed on an exchange and trades below that price, our Class A Common Stock is considered a “penny stock,” and trading in our Class A Common Stock is subject to the requirements of Rules 15g-1 through 15g-9 under the Exchange Act, or the penny stock rules. The penny stock rules require a broker-dealer effecting certain types of transactions in penny stocks to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer may also be required to give bid and offer quotations and broker and salesperson compensation information to the purchaser orally or in writing before or with the confirmation of the transaction. In addition, the penny stock rules may require a broker-dealer to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction before a transaction in a penny stock. These requirements may severely limit the liquidity of securities in the secondary market because few broker-dealers may be likely to undertake these compliance activities. Further, certain investors may have policies or may otherwise be prohibited from investing in securities subject to these requirements. Therefore, the disclosure requirements under the penny stock rules may have the effect of reducing trading activity in our Class A Common Stock, which may make it more difficult for holders to sell their shares.

Our Class A Common Stock price may be volatile.

There can be no assurance that shares of our Class A Common Stock will be resold at or above their purchase price. The market value of our Class A Common Stock could be substantially affected by many factors, including our financial condition and performance, our quarterly and annual operating results, our decision to suspend our Class A Common Stock dividend beginning with the first quarter of 2011 and any future actions with respect to dividends, the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies), and general market conditions.

Our ability to pay dividends is limited, and we cannot provide assurance that we will be able to pay dividends regularly or at all.

Substantially all of our assets are owned through our general partnership interest in our Operating Partnership.  Our Operating Partnership holds substantially all of its properties and assets through subsidiaries, including subsidiary limited liability companies and a corporation that has elected to be treated as a taxable REIT subsidiary.  Our Operating Partnership therefore derives substantially all of its cash flow from cash distributions to it by its subsidiaries and we, in turn, derive substantially all of our cash flow from cash distributions to us by our Operating Partnership.  The creditors and preferred securityholders, if any, of each of our direct and indirect subsidiaries are entitled to payment of that subsidiary’s obligations to them, when due and payable, before that subsidiary may make distributions to us.  Thus, our Operating Partnership’s ability to make distributions to its partners, including us, depends on its subsidiaries’ ability first to satisfy obligations to their creditors and preferred securityholders, if any, and then to make distributions to our Operating Partnership.  Similarly, our ability to pay dividends to holders of our Class A Common Stock depends on our Operating Partnership’s ability first to satisfy its obligations to its creditors and preferred unitholders (including us with respect to the outstanding Senior Common Units of our Operating Partnership, and then to the holder of the outstanding Preferred Units of our Operating Partnership) and then to make distributions to us with respect to our general partnership interest.  Our Operating Partnership may not make distributions to the holders of its outstanding Common Units (including us

16



with respect to our general partnership interest) unless full cumulative distributions have been paid on its outstanding Senior Common Units and Preferred Units, and we may not pay dividends on our Class A Common Stock unless full cumulative dividends have been paid on our outstanding Senior Common Stock.

We did not declare a dividend on our Class A Common Stock in 2012 or 2011, and do not currently expect to declare a dividend on our Class A Common Stock in 2013.  Furthermore, our Operating Partnership did not pay a distribution with respect to its outstanding Preferred Units or Common Units in 2012 or 2011, and does not expect to do so in 2013.  As noted above, unless full cumulative distributions have been paid on the outstanding Senior Common Units and Preferred Units, our Operating Partnership may not pay a distribution on its outstanding Common Units (including us with respect to our general partnership interest), which effectively means that we will be unable to declare dividends on our Class A Common Stock unless and until all cumulative dividends and distributions have been paid with respect to the Senior Common Stock and the Preferred Units.

Any dividends or other distributions we pay in the future will depend upon our legal and contractual obligations, including the provisions of the Senior Common Stock, as well as actual results of operations, economic conditions, debt service requirements and other factors. Our actual results of operations will be affected by a number of factors, including the revenue we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. We cannot guarantee that we will be able to pay dividends (including dividends on our Senior Common Stock) on a regular basis or at all in the future.

The potential issuance of Class A Common Stock in exchange for partnership units of our Operating Partnership and future offerings of debt, preferred stock or other securities may dilute the holdings of, or otherwise adversely impact, our existing stockholders.

We may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium term notes, senior or subordinated notes and classes of preferred stock, convertible preferred units or common stock. Upon liquidation, holders of our debt securities, holders of our Senior Common Stock or any preferred stock with preferential distribution rights that we may issue and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our Class A Common Stock. Future equity offerings and the issuance of Class A Common Stock in exchange for partnership units of our Operating Partnership may dilute the holdings of our existing stockholders. If we decide to issue preferred stock in addition to our Proportionate Voting Preferred Stock already issued, it could have a preference on liquidation distributions or a preference on dividend payments that could limit our ability to make a dividend distribution to our existing stockholders.  Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.

Provisions in our charter, bylaws and Maryland law may delay or prevent our acquisition by a third party, even if such acquisition were in the best interests of our stockholders.

Certain provisions of Maryland law and our charter and bylaws could have the effect of discouraging, delaying or preventing transactions that involve an actual or threatened change in control of us, and may have the effect of entrenching our management and members of our board of directors, regardless of their performance.  These provisions cover, among other topics, the following:

removal of directors;
limitation on stockholder-requested special meetings;
advance notice provisions for stockholder nominations and proposals;
exclusive power of our board to amend our bylaws;
issuance of preferred stock;
restrictions on transfer and ownership of shares of our stock; and
duties of directors with respect to unsolicited takeovers.

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 dividends or other 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 priority as to distributions and amounts payable upon liquidation over the rights of our existing stockholders. Such 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 to our existing stockholders.  Our board of directors may also, without stockholder approval, amend our charter to increase or decrease the aggregate number of shares of our stock or the number of shares of stock of any class or series that we have authority to issue.


17



If we fail to remain qualified as a REIT in any taxable year, our operations and ability to make distributions will be adversely affected because we will be subject to U.S. federal income tax on our taxable income at regular corporate rates with no deduction for distributions made to stockholders.

We believe that we are organized and operate in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our method of operation enables us to continue to meet the requirements for qualification and taxation as a REIT under the Code. However, qualification as a REIT requires us to satisfy highly technical and complex Code provisions for which only limited judicial and administrative authorities exist, and which are subject to change, potentially with retroactive effect. Even a technical or inadvertent mistake could jeopardize our REIT status. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In particular, our ability to qualify as a REIT depends on the relative values of our common stock and our other classes of equity, which are susceptible to fluctuations, and on the actions of third parties in which we may own an interest but over which we have no control or limited influence.

If we were to fail to qualify as a REIT in any tax year, then:

we would not be required to make distributions to our stockholders;
we would not be allowed to deduct distributions to our stockholders in computing our taxable income;
we would be subject to federal income tax, including any applicable alternative minimum tax, at regular corporate rates; and
any resulting tax liability could be substantial and could require us to borrow money or sell assets to pay such liability, and would reduce the amount of cash available for distribution to stockholders. Unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year during which we lost our qualification, and thus, our cash available for distribution to stockholders would be reduced for each of the years during which we did not qualify as a REIT.

Our ownership of taxable REIT subsidiaries will be limited, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our taxable REIT subsidiaries are not conducted on arm’s length terms.

We will continue to elect to treat one of our subsidiaries, Pacific Office Management, as a taxable REIT subsidiary for federal income tax purposes upon the filing of its 2012 tax return, and we may acquire securities in additional taxable REIT subsidiaries in the future. A taxable REIT subsidiary is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a taxable REIT subsidiary. If a taxable REIT subsidiary owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a taxable REIT subsidiary. Other than some activities relating to lodging and health care facilities, a taxable REIT subsidiary may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A taxable REIT subsidiary is subject to federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis.

A REIT’s ownership of securities of a taxable REIT subsidiary is not subject to the 5% or 10% asset tests applicable to REITs. However, not more than 25% of our total assets may be represented by securities of one or more taxable REIT subsidiaries, other than those securities includable in the 75% asset test. We anticipate that the aggregate value of the stock and securities of our taxable REIT subsidiaries will be less than 25% of the value of our total assets, and we will monitor the value of these investments to ensure compliance with applicable ownership limitations. In addition, we intend to structure our transactions with our taxable REIT subsidiaries to ensure that they are entered into on arm’s length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% limitation or to avoid application of the 100% excise tax discussed above.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income and any taxable REIT subsidiary will be subject to federal, state and local taxes on its income. Any of these taxes would decrease the amount of cash available for distribution to our stockholders. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% prohibited transactions tax that generally applies to certain gains derived by a REIT from dealer property or inventory, we may in the future hold some of our assets through taxable REIT subsidiaries, which (unlike REITs) are taxed on their taxable income, whether or not distributed.


18



Complying with REIT requirements may force us to borrow or take other adverse actions to make distributions to stockholders.

As a REIT, we must generally distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our stockholders. If we satisfy the REIT distribution requirement but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws.

From time to time, we may generate taxable income greater than our cash flow available for distribution to stockholders (for example, due to substantial non-deductible cash outlays, such as capital expenditures or principal payments on debt). In order to avoid income and excise taxes in these situations, we could be required to fund distributions from working capital, liquidate assets at prices or times that we regard as unfavorable or borrow to provide funds for distributions, or we may make distributions in the form of a taxable stock dividend. As a result, having to comply with the distribution requirement could cause us to sell assets in adverse market conditions, borrow on unfavorable terms or distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. These alternatives could increase our operating costs or diminish our levels of growth.

REIT restrictions on ownership of our capital stock may delay or prevent our acquisition by a third party, even if an acquisition is in the best interests of our stockholders.

In order for us to qualify as a REIT, not more than 50% of the value of our capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any taxable year.

Our charter provides that, subject to certain exceptions, no person, including entities, may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 4.9% in economic value of the aggregate of the outstanding shares of capital stock, or more than 4.9% in economic value or number of shares, whichever is more restrictive, of our outstanding shares of common stock. While these restrictions may prevent any five individuals from owning more than 50% of the shares, they could also discourage a change in control of our company. These restrictions may also deter tender offers that may be attractive to stockholders or limit the opportunity for stockholders to receive a premium for their shares if an investor seeks to acquire a block of shares of our capital stock.

Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive investments.

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our stockholders. We may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We also may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Accordingly, satisfying the REIT requirements could have an adverse effect on our business results, profitability and ability to execute our business plan. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.

Liquidation of collateral may jeopardize our REIT status.

To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our status as a REIT.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Code may limit our ability to hedge our operations. Under current law, any income that we generate from derivatives or other transactions intended to hedge our interest rate risks, or any income from foreign currency or other hedges, will generally be treated as nonqualifying income for purposes of the REIT 75% and 95% gross income tests unless specified requirements are met. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.


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

At any time, the federal income tax laws governing REITs, or the administrative interpretations of those laws, may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a stockholder.

 
ITEM 1B.  -  UNRESOLVED STAFF COMMENTS

None.


ITEM 2.  -  PROPERTIES

Our property portfolio is comprised primarily of institutional-quality office buildings located principally in selected long-term growth markets in Hawaii and southern California. Each property is owned either through entities wholly-owned by us or through joint ventures.  We hold managing ownership interests in four of our seven joint ventures. One of our joint ventures owns a sports club associated with our City Square property in Phoenix, Arizona.

As of December 31, 2012, we owned 16 office properties, including the interests in our joint venture properties, comprising 3.3 million rentable square feet in 31 buildings. The following tables contain descriptive information about all of our properties as of December 31, 2012, excluding the City Square Sports Club.

Property
 
No. of Buildings
 
Year Built/ Renovated
 
Rentable Sq.Ft.
 
Annualized Rent(1)

Percentage Ownership
 
Interest
Wholly-Owned Properties
 
 
 
 
 
 

 
 

 
 
 
 
Waterfront Plaza
 
1
 
1988/2006
 
555,780

 
$
18,664,178

 
100%
 
Leasehold
500 Ala Moana Boulevard
 
 
 
 
 
 

 
 

 
 
 
 
Honolulu, HI 96813
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Davies Pacific Center
 
1
 
1972/2006
 
376,093

 
9,406,416

 
100%
 
Fee Simple
841 Bishop Street
 
 
 
 
 
 

 
 

 
 
 
 
Honolulu, HI 96813
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pan Am Building
 
1
 
1969/2005
 
225,546

 
6,893,424

 
100%
 
Fee Simple
1600 Kapiolani Boulevard
 
 
 
 
 
 

 
 

 
 
 
 
Honolulu, HI 96814
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Clifford Center(2)
 
1
 
1964/2005
 
77,693

 
1,360,618

 
100%
 
Fee Simple
810 Richards Street
 
 
 
 
 
 

 
 

 
 
 
 
Honolulu, HI 96813
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Wholly-Owned Properties
 
4
 
 
 
1,235,112

 
$
36,324,636

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

20



Property
 
No. of Buildings
 
Year Built/ Renovated
 
Rentable Sq.Ft.
 
Annualized Rent(1)

Percentage Ownership
 
Interest
Joint Venture Properties
 
 
 
 
 
 

 
 

 
 
 
 
City Square
 
3
 
1961/1988
 
749,578

 
$
8,803,662

 
5%
 
Fee Simple
3800 North Central Avenue
 
 
 
1971/1994
 
 

 
 

 
 
 
 
3838 North Central Avenue
 
 
 
1965/2000
 
 

 
 

 
 
 
 
4000 North Central Avenue
 
 
 
 
 
 

 
 

 
 
 
 
Phoenix, AZ 85012
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pacific Business News Building
 
1
 
1964/2006
 
97,467

 
1,754,045

 
5%
 
Fee Simple
1833 Kalakaua Avenue
 
 
 
 
 
 

 
 

 
 
 
 
Honolulu, HI 96815
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank of Hawaii Waikiki Center(3)
 
1
 
1980/1989
 
153,889

 
7,404,594

 
17.5%
 
Leasehold
2155 Kalakaua Avenue
 
 
 
 
 
 

 
 

 
 
 
 
Honolulu, HI 96815
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Torrey Hills Corporate Center
 
1
 
1998
 
23,478

 
579,665

 
32.17%
 
Fee Simple
11250 El Camino Real
 
 
 
 
 
 

 
 

 
 
 
 
San Diego, CA 92130
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scripps Ranch Business Park
 
2
 
1984/2006
 
48,146

 
882,787

 
32.17%
 
Fee Simple
9775 Business Park Avenue
 
 
 
 
 
 

 
 

 
 
 
 
10021 Willow Creek Road
 
 
 
 
 
 

 
 

 
 
 
 
San Diego, CA 92131
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Palomar Heights Plaza
 
3
 
2001
 
45,538

 
617,135

 
32.17%
 
Fee Simple
5860 Owens Avenue
 
 
 
 
 
 

 
 

 
 
 
 
5868 Owens Avenue
 
 
 
 
 
 

 
 

 
 
 
 
5876 Owens Avenue
 
 
 
 
 
 

 
 

 
 
 
 
Carlsbad, CA 92008
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Via Frontera Business Park
 
2
 
1979/1996
 
75,651

 
579,998

 
10%
 
Fee Simple
10965 Via Frontera Drive
 
 
 
 
 
 

 
 

 
 
 
 
10993 Via Frontera Drive
 
 
 
 
 
 

 
 

 
 
 
 
San Diego, CA 92127
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savi Tech Center
 
4
 
1989
 
371,098

 
6,655,632

 
10%
 
Fee Simple
22705 Savi Ranch Parkway
 
 
 
 
 
 

 
 

 
 
 
 
22715 Savi Ranch Parkway
 
 
 
 
 
 

 
 

 
 
 
 
22725 Savi Ranch Parkway
 
 
 
 
 
 

 
 

 
 
 
 
22745 Savi Ranch Parkway
 
 
 
 
 
 

 
 

 
 
 
 
Yorba Linda, CA 92887
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

21



Property
 
No. of Buildings
 
Year Built/ Renovated
 
Rentable Sq.Ft.
 
Annualized Rent(1)

Percentage Ownership
 
Interest
Yorba Linda Business Park
 
5
 
1988
 
164,121

 
1,672,165

 
10%
 
Fee Simple
22833 La Palma Avenue
 
 
 
 
 
 

 
 

 
 
 
 
22343 La Palma Avenue
 
 
 
 
 
 

 
 

 
 
 
 
22345 La Palma Avenue
 
 
 
 
 
 

 
 

 
 
 
 
22347 La Palma Avenue
 
 
 
 
 
 

 
 

 
 
 
 
22349 La Palma Avenue
 
 
 
 
 
 

 
 

 
 
 
 
Yorba Linda, CA 92887
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
South Coast Executive Center
 
1
 
1980/1997
 
60,798

 
946,169

 
10%
 
Fee Simple
1503 South Coast Dr.
 
 
 
 
 
 

 
 

 
 
 
 
Costa Mesa, CA 92626
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gateway Corporate Center
 
1
 
1987
 
85,048

 
1,166,919

 
10%
 
Fee Simple
1370 Valley Vista Drive
 
 
 
 
 
 

 
 

 
 
 
 
Diamond Bar, CA 91765
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Valencia Corporate Center
 
3
 
1997-2007
 
194,268

 
4,791,503

 
5%
 
Fee Simple
28490 Avenue Stanford
 
 
 
 
 
 

 
 

 
 
 
 
28480 Avenue Stanford
 
 
 
 
 
 

 
 

 
 
 
 
28470 Avenue Stanford
 
 
 
 
 
 

 
 

 
 
 
 
Santa Clarita, CA 91355
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Joint Venture Properties
 
27
 
 
 
2,069,080

 
$
35,854,274

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Properties
 
31
 
 
 
3,304,192

 
$
72,178,910

 
 
 
 
____________________________

(1)
Annualized rent represents the monthly contractual rent under commenced leases as of December 31, 2012. This amount reflects total rent before abatements and includes contractual expense reimbursements, which are estimated by annualizing December 2012 actual expense reimbursement billings. Joint venture properties are reported with respect to each property in its entirety, rather than the portion of the property represented by our ownership interest. No portion of the joint venture properties annualized rent is consolidated in our consolidated financial statements because our interests in our joint venture properties are accounted for under the equity method of accounting.
(2)
On February 23, 2012, we acquired the fee interest in the land underlying the Clifford Center property. On February 28, 2013, we entered into an agreement to sell our Clifford Center property to an unaffiliated third party. The completion of the sale transaction is scheduled to occur in the second quarter of 2013.
(3)
In February 2013, the joint venture completed the sale of our Bank of Hawaii Waikiki Center joint venture property to an unaffiliated third party.

Occupancy Rates and Annualized Rents

The following table sets forth the occupancy rate and average annualized rent per square foot for each of our properties at December 31 of each of the past five years commencing with the year of the property’s acquisition by either the Company or affiliates of The Shidler Group.


22



 
 
Percent Leased(1)
 
Annualized Rent Per Leased SF(2)
Property
 
2008
 
2009
 
2010
 
2011
 
2012
 
2008
 
2009
 
2010
 
2011
 
2012
Wholly-Owned Properties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Waterfront Plaza
 
86
%
 
94
%
 
93
%
 
92
%
 
90
%
 
$
33.95

 
$
37.12

 
$
37.71

 
$
38.53

 
$
38.94

Davies Pacific Center
 
87
%
 
86
%
 
81
%
 
76
%
 
77
%
 
35.93

 
35.12

 
35.79

 
34.77

 
34.48

Pan Am Building
 
97
%
 
93
%
 
88
%
 
89
%
 
90
%
 
38.83

 
38.57

 
36.97

 
37.07

 
36.51

Clifford Center
 
81
%
 
83
%
 
74
%
 
76
%
 
58
%
 
29.39

 
31.95

 
33.09

 
32.04

 
31.26

Weighted Average: Wholly-Owned Properties
 
 
 
 
 
 
 
 
 
84
%
 
 
 
 
 
 
 
 
 
$
36.65

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Joint Venture Properties
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bank of Hawaii Waikiki Center
 
87
%
 
86
%
 
87
%
 
86
%
 
85
%
 
$
54.05

 
$
52.25

 
$
56.21

 
$
56.56

 
$
56.69

Pacific Business News Building
 
73
%
 
73
%
 
68
%
 
52
%
 
60
%
 
31.36

 
32.33

 
32.64

 
33.07

 
31.98

City Square
 
77
%
 
72
%
 
71
%
 
70
%
 
63
%
 
20.35

 
20.64

 
20.62

 
20.44

 
20.19

Scripps Ranch Business Park
 
85
%
 
44
%
 
49
%
 
74
%
 
74
%
 
18.89

 
26.20

 
25.04

 
27.30

 
26.13

Torrey Hills Corporate Center
 
100
%
 
89
%
 
11
%
 
11
%
 
88
%
 
40.00

 
41.81

 
40.80

 
42.02

 
27.79

Palomar Heights Plaza
 
88
%
 
70
%
 
74
%
 
64
%
 
51
%
 
25.08

 
23.07

 
24.19

 
24.64

 
26.19

Via Frontera Business Park
 
93
%
 
100
%
 
51
%
 
51
%
 
41
%
 
19.39

 
18.68

 
18.08

 
18.70

 
18.81

South Coast Executive Center
 
60
%
 
51
%
 
65
%
 
68
%
 
83
%
 
25.43

 
25.82

 
19.51

 
21.98

 
18.87

Savi Tech Center
 
97
%
 
97
%
 
100
%
 
100
%
 
87
%
 
18.80

 
19.26

 
20.03

 
20.00

 
21.20

Yorba Linda Business Park
 
87
%
 
94
%
 
81
%
 
87
%
 
91
%
 
11.65

 
11.66

 
10.41

 
10.35

 
11.10

Valencia Corporate Center
 

 

 

 
78
%
 
79
%
 

 

 

 
30.27

 
31.30

Gateway Corporate Center
 
94
%
 
91
%
 
90
%
 
79
%
 
53
%
 
27.45

 
26.65

 
27.47

 
26.30

 
25.75

Weighted Average: Joint Venture Properties
 
 
 
 
 
 
 
 
 
72
%
 
 
 
 
 
 
 
 
 
$
24.46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average: Total Portfolio
 
 
 
 
 
 
 
 
 
77
%
 
 
 
 
 
 
 
 
 
$
29.02

____________________________

(1)
Based on leases signed as of December 31 of each historical year and rentable square footage.
(2)
Annualized Rent represents the monthly contractual rent under commenced leases as of December 31, 2012. This amount reflects total rent before abatements and includes contractual expense reimbursements, which are estimated by annualizing December 2012 actual expense reimbursement billings. Annualized rent for the joint venture properties is reported with respect to each property in its entirety, rather than the portion of the property represented by our ownership interest. Annualized Rent per Leased Square Foot represents Annualized Rent divided by square feet of commenced leases as of December 31, 2012.

Tenant Diversification

The following tables provide information on the ten largest tenants, by annualized rent, in our wholly-owned and joint venture properties as of December 31, 2012. No single tenant accounts for 10% or more of our total consolidated revenues.

23



 
 
Tenant
 
 
Lease
Expiration
 
Rentable
Square
Feet
 
Annualized
Rent(1)
 
% of Total
Annualized
Rent
 
 
 
Property
 
 
 
Industry
Wholly-Owned Properties
 
 
 
 

 
 

 
 
 
 
 
 
Farmers Insurance Hawaii, Inc.
 
12/31/2017
 
76,828

 
$
3,381,767

 
9.31
%
 
Waterfront Plaza
 
Insurance
General Services Administration
 
6/20/2025
 
43,727

 
1,911,370

 
5.26
%
 
Waterfront Plaza
 
Government
Oahu Publications Inc.
 
1/31/2018
 
30,399

 
1,303,349

 
3.59
%
 
Waterfront Plaza
 
Media and Journalism
AT&T Corp.
 
6/30/2015
 
26,160

 
1,092,863

 
3.01
%
 
Waterfront Plaza
 
Communications
McCorriston Miller Mukai MacKinnon LLLP
 
12/31/2021
 
29,231

 
866,371

 
2.39
%
 
Waterfront Plaza
 
Legal Services
Honolulu Surgery Center L.P.
 
6/30/2025
 
17,026

 
810,064

 
2.23
%
 
Waterfront Plaza
 
Medical
Royal State Financial Corp.
 
1/31/2015
 
20,915

 
794,226

 
2.19
%
 
Pan Am Building
 
Insurance
Hilton Grand Vacations Company LLC
 
3/13/2018
 
19,263

 
789,860

 
2.17
%
 
Pan Am Building
 
Tourism and Hospitality
Covance CRU Inc.
 
4/30/2016
 
18,665

 
689,682

 
1.90
%
 
Waterfront Plaza
 
Medical
Hawaii HIDTA
 
9/30/2019
 
18,589

 
659,850

 
1.81
%
 
Waterfront Plaza
 
Government
Total Annualized Rent for Top 10 Tenants – Wholly-Owned Properties
 
$
12,299,402

 
33.86
%
 
 
 
 
Total Annualized Rent – Wholly-Owned Properties
 
$
36,324,636

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Joint Venture Properties
 
 
 
 

 
 

 
 

 
 
 
 
Carefusion Inc.
 
2/28/2015
 
130,000

 
$
2,961,872

 
8.26
%
 
Savi Tech Center
 
Medical
Nobel Biocare USA Inc.
 
10/31/2017
 
122,361

 
2,626,450

 
7.33
%
 
Savi Tech Center
 
Medical
Bank of Hawaii
 
1/31/2038
 
11,561

 
2,269,572

 
6.33
%
 
Bank of Hawaii Waikiki Center
 
Financial Services and Banking
AZ Dept of Economic Security
 
12/31/2015
 
107,744

 
2,061,454

 
5.75
%
 
City Square
 
Government
Insurance Company of the West
 
6/30/2019
 
43,956

 
1,513,235

 
4.22
%
 
Valencia Corporate Center
 
Insurance
JTB Hawaii Inc.
 
12/31/2017
 
27,293

 
1,165,531

 
3.25
%
 
Bank of Hawaii Waikiki Center
 
Tourism and Hospitality
Teddy Bear Museum Inc.
 
10/31/2020
 
18,788

 
1,026,769

 
2.86
%
 
Bank of Hawaii Waikiki Center
 
Retail - Miscellaneous
Ashley Furniture Homestore
 
9/30/2016
 
46,176

 
1,026,747

 
2.86
%
 
Savi Tech Center
 
Retail - Miscellaneous
AZ DES - Social Security
 
5/31/2017
 
39,524

 
820,913

 
2.29
%
 
City Square
 
Government
County of Los Angeles
 
5/20/2017
 
32,743

 
817,265

 
2.28
%
 
Valencia Corporate Center
 
Government
Total Annualized Rent for Top 10 Tenants – Joint Venture Properties
 
$
16,289,808

 
45.43
%
 
 
 
 
Total Annualized Rent – Joint Venture Properties
 
$
35,854,274

 
 

 
 
 
 
____________________________

24




(1)
Annualized Rent represents the monthly contractual rent under commenced leases as of December 31, 2012. This amount reflects total rent before abatements and includes contractual expense reimbursements, which are estimated by annualizing December 2012 actual expense reimbursement billings.  Annualized rent for the tenants of our joint venture properties is reported with respect to each lease in its entirety, rather than the portion of the lease represented by our ownership interest.

The following table contains information about tenants who occupy more than 10% of any of our properties as of December 31, 2012. Four properties have no tenant that occupies more than 10% of the rentable area. No tenant occupies more than 10% of the aggregate rentable area of all of our properties combined.
 
 
 
 
Property/Tenant
 
 
 
 
Industry
 
 
 
Lease Expiration(1)
 
 
Renewal
Option
 
Total
Leased
Square feet
 
% of
Rentable
Square Feet
 
Annualized
Rent(2)
 
% of
Annualized
Rent
Wholly-Owned Properties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Waterfront Plaza
 
 
 
 
 
 
 
 

 
 
 
 

 
 
Farmers Insurance Hawaii, Inc.
 
Insurance
 
12/31/2017
 
Yes(3)
 
76,828

 
13.82
%
 
$
3,381,767

 
18.12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Joint Venture Properties
 
 
 
 
 
 
 
 

 
 

 
 

 
 

City Square
 
 
 
 
 
 
 
 
 
 
 
 
 AZ Dept of Economic Security
 
Government
 
12/31/2015
 
Yes(4)
 
107,744

 
14.37
%
 
$
2,061,454

 
23.42
%
Bank of Hawaii Waikiki Center
 
 
 
 
 
 

 
 

 
 

 
 

JTB Hawaii  Inc.
 
Tourism & Hospitality
 
12/31/2017
 
Yes(5)
 
27,293

 
17.74
%
 
$
1,165,531

 
15.74
%
Teddy Bear Museum Inc.
 
Retail - Miscellaneous
 
10/31/2020
 
Yes(6)
 
18,788

 
12.21
%
 
$
1,026,769

 
13.87
%
Aston Hotels & Resorts LLC
 
Tourism & Hospitality
 
10/31/2019
 
Yes(7)
 
17,747

 
11.53
%
 
$
641,444

 
8.66
%
Scripps Ranch Business Park
 
 
 
 
 
 

 
 

 
 

 
 

Jones & Stokes Associates Inc.
 
Accounting & Management Consulting
 
3/31/2015
 
Yes(8)
 
15,356

 
31.89
%
 
$
400,064

 
45.32
%
Department of Insurance
 
Government
 
3/31/2022
 
Yes(9)
 
10,755

 
22.34
%
 
$
302,040

 
34.21
%
Centerbeam Inc.
 
Information Technology
 
5/31/2016
 
Yes(10)
 
5,484

 
11.39
%
 
$
128,326

 
14.54
%
Torrey Hills Corporate Center
 
 
 
 
 
 

 
 

 
 

 
 

3Trace
 
Information Technology
 
10/31/2017
 
Yes(11)
 
12,417

 
52.89
%
 
$
280,800

 
48.44
%
Summa Consulting LLC
 
Educational Services
 
11/30/2017
 
Yes(12)
 
5,798

 
24.70
%
 
$
184,376

 
31.81
%
Pacific Hospitality Group Inc.
 
Construction
 
4/30/2015
 
Yes(13)
 
2,645

 
11.27
%
 
$
114,488

 
19.75
%
Palomar Heights Plaza
 
 
 
 
 
 
 
 

 
 

 
 

 
 

LMR Solutions LLC
 
Services - Miscellaneous
 
1/31/2013
 
None
 
8,758

 
19.23
%
 
$
282,446

 
45.77
%
Via Frontera Business Park
 
 
 
 
 
 
 
 

 
 

 
 

 
 

Xpress Data Inc.
 
Media & Journalism
 
9/30/2015
 
Yes(14)
 
15,298

 
20.22
%
 
$
250,508

 
43.19
%
South Coast Executive Center
 
 
 
 
 
 

 
 

 
 

 
 

Consumer Protection Assistance Coalition Inc
 
Services - Miscellaneous
 
4/30/2018
 
Yes(15)
 
6,855

 
11.28
%
 
$
81,437

 
8.61
%
Savi Tech Center
 
 
 
 
 
 
 
 

 
 

 
 

 
 

Carefusion Inc
 
Medical
 
2/28/2015
 
None
 
130,000

 
35.03
%
 
$
2,961,872

 
44.50
%
Nobel Biocare USA Inc.
 
Medical
 
10/31/2017
 
Yes(16)
 
122,361

 
32.97
%
 
$
2,626,450

 
39.46
%
Ashley Furniture Homestore
 
Retail – Miscellaneous
 
9/30/2016
 
None
 
46,176

 
12.44
%
 
$
1,026,747

 
15.43
%
Yorba Linda Business Park
 
 
 
 
 
 

 
 

 
 

 
 


25



 
 
 
Property/Tenant
 
 
 
 
Industry
 
 
 
Lease Expiration(1)
 
 
Renewal
Option
 
Total
Leased
Square feet
 
% of
Rentable
Square Feet
 
Annualized
Rent(2)
 
% of
Annualized
Rent
AJ Oster West Inc
 
Services - Miscellaneous
 
3/31/2014
 
Yes(17)
 
50,282

 
30.64
%
 
$
453,045

 
27.09
%
Valencia Corporate Center
 
 
 
 
 
 
 
 
 
 
 
 
Insurance Company of the West
 
Insurance
 
6/30/2019
 
Yes(18)
 
43,956

 
51.68
%
 
$
1,513,235

 
31.58
%
County of Los Angeles
 
Government
 
5/20/2017
 
Yes(19)
 
32,743

 
38.50
%
 
$
817,265

 
17.06
%
Scorpion Design Inc.
 
Media & Journalism
 
1/31/2016
 
None
 
15,860

 
18.65
%
 
$
514,217

 
10.73
%
Psomas
 
Architectural & Engineering
 
11/30/2017
 
Yes(20)
 
15,312

 
18.00
%
 
$
555,147

 
11.59
%
North Los Angeles Regional Center
 
Government
 
7/31/2013
 
Yes(21)
 
10,743

 
12.63
%
 
$
348,231

 
7.27
%
Gateway Corporate Center
 
 
 
 
 
 
 
 

 
 

 
 

 
 

University of Phoenix
 
Educational Services
 
9/30/2014
 
None
 
30,627

 
36.01
%
 
$
783,599

 
67.15
%
____________________________

(1)
Expiration dates assume no exercise of renewal, extension or termination options.
(2)
Annualized rent represents the monthly contractual rent under commenced leases as of December 31, 2012. This amount reflects total rent before abatements and includes contractual expense reimbursements, which are estimated by annualizing December 2012 actual expense reimbursement billings. Annualized rent for the tenants of our joint venture properties is reported with respect to each lease in its entirety, rather than the portion of the lease represented by our ownership interest.
(3)
Farmers Insurance Hawaii has an option to extend its term for two 5-year periods at 95% of the fair market rent.
(4)
Arizona Department of Economic Security has an option to extend its term for 5 years upon 120-day written notice.
(5)
JTB Hawaii has an option to extend its term for one 5-year period at fair market rent. If Tenant constructs a building, Tenant may terminate with 12 months written notice.
(6)
Teddy Bear Museum has an option to extend its term for one 10-year period at fair market rent.
(7)
Aston Hotels & Resorts has an option to extend its term for one 5-year period at 90% of fair market rent. Tenant has a right of first offer to lease space located on the fourth floor.
(8)
Jones & Stokes Associates has an option to extend its term for one 5-year period at fair market rent.
(9)
Department of Insurance may terminate lease at any time on or after November 30, 2015 upon 30-day written notice.
(10)
Centerbeam has an option to extend its term for one 5-year period at fair market rent.
(11)
3Trace has an option to extend its term for one 5-year period at fair market rent. Tenant has an option to terminate the lease on the 42nd through 47th months with written notice by the 34th month.
(12)
Summa Consulting has an option to extend its term for one 5-year period at fair market rent.
(13)
Pacific Hospitality Group has an option to extend its term for one 5-year period at fair market rent.
(14)
Xpress Data has an option to extend its term for one 5-year period at fair market rent.
(15)
Consumer Protection Assistance Coalition has an option to extend its term for one 5-year period at fair market rent.
(16)
Nobel Biocare USA has an option to extend its term for two 5-year periods at fair market rent.
(17)
AJ Oster West has an option to extend its term for one 5-year period at 95% of fair market rent.
(18)
Insurance Company of the West has an option to extend its term for two 5-year periods at fair market rent at the time of extension.
(19)
County of Los Angeles has an option to extend its term for one 5-year period.
(20)
Psomas has an option to extend its term for one 5-year period at fair market rent.
(21)
North Los Angeles Regional Center has an option to extend its term for two 5-year periods at fair market rent.

Lease Distribution by Square Footage


26



The following tables summarize the lease distributions by square footage for all our properties as of December 31, 2012.
Square Footage Under Lease
 
Number of
Leases
 
Leases as a %
of Total
 
Rentable
Square
Feet(1)
 
Square Feet
as a %
of Total
 
Annualized
Rent(2)
 
Annualized
Rent as a %
of Total
Wholly-Owned Properties
 
 
 
 
 
 

 
 

 
 

 
 

2,500 or less
 
267

 
75.00
%
 
237,156

 
19.20
%
 
$
8,301,867

 
22.86
%
2,501 - 10,000
 
68

 
19.10
%
 
313,212

 
25.36
%
 
10,964,312

 
30.18
%
10,001 - 20,000
 
15

 
4.21
%
 
206,830

 
16.75
%
 
7,708,511

 
21.22
%
20,001 - 40,000
 
4

 
1.13
%
 
106,705

 
8.64
%
 
4,056,808

 
11.17
%
40,001 - 100,000
 
2

 
0.56
%
 
120,555

 
9.76
%
 
5,293,138

 
14.57
%
Greater than 100,000
 

 
%
 

 
%
 

 
%
Subtotal
 
356

 
100.00
%
 
984,458

 
79.71
%
 
36,324,636

 
100.00
%
Signed Leases Not Commenced
 

 

 
9,367

 
0.76
%