Form 10-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

AMENDMENT No. 1


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

For the fiscal year ended December 31, 2007


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

For the transition period from to

Commission file number: 1-13589

PRIME GROUP REALTY TRUST

(Exact name of registrant as specified in its charter)


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

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

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

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


Title of each class		Name of each exchange on which registered

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

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

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

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

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

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

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


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

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

The aggregate market value of the registrant’s common shares held by non-affiliates as of June 30, 2007 was $0 as the common shares were de-listed from the New York Stock Exchange as a result of our acquisition by an affiliate of The Lightstone Group, LLC.

The number of the registrant’s common shares outstanding was 236,483 as of June 30, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

None.

EXPLANATORY NOTE

As previously reported on a Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on August 21, 2008, the Audit Committee of the Board of Trustees (the “Audit Committee”) of Prime Group Realty Trust (the “Company”), in consultation with members of the Company’s management, determined that the Company’s distributions to the owners of the common units of Prime Group Realty, L.P. (the “Operating Partnership”) were incorrectly recorded in the Company’s consolidated financial statements. In addition, as disclosed in the Company’s Current Report on Form 8-K filed February 18, 2009, the Company, determined that a $4.2 million tax indemnification payment made in January 2006 was incorrectly recorded in the Company’s consolidated financial statements. Accordingly, the Company stated that the previously filed consolidated financial statements for the fiscal years ended December 31, 2006 and December 31, 2007 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, should no longer be relied upon because of the restatement of certain items in the consolidated financial statements. This change relates only to the interpretation of existing accounting literature and does not involve new facts or circumstances.

Historically, the Company has accounted for distributions to the owners of the Operating Partnership common units as a dividend of the Company and has recorded such dividends as a reduction of retained earnings (or equity). However, as a result of a review of the appropriate accounting for these distributions by management, the Audit Committee determined that the Company should have accounted for these distributions as a distribution to minority interest-operating partnership (a liability account). In addition, the tax indemnification payment made in January 2006 was previously capitalized as building improvements as a purchase price allocation under Statement of Financial Accounting Standards No. 141 “Business Combinations.” It was determined by the Company’s management, that the Company should have accounted for the payment as a charge to operations. Accordingly, the Company has restated its previously issued financial statements and other financial information for the years ended December 31, 2006 and 2007. The restatements increased the loss from continuing operations before minority interests by $4.1 million for the year ended December 31, 2006, increased the net loss by $14.2 million ($60.14 per diluted share) for the year ended December 31, 2007 and increased shareholders equity by $61.1 million and $75.3 million as of December 31, 2007 and 2006, respectively.

This amendment No. 1 (the “Amendment”) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Form 10-K”) is being filed to effect the restatements described above. In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Act”), this Amendment sets forth the complete text of each item amended, as well as all other items contained in the 2007 Form 10-K. This amendment amends Items 1, 1A, 5, 6, 7, 8, and 9A of the 2007 Form 10-K. This Amendment also includes Item 15 to the 2007 Form 10-K to file the certifications required by Rule 13a-14(a) under the Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. Except as noted, this Amendment speaks as of the original filing date and has not been updated to reflect every event occurring subsequent to the original filing date. The following Items have not been amended but have been included with this filing for ease of reference: Items 2, 3, 4, 7A, 9, 10, 11, 12, 13 and 14.

This form 10-K/A Amendment No. 1 also includes amended Exhibits 31.1, Certification of the Principal Executive Officer and 31.2, Certification of the Principal Financial Officer for the period ending December 31, 2007, as originally filed with the Securities and Exchange Commission on July 23, 2008, to address comments from the staff of the Securities and Exchange Commission in connection with the staff’s review with respect to the use of “annual report” instead of “report” in paragraphs 2, 3 and 4 of Exhibits 31.1 and 31.2 as required by Regulation S-K Item 601(b)(31).

Forward-Looking Statements

Forward-Looking Statements contained in this Annual Report on Form 10-K/A (Amendment No. 1), including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect management’s current view with respect to future events and financial performance. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those anticipated, and include but are not limited to, the effects of future events on our financial performance; risks associated with our high level of indebtedness and our ability to refinance our indebtedness as it becomes due; the risk that we or our subsidiaries will not be able to satisfy scheduled debt service obligations or will not remain in compliance with existing loan covenants; the effects of future events, including tenant bankruptcies and defaults; risks associated with conflicts of interest that exist with certain members of our board of trustees (“Board”) as a result of such members’ affiliation with our sole common shareholder; the risks related to the office and, to a lesser extent, industrial markets in which our properties compete, including the adverse impact of external factors such as inflation, consumer confidence, unemployment rates and consumer tastes and preferences; the risk of potential increase in market interest rates from current rates; and risks associated with real estate ownership, such as the potential adverse impact of changes, in the local, economic climate on the revenues and the value of our properties as well as our tenants and vendors operations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of December 31, 2007.

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

•

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

•

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

•

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

•

prevailing interest rates;

•

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

•

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

•

the availability of financing and capital.

In addition, historical results and percentage relationships set forth in this Annual Report on Form 10-K/A (Amendment No. 1) are not necessarily indicative of future operations.

PART I

ITEM 1. BUSINESS

Background and General

We are a fully-integrated, self-administered and self-managed real estate investment trust (“REIT”) which owns, manages, leases, develops and redevelops office and industrial real estate, primarily in the Chicago metropolitan area. Our portfolio of properties consists of 9 office properties, containing an aggregate of 3.8 million net rentable square feet, and one industrial property, containing 0.1 million net rentable square feet (see the “Properties” section for detailed information concerning the individual properties). As of December 31, 2007, we had joint venture interests in two office properties containing an aggregate of 1.1 million net rentable square feet and a membership interest in an unconsolidated entity which owns extended-stay hotel properties. One of our joint venture properties is located in Arizona. We lease and manage 4.9 million square feet comprising all of our wholly-owned properties and one joint venture property. In addition, we are also the managing and leasing agent for the 1.5 million square foot Citadel Center office building located at 131 South Dearborn Street in Chicago, Illinois, in which we previously owned a joint venture interest which was sold in November 2006.

Our two joint venture interests and our membership interest are accounted for as investments in unconsolidated joint ventures under the equity method of accounting. These consisted of a 50.0% common interest in a joint venture which owns the 959,258 square foot office tower located at 77 West Wacker Drive, Chicago, Illinois (“The United Building”), a 23.1% common interest in a joint venture which owns a 101,006 square foot office building located in Phoenix, Arizona and a membership interest in an unconsolidated entity which owns 552 extended-stay hotel properties in operation in 43 U.S. states consisting of approximately 59,000 rooms and three hotels in operation in Canada consisting of 500 rooms.

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

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

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

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

Effective on November 16, 2005, Prime Office transferred 5,512,241 common units in the Operating Partnership to Park Avenue Funding, LLC, an affiliate of Lightstone. Subsequent to the transfer, Prime Office owns 78.5%, or 20,976,148, of the outstanding common units in the Operating Partnership, while Park Avenue Funding, LLC owns 20.6% and PGRT owns 0.9% of the outstanding common units in the Operating Partnership.

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

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

Tax Status

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

Business Strategy

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

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

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

•

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

•

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

•

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

•

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

•

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

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

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

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

Our anticipated cash flows from operations combined with cash on hand are expected to be sufficient to fund our anticipated short-term capital needs over the next twelve months. In 2008, we anticipate the need to fund significant capital expenditures to retenant and/or redevelop space that has been previously vacated, or is anticipated to be vacated, or renew leases which are expiring during the year. In order to fund these and our other short-term and long-term capital needs, we expect to utilize available funds from cash on hand, cash generated from our operations and existing or future escrows with lenders. In addition, we may enter into capital transactions, which could include asset sales, refinancings and modifications or extensions of existing loans. There can be no assurances that any capital transactions will occur or, if they do occur, that they will yield adequate proceeds to fund our long-term capital needs or will be on terms favorable to us.

The financial covenants contained in some of our loan agreements and guarantee agreements with our lenders include minimum ratios for debt service coverage and other financial covenants. As of December 31, 2007, we are in compliance with the requirements of all of our financial covenants. We were not in compliance with one of our non-financial covenants with a lender. We obtained an extension on this covenant relating to filing of financial statements through July 31, 2008 and did not incur penalties or restrictions related to the covenant.

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

Recent Developments

Dispositions. During the period from January 1, 2007 through December 31, 2007, we sold the following operating property:

Net

Mortgage

Rentable

Sales Price

Debt

Month

Property

Location

Square Feet

(in millions)

Sold

Narco River Business Center (1)

Calumet City, IL

65,394

7.4

2.7

May


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

Indebtedness. During 2007, we completed the following transactions with respect to our indebtedness:

Loan

Principal

Original

Amount

Interest

Transaction

Maturity

Collateral

Type of Loan

(in millions)

Rate

Date

New Indebtedness

PGRT ESH, Inc.

Non-recourse

120.0

Variable

6/07

6/08

Indebtedness Retirement

Narco River Business Center

First Mortgage

2.7

Fixed

5/07

12/09

Principal Payments

Amortization

Various

1.8

Various

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

In February 2006, we exercised the first extension option on the $195.0 million first mortgage loan secured by our 330 N. Wabash Avenue property and paid a $0.5 million extension fee, which extended the maturity date to March 9, 2007. We exercised the second and final option in February 2007 for an additional $0.5 million payment to extend the maturity date to March 10, 2008, which includes the cost of extending the interest rate cap agreement.

Total interest paid on mortgage notes payable was $38.6 million for the year ended December 31, 2007, $44.0 million for the year ended December 31, 2006, $13.4 million for the six months ended December 31, 2005 and $14.3 million for the six months ended June 30, 2005, respectively. No capitalization of interest occurred in the years ended December 31, 2007, 2006 and 2005.

Shareholders and Board of Trustees Developments. On June 21, 2007, we held our Annual Meeting of Shareholders, at which all of our existing Board Members were re-elected for additional one-year terms. At that time, our Board consisted of (i) Messrs. David Lichtenstein, the Chairman and Principal of Lightstone, Jeffrey Patterson, our President and Chief Executive Officer, Michael M. Schurer, the Chief Financial Officer of Lightstone, and Bruno de Vinck, a Senior Vice President of Lightstone, each of whom were re-elected as non-independent trustees, and (ii) Messrs. George R. Whittemore, John M. Sabin, and Shawn R. Tominus, each of whom were re-elected as independent trustees. Mr. Whittemore is the Chairman of our audit committee and Messrs. Whittemore and Sabin were each named as “financial experts” of our audit committee.

On September 18, 2007, Michael M. Schurer resigned from his position as a trustee on our Board because he had decided to resign his position as the Chief Financial Officer of the Company’s parent company, Lightstone.

In addition, on September 24, 2007, our Board elected Peyton Owen, Jr. as a non-independent trustee on our Board and a member of the Executive Committee of our Board, to replace Mr. Schurer. Mr. Owen is the President and Chief Operating Officer of Lightstone. Prior to joining Lightstone, Mr. Owen was the Chief Operating Officer of Equity Office Properties Trust.

Competition

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

Services Company

We provide certain services requested by tenants through our Services Company. As a taxable REIT subsidiary, our Services Company can provide services to tenants of our properties, even if these services are not considered services customarily furnished in connection with the rental of real estate property, without causing the rental income from the properties to be treated as other than rents from real property by the Internal Revenue Service under the Code. Our Services Company, either directly or through its subsidiaries, provides certain leasing services to the unconsolidated joint venture that owns The United Building and to the owner of Citadel Center.

Government Regulations

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

During the due diligence process in connection with the sale of certain industrial properties in October 2004, additional environmental contamination, beyond that previously identified by our environmental consultants, was discovered by the purchaser of our Chicago Enterprise Center, East Chicago Enterprise Center and Hammond Enterprise Center facilities. As a result, we agreed to establish a $1.25 million environmental escrow at the closing, in addition to a $3.2 million reserve for the previously identified environmental contamination, for use in remediation of the additional environmental contamination. In connection with the sale, the purchaser of these properties agreed to assume the responsibility for the environmental remediation of the property and any costs which may be incurred in excess of the amounts we placed in escrow at the closing. Any excess funds remaining in the $1.25 million escrow after the remediation of the additional environmental contamination will be returned to us. This escrow is included in our restricted cash with a corresponding liability included in other liabilities. At December 31, 2007, this escrow had a balance of $0.8 million.

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

Our 330 N. Wabash Avenue office property currently contains asbestos in the form of spray–on insulation located on the decking and beams of the building. We have been informed by our environmental consultants that the asbestos in 330 N. Wabash Avenue is being properly maintained and no remediation of the asbestos is necessary. However, we have in the past and we may in the future voluntarily decide to remove or otherwise remediate some or all of this asbestos in connection with the releasing and/or redevelopment of this property. Financial Accounting Standards Board (“FASB”) Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations,” (“FIN No. 47”), clarifies the accounting for conditional asset retirement obligations as used in Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”. A conditional asset retirement obligation is an unconditional legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Therefore, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation under SFAS No. 143 if the fair value of the liability can be reasonably estimated. We recorded an asset and a liability of $4.4 million related to asbestos abatement as of December 31, 2007.

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

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

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

Insurance

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

On April 1, 2007, we obtained new property insurance policies in combination with Lightstone’s overall insurance program for it and its affiliates consisting of (i) a primary property policy in the amount of $10.0 million covering risk of physical damage to the properties in our portfolio and (ii) several layers of excess property insurance in an aggregate amount of $540.0 million covering physical property damages to our properties in excess of our primary policy (the “excess policies”). Our primary policy and excess policies include insurance for acts of terrorism as a covered loss. We are at risk for financial loss, which could be material, relating to losses in excess of our policy limits. In addition, we are at risk under our insurance policies for losses of any amount relating to occurrences which are not covered by our insurance policies, such as occurrences excluded under the standard coverage exclusions such as acts of war, military action, nuclear hazards, governmental action, illegal acts of the insured and pollution, which in the event of such losses could be material.

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

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

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

ITEM 1A. RISK FACTORS

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

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

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

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

As of December 31, 2007, leases representing 6.9% of the annual base rent we receive for the properties in our portfolio, excluding joint venture properties, will expire in 2008. Above market rental rates at some of our properties may force us to renew or re-lease some expiring leases at lower rates. There can be no assurance that leases will be renewed or that our properties will be re-leased at net effective rental rates equal to or above their current net effective rental rates. If the rental rates for our properties decrease, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our financial condition, results of operations, cash flow and our ability to satisfy our debt service obligations and to pay dividends to holders of Series B Shares and our common shareholder would be adversely affected.

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

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

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

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inability to collect rent from tenants;

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vacancies or our inability to rent space on favorable terms;

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

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costs of complying with changes in governmental regulations;

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the relative illiquidity of real estate investments; and

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changing submarket demographics.

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

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

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

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

As of December 31, 2007, the fair market value of our total consolidated indebtedness was approximately $567.9 million and the carrying value (i.e., face value) was $565.1 million. Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties, fund necessary capital expenditures or to pay the distributions necessary to maintain our REIT qualification. Our relatively high level of debt and the limitations imposed on us by our loan agreements could have significant adverse consequences to us, including the following:

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

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

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

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

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

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

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

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

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

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

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

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

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

After the closing of the Acquisition on July 1, 2005, our newly constituted Board declared a distribution to Prime Office, the holder at that time of the 26,488,389 common units in our Operating Partnership and declared a dividend to Prime Office, the holder of our 236,483 common shares, in an amount of $1.1225 per unit/share and having a record date and a payment date of July 5, 2005.

On September 22, 2006, our Board declared a quarterly dividend on our Series B Shares for the second quarter 2006 of $0.5625 per share. The quarterly dividend had a record date of October 6, 2006 and a payment date of October 31, 2006. On December 14, 2006, based on the Board’s review of our current capital resources and liquidity needs and the completion of certain capital events, our Board decided to bring dividends on the Series B Shares current and declared for payment two quarterly dividends for the third and fourth quarters of 2006 on our Series B Shares of $0.5625 per share, per quarter, for a total dividend of $1.125 per share. The dividends had a record date of January 5, 2007 and a payment date of January 31, 2007.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We depend on significant tenants.

For the year ended December 31, 2007, the five largest tenants in our portfolio represented approximately 28.5% of the total revenue generated by our properties (including joint ventures), of which one tenant, Jenner & Block, represented approximately 11.9% of our total revenues. Our tenants may experience a downturn in their businesses, which may weaken their financial condition, result in their failure to make timely rental payments or result in their default under their leases. In the event of any tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs attempting to protect our investment.

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

Our financial condition and results of operations could be materially adversely affected if any of our significant tenants were to become bankrupt or insolvent, or suffer a downturn in their business, or fail to renew their leases at all or renew on terms less favorable to us than their current terms.

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

As of December 31, 2007, we owned two joint venture interests and a membership interest in an entity that owns extended-stay hotel properties, and in the future we may co-invest with, or sell interests in our existing properties to third parties through joint ventures. We may not be in a position to exercise sole decision-making authority regarding the properties owned through joint ventures. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions. Joint venture partners may have business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments also may have the potential risk of impasses on decisions, such as those relating to a sale, refinancing or lease, because neither we nor the joint venture partner would have full control over the joint venture. Any disputes that may arise between us and the joint venture partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or trustees from focusing their time and effort principally on our business. Consequently, actions by or disputes with joint venture partners might result in subjecting properties owned by the joint venture to incur additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party joint venture partners.

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

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

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

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

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

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

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

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

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

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

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

We are required to comply with the Sarbanes-Oxley Act of 2002 and related rules and regulations of the Securities Exchange Commission, which include the requirement that our annual report include our management’s report on internal controls over financial reporting. To comply with these requirements the management report must contain an assessment of the effectiveness of our internal controls as of December 31, 2007 and we must disclose any material weakness in our internal controls over financial reporting that were identified by us. If we are unable in the future to assert that our internal controls over financial reporting are effective we could lose investor confidence in our financial reports, which could have an adverse effect on the value of our Series B Shares and common shares.

Other regulations could adversely affect our financial condition.

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

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

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

Potential losses may not be covered by insurance.

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

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

Two large new developments being built by third parties are currently under construction adjacent to two of our properties, one across the street from The United Building and the other across the street from our property located at 330 North Wabash Avenue. While to our knowledge neither of these projects under development currently contemplate any material office component and thus will not directly compete with the existing use of our properties, the major construction activities underway at these adjacent sites could cause significant disruptions to the operation of our two properties identified above, including those resulting from noise, dust, vibrations, construction traffic and other related activities. These activities could inconvenience our tenants at these properties and make it difficult to renew certain leases as their terms expire or lease vacant space in these properties to new tenants. In addition, the new projects currently under construction may also adversely affect our leasing efforts and the value of our properties affected, by among other things, blocking certain views from our properties and creating increased traffic and congestion. In addition, two large new office developments are currently underway in the vicinity of The United Building, our 180 N. LaSalle and 330 N. Wabash Avenue properties. These projects will directly compete with our properties referred to above and could materially adversely affect (i) our ability to retain our existing tenants, and attract new tenants, and (ii) for those existing tenants that we are able to retain and new tenants that we are able to attract, the business terms on which such deals are completed. This could result in us leasing less space at lower rents and with higher costs at our properties than we could have otherwise, which could materially adversely affect our liquidity, revenue and financial results.

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

During fiscal year 2007, we recognized aggregate losses of $47.8 million related to our investment in Extended Stay, Inc. (“ESH”). Although these losses are non-cash (GAAP) losses, they have contributed to the erosion of our book value to $40.3 million as of December 31, 2007, compared to $129.2 million at December 31, 2006. We anticipate that we will continue to recognize losses relating to ESH during calendar year 2008, and any further losses will continue to erode our book value.

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

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

Many of our properties are encumbered by debt that is non-recourse to us (except for customary “non-recourse carve out” provisions relating to matters such as fraud, misallocation of funds and other customary exclusions). Should the cash flow from any of these properties cease to be sufficient to fund debt service, operating expenses and capital requirements relating to the property, or should we be unable to refinance a property’s debt upon the maturity of such debt, we may face foreclosure by our

lenders on that property or we may decide to voluntarily convey the property to the relevant lenders in lieu of foreclosure. We may or may not decide to fund cash flow shortfalls at a property in such a circumstance. As a result of any loan defaults, our portfolio of properties may be reduced (resulting in a higher allocation of overhead to each of our remaining properties), our existing and potential future lenders and tenants may be less willing to consummate transactions with us based on such loan default by us, our shareholders will not be able to realize any value from any such properties and we may incur losses on our financial statements regarding any such properties.

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

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

Liabilities for environmental matters could adversely affect our financial condition.

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

General

Our portfolio of properties consists of 9 office properties, containing an aggregate of 3.8 million net rentable square feet, and one industrial property, containing 0.1 million net rentable square feet, located in the Chicago metropolitan area. This includes Continental Towers, on which we own a second mortgage note that constitutes a significant financial interest in this property. We therefore consolidate its operations. As of December 31, 2007, we also owned a 50.0% common interest in a joint venture, which owns the 959,258 square foot office tower known as The United Building located at 77 West Wacker Drive in downtown Chicago, a 23.1% common interest in a joint venture, which owns a 101,006 square foot office building located in Phoenix, Arizona and a membership interest in an unconsolidated entity which owns 552 extended-stay hotel properties in operation in 43 U.S. states consisting of approximately 59,000 rooms and three hotels in operation in Canada consisting of 500 rooms. We lease and manage 4.9 million square feet comprising all of our wholly-owned properties and one joint venture property. In addition, we also manage and lease the 1,504,364 square foot Citadel Center office building located at 131 South Dearborn Street in Chicago, Illinois, which we previously owned a joint venture interest in and was sold in November 2006.

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

We do not currently anticipate commencing any new development projects in the near future, although we do anticipate undertaking the redevelopment of, improvements to, and/or expansion of, certain properties we currently own and/or may acquire in the future.

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

Properties

The following table sets forth certain information relating to each of our properties. Through the Operating Partnership and other subsidiaries, we own 100.0% fee-simple title in all of the office and industrial properties, except for Continental Towers and the unconsolidated joint venture properties identified below. All of the properties are office properties with the exception of 1051 N. Kirk Road, which is an industrial property.


			Net		Percentage
		Year Built/	Rentable		Occupied as
	Location	Renovated	Square Feet		of 12/31/07
Wholly-Owned Properties:
330 N. Wabash Avenue (1)	Chicago, IL	1971		1,466,023		66.5	%
Continental Towers (2)	Rolling Meadows, IL	1977 thru
		1981/2001		910,796		76.6	%
180 North LaSalle Street	Chicago, IL	1982/1999		770,191		87.0	%
800-810 Jorie Boulevard	Oak Brook, IL	1961/1992		193,688		41.8	%
4343 Commerce Court	Lisle, IL	1989		167,756		78.5	%
740-770 Pasquinelli Drive	Westmont, IL	1986		110,299		97.8	%
280 Shuman Blvd.	Naperville, IL	1979		69,077		90.1	%
Enterprise Center II	Westchester, IL	1999		62,580		64.8	%
7100 Madison Avenue	Willowbrook, IL	1999		50,157		100.0	%
1051 N. Kirk Road (3)	Batavia, IL	1990		120,004		100.0	%

Portfolio total				3,920,571		74.9	%


Unconsolidated Joint Venture Properties:
77 West Wacker Drive (4)	Chicago, IL	1992		959,258		86.3	%
Thistle Landing (5)	Phoenix, AZ	1999		101,006		59.4	%


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

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

(3)		1051 N. Kirk Road was sold to the tenant of this property on May 2, 2008.

(4)		At December 31, 2007, we held a 50.0% common ownership interest in a joint venture that owned this office property. On January 7, 2008, we sold our joint venture interest in this property to our joint venture partner and no longer hold any ownership interest in this property.

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

ITEM 3. LEGAL PROCEEDINGS

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

On December 4, 2006, we were served with a copy of a Class Action Complaint and Demand for Jury Trial (the “Complaint”) filed by The Jolly Roger Fund LP and Jolly Roger Offshore Fund Ltd. (“Plaintiffs”) against Lightstone and us. The Complaint was filed on November 16, 2006 in the Circuit Court of Baltimore City, Maryland, Civil Division. We filed a motion to dismiss the Complaint on February 5, 2007. On March 1, 2007, Plaintiffs filed their First Amended Class Action Complaint and Demand for Jury Trial (“Amended Complaint”) and we filed a motion to dismiss the Amended Complaint on April 2, 2007.

In the Amended Complaint, the Plaintiffs sought damages, on behalf of the holders of our Series B Shares, resulting from an alleged plan by us to liquidate our assets and wind up our business without paying the Plaintiffs the $25.00 per share liquidation preference provided in our Articles of Amendment and Restatement. The Complaint also sought disgorgement of dividends paid to Lightstone that Plaintiffs allege should have been paid to the holders of the Series B Shares in the form of the liquidation preference.

On August 16, 2007, the Court dismissed the Plaintiffs’ lawsuit against all of the defendants with prejudice. The time for the Plaintiffs to appeal this decision has expired and the Plaintiffs did not file an appeal. Accordingly, this matter has been resolved.

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

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

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

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

No matters were submitted to a vote of our public security holders during the fourth quarter of 2007. On June 21, 2007, we held our Annual Meeting of Shareholders, at which all of our existing Board Members were re-elected for additional one-year terms. At that time, our Board consisted of (i) Messrs. David Lichtenstein, the Chairman and Principal of Lightstone, Jeffrey Patterson, our President and Chief Executive Officer, Michael M. Schurer, the Chief Financial Officer of Lightstone, Bruno de Vinck, a Senior Vice President of Lightstone, each of whom were re-elected as non-independent trustees, and (ii) Messrs. George R. Whittemore, John M. Sabin, and Shawn R. Tominus, each of whom were re-elected as independent trustees. Mr. Whittemore is the Chairman of our audit committee and Messrs. Whittemore and Sabin were each named as “financial experts” of our audit committee.

PART II


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

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

Currently, Prime Office owns 78.5%, or 20,976,148, of the outstanding common units in the Operating Partnership while Park Avenue Funding, LLC owns 20.6% and PGRT owns 0.9% of the outstanding common units. Prime Office also owns 100% or 236,483, of our common shares.

The following table sets forth the common share dividends we paid for the years ended December 31, 2006 and December 31, 2007:


	Cash
	Dividends
	Paid (per share)

Fiscal Year 2006
First quarter	$	2.8438
Second quarter		—
Third quarter		—
Fourth quarter		—

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

On December 30, 2005, our Board declared a quarterly dividend of $0.5625 per share on our Series B Shares for the shareholders of record on January 16, 2006. This dividend was paid on January 31, 2006. On February 9, 2006, our Board declared (i) a quarterly dividend on our Series B Shares for the first quarter of 2006 of $0.5625 per share with a record date of March 31, 2006 and a payment date of April 28, 2006 and (ii) a common distribution to the holders of the 26,488,389 common units in the Operating Partnership and declared a dividend to the holder of our 236,483 common shares, in an amount of $2.8438 per unit/share having a record date of February 9, 2006 and a payment date of February 10, 2006. On June 14, 2006, our Board decided not to declare a quarterly dividend on the Series B Shares for the second quarter of 2006, based on the Board’s review of our then current capital resources and liquidity needs and the timing and uncertainty of certain previously anticipated capital events. On September 22, 2006, our Board declared a quarterly dividend on our Series B Shares for the second quarter 2006 of $0.5625 per share. The quarterly dividend had a record date of October 6, 2006 and a payment date of October 31, 2006. On December 14, 2006, based on the Board’s review of our current capital resources and liquidity needs and the completion of certain capital events, our Board decided to bring dividends on the Series B Shares current and declared for payment two quarterly dividends for the third and fourth quarters of 2006 on our Series B Shares of $0.5625 per share, per quarter, for a total dividend of $1.125 per share. The dividends had a record date of January 5, 2007 and a payment date of January 31, 2007.

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

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

Equity Compensation Plans. For a discussion of our equity compensation plans see the information contained in Item 12 — Security Ownership of Certain Beneficial Owners and Management — Equity Compensation Plan Information of this report.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by Issuer and Affiliated Purchasers

None.

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth our selected consolidated financial data and should be read in conjunction with our consolidated financial statements included elsewhere in this Form 10-K/A (Amendment No. 1). For further discussion of the restatements discussed in the explanatory note and their specific impact on the historical financial statements, see Note 17 to our consolidated financial statements. The five-year financial summary set forth in this Item 6 has been revised to reflect the restatement.


	Successor Company						Predecessor Company
	Year ended December 31						Year ended December 31
	2007		2006		2005		2004		2003
	(dollars in thousands)						(dollars in thousands)
	As Restated(3)		As Restated(3)
Balance Sheet Data
Real estate assets	$	499,050	$	482,447	$	471,892	$	619,059	$	681,933
Total assets		671,916		650,013		771,921		767,363		948,781
Mortgage notes and notes payable		567,910		453,695		452,965		427,445		435,869
Total liabilities		635,559		524,868		530,668		502,785		663,640
Minority interests		—		20,770		135,853		19,154		21,803
Shareholders’ equity		36,357		104,375		105,400		245,424		263,338


	Successor Company									Predecessor Company
							Six months			Six months
							ended			ended
							December 31			June 30
	2007			2006			2005			2005			2004			2003
	(dollars in thousands,									(dollars in thousands, except
	except per share amount)									per share amount)
	As Restated(3)			As Restated(3)
Statement of Operations Data (1)
Total revenue	$	91,013		$	97,396		$	47,691		$	47,339		$	97,040		$	123,532
Operating income (loss)		1,603			1,108			(1,025	)		(3,657	)		15,514			28,741
(Loss) income from continuing operations		(59,044	)		8,647			4,292			(9,344	)		(20,143	)		(15,666	)
Net (loss) income		(59,018	)		8,647			4,319			(19,571	)		(11,383	)		(36,217	)
Net loss available to common shareholders		(68,018	)		(353	)		(181	)		(24,071	)		(20,383	)		(45,217	)

Basic and diluted earnings available to common shares per weighted-average common share (2)
Loss from continuing operations	$	(287.73	)	$	(1.49	)	$	(0.88	)	$	(0.59	)	$	(1.23	)	$	(1.23	)
Net loss available per weighted-average common share of beneficial interest —basic and diluted		(287.62	)		(1.49	)		(0.76	)		(1.02	)		(0.86	)		(2.25	)
Dividends paid per common share		—			2.8438			1.1225			—			—			—
Dividends paid per preferred share		2.8125			1.6875			4.50			1.125			1.6875			—

Cash Flow and Operating Data
Cash flow provided by (used in):
Operating activities	$	1,134		$	638		$	1,236		$	(6,659	)	$	22,108		$	56,875
Investing activities		(129,700	)		70,603			(60,044	)		2,258			116,613			296,732
Financing activities		106,348			(28,739	)		6,773			2,314			(99,598	)		(336,799	)
Office Properties:
Square footage		3,800,567			3,865,828			3,772,482			4,636,918			4,632,633			5,536,065
Occupancy (%)		74.1			79.0			83.7			82.8			85.1			75.1
Industrial Properties:
Square footage		120,004			120,004			120,004			120,004			120,004			3,874,712
Occupancy (%)		100.0			100.0			100.0			100.0			100.0			81.4
Unconsolidated Joint Venture Properties:
Square footage		1,060,264			1,060,725			2,554,866			2,833,068			2,831,303			2,827,302
Occupancy (%)		83.7			76.4			77.6			80.9			79.7			74.1


(1)		Information for the years ended December 31, 2006 (including the six months ended December 31, 2005 and the six months ended June 30, 2005), 2004 and 2003 has been restated for the reclassification of the operations of properties, to reflect the impact of SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS No. 144”), from continuing operations to discontinued operations.

(2)		Net loss available per weighted-average common share of beneficial interest-basic equals net income divided by 236,483; 236,483; 236,483; 23,658,579; 23,671,412 and 20,105,183 common shares for the years ended December 31, 2007, December 31, 2006, for the six months ended December 31, 2005, for the six months ended June 30, 2005 and for the years ended December 31, 2004 and 2003, respectively. Net loss available per weighted-average share of beneficial interest-diluted equals net income divided by 236,483; 236,483; 236,483; 23,658,579; 23,671,412 and 20,105,183 common shares for the years ended December 31, 2007, December 31, 2006, for the six months ended December 31, 2005, for the six months ended June 30, 2005 and for the years ended December 31, 2004 and 2003, respectively. The change in number of weighted-average common shares is principally due to the Acquisition by Lightstone and common unitholders in our Operating Partnership exchanging common units for common shares and the issuance of new common units in our Operating Partnership in connection with property acquisitions.

(3)		See Note 17 to the consolidated financial statements included in this report for further discussion on the restatements and their specific impact on the historical financial statements.


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

Overview

The following discussion should be read in conjunction with our historical consolidated financial statements and related notes thereto included elsewhere in this Form 10-K/A (Amendment No. 1).

We are a fully-integrated, self-administered and self-managed REIT which owns, manages, leases, develops and redevelops office and industrial real estate, primarily in the Chicago metropolitan area. Our portfolio of properties consists of 9 office properties, containing an aggregate of 3.8 million net rentable square feet and one industrial property, containing 0.1 million net rentable square feet. As of December 31, 2007, we had joint venture interests in two office properties containing an aggregate of 1.1 million rentable square feet and a membership interest in an unconsolidated entity which owns 552 extended-stay hotel properties in operation in 43 U.S. states consisting of approximately 59,000 rooms and three hotels in operation in Canada consisting of 500 rooms. We lease and manage 4.9 million square feet comprising all of our wholly-owned properties and one joint venture property. In addition, we are also the managing and leasing agent for the 1.5 million square foot Citadel Center office building located at 131 South Dearborn Street in Chicago, Illinois, in which we previously owned a joint venture interest which was sold in November 2006.

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

Our two joint venture interests are accounted for as investments in unconsolidated joint ventures under the equity method of accounting. These consisted of a 50.0% common interest in a joint venture which owns the 959,258 square foot office tower known as The United Building located at 77 West Wacker Drive, Chicago, Illinois, and a 23.1% common interest in a joint venture which owns a 101,006 square foot office building located in Phoenix, Arizona.

We have accounted for our investment in the membership interest that owns extended-stay hotel properties (the “ES Interest”) under the equity method of accounting effective in the fourth quarter of 2007. This change from the cost method of accounting is primarily due to deteriorating real estate and financial market conditions resulting in a re-evaluation of the expected term and nature of the investment. We have incurred non-cash allocation of losses in 2007 and expect to continue recognizing non-cash loss allocations during the first six months of 2008. We anticipate continuing to meet debt service payments on the debt encumbering the ES Interest (which has been guaranteed by certain affiliates of Lightstone but which is non-recourse to us) through capital contributions from affiliates of Lightstone, although there can be no assurances that this will be the case.

Impact of Restatement

On August 20, 2008, the Audit Committee of the Board of Trustees (the “Audit Committee”) of the Company, in consultation with members of the Company’s management, determined that the Company’s distributions to the owners of the common units of the Operating Partnership were incorrectly recorded on the Company’s consolidated financial statements. In addition, in February 2009, the Company also determined that a $4.2 million tax indemnification payment made in January 2006 was incorrectly recorded. Accordingly, the Company disclosed that the previously filed consolidated financial statements for the fiscal years ended December 31, 2006 and December 31, 2007 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 should no longer be relied upon because of the restatement of certain items in the consolidated financial statements.

The effect of the restatement on prior period financial statements is discussed in Note 17 — Restatements and Note 18 — Interim Financial Information (unaudited) (as restated) to our consolidated financial statements included in this report. Additionally, information on the impact of the restatement on the 2007 and 2006 years is provided in Item 6 — Selected Financial Data.

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

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

Our income and cash flow is derived primarily from rental revenue (including tenant reimbursements) from our properties. We expect that any revenue growth over the next several years will come from revenue generated through increased occupancy rates in our portfolio. The following summarizes our portfolio occupancy at the end of 2006 and at the end of each quarter of 2007, excluding properties sold in subsequent periods and our membership interest in the entity that owns extended-stay hotel properties:


	Portfolio Occupancy
	December 31			September 30			June 30			March 31			December 31
	2007			2007			2007			2007			2006

Portfolio Total		74.9	%		74.5	%		76.3	%		80.2	%		79.6	%


Unconsolidated Joint Venture Properties		83.7	%		80.8	%		90.0	%		92.1	%		76.4	%

2007 Business Summary

For 2007, our focus was on:

•

retiring, extending or refinancing debt;

•

completing certain capital transactions;

•

reducing operating costs; and

•

aggressively pursuing leasing transactions.

Below is a summary of several of the activities we undertook in 2007 in keeping with these objectives.

•

We initiated efforts to refinance our 330 N. Wabash Avenue property and to sell floors 2 through 13 to a hotel developer for the construction of a five-star super-luxury hotel, and both transactions ultimately closed on March 18, 2008.

•

Through December 31, 2007, we commenced 41 new and expansion office leases totaling 696,160 square feet, and renewed or extended 35 office leases totaling 376,403 square feet including our joint venture properties.

•

In 2007, we began negotiating the sale of our joint venture interest in The United Building, and in January 2008 we closed on the sale and used a portion of the proceeds to retire the $18.8 million outstanding indebtedness on two Citicorp mezzanine loans.

Key Performance Indicators

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

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

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

Results of Operations

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

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


	2007			2006			$ Change			% Change
	(dollars in thousands)
	As Restated			As Restated
Property revenues	$	87,654		$	94,590		$	(6,936	)		(7.3	)%
Services Company revenues		3,359			2,806			553			19.7

Total revenues		91,013			97,396			(6,383	)		(6.6	)

Property operating expenses		47,780			47,240			540			1.1
Depreciation and amortization		32,585			34,483			(1,898	)		(5.5	)
General and administrative		6,210			6,393			(183	)		(2.9	)
Services Company operations		2,835			3,972			(1,137	)		(28.6	)
Loss on tax indemnification		—			4,200			(4,200	)		(100.0	)

Total expenses		89,410			96,288			(6,878	)		(7.1	)

Operating income		1,603			1,108			495			44.7
Loss from investments in unconsolidated joint ventures		(49,687	)		(9,145	)		(40,542	)		(443.3	)
Interest and other income		2,961			2,850			111			3.9
Interest:
Expense		(36,610	)		(42,183	)		5,573			13.2
Amortization of deferred financing costs		(910	)		(3,146	)		2,236			71.1
Gain on sales of real estate and joint venture interests		—			19,460			(19,460	)		(100.0	)
Distributions and losses to minority partners in excess of basis		(14,222	)		—			(14,222	)		—

Loss from continuing operations before minority interests		(96,865	)		(31,056	)		(65,809	)		(211.9	)
Minority interests		37,821			39,703			(1,882	)		(4.7	)

(Loss) income from continuing operations		(59,044	)		8,647			(67,691	)		(782.8	)
Discontinued operations, net of minority interests		26			—			26			—

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

Property Revenues. The decrease of $6.9 million in property revenues was primarily attributable to the expiration of two leases at our 330 N. Wabash Avenue property in August 2006 and May 2007 ($8.1 million) and the expiration of a lease at our 800-810 Jorie Boulevard property in August 2007 ($0.5 million). The decrease was partially offset by the recognition of management fee income for an office and retail building located at 1407 Broadway Avenue in New York, New York, which is owned by an affiliate of Lightstone ($0.6 million), increased occupancy at our 180 N. LaSalle Street property ($0.5 million) and termination fees for a lease at our 330 N. Wabash Avenue property ($0.4 million).

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

Property Operating Expenses. The increase of $0.5 million in property operating expenses was primarily attributable to an increase in utility rates for our properties ($1.1 million), bad debt expense associated with a tenant at our 800-810 Jorie Boulevard property ($0.9 million), architectural fees associated with our 330 N. Wabash Avenue property ($0.3 million), increased snow removal costs for our properties ($0.3 million) and increased repairs and maintenance at our 800-810 Jorie Boulevard property ($0.2 million). The increase was partially offset by adjustments to prior year real estate tax estimates ($1.3 million) and reduced real estate tax projections for our properties ($1.1 million).

Depreciation and Amortization. The decrease of $1.9 million in depreciation and amortization in 2007 was primarily attributable to the expiration of two leases at our 330 N. Wabash Avenue property in August 2006 and May 2007, at which time the tenant related assets became fully depreciated ($3.3 million) in 2007 and various other lease expirations at our properties resulting in decreased depreciation and amortization ($1.3 million). The decrease was partially offset by the accelerated depreciation and amortization of tenant improvements and in-place lease values due to the lease amendment executed with a tenant at our Continental Towers property ($2.7 million).

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

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

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

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

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

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

Distributions and losses to minority partners in excess of basis. The increase of $14.2 million in distributions and losses to minority partners in excess of basis represents current year losses resulting in a deficit position in the minority interest balance. Losses in excess of the minority interest basis have been charged to operations as a result of the minority interest holder having no contractual obligation to return such amounts, to fund operations nor restore any capital deficits.

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

Comparison of the Year ended December 31, 2006 to the Year ended December 31, 2005


	2006			2005			$ Change			% Change
	As Restated
	(dollars in thousands)
Property revenues	$	94,590		$	92,834		$	1,756			1.9	%
Services Company revenues		2,806			2,196			610			27.8

Total revenues		97,396			95,030			2,366			2.5

Property operating expenses		47,240			47,707			(467	)		(1.0	)
Depreciation and amortization		34,483			29,553			4,930			16.7
General and administrative		6,393			7,708			(1,315	)		(17.1	)
Services Company operations		3,972			4,062			(90	)		(2.2	)
Loss on tax indemnification		4,200			—			(4,200	)		(100.0	)
Severance costs		—			394			(394	)		(100.0	)
Strategic alternative costs		—			10,288			(10,288	)		(100.0	)

Total expenses		96,288			99,712			(3,424	)		(3.4	)

Operating income (loss)		1,108			(4,682	)		5,790			123.6
Loss from investments in unconsolidated joint ventures		(9,145	)		(13,022	)		3,877			29.8
Interest and other income		2,850			2,596			254			9.8
Interest:
Expense		(42,183	)		(23,940	)		(18,243	)		(76.2	)
Amortization of deferred financing costs		(3,146	)		(1,288	)		(1,858	)		(144.3	)
Gain on sales of real estate and joint venture interests		19,460			10,025			9,435			94.1

Loss from continuing operations before minority interests		(31,056	)		(30,311	)		(745	)		(2.4	)
Minority interests		39,703			25,259			14,444			57.2

Income (loss) from continuing operations		8,647			(5,052	)		13,699			271.1
Discontinued operations, net of minority interests		—			(10,200	)		10,200			100.0

Net income (loss)	$	8,647		$	(15,252	)	$	23,935			156.9	%

Property Revenues. The increase of $1.8 million in property revenues was primarily attributable to increased straight-line rent as a result of the Acquisition ($1.8 million), other income associated with the sale of Citadel Center ($0.6 million), increased other property revenues due to higher parking revenues at 330 N. Wabash Avenue ($0.5 million) and management fee income from 77 West Wacker and Citadel Center ($0.4 million). The increase was partially offset by the amortization of the above-market and below-market lease values as a result of the Acquisition, recorded as a reduction of rental revenue ($1.2 million), and lower tenant reimbursements due to reduced property operating expenses ($0.1 million).

Services Company Revenues. The increase of $0.6 million in our Services Company revenues during 2006 was primarily due to increased leasing commission income from the joint ventures due to increased leasing activity.

Property Operating Expenses. The decrease of $0.5 million in property operating expenses was primarily attributable to reduced real estate tax projections primarily at our 330 N. Wabash Avenue property ($1.6 million) and lower bad debt expense ($0.2 million), partially offset by increased utilities due to higher rates ($1.1 million) and increased repairs and maintenance occurring at our 330 N. Wabash Avenue, 180 North LaSalle Street and Continental Towers properties ($0.3 million).

Depreciation and Amortization. The increase of $4.9 million in depreciation and amortization was primarily attributable to the increase in depreciable basis of the tangible and intangible assets as a result of the Acquisition.

General and Administrative. The decrease of $1.3 million in general and administrative expenses was primarily due to lower directors and officers insurance expense ($1.2 million).

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

Strategic Alternative Costs. The $10.3 million decrease in strategic alternative costs is primarily due to the settlement payment made in 2005 to settle certain litigation ($7.0 million) and a reduction in legal, consulting and professional fees which were higher in 2005 as a result of the Acquisition.

Loss From Investments in Unconsolidated Joint Ventures. The decrease of $3.9 million in loss from investments in unconsolidated joint ventures was primarily due to increased straight-line rent revenue ($3.7 million), a reduction of distributions paid to our joint venture partner ($1.7 million) and a reduction of real estate taxes net of associated recovery revenue ($0.7 million) all at our Citadel Center property. This decrease was partially offset by an increase in depreciation and amortization for the tangible and intangible basis of the joint venture properties as a result of the Acquisition ($2.3 million).

Interest and Other Income. The increase of $0.3 million in interest and other income was primarily due to an increase in interest income related to our short-term investments and restricted escrow accounts, which was the result of an increase in average interest rates on investment from 3.0% in 2005 to 4.9% in 2006, while the average balance was unchanged.

Interest Expense. The increase in interest expense of $18.2 million was primarily the result of $9.7 million, $4.6 million and $1.1 million of additional interest expense in 2006 compared to 2005 for the IPC Loan, Citicorp Loans and the Continental Towers refinancing, respectively. Additionally, the increase in the average LIBOR from 3.5% in 2005 to 5.0% in 2006 led to a $3.6 million increase in interest expense related to our variable rate debt collateralized by our 330 N. Wabash Avenue property.

Amortization of Deferred Financing Costs. The increase of $1.9 million in amortization of deferred financing costs was primarily attributable to the write-off of unamortized deferred financing fees related to the repayments of the IPC Loan and a portion of the Citicorp Loan.

Minority Interests. The increase of $28.7 million in minority interests was primarily due to the Acquisition. As a result of the Acquisition, minority interest percentage ownership increased from 11.5% to 99.1%.

Discontinued Operations. Discontinued operations reflect net income (loss) (including provision for asset impairment and lease termination revenue) and gain (loss) on sales of real estate for operating properties which have been sold. Discontinued operations include the results of operations of our 208 South LaSalle Street property, which was sold in December 2005, and the residual effects related to properties sold in prior years. The decrease in the loss from discontinued operations of $10.2 million was primarily attributable to a provision for asset impairment associated with our 208 South LaSalle Street property ($15.1 million), partially offset by a gain from operations associated with our 208 South LaSalle Street property in 2005 ($2.3 million), a gain on sale of a portfolio of our industrial properties upon finalization of our related obligation under a tax indemnity in 2005 ($0.7 million), a decrease in projected real estate taxes associated with our former 33 West Monroe Street property in 2005 ($0.3 million) and a change in minority interests ($1.6 million).

Gain on Sales of Real Estate and Joint Venture Interests. The increase of $9.4 million in gain on sales of real estate and joint venture interests was primarily due to a recognized gain of $18.8 million from the sale of our joint venture interest in the Citadel Center property in November 2006. In addition, we recognized a gain of $0.6 million as a result of the sale of a land parcel located in Libertyville, Illinois during the second quarter of 2006. Partially offsetting the increase was a $9.8 million gain in 2005 from the Citadel Center joint venture as a result of the receipt of a contingent purchase price resulting from a leasing earn-out we met under the joint venture agreement.

Liquidity and Capital Resources

Recent Developments.

On December 20, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2007 dividend period. The quarterly dividend had a record date of January 10, 2008 and was paid on January 31, 2008.

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

Two of the Company’s subsidiaries entered into a management and leasing agreement at closing providing that they will be the manager and leasing agents for The United Building through January 6, 2013, subject to the terms of the agreement, including the owner’s right to terminate the agreement early upon 30 days notice.

BHAC Capital IV, L.L.C. In January 2008, PGRT ESH was informed that BHAC Capital IV, L.L.C. (“BHAC”), was temporarily suspending distributions on the membership units held by PGRT ESH, and the suspension is estimated to last through 2008. Since that time, the debt service on the Citicorp Loan, which is non-recourse to PGRT ESH, was funded with the proceeds of a $4.4 million capital contribution by Prime Office to the Company and, in turn, to PGRT ESH.

On February 12, 2008, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the first quarter of 2008 dividend period. The quarterly dividend had a record date of March 31, 2008 and was paid on April 30, 2008. In addition, our Board also declared a distribution to the holders of the 26,488,389 common units in the Operating Partnership and our 236,483 common shares, in an amount of $0.112255 per unit/share and having a record date of February 12, 2008 and a payment date of February 13, 2008.

330 N. Wabash Avenue Hotel Sale. On March 18, 2008, one of our subsidiaries, 330 N. Wabash Avenue, L.L.C. (“330 LLC”), completed the sale of Floors 2 through 13 of our 330 N. Wabash Avenue property to Modern Magic Hotel, LLC (the “Hotel Buyer”) for the purchase price of $46.0 million, subject to customary prorations and adjustments as provided in the purchase and sale agreement. The Hotel Buyer has an option to purchase the 14th Floor of our 330 N. Wabash Avenue property for $5.0 million (subject to escalation by CPI and certain other adjustments), in which case the proceeds would be used to partially prepay the mortgage loan encumbering the property. The Hotel Buyer and 330 LLC have also entered into a Declaration of Covenants, Conditions, Restrictions and Easements and various other documents that provide for necessary cross-easements and sharing of common area costs. The purchase and sale agreement includes a covenant by 330 LLC to perform certain asbestos removal, demolition and pre-construction work on all floors subject to the sale. 330 LLC deposited $10.7 million at closing into construction escrows with the title insurance company and $2.1 million with one of the mortgage lenders to be used for such costs. These obligations were recorded as a liability and charged against the gain when determining the book gain on sale. We recognized a book gain on the sale of approximately $9.8 million. The net proceeds from the Hotel sale, together with the proceeds from the loans referred to below, and a payment of $31.5 million from the Operating Partnership, were used to repay the prior debt on our 330 N. Wabash Avenue property and fund all of the escrows and cash deposit referred to above.

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

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

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

The Loans are non-recourse to 330 LLC except for certain recourse exceptions, including waste, fraud, misallocation of funds and other similar exceptions. The recourse exceptions have been guaranteed (the “Non-Recourse Carve-Out Guaranty”) by our Operating Partnership. The Operating Partnership also entered into a completion guaranty relating to certain construction, demolition and asbestos abatement work at the Office Property for the benefit of the Loan B Lender (the “Completion Guaranty” and, together with the Non-Recourse Carve-Out Guaranty, the “Guaranties”). The Guaranties include a covenant that the Operating Partnership will maintain a minimum net worth of $15.0 million, calculated by adding back accumulated depreciation, and a minimum cash liquidity balance of $10.0 million. 330 LLC also entered into environmental indemnity agreements related to both the Office Property and the Parking Garage, which obligations were also guaranteed by the Operating Partnership. The Guaranties also include a guaranty that approximately $15.3 million will be deposited into the leasing escrow from property cash flow within approximately two years of closing.

The Loans required the establishment of various customary and negotiated leasing, tenant improvements, real estate tax, ground lease rent, capital improvements, debt service and insurance reserves, all as more fully set forth in the loan documents, and totaling $6.5 million at closing (not including the escrows with the title insurance company referred to above). Net cash flow from the Office Property and the Parking Garage will be deposited into the escrows to fund future leasing, capital improvements and other costs relating to the Office Property and the Parking Garage.

1051 N. Kirk Road Sale. On May 2, 2008, we closed on the sale of our 1051 North Kirk Road property, a 120,004 square foot industrial property located in Batavia, Illinois. The net proceeds from the sale of $4.1 million were used to pay a release price to the lender of $4.2 million on the property. We recognized a book gain of $0.5 million in the second quarter of 2008.

On May 2, 2008, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the second quarter of 2008 dividend period. The quarterly dividend has a record date of July 10, 2008 and a payment date of July 31, 2008.

In addition, on May 2, 2008, our Board declared a distribution to the holders of the 26,488,389 common units in the Operating Partnership and a dividend to the holder of our 236,483 common shares, in an amount of $0.561275 per unit/share and having a record date of May 2, 2008 and a payment date of May 2, 2008.

BHAC Capital IV, L.L.C. Effective June 10, 2008, PGRT ESH extended the maturity date of the Citicorp Loan in the original principal amount of $120 million, from June 10, 2008 until June 15, 2009. The interest rate for the extension is at PGRT ESH’s election (a) one or three-month LIBOR plus 6% or (b) the lender’s base rate plus 4% per annum. The loan is non-recourse to PGRT ESH and is secured by, among other things, a pledge of PGRT ESH’s membership interest in BHAC, an entity that owns 100% of ESH. The loan is guaranteed by David Lichtenstein, the Chairman of our Board of Trustees, and Lightstone Holdings, LLC (“Guarantors”), both of which are affiliates of our parent company. In addition, affiliates of Guarantors recently repaid $25.0 million of principal of the loan and have been paying the debt service on the loan, all as capital contributions to the Company and, in turn, to PGRT ESH.

The loan extension has a $3.0 million restructuring fee payable in three installments through September 30, 2008, $2.0 million of which has already been paid by affiliates of Guarantors. The loan also has a $1.1 million exit fee. Future partial principal repayments of the loan are due as follows: (i) $5.0 million on July 31, 2008, (ii) $20.0 million on September 30, 2008, (iii) $20.0 million on December 31, 2008 and (iv) $20.0 million on March 31, 2009. Of the amount due on September 30, 2008 $10.0 million may be deferred at PGRT ESH’s election until December 31, 2008 provided that the interest rate on the loan will then increase by 2% per annum until such amount is paid. It is currently anticipated that all or a portion of these required repayments will be funded by affiliates of the Guarantors, although there can be no assurances that this will be the case.

4343 Commerce Court Refinancing. On June 4, 2008, we refinanced our 4343 Commerce Court property with a first mortgage loan in the principal amount of $11.6 million from Leaders Bank, with $0.9 million available for future fundings related to leasing costs. The proceeds of the loan were primarily utilized to repay the existing first mortgage loan encumbering the property in the principal amount of $10.2 million. The new loan bears interest at the variable rate of LIBOR plus 2.0% and has an interest rate collar that contains an interest rate ceiling of 6.5% and an interest rate floor of 4.5%. This loan has a 5-year term and requires monthly amortization payments based on a thirty-year amortization schedule.

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

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

As a requirement of our lenders, we maintain escrow accounts and restricted cash balances for particular uses. At December 31, 2007, these accounts totaled $41.7 million. These escrows relate to $17.3 million in escrow for capital and tenant improvements, $9.8 million in escrow for real estate taxes and insurance, $6.3 million in escrow representing lease obligations, $3.0 million in escrow for depository accounts, $1.0 million in escrow related to environmental remediation and a remaining $4.3 million in escrow for various other purposes.

Given our current level of debt, limited availability of unencumbered collateral and our current financing arrangements, we may not be able to obtain additional debt financing, refinance or extend our existing financings or, if we are able to do the foregoing, negotiate terms that are fair and reasonable. The following tables disclose our contractual obligations and commercial commitments as of December 31, 2007:


	Payments Due by Period
	(dollars in thousands)
					2009/		2011/		2013 and
Contractual Obligations(A)	Total		2008		2010		2012		Thereafter
Mortgage notes payable (B)	$	567,910	$	351,014	$	36,492	$	65,404	$	115,000
Operating lease obligations		2,882		561		482		442		1,397
Tenant improvement allowances (C)		10,337		10,337		—		—		—
Liabilities for leases assumed and lease reimbursement obligations (D)		43,556		10,040		17,805		15,711		—

Total contractual cash obligations	$	624,685	$	371,952	$	54,779	$	81,557	$	116,397


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

(B)		These totals represent the fair value of our mortgage notes payable as adjusted in conjunction with the application of purchase accounting related to the Acquisition. Also, as a result of the Acquisition, we are amortizing the fair value adjustment for our debt over the remaining life of the debt, which is recorded in the accretion of mortgage note payable. For the year ended December 31, 2007, amortization totaled $1.3 million. The actual amount owed to lenders for mortgage notes payable at December 31, 2007, is $565.1 million. Of this balance, $18.8 million was paid on January 7, 2008 to retire the outstanding balance on two Citicorp mezzanine loans. In addition, on March 18, 2008, a $195.0 million first mortgage and mezzanine loan was retired and refinanced by a new $138.0 million loan. Interest expense obligations related to mortgage notes payable total $89.9 million and are due as follows: $22.5 million in 2008; $26.5 million in 2009/2010; $14.1 million in 2011/2012; and $26.8 million in 2013/thereafter.

(C)		We have escrows of $9.0 million that may be utilized to fund these obligations.

(D)		These obligations would be offset by any receipts from subleasing of the related space. We currently have executed subleases that we estimate will provide subleasing receipts of $35.8 million consisting of base rent and the pro-rata share of operating expenses and real estate taxes. In addition, we have escrowed reserves totaling $6.3 million to fund a portion of this contractual amount at December 31, 2007.


				Amount of Commitment Expiration Per Period
	Total			(dollars in thousands)
	Amounts												2013 and
Other Commercial Commitments	Committed			2008			2009-2010			2011-2012			Thereafter
Guarantees (A)	$	2,756		$		(A)	$		(A)	$		(A)	$		(A)
Unconsolidated joint ventures (B)		80,820				(B)			(B)			(B)			(B)
Tax indemnifications (C)		14,018				(C)			(C)			(C)			(C)
Environmental remediation (D)		4,467			3,612			609			43			203
Series B Shares (E)			(E)		2,250				(E)			(E)			(E)

Total commercial commitments	$	102,061		$	5,862		$	609		$	43		$	203


(A)		This represents a guarantee for $2.8 million to ensure certain tenant improvement and lease commission payments are made with respect to the joint venture that owned an office building known as The United Building located at 77 West Wacker Drive in Chicago, Illinois. On January 7, 2008, we sold our joint venture interest in this property to our joint venture partner and no longer hold any ownership interest in this property.

(B)		We had a 50.0% common interest in an unconsolidated real estate joint venture that owned The United Building. The amount shown includes 50.0% of the balance of the $161.6 million mortgage note payable secured by the property.


		In addition, we have a 23.1% interest in an unconsolidated real estate venture, which owns a 0.1 million square foot office property in Phoenix, Arizona and subsequent to the sale of three of the four buildings owned by the venture in August 2005, is unencumbered.

(C)		We estimate our maximum possible exposure on tax indemnifications to be $14.0 million if the remaining indemnity property had been sold as of December 31, 2007. See Note 15 — Commitments and Contingencies — Tax Indemnities to our consolidated financial statements included in this report for further information.

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

(E)		Dividends are cumulative and payable at a 9.0% annual rate each quarter that our Series B Shares remain outstanding. On March 22, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the first quarter of 2007 dividend period. This quarterly dividend had a record date of April 9, 2007 and a payment date of April 30, 2007. On June 21, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the second quarter of 2007 dividend period. This quarterly dividend had a record date of July 6, 2007 and a payment date of July 31, 2007. On September 24, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the third quarter of 2007 dividend period. This quarterly dividend had a record date of October 8, 2007 and a payment date of October 31, 2007. On December 20, 2007, our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2007 dividend period. The quarterly dividend had a record date of January 10, 2008 and a payment date of January 31, 2008. Under our Charter, these dividends are deemed to be quarterly dividends relating to the first, second, third and fourth quarter 2007 dividend periods, the earliest accrued but unpaid quarterly dividends on our preferred shares.

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

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

Tenant Concentration. The following represents our five largest tenants in 2007 based on gross revenue recognized during 2007:


	Gross
	Tenant		% Of Our Total			Lease
Tenant	Revenue		Revenue			Expiration
	(dollars in thousands)
Jenner & Block (1)	$	13,339		11.9	%	April 2010
Ameriquest Mortgage Company		6,736		6.0		June 2011
Accenture		5,124		4.6		July 2015
Jones Day (2)		3,409		3.0		September 2022
United Airlines (2)		3,402		3.0		February 2022

	$	32,010		28.5	%


(1)		We have been informed that Jenner & Block will not be renewing their lease at expiration.

(2)		These are tenants of The United Building in which we had an ownership interest in the joint venture that owned the office property until our sale of such interest in January 2008 to our joint venture partner.

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

	•		the nature of the financial difficulties;

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

	•		market conditions;

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

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

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

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

On December 30, 2005, our Board declared a quarterly dividend of $0.5625 per share on our Series B Shares for the fourth quarter of 2005 for the shareholders of record on January 16, 2006. This dividend was paid on January 31, 2006. On February 9, 2006, our Board declared (i) a quarterly dividend on our Series B Shares for the first quarter of 2006 of $0.5625 per share with a record date of March 31, 2006 and a payment date of April 28, 2006 and (ii) a common distribution to the holders of the 26,488,389 common limited partnership interests in the Operating Partnership and declared a dividend to the holder of our 236,483 common shares, in an amount of $2.8438 per unit/share having a record date of February 9, 2006 and a payment date of February 10, 2006. On June 14, 2006, our Board decided not to declare a quarterly distribution on the Series B Shares for the second quarter of 2006, based on the Board’s review of our current capital resources and liquidity needs and the timing and uncertainty of certain previously anticipated capital events. On September 22, 2006, our Board declared a quarterly dividend on our Series B Shares for the second quarter 2006 of $0.5625 per share. The quarterly dividend had a record date of October 6, 2006 and a payment date of October 31, 2006. On December 14, 2006, based on the Board’s review of our current capital resources and liquidity needs and the completion of certain capital events, our Board decided to bring dividends on the Series B Shares current and declared for payment two quarterly dividends for the third and fourth quarters of 2006 on our Series B Shares of $0.5625 per share, per quarter, for a total dividend of $1.125 per share. The dividends had a record date of January 5, 2007 and a payment date of January 31, 2007.

Dividends paid in the amount of $2.8125 per share in 2007 on our Series B Shares have been determined to be ordinary dividends of $1.40625 per share and a return of capital of $1.40625 per share. There can be no assurances as to the timing and amounts of any future dividends on our Series B Shares and the payment of preferred dividends at this time should not be construed to convey any degree of certainty with respect to future preferred dividend payments. The holders of Series B Shares have the right to elect two additional members to our Board if six consecutive quarterly dividends on our Series B Shares are outstanding. The term of any trustees elected by the holders of the Series B Shares will expire whenever the total dividend arrearage on our Series B Shares has been paid and current dividends have been declared and set apart for payment.

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

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

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

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

Indebtedness. Our aggregate indebtedness had a fair market value of $567.9 million and a carrying value (i.e., face value of debt) of $565.1 million at December 31, 2007. This indebtedness had a weighted average maturity of 2.5 years and bore interest at a weighted average interest rate of 7.5% per annum. At December 31, 2007, $234.1 million, or 41.2% of such indebtedness, bore interest at fixed rates, and $333.8 million, or 58.8% of such indebtedness, bore interest at variable rates. Of the variable rate debt, $213.8 million is subject to interest rate cap agreements.

Interest Rate Protection Agreement. We have entered into the following interest rate cap agreements:

Notional

Capped

Amount as of

LIBOR/

December 31

Eurodollar

Effective

Expiration

Loan Associated with

2007

Rate

Date

330 N. Wabash Avenue
First Mortgage/Mezzanine Loans

195,000,000

6.6

3/15/07

3/15/08

Continental Towers
First Mortgage

75,000,000

6.5

5/02/05

5/01/08

PGRT Equity
Mezzanine Loans

47,000,000

4.8

1/03/06

1/03/08

PGRT Equity II
Mezzanine Loan

11,000,000

4.8

1/03/06

1/03/08

Under the terms of the interest rate protection agreements we made no payments in one-time fees during 2007 and $0.3 million and $0.1 million during 2006 and 2005, respectively. We received $0.3 million in 2007, $0.1 million in 2006 and no amounts were received in 2005. The fair value of these agreements was nominal at December 31, 2007, $0.3 million at December 31, 2006, and nominal at December 31, 2005.

In February 2007, we exercised the final extension option on the $195.0 million first mortgage loan secured by our 330 N. Wabash Avenue property and paid a $0.5 million extension fee, which extended the maturity date to March 10, 2008, and includes the cost of extending the interest rate cap agreement.

Debt Activity. We paid $1.8 million of principal payments during 2007.

Capital Improvements. In order to secure new and renewal leases, our properties require an infusion of capital for tenant improvements and leasing commissions. For the years ended December 31, 2007, 2006 and 2005, our tenant improvements and leasing commissions averaged $38.88, $27.60 and $32.74, respectively, per square foot of newly-leased office space totaling 405,680, 260,598 and 241,642 square feet, respectively, and $11.58, $9.13 and $16.18, respectively, per square foot of office leases renewed by existing tenants totaling 236,752, 155,110 and 285,957 square feet, respectively. For 2007, we incurred $9.8 million of capital improvement expenditures, excluding discontinued operations, and we expect to incur approximately $4.6 million for 2008.

Off-Balance Sheet Arrangements

As listed above, our share of mortgage debt of unconsolidated joint ventures is $80.8 million. On January 7, 2008, we sold our joint venture interest in The United Building to our joint venture partner. We do not have any other off-balance sheet arrangements with any unconsolidated investments or joint ventures that we believe have or are reasonably likely to have a material effect on our financial condition, results of operations, liquidity or capital resources.

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As of December 31, 2007, we are not involved in any unconsolidated SPE transactions.

Historical Cash Flows


	Year ended December 31
	2007			2006			$ Change			% Change
	(dollars in thousands)
				As Restated
Net cash provided by operating activities	$	1,134		$	638		$	496			77.7	%
Net cash (used in) provided by investing activities	$	(129,700	)	$	70,603		$	(200,303	)		(283.7	)%
Net cash provided by (used in) financing activities	$	106,348		$	(28,739	)	$	135,087			470.0	%

Cash Flows from Operating Activities. Net cash provided by operating activities was $1.1 million for the year ended December 31, 2007 compared to $0.6 million for the year ended December 31, 2006 — an increase of $0.5 million. The increase was primarily due to a $1.1 million refund of real estate taxes in the first quarter of 2007 associated with a former property and a $0.6 million lease termination fee from a tenant at our 330 N. Wabash Avenue property in the second quarter of 2007. In addition, we experienced the following favorable changes: a payment in 2006 of $4.2 million related to an amended tax indemnity agreement related to our Continental Towers property that did not occur in 2007; a $1.1 million decrease in Services Company expenses due to reduced income taxes; a $1.0 million decrease in the payment of insurance premiums for our properties; a $0.6 million increase in Services Company revenue due to additional leasing commissions; and $0.6 million of management fees for an office and retail building located at 1407 Broadway Avenue in New York, New York, which is owned by an affiliate of Lightstone. The increase was partially offset by a $8.5 million reduction of rental and tenant reimbursements receipts due to lower occupancy, primarily at our 330 N. Wabash Avenue and Continental Towers properties.

Cash Flows from Investing Activities. Net cash (used in) provided by investing activities was $(129.7) million for the year ended December 31, 2007 compared to $70.6 million for the year ended December 31, 2006 — a decrease of $200.3 million. In 2007, we invested $120.0 million in a membership interest in the unconsolidated entity that owns ESH (see Note 11 — Investments in Unconsolidated Joint Ventures to our consolidated financial statements included in this report for further information). In addition, in 2006, $92.8 million was received from the sale of our joint venture interest in Citadel Center net of a $4.0 million distribution to IPC Prime Equity, LLC (“IPC Equity”). These decreases were partially offset by a $6.2 million return of capital received from our investment in the unconsolidated entity that owns ESH, proceeds received in 2007 of $4.7 million related to the sale of our Narco River property. In addition, a net of $2.3 million became unrestricted and available for use from our restricted escrow accounts in 2007, whereas, a net of $4.1 million became restricted in 2006.

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


	Year ended December 31
	2006			2005			$ Change			% Change
	As Restated
	(dollars in thousands)
Net cash provided by (used in) operating activities	$	638		$	(5,423	)	$	6,061			111.8	%
Net cash provided by (used in) investing activities	$	70,603		$	(57,786	)	$	128,389			222.2	%
Net cash (used in) provided by financing activities	$	(28,739	)	$	9,087		$	(37,826	)		(416.3	)%

Cash Flows from Operating Activities. Net cash provided by (used in) operating activities was $0.6 million for the year ended December 31, 2006 compared to $(5.4) million for the year ended December 31, 2005 — an increase of $6.1 million. This increase is mainly attributable to a reduction in strategic alternative expenses of $10.3 million, a return on investment of $4.2 million, an increase in total revenues of $2.4 million and a decrease in general, administrative and severance expenses of $1.7 million in 2006 compared to 2005. This increase was partially offset by: a $6.4 million reduction of income from operations earned from our 208 South LaSalle Street property, which was sold in December 2005; a payment in 2006 of $4.2 million in connection with an amended tax indemnity agreement related to our Continental Towers property; and a $1.1 million tax refund received in 2005 related to our former 33 West Monroe Street property for taxes paid in 2004.

Cash Flows from Investing Activities. Net cash provided by (used in) investing activities was $70.6 million for the year ended December 31, 2006 compared to $(57.8) million for the year ended December 31, 2005 — an increase of $128.4 million. This increase was due to an increase of $88.6 million in distributions from the sale of our joint venture interest in Citadel Center and the sale of a land parcel located in Libertyville, Illinois, partially offset by a distribution of $4.0 million to IPC Equity. This compares to a $9.8 million receipt from the Citadel Center joint venture, a $3.9 million distribution received from the Plumcor/Thistle joint venture and $0.6 million in proceeds from the sale of a different Libertyville land parcel during 2005. In January 2006, loan proceeds of $55.0 million that were in a restricted escrow account in the fourth quarter of 2005 were funded to us and available for operations. Additionally, we funded $1.2 million into the escrows associated with two Citicorp mezzanine loans, and an additional $2.5 million for leasing costs and tenant improvements at our 330 N. Wabash Avenue property in 2006 compared to 2005.

Cash Flows from Financing Activities. Net cash (used in) provided by financing activities was $(28.7) million for the year ended December 31, 2006 compared to $9.1 million for the year ended December 31, 2005 — a decrease of $37.8 million. This decrease was primarily a result of loan activity and dividends paid. Specifically, loan proceeds received of $55.0 million that were in a restricted escrow account in the fourth quarter of 2005 became unrestricted and available for operations in January 2006. This $55.0 million loan was fully retired in conjunction with the previously discussed sale of Citadel Center. We received net proceeds of $37.9 million and $9.6 million from the refinancing of our Continental Towers property in 2006 and 2005, respectively. Proceeds from the 2006 Continental Towers refinancing were used to pay $39.2 million of principal on the $58.0 million Citicorp mezzanine loan that was funded in January 2006. Also, dividends totaling $82.8 million and $50.3 million were paid in 2006 and 2005, respectively.

Critical Accounting Policies

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

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

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

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

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

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

Assumed Lease Liabilities. As a result of the negotiation of certain leases, we assumed the liability for the tenants’ obligation or agreed to reimburse the tenants for their obligation under leases with their prior landlords. In addition, in connection with the sale of certain industrial properties in 1999, we agreed to a master lease agreement for certain properties for a defined period. Our policy is to record the estimated net obligation we may be subject to as a liability. The net obligation is derived by calculating our total contractual obligation and reducing the amount by existing subleases and an estimate of subleases we anticipate signing in the future based on the nature of the space, the property and market conditions. We periodically review these estimates for reasonableness based on changes in market conditions and executed subleases. Failure to achieve forecasted results could lead to a future increase in the liabilities associated with these transactions. The liability for leases assumed at December 31, 2007 as compared to 2006 reflects payments under these leases, in addition to an increase in the liability during 2007 of $0.5 million due to assumption changes.

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

Interest Rate Protection Agreements. We recognize all derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments that qualify for hedge accounting are recorded in stockholder’s equity as a component of comprehensive income or as an adjustment to the carrying value of the hedged item. Changes in fair values of derivatives not qualifying for hedge accounting are reported in earnings.

Interest rate hedges that are designated as cash flow hedges, hedge the future cash outflows on debt. Interest rate swaps that convert variable payments to fixed payments, interest rate caps, floors, collars and forwards are cash flow hedges. The unrealized gains/losses in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to either accumulated other comprehensive income or in earnings, depending on the type of hedging relationship. If the hedging transaction is a cash flow hedge, then the offsetting gains and losses are reported in accumulated other comprehensive income. Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings. This reclassification is consistent when the hedged items are also recognized in earnings. Since the time of the Acquisition all of our derivative instruments have been marked to their fair value. We do not foresee any material accumulated other comprehensive income being reclassified to earnings during the next twelve months. If a derivative instrument is terminated or the hedging transaction is no longer determined to be effective, amounts held in accumulated other comprehensive income are reclassified into earnings over the term of the future cash outflows on the related debt.

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

At December 31, 2007, we determined that no reserves were warranted. In evaluating our other long-lived assets used in operations for impairment at December 31, 2007, we assumed anticipated hold periods of three to five years for our operating properties. In evaluating our property held for development, we concluded that development expenditures, including capitalized interest, were recoverable and no reserves were warranted at this time. However, as discussed under “Liquidity and Capital Resources”, if we determine that a capital transaction is desired, our anticipated hold periods for certain assets would be shortened and impairment reserves could be required. These reserves could have significant impacts on our operating results.

Minority Interest in Consolidated Real Estate Partnerships. Interests held in consolidated real estate partnerships by limited partners other than the Company are reflected as minority interest in consolidated real estate partnerships. Minority interest in real estate partnerships represents the minority partners’ share of the underlying net assets of the Company’s consolidated real estate partnerships. When these consolidated real estate partnerships make cash distributions in excess of net income, the Company, as the majority partner, records a charge equal to the minority partners’ excess of distributions over net income when the partnership has deficit equity. This charge is classified in the consolidated statements of operations as distributions and losses to minority partners in excess of basis. Losses are allocated to minority partners until such time as such losses exceed the minority interest basis, in which case the Company recognizes 100% of the losses in operating earnings. With regard to such consolidated real estate partnerships, approximately $14.2 million in losses related to the minority interest ownership were charged to operations for the year ended December 31, 2007, and no losses were charged to operations for the years ended December 31, 2006 and 2005.

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

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

Impact of Recently Issued Accounting Standards

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

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

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

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

Inflation

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

As of December 31, 2007, approximately $333.8 million of our outstanding indebtedness was subject to interest at floating rates. Future indebtedness may also be subject to floating rate interest. Inflation, and its impact on floating interest rates, could affect the amount of interest payments due on such indebtedness. Of our floating rate debt, $213.8 million is subject to interest rate cap agreements that are designed to mitigate some of this risk.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following table provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For our mortgage notes payable, the table presents principal cash flows, including principal amortization, and related weighted-average interest rates by expected maturity dates as of December 31, 2007. For the interest rate protection agreement, the table presents the notional amount entered into and the cap rate.


	Interest Rate Sensitivity
	Principal (Notional) Amount by Expected Maturity
	Average Interest Rate
	2008			2009			2010			2011			2012		Thereafter			Total
	(dollars in millions)
Liabilities
Mortgage notes payable (1):
Fixed rate amount — Carrying Value	$	16.1		$	1.7		$	33.1		$	65.4		$	—	$	115.0		$	231.3
Weighted-average interest rate — Carrying Value		7.1	%		6.4	%		8.3	%		5.6	%		—		5.9	%		—

Fixed rate amount — Fair Value	$	17.2		$	2.7		$	33.8		$	65.4		$	—	$	115.0		$	234.1
Weighted-average interest rate — Fair Value		7.2	%		7.2	%		8.3	%		5.6	%		—		5.9	%		—

Variable rate amount (2)	$	333.8		$	—		$	—		$	—		$	—	$	—		$	333.8
Weighted-average interest rate		8.3	%		—			—			—			—		—			—

Interest rate cap agreements (3):
Notional amount	$	213.8		$	—		$	—		$	—		$	—	$	—		$	213.8
Weighted-average cap rate		9.4	%		—			—			—			—		—			—


(1)		Based upon the rates in effect at December 31, 2007, the weighted-average interest rates on our mortgage notes payable at December 31, 2007 was 7.5%. If interest rates on our variable rate debt increased by one percentage point, our annual interest incurred (excluding the effects of the interest rate protection agreements) would increase by $3.3 million.

(2)		On June 29, 2007, through one of our subsidiaries, PGRT ESH, we obtained a $120.0 million non-recourse loan from Citicorp. The loan is interest only and accrues interest at a variable rate of 4.0% above LIBOR or 1.50% above Citicorp’s base interest rate, as selected by PGRT ESH from time to time. The loan has a maturity date of June 10, 2008, and is guaranteed by Lightstone Holdings, and our Chairman of the Board, Mr. David Lichtenstein.

		In February 2007, the final extension option on the $195.0 million 330 N. Wabash Avenue loan was purchased for $0.5 million, which extended the maturity date to March 10, 2008 and included the costs of extending the interest rate cap agreement.

(3)		In connection with the 330 N. Wabash Avenue loan extension we obtained an interest rate cap of LIBOR at 6.6% with a notional amount of $195.0 million for the term of the outstanding debt collateralized by our 330 N. Wabash Avenue property. In March 2008, this debt was retired and replaced with a new $138.0 million first mortgage loan.

		In January 2006, a mezzanine loan for $58.0 million was obtained and collateralized by a pledge of our holdings of Prime Equity. In addition, we purchased an interest rate protection agreement which caps the total interest rate at 9.1%. On November 21, 2006, $39.2 million of principal was repaid, leaving an outstanding balance of $18.8 million. This remaining balance was subsequently paid on January 7, 2008 utilizing proceeds from the sale of our joint venture interest in The United Building to our joint venture partner.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by Regulation S-X are included in this Report on Form 10-K/A (Amendment No. 1) commencing on page F-1.


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

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures (Restated)

As described above in the “Explanatory Note” to this Amendment and in Note 17 to our consolidated financial statements, on August 20, 2008, the Audit Committee, in consultation with members of our management, determined that our distributions to the owners of the common units of the Operating Partnership were incorrectly recorded in our consolidated financial statements. In addition, as disclosed in the Company’s Current Report on Form 8-K filed February 18, 2009, it was determined that a $4.2 million tax indemnification payment made in January 2006 was incorrectly recorded. Accordingly, we determined that we should restate our consolidated financial statements for the years ended December 31, 2006 and 2007 to correct the misclassifications.

Our management evaluated, under the supervision and with the participation of our Chief Executive Officer and our Executive Vice President —Capital Markets, the officer currently performing the function of our principal financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2007. Based on that initial evaluation, our Chief Executive Officer and Executive Vice President —Capital Markets concluded that, as of December 31, 2007, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), were effective.

Subsequent to that evaluation and in connection with the restatement and filing of this Amendment, under the supervision and with the participation of our Chief Executive Officer and our Executive Vice President —Capital Markets, our management reevaluated the effectiveness of our disclosure controls and procedures and determined that our disclosure controls and procedures were not effective as of December 31, 2007. As described below, management concluded that our internal disclosure controls and procedures had a material weakness as of December 31, 2007 because of the failure of such controls to prevent the restatements disclosed above. We recognize that internal control over financial reporting is an integral component of our disclosure controls and procedures.

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

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

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

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. In Management’s Report on Internal Control over Financial Reporting included in the Company’s original Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on July 23, 2008, management previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2007. Management subsequently concluded, based on the failure of such controls to prevent the restatements described above, that the material weakness described below existed as of December 31, 2007. Accordingly, management has restated its report on internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting were not effective as of December 31, 2007 due to the material weakness further discussed below. Management’s evaluation was based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.

A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

In connection with the restatement of the Company’s financials statements as of December 31, 2006 and 2007, we identified the following material weakness in our internal control over financial reporting:

	•		Accounting for distributions made to our minority interest partner. Specifically, our policies and procedures did not provide for periodic review of the proper accounting for distributions and dividends, and our personnel did not possess sufficient technical expertise related to the application of EITF 95-7 (Implementation Issues Related to the Treatment of Minority Interests in Certain Real Estate Investment Trusts). The Company had accounted for distributions to the owners of the Operating Partnership common units as a dividend of the Company and has recorded such dividends as a reduction of retained earnings (or equity) when it should have accounted for these distributions as a distribution to minority interest-operating partnership (a liability account).

	•		Accounting for tax indemnity payment. The Company did not possess sufficient technical expertise related to the application of Statement of Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations.” The Company had determined that the tax indemnification payment made in January 2006 that was previously capitalized as building improvements as a purchase price allocation under SFAS No. 141 should have been charged to operations.

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

Plan for Remediation for Material Weakness

Management has prepared an action plan for the remediation of all identified deficiencies at December 31, 2007. The status of this plan will be monitored by management and reviewed by the Audit Committee periodically.

With respect to the identified material weakness, we will review and assess our internal controls, processes and procedures to timely and properly monitor, evaluate and record complex tax and accounting matters in accordance with US GAAP. In cases where complex accounting issues occur, we intend to consult with external financial reporting and accounting consultants to review and support our conclusions.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Trustees

The following table presents certain information as of March 1, 2008 concerning each of our trustees serving in such capacity:


		Principal	Year Term of	Served as a
		Occupation and	Office Will	Trustee
Name	Age	Positions Held	Expire	Since
David Lichtenstein	47	Chairman of the Board	2008	2005
Jeffrey A. Patterson	48	President and Chief Executive Officer, Trustee	2008	2005
Peyton Owen, Jr.	51	Trustee	2008	2007
John M. Sabin	53	Independent Trustee	2008	2005
Shawn R. Tominus	48	Independent Trustee	2008	2005
Bruno de Vinck	62	Trustee	2008	2005
George R. Whittemore	58	Independent Trustee	2008	2005

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

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

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

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

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

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

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

Executive Officers

The following table presents certain information as of March 1, 2008 concerning each of our executive officers and key employees serving in such capacities:


Name	Age	Position
David Lichtenstein	47	Chairman of the Board
Jeffrey A. Patterson	48	President and Chief Executive Officer, Trustee
James F. Hoffman	45	Senior Executive Vice President—General Counsel and Secretary
Steven R. Baron	59	Executive Vice President—Leasing
Paul G. Del Vecchio	43	Executive Vice President—Capital Markets
Victoria A. Cory	43	Senior Vice President—Loan Administration, Real Estate Tax and Due Diligence
Anita T. Pallardy	49	Senior Vice President—Leasing

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

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

Steven R. Baron. Mr. Baron serves as our Executive Vice President—CBD Office Leasing. In this capacity, Mr. Baron is the leasing executive responsible for the The United Building at 77 West Wacker Drive and Citadel Center at 131 South Dearborn in Chicago. Mr. Baron is also involved in performing certain asset management and development services in connection with the 1407 Broadway Avenue building in New York. Mr. Baron has previously served as the Executive Vice President in charge of our Industrial Group, responsible for portfolio leasing and build to suit development and served as our Senior Vice President—Development and Leasing, where he was responsible for the oversight of our redevelopment of the 180 North LaSalle Street building in Chicago, Illinois. Prior to joining Prime Group Realty Trust, Mr. Baron held senior leasing and/or development positions with The Prime Group, Inc., Metropolitan Structures, Inc., and Stein & Co. where he leased over 7 million square feet of CBD office space. Mr. Baron is a licensed real estate broker and has taught at DePaul University and Kellogg School of Management at Northwestern University, where he lectured on commercial real estate development, leasing and marketing.

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

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

Based solely on our review of the copies of Forms 3, 4 and 5 and the amendments thereto received by it for the year ended December 31, 2007, or written representations from certain reporting persons that no Forms 3, 4 or 5 were required to be filed by those persons, to our knowledge, no transactions were reported late during the year ended December 31, 2007.

Code of Ethics

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

Information Regarding Audit Committee

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

Information Regarding Compensation Committee (or equivalent)

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

The members of our Board’s Executive Committee, consisting of Mr. Lichtenstein, our Chairman, Mr. Patterson, our President and Chief Executive Officer and Mr. Owen, a member of our Board, periodically review our compensation practices. Our compensation program consists of a base salary and opportunity to receive a cash bonus for our executive officers, and fees for our trustees. The Executive Committee reviewed in January 2008 the compensation of our executive officers and determined the cash bonuses for 2007 to be paid to our executive officers based on the performance of each executive officer and the Company during 2007. Fees for our trustees are unchanged for calendar years 2007 and 2008. Mr. Patterson’s bonus for 2007 and base salary for 2008 were set pursuant to the terms of his employment agreement, which was previously approved by our Board.

Although we have in the past and may again in the future engage compensation consultants to review our compensation program, we did not engage a compensation consultant to assist us in determining compensation for calendar year 2007.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

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

We believe that, through the foregoing employment agreements and arrangements, the financial interests of our President and Chief Executive Officer and key executives are as a whole aligned with the interests of our shareholders. Throughout 2007, we had employment agreements with certain of our senior executives. See “ — Employment Agreements” for more information regarding these employment agreements.

Mr. Patterson was named the Company’s President and Chief Executive Officer in August 2004, prior to the Acquisition. Mr. Patterson’s annual base salary was $437,091 for calendar year 2007 and pursuant to the terms of his employment agreement was increased by 3% to $450,203 for calendar year 2008. Mr. Patterson received an annual bonus of $542,913 for 2007.

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

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

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

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

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

Summary Compensation Table

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


									All Other
							Option		Compen-
			Salary		Bonus		Awards		sation ($)
Name and Principal Position	Year		($) (1)		($) (1)(2)		($) (3)		(4)		Total ($)
Jeffrey A. Patterson		2007		437,091		542,913		106,000		5,500		1,091,504
President and Chief Executive Officer		2006		424,360		500,000		153,400		5,500		1,083,260

James F. Hoffman		2007		242,500		227,087		0		5,500		475,087
Senior Executive Vice President—		2006		233,400		215,000		0		5,500		453,900
General Counsel and Secretary

Anita T. Pallardy		2007		126,161		293,696		0		3,154		423,011
Senior Vice President—Leasing		2006		120,000		191,053		0		3,000		314,053

Paul G. Del Vecchio		2007		180,000		120,000		0		5,500		305,500
Executive Vice President—Capital Markets		2006		159,650		110,000		0		5,500		275,150

Steven R. Baron		2007		94,045		127,529		0		5,313		226,887
Executive Vice President—Leasing		2006		0		0		0		0		0


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

(2)		Bonus amounts for 2007 include cash bonuses paid in the ordinary course for services performed in 2007. Further, Ms. Pallardy and Mr. Baron received leasing bonuses of $293,696 and $127,529, respectively, which are included in the table above.

(3)		Consisting of grants of options to acquire either directly or through equity interests in Prime Office a 3.5% ownership interest in the Operating Partnership and us on substantially the same economic terms as Prime Office’s other initial equity investors. The option award in the 2006 row expired on December 31, 2007 without being exercised. In January 2008, Mr. Patterson and Prime Office entered into a new option agreement dated as of December 31, 2007, as more fully described in “Employment Agreements” below.

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

Employment Agreements

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

The employment agreements provide for initial base salaries of $412,000 and $226,600, respectively, with the base salary of Mr. Patterson increasing to $424,000 in 2006 and increasing each year thereafter by no less than three percent. Mr. Hoffman’s employment agreement provides that his base salary will increase by no less than three percent each year beginning in 2006. Further, the employment agreements of both Messrs. Patterson and Hoffman provide for the opportunity for the executives to earn annual bonus compensation as set forth in the respective employment agreement. Mr. Patterson’s agreement provides for an annual bonus based on increases in the net operating income for our properties, subject to a minimum annual bonus of $500,000 for calendar years 2005, 2006 and 2007. The employment agreements each have an initial thirty month term and automatically renew for successive one year terms, unless either party gives written notice of termination to the other party. The employment agreements required us to pay to the executives at the closing of the Acquisition, certain “change of control” payments in accordance with the prior employment agreements between us and the executives.

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

Assuming on December 31, 2007 Mr. Patterson’s employment with us was terminated pursuant to any of clause (i) through (v) above, the estimated value of Mr. Patterson’s severance pursuant to his employment agreement would be $950,204, which is the bonus compensation payable to Mr. Patterson with respect to the calendar year 2007 and the aggregate base compensation payable to Mr. Patterson through December 31, 2008. Assuming on December 31, 2007 Mr. Hoffman’s employment with us was terminated pursuant to any of clause (i) through (v) above, the estimated value of Mr. Hoffman’s severance pursuant to his employment agreement would be $472,500, which is based on and includes the bonus compensation payable to Mr. Hoffman with respect to the calendar year 2007 and the aggregate base compensation payable to Mr. Hoffman through December 31, 2008. There are no material conditions to receipt by the executives of these termination benefits. The amount and terms of these severance arrangements was determined by Prime Office, and included consideration of market practices for other similar officers of comparable companies.

The employment agreements also subject the executives to certain confidentiality obligations and non-solicitation restrictions, and in the case of Mr. Patterson certain non-competition restrictions, all as more fully set forth in the agreements. Mr. Patterson’s agreement also granted him an option for eighteen months after the closing date of the Acquisition to acquire membership interests in Prime Office equivalent to a 3.5% ownership interest in the Operating Partnership and us. Pursuant to a letter agreement dated March 15, 2007, between Mr. Patterson and Prime Office, Mr. Patterson and Prime Office agreed to extend the exercise period for the options to the earlier of the occurrence of a change of control involving the Company or December 31, 2007. This option expired on December 31, 2007. In January 2008, Mr. Patterson and Prime Office, entered into an Equity Option Agreement dated as of December 31, 2007, granting Mr. Patterson an option to acquire either directly or through equity ownership in Prime Office up to 3.5% of the equity interests in the Company and the Operating Partnership pursuant to the terms set forth in such agreement. The purchase price for the interest is on substantially the same economic terms

as the class, price and economic terms applicable to Prime Office’s other initial equity investors, taking into account both capital contributions and distributions since the date of the investors’ original investment. In addition, the purchase price for the equity shall be increased at the rate of seven percent (7%) per year, pro-rated on a per diem basis, from January 1, 2007, through the date of the closing of the purchase of the equity. The option expires on December 31, 2008, subject to earlier termination if not exercised prior to Mr. Patterson’s termination of employment under his employment agreement. The closing on the purchase of the equity may only be effective on the earlier of (i) immediately preceding a “change of control” as defined in Mr. Patterson’s employment agreement and (ii) December 31, 2008. The closing will still occur and the exercise of the option will be effective if Mr. Patterson’s employment is terminated in connection with or in anticipation of a “change of control” or otherwise after the exercise of the option but prior to the closing on the purchase of the equity.

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

Option Grants, Exercises and Holdings

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

Compensation of Trustees

The following table sets forth the compensation earned for the year ended December 31, 2007 with respect to our trustees other than Mr. Patterson (who is also a Named Executive Officer) and whose compensation as a trustee is fully reflected in the Summary Compensation Table and other portions of this Form 10-K. In addition to trustees’ fees, our trustees receive reimbursement of all travel and lodging expenses related to their attendance at both Board and committee meetings. As of December 31, 2007, our trustees did not hold any options to purchase our common shares or hold any of our common shares.


	Fees Earned
	or Paid in
Name	Cash ($) (1)
David Lichtenstein		0
John M. Sabin		45,500
Peyton Owen, Jr. (2)		8,924
Michael M. Schurer (2)		31,152
Shawn R. Tominus		45,500
Bruno de Vinck		32,000
George R. Whittemore		50,500


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


(2)		On September 18, 2007, Michael M. Schurer resigned from his position as a Trustee on our Board because he had decided to resign his position as the Chief Financial Officer of the Company’s parent company, Lightstone. On September 24, 2007, the Board of Trustees of the Company elected Peyton Owen, Jr. as a non-independent trustee of our Board and a member of the Executive Committee of the Board, to replace Mr. Schurer. Mr. Owen is currently the President and Chief Operating Officer of Lightstone.

Compensation Committee Interlocks and Insider Participation

Our Chairman and the Executive Committee of our Board are charged with determining compensation for our President and Chief Executive Officer. Mr. Patterson is a member of our Board and our President and Chief Executive Officer. No executive officer of ours served as a (i) member of the compensation committee of another entity in which one of the executive officers of such entity served on our Board or (ii) director of another entity in which one of the executive officers of such entity served on our Board, during the year ended December 31, 2007.

Compensation Report

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

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

BOARD OF TRUSTEES

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


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

Principal Security Holders Of The Company

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

The following table furnishes information, as of March 1, 2008, as to common units of our Operating Partnership, in each case which are beneficially owned by each trustee, each Named Executive Officer and trustees and executive officers as a group. Unless otherwise indicated in the footnotes to the tables, all of such interests are owned directly, and the indicated person or entity has sole voting and investment power.


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

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


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

(2)		Mr. Lichtenstein controls (i) Prime Office which owns 78.49% of the common units of limited partner interest in the Operating Partnership and 100% of our common shares and (ii) Park Avenue Funding, LLC, which owns 20.63% of the common units of limited partner interest in the Operating Partnership.

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

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

Equity Compensation Plan Information

As of December 31, 2007, we do not have any equity securities that may be issued upon the exercise of options, warrants and rights under a share incentive plan because our share incentive plan was terminated as a part of the Acquisition on July 1, 2005. The Company has no other compensation plans pursuant to which equity securities may be issued.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with Related Persons

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

In addition, on February 1, 2007, our Board approved of us, through one or more of our subsidiaries, entering into agreements with other affiliates of Lightstone to perform certain asset management services for several other portfolios of properties owned by affiliates of Lightstone. However, these arrangements described in this paragraph were never finalized since Lightstone hired separate personnel to manage these portfolios.

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

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

The $120.0 million membership interest has a liquidation preference of $120.0 million, a 12.0% preferred dividend rate per annum, and is entitled to receive a 15.14% residual profits interest. Through December 31, 2007, PGRT ESH received distributions monthly at a 10% rate per annum, with the remaining 2% accruing pursuant to the terms of BHAC’s organizational documents. However, PGRT ESH has not received any distributions since December 31, 2007 as described below. The membership interest generally has no voting rights, PGRT ESH’s consent is generally required to amend, alter or repeal any provision that materially or adversely affects the powers, rights, privileges or preferences of PGRT ESH’s membership interest.

The purchase price was financed by a $120.0 million non-recourse loan to PGRT ESH from Citicorp, which loan is secured by a pledge of the membership interest and any proceeds from such interest. The loan has a maturity date of June 10, 2008, and an interest rate of 4.0% above LIBOR or 1.50% above Citicorp’s base interest rate, as selected by PGRT ESH from time to time. The loan is guaranteed by Lightstone Holdings and David Lichtenstein.

In January 2008, PGRT ESH was informed that BHAC was temporarily suspending distributions on the membership units held by PGRT ESH, and the suspension is estimated to last through 2008. Since that time, the debt service on the Citicorp Loan, which is non-recourse to PGRT ESH, was funded with the proceeds of a $4.4 million capital contribution by Prime Office to the Company and, in turn, to PGRT ESH.

Review, Approval or Ratification of Transaction with Related Persons

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

Director Independence

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit And Non-Audit Fees

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


	Grant Thornton LLP				Ernst & Young LLP				Total
	2007		2006		2007		2006		2007		2006
Audit Fees	$	357,375	$	484,709	$	16,000	$	17,000	$	373,375	$	501,709
Audit-Related Fees		168,944		122,225		—		49,000		168,944		171,225
Tax Fees		230,370		288,185		119,499		8,000		349,869		296,185

	$	756,689	$	895,119	$	135,499	$	74,000	$	892,188	$	969,119

Neither Ernst & Young LLP, our independent registered public accounting firm until October 2005, nor Grant Thornton LLP, our independent registered accounting firm from October 2005, provided any financial information systems design and implementation services during 2007 or 2006. Audit-related services generally include fees for 401(k) plan and individual property audits, due diligence, technical consulting and transaction structuring. Tax services generally relate to a review of tax returns prior to filing, tax consultation and transaction structuring.

The audit committee has adopted policies and procedures for pre-approving all non-audit work performed by our independent registered public accounting firm. Specifically, the audit committee has pre-approved the use of Grant Thornton LLP, and had pre-approved prior to October 5, 2005, Ernst & Young LLP, for detailed, specific types of services within the following categories of non-audit services: certain tax related services (including tax compliance matters, REIT compliance, federal state and local tax audits, private letter rulings, technical tax guidance and corporate acquisition, disposition and partnership tax matters); registration statements and related matters; debt covenant compliance letters; technical accounting guidance; internal control documentation; and SEC comment letters. Further, the audit committee has required management to report to it on an annual basis (or as more frequently as the audit committee may request) the specific engagements of our independent registered public accounting firm pursuant to the pre-approval policies and procedures. All engagements of either Grant Thornton LLP or Ernst & Young LLP related to the audit-related fees and tax fees disclosed in the table above for 2006 and 2007 were eligible to be approved pursuant to our pre-approval policies, though some engagements were specifically approved by the audit committee prior to the commencement of the engagement.

PRIME GROUP REALTY TRUST

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


(a) (1) Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm			F-2

Consolidated Balance Sheets as of December 31, 2007 (as restated) and 2006 (as restated)			F-3

Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2007 (as restated), December 31, 2006 (as restated), for the six months ended December 31, 2005 (successor company) and for the six months ended June 30, 2005 (predecessor company)			F-4

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2007 (as restated), December 31, 2006 (as restated), for the six months ended December 31, 2005 (successor company) and for the six months ended June 30, 2005 (predecessor company)			F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2007 (as restated), December 31, 2006 (as restated), for the six months ended December 31, 2005 (successor company) and for the six months ended June 30, 2005 (predecessor company)			F-6

Notes to Consolidated Financial Statements			F-8

Financial Statement Schedule

Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2007 (as restated)			F-51

Financial Statements of Significant Subsidiary			F-55

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

(3) Exhibits


Exhibit
Number		Description

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

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

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

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

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

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

	10.1	Loan Agreement dated as of March 10, 2003 between Lehman Brothers Bank FSB and 330 N. Wabash Avenue, L.L.C., as filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.

	10.2	Promissory Note dated as of March 10, 2003 from 330 N. Wabash Avenue, L.L.C. in favor of Lehman Brothers Bank FSB, as filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.

	10.3	Guaranty dated as of March 10, 2003 by Prime Group Realty, L.P. for the benefit of Lehman Brothers Bank FSB, as filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.

	10.4	Guaranty dated as of March 10, 2003 by Prime Group Realty, L.P. for the benefit of Lehman Brothers Bank FSB, as filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.

	10.5	Guaranty dated as of March 10, 2003 by Prime Group Realty, L.P. for the benefit of Lehman Brothers Bank FSB, as filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.


Exhibit
Number		Description

	10.6	Mezzanine Loan Agreement dated as of May 28, 2003 between Lehman Brothers Holdings Inc. and 330 N. Wabash Mezzanine, L.L.C., as filed as Exhibit 10.15 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.

	10.7	Promissory Note dated as of May 28, 2003 from 330 N. Wabash Mezzanine, L.L.C. in favor of Lehman Brothers Holdings Inc., as filed as Exhibit 10.16 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.

	10.8	Guaranty dated as of May 28, 2003 by Prime Group Realty, L.P. for the benefit of Lehman Brothers Holdings Inc., as filed as Exhibit 10.17 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.

	10.9	Guaranty dated as of May 28, 2003 by Prime Group Realty, L.P. for the benefit of Lehman Brothers Holdings Inc., as filed as Exhibit 10.18 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.

	10.10	Guaranty dated as of May 28, 2003 by Prime Group Realty, L.P. for the benefit of Lehman Brothers Holdings Inc., as filed as Exhibit 10.19 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.

	10.11	Amendment to Loan Agreement dated as of May 28, 2003 between 330 N. Wabash Avenue, L.L.C. and Lehman Brothers Bank FSB, as filed as Exhibit 10.20 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.

	10.12	Omnibus Amendment to Loan Documents dated as of May 28, 2003 between 330 N. Wabash Avenue, L.L.C. and Lehman Brothers Bank FSB, as filed as Exhibit 10.21 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.

	10.13	Amendment to Guaranty dated as of May 28, 2003 between Prime Group Realty, L.P. and Lehman Brothers Bank FSB, as filed as Exhibit 10.22 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.

	10.14	Termination of $4,000,000 Mortgage Guaranty Note dated as of May 28, 2003 between Prime Group Realty, L.P. and Lehman Brothers Bank FSB, as filed as Exhibit 10.23 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.

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

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


Exhibit
Number			Description

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

	10.18		Sale and Purchase Agreement dated as of May 18, 2005 by and between LaSalle-Adams, L.L.C. and Prime/Mansur Investment Partners, LLC, as filed as exhibit 10.7 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.

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

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

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

	10.22		Loan Agreement dated as of December 30, 2005 between Prime Dearborn Equities LLC and IPC Investments Holdings Canada Inc. as filed as exhibit 10.1 to our Current Report on Form 8-K (filed January 11, 2006, File No. 001-13589) and incorporated herein by reference.

	10.23		Investment Agreement dated as of December 30, 2005 among The Lightstone Group, LLC and IPC Prime Equity, LLC, as filed as exhibit 10.2 to our Current Report on Form 8-K (filed January 11, 2006, File No. 001-13589) and incorporated herein by reference.

	10.24		First Amendment to Investment Agreement dated as of December 30, 2005 among The Lightstone Group, LLC and IPC Prime Equity, LLC, as filed as exhibit 10.3 to our Current Report on Form 8-K (filed January 11, 2006, File No. 001-13589) and incorporated herein by reference.

	10.25		Note dated as of December 30, 2005 from Prime Dearborn Equities LLC to IPC Investments Holdings Canada Inc., as filed as exhibit 10.4 to our Current Report on Form 8-K (filed January 11, 2006, File No. 001-13589) and incorporated herein by reference.


Exhibit
Number		Description

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

	10.27	Loan Agreement dated as of January 10, 2006 between PGRT Equity LLC and Citicorp USA, Inc., as filed as filed as exhibit 10.1 to our Current Report on Form 8-K (filed January 18, 2006, File No. 001-13589) and incorporated herein by reference.

	10.28	Guaranty dated as of January 10, 2006 by David Lichtenstein in favor of Citicorp USA, Inc., as filed as exhibit 10.2 to our Current Report on Form 8-K (filed January 18, 2006, File No. 001-13589) and incorporated herein by reference.

	10.29	Promissory Note dated as of January 10, 2006 from PGRT Equity LLC in favor of Citicorp USA, Inc., as filed as exhibit 10.3 to our Current Report on Form 8-K (filed January 18, 2006, File No. 001-13589) and incorporated herein by reference.

	10.30	Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of January 10, 2006 by 280 Shuman Blvd., L.L.C. to and for the benefit of Citicorp USA, Inc., as filed as exhibit 10.4 to our Current Report on Form 8-K (filed January 18, 2006, File No. 001-13589) and incorporated herein by reference.

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

	10.32	Assumption, Consent and Modification Agreement dated as of January 10, 2006 by and among Chicago Title Land Trust Company, as trustee under Land Trust Numbers 40935 and 5602, Continental Towers Associates-I, L.P., Continental Towers, L.L.C., SunAmerica Life Insurance Company, Prime Group Realty, L.P. and Prime Group Management, LLC, as filed as exhibit 10.6 to our Current Report on Form 8-K (filed January 18, 2006, File No. 001-13589) and incorporated herein by reference.

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

	10.34	Co-Ownership Agreement dated as of January 10, 2006 by and among Continental Towers Associates-I, L.P. and Continental Towers, L.L.C., as filed as exhibit 10.8 to our Current Report on Form 8-K (filed January 18, 2006, File No. 001-13589) and incorporated herein by reference.

	10.35	Amended and Restated Loan Agreement dated as of September 27, 2006 between PGRT Equity LLC and Citicorp USA, Inc., as filed as exhibit 10.1 to our Current Report on Form 8-K (filed October 3, 2006, File No. 001-13589) and incorporated herein by reference.


Exhibit
Number		Description

	10.36	Amended and Restated Promissory Note dated as of September 27, 2006 from PGRT Equity LLC in favor of Citicorp USA, Inc., as filed as exhibit 10.2 to our Current Report on Form 8-K (filed October 3, 2006, File No. 001-13589) and incorporated herein by reference.

	10.37	Amended and Restated Guaranty dated as of September 27, 2006 by David Lichtenstein in favor of Citicorp USA, Inc., as filed as exhibit 10.3 to our Current Report on Form 8-K (filed October 3, 2006, File No. 001-13589) and incorporated herein by reference.

	10.38	Loan Agreement dated as of September 27, 2006 between PGRT Equity II LLC and Citicorp USA, Inc., as filed as exhibit 10.4 to our Current Report on Form 8-K (filed October 3, 2006, File No. 001-13589) and incorporated herein by reference.

	10.39	Promissory Note dated as of September 27, 2006 from PGRT Equity II LLC in favor of Citicorp, USA Inc., as filed as exhibit 10.5 to our Current Report on Form 8-K (filed October 3, 2006, File No. 001-13589) and incorporated herein by reference.

	10.40	Guaranty dated as of September 27, 2006 by David Lichtenstein in favor or Citicorp USA, Inc., as filed as exhibit 10.6 to our Current Report on Form 8-K (filed October 3, 2006, File No. 001-13589) and incorporated herein by reference.

	10.41	Guaranty dated as of September 27, 2006 by PGRT Equity LLC in favor of Citicorp USA, Inc., as filed as exhibit 10.7 to our Current Report on Form 8-K (filed October 3, 2006, File No. 001-13589) and incorporated herein by reference.

	10.42	Amendment to Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of September 27, 2006 by and between 280 Shuman Blvd., L.L.C., and Citicorp USA, Inc., as filed as exhibit 10.8 to our Current Report on Form 8-K (filed October 3, 2006, File No. 001-13589) and incorporated herein by reference.

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

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


Exhibit
Number			Description

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

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

	10.47		First Amendment to Co-Ownership Agreement dated as of November 21, 2006 by and among Continental Towers Associates III, LLC and Continental Towers, L.L.C., as filed as exhibit 10.5 to our Current Report on Form 8-K (filed November 28, 2006, File No. 001-13589) and incorporated herein by reference.

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

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

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

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

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

	10.53	*	Employment Agreement, made and entered into as of November 30, 2006, by and between Prime Group Realty Trust, Prime Group Realty, L.P., Prime Office Company LLC and Nancy Fendley as filed as exhibit 10.60 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.

	10.54		Termination of Co-Ownership Agreement dated as of December 29, 2006, by and between Continental Towers Associates III, LLC and Continental Towers, L.L.C as filed as exhibit 10.61 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference.


Exhibit
Number		Description

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

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

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

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

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

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

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

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


Exhibit
Number		Description

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

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

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

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

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

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

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

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


Exhibit
Number		Description

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

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

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

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

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

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

	10.77	Loan Agreement dated as of June 29, 2007, by and between PGRT ESH, Inc. and Citicorp USA, Inc. as filed as exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference.

	10.78	Pledge Agreement dated as of June 29, 2007, by PGRT ESH, Inc. in favor of Citicorp USA, Inc. as filed as exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference.

	10.79	Continuing Guaranty dated as of June 29, 2007, by David Lichtenstein in favor of Citicorp USA, Inc. as filed as exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference.

	10.80	Promissory Note dated as of June 29, 2007, by PGRT ESH, Inc. to Citicorp USA, Inc. as filed as exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference.


Exhibit
Number		Description

	10.81	Equity Purchase Agreement dated as of December 31, 2007, by and between Jeffrey A. Patterson, and Prime Office Company LLC.

	21.1	Subsidiaries of Registrant.

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

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

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

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


*		Management contracts or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-K pursuant to Item 14(b) of the Report on Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 26, 2009.


PRIME GROUP REALTY TRUST

By:	/s/ Jeffrey A. Patterson

	Name:	Jeffrey A. Patterson
	Title:	President and Chief Executive Officer

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


Signature	Title	Date

/s/ Jeffrey A. Patterson	President, Chief Executive Officer and Trustee	March 26, 2009
Jeffrey A. Patterson	(Principal Executive Officer)

/s/ Paul G. Del Vecchio	Executive Vice President —Capital Markets	March 26, 2009
Paul G. Del Vecchio	(Principal Financial Officer)

/s/ Robert M. O’Connor	Vice President —Corporate Accounting	March 26, 2009
Robert M. O’Connor	(Principal Accounting Officer)

/s/ Bruno de Vinck	Trustee	March 26, 2009
Bruno de Vinck

/s/ David Lichtenstein	Chairman of the Board of Trustees	March 26, 2009
David Lichtenstein

/s/ Peyton (Chip) Owen, Jr.
Peyton (Chip) Owen, Jr.	Trustee	March 26, 2009

/s/ John M. Sabin	Trustee	March 26, 2009
John M. Sabin

/s/ Shawn R. Tominus
Shawn R. Tominus	Trustee	March 26, 2009

/s/ George R. Whittemore
George R. Whittemore	Trustee	March 26, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Trustees
Prime Group Realty Trust

We have audited the accompanying balance sheets of Prime Group Realty Trust (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for the years ended December 31, 2007 and 2006 and the period from January 1, 2005 to June 30, 2005 (predecessor company) and the period from July 1, 2005 to December 31, 2005 (successor company). Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(1). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of BHAC Capital IV LLC (“BHAC”), a joint venture, the investment in which, as discussed in Note 11 to the financial statements, is accounted for by the equity method of accounting. The investment in BHAC was $65,985,000 as of December 31, 2007 and the equity in its net loss was ($47,848,000) for the year then ended. The financial statements of BHAC were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for BHAC, is based solely on the report of the other auditors.

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

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Prime Group Realty Trust as of December 31, 2007 and 2006 and the results of its operations and its cash flows for the years ended December 31, 2007 and 2006 and the period from January 1, 2005 to June 30, 2005 (predecessor company) and the period from July 1, 2005 to December 31, 2005 (successor company) in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 17 to the consolidated financial statements, the Company has restated its consolidated financial statements as of December 31, 2007 and 2006 and for the years then ended.


/s/ GRANT THORNTON LLP
Chicago, Illinois
July 22, 2008 (except for Note 17, as to which the date is March 26, 2009)

F-2

PRIME GROUP REALTY TRUST

CONSOLIDATED BALANCE SHEETS

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


	December 31			December 31
	2007			2006
	As Restated			As Restated
Assets
Real estate:
Land	$	89,661		$	90,936
Building and improvements		347,582			341,263
Tenant improvements		60,709			49,662
Furniture, fixtures and equipment		1,098			586

		499,050			482,447
Accumulated depreciation		(52,627	)		(31,366	)

		446,423			451,081
In—place lease value, net		15,035			25,493
Above—market lease value, net		16,396			23,265

		477,854			499,839

Property held for sale		3,691			3,740
Investments in unconsolidated entities		87,741			23,658
Cash and cash equivalents		37,893			60,111
Receivables, net of allowance for doubtful accounts of $1,074 and $402 at December 31, 2007 and 2006, respectively:
Tenant		402			1,018
Deferred rent		9,857			6,200
Other		1,204			2,202
Restricted cash escrows		41,696			43,998
Deferred costs, net		10,939			7,837
Other		639			1,410

Total assets	$	671,916		$	650,013


Liabilities and Shareholders’ Equity
Mortgage notes payable	$	564,877		$	450,547
Mortgage notes payable related to property held for sale		3,033			3,148
Liabilities related to property held for sale		165			110
Accrued interest payable		2,106			2,173
Accrued real estate taxes		19,871			21,302
Accrued tenant improvement allowances		10,337			8,849
Accounts payable and accrued expenses		13,102			9,822
Liabilities for leases assumed		3,958			4,962
Below—market lease value, net		7,442			11,868
Dividends payable		2,250			4,500
Other		8,418			7,587

Total liabilities		635,559			524,868
Minority interests:
Operating Partnership		—			20,770
Shareholders’ equity:
Preferred Shares, $0.01 par value; 30,000,000 shares authorized:
Series B — Cumulative Redeemable Preferred Shares, 4,000,000 shares designated, issued and outstanding		40			40
Common Shares, $0.01 par value; 100,000,000 shares authorized; 236,483 shares issued and outstanding		2			2
Additional paid-in capital		109,039			107,639
Distributions in excess of earnings		(72,724	)		(3,306	)

Total shareholders’ equity		36,357			104,375

Total liabilities and shareholders’ equity	$	671,916		$	650,013

See accompanying notes.

F-3

PRIME GROUP REALTY TRUST

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except per share amounts)


										Predecessor
	Successor Company									Company
	Year			Year			Six months			Six months
	ended			ended			ended			ended
	December 31			December 31			December 31			June 30
	2007			2006			2005			2005
	As Restated			As Restated
Revenue:
Rental	$	49,019		$	53,067		$	26,411		$	26,112
Tenant reimbursements		31,683			34,480			17,331			17,305
Other property revenues		6,952			7,043			2,855			2,820
Services Company revenue		3,359			2,806			1,094			1,102

Total revenue		91,013			97,396			47,691			47,339

Expenses:
Property operations		29,892			26,985			13,371			12,618
Real estate taxes		17,888			20,255			10,823			10,895
Depreciation and amortization		32,585			34,483			19,770			9,783
General and administrative		6,210			6,393			2,941			4,767
Services Company operations		2,835			3,972			1,593			2,469
Loss on tax indemnification		—			4,200			—			—
Severance costs		—			—			218			176
Strategic alternative costs		—			—			—			10,288

Total expenses		89,410			96,288			48,716			50,996

Operating income (loss)		1,603			1,108			(1,025	)		(3,657	)
Loss from investments in unconsolidated joint ventures		(49,687	)		(9,145	)		(6,998	)		(6,024	)
Interest and other income		2,961			2,850			1,271			1,325
Interest:
Expense		(36,610	)		(42,183	)		(12,163	)		(11,777	)
Amortization of deferred financing costs		(910	)		(3,146	)		(25	)		(1,263	)
Gain (loss) on sales of real estate and joint venture interests		—			19,460			(228	)		10,253
Distributions and losses to minority partners in excess of basis		(14,222	)		—			—			—

Loss from continuing operations before minority interests		(96,865	)		(31,056	)		(19,168	)		(11,143	)
Minority interests		37,821			39,703			23,460			1,799

(Loss) income from continuing operations		(59,044	)		8,647			4,292			(9,344	)
Discontinued operations, net of minority interests of $(2,919) for the year ended December 31, 2007, $45 for the year ended December 31, 2006, $(3,102) and $1,329 for the six months ended December 31, 2005 and for the six months ended June 30, 2005, respectively		26			—			27			(10,227	)

Net (loss) income		(59,018	)		8,647			4,319			(19,571	)
Net income allocated to preferred shareholders		(9,000	)		(9,000	)		(4,500	)		(4,500	)

Net loss available to common shareholders	$	(68,018	)	$	(353	)	$	(181	)	$	(24,071	)


Basic and diluted earnings available to common shares per weighted—average common share:
Loss from continuing operations after minority interests and allocation to preferred shareholders	$	(287.73	)	$	(1.49	)	$	(0.88	)	$	(0.59	)
Discontinued operations, net of minority interests		0.11			—			0.12			(0.43	)

Net loss available per weighted—average common share of beneficial interest — basic and diluted	$	(287.62	)	$	(1.49	)	$	(0.76	)	$	(1.02	)


Comprehensive (loss) income:
Net (loss) income	$	(59,018	)	$	8,647		$	4,319		$	(19,571	)
Other comprehensive income (loss) — interest rate protection agreements Net unrealized gains arising during the year		—			—			2			39

Comprehensive (loss) income	$	(59,018	)	$	8,647		$	4,321		$	(19,532	)

See accompanying notes.

F-4

PRIME GROUP REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2007 (AS RESTATED) AND 2006

(AS RESTATED) FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 (SUCCESSOR

COMPANY) AND FOR THE SIX MONTHS ENDED JUNE 30, 2005 (PREDECESSOR

COMPANY)

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


										Accumulated			(Distributions
	Series B						Additional			Other			in Excess of)
	Preferred			Common			Paid-In			Comprehensive			Retained
	Shares			Shares			Capital			Loss			Earnings			Total
Balance at January 1, 2005	$	40		$	236		$	381,293		$	(468	)	$	(135,677	)	$	245,424
Net loss Predecessor Company		—			—			—			—			(19,571	)		(19,571	)
Series B — preferred share dividends declared ($1.125 per share)		—			—			—			—			(4,500	)		(4,500	)
Net unrealized gain on derivative instruments		—			—			—			39			—			39

Balance at June 30, 2005	$	40		$	236		$	381,293		$	(429	)	$	(159,748	)	$	221,392
Impact of applying push down accounting		(40	)		(236	)		(381,293	)		429			159,748			(221,392	)
Opening balance at date of Acquisition — July 1, 2005		40			2			105,539			—			—			105,581
Accretion of fair value of preferred stock		—			—			700			—			(700	)		—
Net income Successor Company		—			—			—			—			4,319			4,319
Series B — preferred share dividends declared ($1.125 per share)		—			—			—			—			(4,500	)		(4,500	)

Balance at December 31, 2005	$	40		$	2		$	106,239		$	—		$	(881	)	$	105,400
Accretion of fair value of preferred stock		—			—			1,400			—			(1,400	)		—
Net income		—			—			—			—			8,647			8,647
Series B — preferred share dividends declared ($2.25 per share)		—			—			—			—			(9,000	)		(9,000	)
Common share dividends declared ($2.8438 per common share)		—			—			—			—			(672	)		(672	)

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

Balance at December 31, 2007 — as restated	$	40		$	2		$	109,039		$	—		$	(72,724	)	$	36,357

See accompanying notes.

F-5

PRIME GROUP REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)


										Predecessor
	Successor Company									Company
	Year			Year			Six months			Six months
	ended			ended			ended			ended
	December 31			December 31			December 31			June 30
	2007			2006			2005			2005
	As Restated			As Restated
Operating activities
Net (loss) income	$	(59,018	)	$	8,647		$	4,319		$	(19,571	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Accretion of mortgage notes payable		(1,326	)		(1,373	)		(927	)		—
Amortization of costs for leases assumed (included in rental revenue)		—			—			52			138
Amortization of above/below—market lease value (included in rental revenue)		2,222			2,987			1,762			—
Amortization of in—place lease value		9,919			14,141			8,956			—
Provision for doubtful accounts		996			96			(713	)		(186	)
Gain on sales of real estate and joint venture interests (gain (loss) of $2,220, $(6) and $709 for the year ended December 31, 2007, for the six months ended December 31, 2005 and for the six months ended June 30, 2005, respectively, included in discontinued operations)		(2,220	)		(19,460	)		(170	)		(10,558	)
Depreciation and amortization (including discontinued operations — See Note 9)		23,704			24,060			11,193			12,075
Distributions and losses to minority partners in excess of basis		14,222			—			—			—
Provision for asset impairment (asset impairments of $15,074 in 2005 included in discontinued operations)		—			—			—			15,074
Net equity in loss from investments in unconsolidated joint ventures		49,687			9,145			6,998			6,024
Minority interests (including discontinued operations)		(34,902	)		(39,749	)		(35,318	)		(3,173	)
Net changes in other operating assets and liabilities (including discontinued operations):
Accounts receivable		(3,090	)		(3,478	)		(2,807	)		545
Other assets		684			1,173			238			224
Accrued interest payable		(67	)		377			137			178
Accrued real estate taxes		(1,056	)		(983	)		(1,102	)		685
Accounts payable and accrued expenses		470			257			245			(153	)
Other liabilities		909			555			8,373			(7,961	)
Preferential return on investments in joint ventures		—			4,243			—			—

Net cash provided by (used in) operating activities		1,134			638			1,236			(6,659	)
Investing activities
Capital expenditures for real estate and equipment		(17,410	)		(14,478	)		(4,612	)		(5,457	)
Proceeds from sales of real estate		4,685			2,136			3,063			10,397
Change in restricted cash escrows		2,295			(4,062	)		(59,355	)		378
Leasing costs (includes lease assumption costs and leasing commissions)		(5,437	)		(5,799	)		(3,073	)		(3,360	)
Investments in unconsolidated entities		(120,000	)		—			—			—
Distributions from unconsolidated joint ventures		6,167			92,806			3,933			300

Net cash (used in) provided by investing activities		(129,700	)		70,603			(60,044	)		2,258

F-6

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


										Predecessor
	Successor Company									Company
	Year			Year			Six Months			Six Months
	ended			ended			ended			ended
	December 31			December 31			December 31			June 30
	2007			2006			2005			2005
Financing activities
Financing costs		(644	)		(3,092	)		(1,367	)		(1,090	)
Proceeds from mortgages and notes payable		120,000			228,000			55,000			75,000
Repayment of mortgages and notes payable		(1,758	)		(170,897	)		(1,110	)		(67,096	)
Distributions to minority interests—operating partnership		—			(75,328	)		(29,735	)		—
Dividends paid to Series B — preferred shareholders		(11,250	)		(6,750	)		(15,750	)		(4,500	)
Dividends paid to common shareholder		—			(672	)		(265	)		—

Net cash provided by (used in) financing activities		106,348			(28,739	)		6,773			2,314

Net (decrease) increase in cash and cash equivalents		(22,218	)		42,502			(52,035	)		(2,087	)
Cash and cash equivalents at beginning of period		60,111			17,609			69,644			71,731

Cash and cash equivalents at end of period	$	37,893		$	60,111		$	17,609		$	69,644


Supplemental cash flow information for net assets sold:

Real estate, net	$	5,513		$	—		$	48,598		$	590
Deferred rent receivable		—			—			—			—
Deferred costs, net		48			—			1,716			—
Restricted escrows		—			—			1,548			—
Mortgage notes payable assumed by buyer		(2,701	)		—			(45,977	)		—
Bonds payable assumed by buyer		—			—			—			—
Accrued real estate taxes		(369	)		—			(3,055	)		—
Other liabilities and assets, net		(26	)		75,482			(2,660	)		—

Net assets sold		2,465			75,482			170			590
Proceeds from sales of real estate		4,685			94,942			—			10,397

Gain on sales of real estate and joint venture interests(1)	$	2,220		$	19,460		$	170		$	9,807

(1)

Gain on sales of real estate of $2.2 million and $0.7 million are included in discontinued operations for the year ended December 31, 2007 and for the six months ended June 30, 2005.


Supplemental cash flow information for significant non-cash activity:

Mortgage notes payable reduction through assumption of debt by purchaser of sold properties	$	—	$	—	$	45,977		$	—

Accretion of fair value of preferred stock	$	1,400	$	1,400	$	700		$	—

	$	1,400	$	1,400	$	46,677		$	—


Supplemental cash flow information for significant non-cash activity related to Acquisition:

Real estate, net	$	—	$	—	$	30,293		$	—
Investments in unconsolidated entities		—		—		107,863			—
Deferred rent receivable		—		—		(18,814	)		—
Deferred costs, net		—		—		(13,363	)		—
Mortgage notes payable		—		—		(10,630	)		—
Other liabilities		—		—		(14,820	)		—
Minority interests		—		—		(202,270	)		—
Shareholder equity		—		—		121,741			—

	$	—	$	—	$	—		$	—

See accompanying notes.

F-7

Prime Group Realty Trust

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Formation and Organization of the Company

We are a fully-integrated, self-administered and self-managed real estate investment trust (“REIT”) which owns, manages, leases, develops and redevelops office and industrial real estate, primarily in the Chicago metropolitan area. Our portfolio of properties consists of 9 office properties, containing an aggregate of 3.8 million net rentable square feet, and one industrial property, containing 0.1 million net rentable square feet. All of our properties are located in the Chicago metropolitan area in prime business locations within established business communities and account for all of our rental revenue and tenant reimbursements revenue. As of December 31, 2007, we had joint venture interests in two office properties totaling approximately 1.1 million net rentable square feet and a membership interest in an unconsolidated entity which owns extended-stay hotel properties. One of our joint venture properties consisting of approximately 0.1 million rentable square feet is located in Arizona. We lease and manage 4.9 million square feet comprising all of our wholly-owned properties and one joint venture property. In addition, we also manage and lease the 1.5 million square foot Citadel Center office building located at 131 South Dearborn Street in Chicago, Illinois, in which we previously owned a joint venture interest which was sold in November 2006.

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

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

F-8

1. Summary of Significant Accounting Policies (continued)

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

Accordingly, the financial statements reflect our operations prior to the Acquisition (predecessor company) and after the Acquisition for the six month period ended December 31, 2005 (successor company) and years ended December 31, 2006 and December 31, 2007.

Basis of Presentation

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

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

Investments in corporations and partnerships in which we do not have a controlling financial interest but do have significant influence or a majority interest are accounted for under the equity method of accounting. These entities are reflected on our consolidated financial statements as investments in unconsolidated entities. To the extent that our recorded share of losses exceeds our investment in an unconsolidated corporation or partnership, we reflect a deficit investment as a liability in our consolidated financial statements.

Significant intercompany accounts and transactions have been eliminated in consolidation.

Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation.

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

F-9

1. Summary of Significant Accounting Policies (continued)

Accounting for the Acquisition

The Acquisition was at a purchase price of $7.25 per common share/ unit and was structured in a manner that resulted in Lightstone owning all 236,483 of our common shares and 26,488,389 limited partnership units of the Operating Partnership. As a result of the closing of the Acquisition on July 1, 2005, we were required to revalue our balance sheet to reflect the fair market value of each of our assets and liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” The total purchase price for the Acquisition was $204.6 million, which included $10.9 million of transaction costs, in addition to the assumption of debt of $435.2 million and the Series B Shares fairly valued at $93.0 million. For accounting purposes, the total purchase price was reduced by the $30.0 million distribution to our common shareholder, which was paid out of acquired cash, made after the Acquisition on July 5, 2005 and was accounted for as a reduction in Prime Office’s investment in us. The purchase price was allocated as follows, using the methods described below:


	(Dollars in
	thousands)
Total Purchase Price	$	732,800
Common Share Distribution		(30,000	)

Net purchase price	$	702,800


Land	$	108,656
Building and improvements		357,324
Tenant Improvements		36,515
Furniture, fixtures and equipment		506
In—place lease value		44,875
Above/below—market lease value		15,579
Property under development		1,500
Deferred Costs		12,805
Investments in unconsolidated entities		122,072
Current assets		63,817
Other assets		2,531
Other liabilities		(52,750	)
Fair value adjustment to debt		(10,630	)

Total allocated purchase price	$	702,800

The net assets at the date of the Acquisition, fairly valued as described below, exceeded the cost of the Acquisition resulting in negative goodwill of approximately $62.0 million, which was allocated on a pro rata basis to all of the acquired non-financial, non-current assets.

As a result of the Acquisition and the revaluation of our balance sheet because of the Acquisition, the fair value of the real estate acquired by Lightstone is allocated to acquired tangible assets, consisting of land, buildings and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases, lease in-place value and the value of tenant relationships, based in each case on their fair values. Purchase accounting was applied to assets and liabilities related to the Acquisition based upon the fair value of interest acquired.

The fair value of the tangible assets of an acquired property (which includes land, buildings and tenant improvements) is determined by valuing the property as if it were vacant, based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using generally accepted methods. In addition, the fair value of our investment in joint ventures is determined by applying our ownership percentage to the new fair value of the property.

F-10

1. Summary of Significant Accounting Policies (continued)

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

The aggregate value of in-place leases is determined by evaluating various factors, including an estimate of carrying costs during the expected lease-up periods, current market conditions and similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs. The in-place lease value is amortized to expense over the remaining lease term.

The aggregate value of other acquired intangible assets include tenant relationships. Factors considered by management in whether to assign a value to these relationships include: assumptions of probability of lease renewals, investment in tenant improvements, leasing commissions and an approximate time lapse in rental income while a new tenant is located. The value, if assigned to this intangible asset, would be amortized over the average life of the relationship. Management after its review decided to assign no fair value to these relationships based on our current tenant mix.

The fair value of the fixed rate long-term debt of the acquired entity was determined by valuing the debt at present value amounts based on market comparisons to similar types of debt instruments having similar maturity.

The Acquisition was accounted for as a purchase, and consequently, results of operations reflect the new basis of accounting from the date of the Acquisition.

Real Estate

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


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

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

F-11

1. Summary of Significant Accounting Policies (continued)

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

The estimated cash flows used for the impairment analysis and to determine estimated fair value are based on our plans for our respective assets and our views of market and economic conditions. The estimates consider matters such as current and historical rental rates, occupancies for the respective properties and comparable properties and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in our plans or views of market and economic conditions could result in the recognition of impairment losses, which, under the applicable accounting guidance, could be substantial. As of December 31, 2007, we believe that no impairments existed.

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

Sales of Real Estate

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

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

Property Held for Sale

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

F-12

1. Summary of Significant Accounting Policies (continued)

As of December 31, 2007, we have classified our 1051 North Kirk Road property, a 120,004 square foot industrial property located in Batavia, Illinois, as held for sale. On May 16, 2007, we received notice from the tenant of their election to exercise the option in their lease to purchase the property. On May 2, 2008, we closed on the sale of this property. The net proceeds from the sale of $4.1 million were used to retire the outstanding debt on the property. We recognized a book gain of $0.5 million in the second quarter of 2008.

Property held for sale at December 31, 2007 and December 31, 2006 (dollars in thousands):


	December 31		December 31
	2007		2006
Real estate, net	$	3,211	$	3,260
Tenant receivables		—		13
Deferred rent receivables		92		61
In-place lease value, net		255		267
Above-market lease value, net		132		139
Deferred costs, net		1		—

Property held for sale	$	3,691	$	3,740

In addition, certain liabilities related to the 1051 North Kirk property at December 31, 2007 and December 31, 2006 have also been reclassified (dollars in thousands):


	December 31		December 31
	2007		2006
Mortgage note payable	$	3,033	$	3,148
Accrued real estate taxes		110		104
Accounts payable and accrued expenses		—		2
Other liabilities		55		4

Mortgage note payable and liabilities related to property held for sale	$	3,198	$	3,258

Intangible Assets

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

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


	December 31, 2007
	Carrying			Accumulated			Carrying
Intangible Asset Category	Amount–Gross			Amortization			Amount–Net
	(dollars in thousands)
In—place lease value	$	47,617		$	(32,582	)	$	15,035
Above—market lease value		34,123			(17,727	)		16,396
Below—market lease value		(18,610	)		11,168			(7,442	)

	$	63,130		$	(39,141	)	$	23,989

F-13

1. Summary of Significant Accounting Policies (continued)

Actual amortization for the year ended December 31, 2007 and estimates for each of the next five fiscal years is as follows:


	In–		Above–		Below–
	Place		market		market
Year ending December 31	Lease Value		Lease Value		Lease Value
	(dollars in thousands)
2007	$	9,879	$	6,522	$	(4,426	)
2008		4,929		4,926		(1,938	)
2009		3,963		4,565		(1,591	)
2010		2,137		2,235		(1,140	)
2011		1,354		1,124		(910	)
2012		962		1,084		(537	)

Cash Equivalents

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

Restricted Cash

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

Deferred Costs

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

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

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects our estimate of the amounts of the recorded accounts receivable at the balance sheet date that will not be recovered from cash receipts in subsequent periods. Our policy is to record a periodic provision for doubtful accounts based on the age of the receivable. We also periodically review specific tenant balances and determine whether an additional allowance is necessary. In recording such a provision, we consider a tenant’s creditworthiness, ability to pay, probability of collection and consideration of the tenant. The allowance for doubtful accounts is reviewed periodically based upon our historical experience. As a result, we recorded a provision of $1.0 million, $0.1 million, $0.1 million and $0.3 million for the years ended December 31, 2007 and 2006, for the six months ended December 31, 2005 and for the six months ended June 30, 2005, respectively. In addition, we had write-offs of $0.3 million during 2007.

F-14

1. Summary of Significant Accounting Policies (continued)

Leases Assumed

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

Revenue Recognition

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

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

Minority Interest in Consolidated Real Estate Partnerships

Interests held in consolidated real estate partnerships by limited partners other than the Company are reflected as minority interest in consolidated real estate partnerships. Minority interest in real estate partnerships represents the minority partners’ share of the underlying net assets of the Company’s consolidated real estate partnerships. When these consolidated real estate partnerships make cash distributions in excess of net income, the Company, as the majority partner, records a charge equal to the minority partners’ excess of distributions over net income when the partnership has deficit equity. This charge is classified in the consolidated statements of operations as distributions and losses to minority partners in excess of basis. Losses are allocated to minority partners until such time as such losses exceed the minority interest basis, in which case the Company recognizes 100% of the losses in operating earnings. With regard to such consolidated real estate partnerships, approximately $14.2 million in losses related to the minority interest ownership were charged to operations for the year ended December 31, 2007, and no losses were charged to operations for the years ended December 31, 2006 and 2005.

F-15

1. Summary of Significant Accounting Policies (continued)

Interest Rate Protection Agreements

In the normal course of business, we are exposed to the effects of interest rate changes. We limit these risks by following established risk management policies and procedures including the use of derivatives. For interest rate exposures, derivatives are used primarily to align rate movements between interest rates associated with our leasing income and other financial assets with interest rates on related debt and to manage the cost of borrowing obligations. These are principally entered into to comply with requirements under certain of our loan agreements.

We have a policy of only entering into derivative contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, we have not sustained a material loss from those instruments nor do we anticipate any material adverse effect on our net income or financial position in the future from the use of derivatives.

We require that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Some derivative instruments are associated with the hedge of an anticipated transaction. In those cases, hedge effectiveness criteria also requires that it be probable that the underlying transaction occurs. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income each period until the instrument matures, unless the instrument is redesignated as a hedge of another transaction. Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market each period in earnings.

To determine the fair values of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

F-16

1. Summary of Significant Accounting Policies (continued)

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS No. 133”), as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” (“SFAS No. 138”), established accounting and reporting standards for derivative instruments. Specifically SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either shareholders’ equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. The Financial Accounting Standards Board also issued guidance on the accounting for options used as hedges under SFAS No. 133. Provided certain criteria are met, options can be considered fully effective hedging vehicles, with gains and losses due to changes in market value recorded in accumulated other comprehensive loss on the balance sheet. Any unrealized gains or losses due to changes in market value of options, such as interest rate caps, have been recorded in comprehensive loss.

Earnings Per Share

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

Income Taxes

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

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

The Services Company recorded a tax provision of $0.3 million during 2007. At December 31, 2007, the Services Company had a current tax liability of $121,000 and a deferred tax asset of $24,000. During 2006, the Services Company recorded a tax provision of $0.8 million and at December 31, 2006 had a current tax liability of $107,000 and a deferred tax asset of $54,000. The Services Company paid income taxes in the amount of $0.2 million for the year ended December 31, 2007, $0.7 million for the year ended December 31, 2006, $0.2 million for the six months ended December 31, 2005 and $0.2 million for the six months ended June 30, 2005.

F-17

1. Summary of Significant Accounting Policies (continued)

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

We had no unrecognized tax benefits as of the January 1, 2007 adoption date or as of December 31, 2007. We expect no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of December 31, 2007. We have no interest or penalties relating to income taxes recognized in the statement of operations for the year ended December 31, 2007 or in the balance sheet as of December 31, 2007. During 2006, the Internal Revenue Service began an examination of the tax returns for our Operating Partnership for the years 2003 and 2004 as well as with respect to the Operating Partnership’s subsidiary 180 N. LaSalle, L.L.C. for the year 2004. We anticipate that those examinations will be concluded and settled during the first half of 2009 with no material impact on our consolidated financial results or financial position. As of December 31, 2007, returns for the calendar years 2005 through 2006 remain subject to examination by the Internal Revenue Service and various state and local tax jurisdictions.

Strategic Alternative Costs

Strategic alternative costs of $10.3 million for the six months ended June 30, 2005 primarily relate to the settlement payment in connection with settling certain litigation ($7.0 million) and legal, consulting, and professional fees incurred as a result of the Acquisition.

2. Asset Impairments

We recorded the following provisions for asset impairments:


							Predecessor
	Successor Company						Company
	Year				Six months		Six months
	ended				ended		ended
	December 31				December 31		June 30
	2007		2006		2005		2005
							(dollars in
							thousands)

Discontinued operations (1)	$	—	$	—	$	—	$	15,074

	$	—	$	—	$	—	$	15,074


(1)		Discontinued operations for the year ended December 31, 2005 include provisions for asset impairments related to properties held for sale or sold. See Note 9 — Discontinued Operations to these consolidated financial statements for a description of these asset impairments.

F-18

3. Deferred Costs

Deferred costs consist of the following:


	December 31
	2007			2006
	(dollars in thousands)

Financing costs	$	3,743		$	4,421
Leasing costs		11,496			7,110

		15,239			11,531
Less: Accumulated amortization		(4,300	)		(3,694	)

	$	10,939		$	7,837

4. Mortgage Notes Payable

Mortgage Notes Payable consisted of the following:


	December 31
	2007		2006
	(dollars in thousands)
Mortgage Notes Payable (1), (2):
Mortgage notes payable to various financial institutions, collateralized by various properties, interest at fixed rates ranging from 5.43% to 8.76% per annum, with principal and interest payable monthly on dates ranging from 2008 through December 1, 2016. The weighted average rates at December 31, 2007 and 2006 were 6.26% and 6.30%, respectively	$	234,132	$	239,917
Mortgage notes payable to various financial institutions, collateralized by various properties, interest at variable rates ranging from LIBOR (5.03% at December 31, 2007) plus 143 basis points to LIBOR plus 570 basis points per annum, with interest payable monthly through June 10, 2008. The weighted average rates at December 31, 2007 and 2006 were 8.29% and 8.28%, respectively		333,778		213,778

Total mortgage notes payable (3)	$	567,910	$	453,695


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

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

(3)		The fair value of our notes payable is estimated at $565.3 million and $452.3 million as of December 31, 2007 and 2006, respectively.

On December 30, 2005, our subsidiary, Prime Dearborn Equity LLC (“Prime Dearborn”), entered into a $55.0 million mezzanine loan agreement with IPC Investments Holdings Canada Inc. (“IPC Lender”) associated with Citadel Center and on January 11, 2006 this loan was funded out of escrow. This loan was collateralized with a pledge by Prime Dearborn of its right to distributions from the joint venture, Dearborn Center L.L.C. (“Dearborn LLC”) owning Citadel Center, and a pledge by our Operating Partnership of its rights to management and leasing fees in connection with the management of the property. This loan contained a 2.0% origination fee, an original maturity date of April 5, 2010 and had an annual interest rate of 12.0%. An affiliate of IPC Lender, IPC Prime Equity, LLC (“IPC Equity”), received a membership interest in Prime Dearborn from which IPC Equity was entitled to receive 10.0% of any net sales proceeds in excess of $50.0 million from Prime Dearborn’s interest in

F-19

4. Mortgage Notes Payable (continued)

Dearborn LLC. IPC Equity also received a membership interest in Prime Office. In connection with this membership interest, and subject to Lightstone receiving the return of its equity and certain priority returns, IPC Equity was entitled to receive 12.6% of the cash available for distribution derived from Prime Office’s direct ownership of the common units of our Operating Partnership and 10% derived from Prime Office’s ownership of our common shares. On November 8, 2006, Dearborn LLC completed the sale of the property for $560.0 million, subject to customary pro-rations and adjustments. In conjunction with the sale of this property, Prime Dearborn repaid this loan and distributed $4.0 million to IPC Equity (recorded as interest expense). Since Prime Dearborn repaid all of the loan before the first anniversary of the loan, IPC Lender had the option to use the proceeds from the repayment to purchase up to 33.3% of the membership interests in Prime Office. This option has since expired unexercised.

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

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

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

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

F-20

4. Mortgage Notes Payable (continued)

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

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

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

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

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

F-21

4. Mortgage Notes Payable (continued)

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

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

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

Effective June 10, 2008, PGRT ESH extended the maturity date of the Citicorp Loan in the original principal amount of $120 million, from June 10, 2008 until June 15, 2009. The interest rate for the extension is at PGRT ESH’s election (a) one or three-month LIBOR plus 6% or (b) the lender’s base rate plus 4% per annum. The loan is non-recourse to PGRT ESH and is secured by, among other things, a pledge of PGRT ESH’s membership interest in BHAC Capital IV, L.L.C. (“BHAC”), an entity that owns 100% of Extended Stay, Inc. (“ESH”). The loan is guaranteed by David Lichtenstein, the Chairman of our Board of Trustees, and Lightstone Holdings, LLC (“Guarantors”), both of which are affiliates of our parent company. In addition, affiliates of Guarantors recently repaid $25.0 million of principal of the loan and have been paying the debt service on the loan, all as capital contributions to the Company and, in turn, to PGRT ESH.

Total interest paid on mortgage notes payable was $38.6 million and $44.0 million for the years ended December 31, 2007 and December 31, 2006, $13.4 million for the six months ended December 31, 2005 and $14.3 million for the six months ended June 30, 2005, respectively. No capitalization of interest occurred in the years ended December 31, 2007, 2006 or 2005.

F-22

4. Mortgage Notes Payable (continued)

Interest Rate Protection Agreement. We have entered into the following interest rate cap agreements:

Notional

Capped

Amount as of

LIBOR/

December 31

Eurodollar

Effective

Expiration

Loan Associated with

2007

Rate

Date

330 N. Wabash Avenue

First Mortgage/Mezzanine Loans

195,000,000

6.6

3/15/07

3/15/08

Continental Towers

First Mortgage

75,000,000

6.5

5/02/05

5/01/08

Prime Equity
Mezzanine Loans

47,000,000

4.8

1/03/06

1/03/08

Prime Equity
Mezzanine Loans

11,000,000

4.8

1/03/06

1/03/08

Amortization of Principal. We made payments totaling $1.8 million, $1.7 million and $2.8 million for amortization of principal for loans on various properties, in 2007, 2006 and 2005, respectively.

Other. We have provided guarantees of escrow balances, certain expenses and in some cases principal balances with regard to certain mortgages and notes payable. In addition, as of December 31, 2007, guarantees related to unconsolidated joint ventures totaled $2.8 million.

The following represents our future minimum principal payments (excluding extension options) on our mortgage notes payable outstanding at December 31, 2007:


Year Ending December 31	Amount
	(dollars in
	thousands)

2008	$	351,014
2009		2,675
2010		33,817
2011		65,404
2012		—
Thereafter		115,000

	$	567,910

In February 2006, we exercised the first extension option on the $195.0 million first mortgage loan secured by the 330 N. Wabash Avenue property and paid a $0.5 million extension fee, which extended the maturity date to March 9, 2007. We exercised the second and final option in February 2007 for an additional $0.5 million payment, and extended the maturity date to March 10, 2008, which was refinanced as disclosed in Note 20 — Subsequent Events — 330 N. Wabash Avenue Refinancing.

F-23

5. Debt Covenants

The financial covenants contained in some of our loan agreements and guarantee agreements with our lenders include minimum ratios for debt service coverage and other financial covenants. As of December 31, 2007, we are in compliance with the requirements of all financial covenants. We were not in compliance with one of our non-financial covenants with a lender. We obtained an extension on this covenant relating to filing of financial statements through July 31, 2008 and did not incur penalties or restrictions related to the covenant.

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

6. Leases

We have entered into lease agreements with tenants with lease terms ranging from month-to-month to twenty years at lease inception. The leases generally provide for tenants to share in operating expenses and real estate taxes, although some leases only provide for sharing amounts in excess of specified base amounts. Approximately 28.5%, 36.1%, 38.6% and 36.2% of rental revenue for the years ended December 31, 2007 and 2006, the six months ended December 31, 2005 and the six months ended June 30, 2005, respectively, was received from five tenants. One tenant represented approximately 12% of our total revenues in 2007.

The total future minimum rentals to be received by us under noncancelable operating leases in effect at December 31, 2007, exclusive of tenant reimbursements and contingent rentals, are as follows:


Year Ending December 31	Amount
	(dollars in thousands)
2008	$	42,962
2009		43,020
2010		31,680
2011		24,690
2012		21,283
Thereafter		81,394

	$	245,029

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

Future minimum rental payments (exclusive of tenant reimbursements) to be paid by us under leases assumed, net of subleases executed through December 31, 2007, are as follows:


	Gross		Executed		Net
Year Ending December 31	Amount		Subleases		Amount
	(dollars in thousands)
2008	$	5,738	$	4,824	$	914
2009		5,098		3,923		1,175
2010		5,226		4,032		1,194
2011		5,357		4,214		1,143
2012		3,630		2,819		811
Thereafter		—		—		—

	$	25,049	$	19,812	$	5,237

F-24

7. Minority Interests

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

As of December 31, 2007, subsidiaries of Lightstone owned 100.0% of our common shares, (236,483, common shares) and 99.1%, of the outstanding common units in the Operating Partnership (26,488,389 common units).

8. Preferred Shares

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

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

On December 20, 2007 our Board declared and set apart for payment a quarterly dividend on our Series B Shares of $0.5625 per share for the fourth quarter of 2007 dividend period. The quarterly dividend had a record date of January 10, 2008. These dividends were paid on January 31, 2008. Under our declaration of trust, these dividends are deemed to be the quarterly dividends related to the fourth quarter of 2007. Dividends paid in the amount of $2.8125 per share in 2007 on our Series B Shares have been determined to be ordinary dividends of $1.40625 per share and a return of capital of $1.40625 per share. The holders of Series B Shares have the right to elect two additional members to our Board if six consecutive quarterly dividends on our Series B Shares are not made. The term of any trustee elected by the holders of Series B Shares will expire whenever the total dividend arrearage in our Series B Shares has been paid and current dividends declared and set apart for payment. Any future dividends in respect of our common shares may not be paid unless all accrued but unpaid preferred share dividends have been or are concurrently satisfied.

9. Discontinued Operations

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

F-25

9. Discontinued Operations (continued)

In accordance with the requirements of SFAS No. 144, we have updated our historical financial statements for the years ended December 31, 2006 and 2005, to present the primary assets and liabilities and the net operating results of those properties sold or classified as held for disposition through December 31, 2007 as discontinued operations for all periods presented. The update does not have an impact on net income available to common stockholders. SFAS No. 144 only results in the reclassification of the operating results of all properties sold or classified as held for disposition through December 31, 2007, within the Consolidated Statements of Operations for the years ended December 31, 2006 and 2005, and the reclassification of the assets and liabilities within the Consolidated Balance Sheets for 2007 and 2006.

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

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

Below is a summary of the results of operations for our 1051 North Kirk Road property, our Narco River Business Center property, our 208 South LaSalle Street property (which we sold in December 2005) and the residual effects related to properties sold in prior years.


										Predecessor
	Successor Company									Company
							Six			Six
	Year						months			months
	ended						ended			ended
	December 31						December 31			June 30
	2007			2006			2005			2005
										(dollars in
	(dollars in thousands)									thousands)
Rental revenue	$	741		$	1,103		$	4,952		$	6,114
Tenant reimbursements		305			441			4,210			4,082
Other property income		1,092			6			151			164

Total revenue		2,138			1,550			9,313			10,360

Property operations		97			151			2,668			3,084
Real estate taxes		581			418			1,698			1,551
Depreciation and amortization		128			572			353			986
Interest expense		607			454			1,459			1,930


Total expenses		1,413			1,595			6,178			7,551
Income (loss) before provisions for asset impairment, net gain (loss) on sales of real estate and minority interests		725			(45	)		3,135			2,809
Provisions for asset impairment(1)		—			—			—			(15,074	)
Net gain (loss) on sales of real estate(2)		2,220			—			(6	)		709
Minority interests		(2,919	)		45			(3,102	)		1,329

Discontinued operations	$	26		$	—		$	27		$	(10,227	)


(1)		During the second quarter of 2005, we recorded an asset impairment of $15.1 million related to our 208 South LaSalle Street office property as our anticipated hold period for the property was reduced based upon our decision to pursue a sale.

(2)		See Note 16 — Property Acquisitions, Placed in Service and Dispositions to these consolidated financial statements for a description of these sales.

F-26

10. Earnings Per Share

The following table sets forth the computation of our basic and diluted net income available per weighted-average common share of beneficial interest for the years ended December 31, 2007 and 2006, for the six months ended December 31, 2005 and for the six months ended June 30, 2005:


										Predecessor
	Successor Company									Company
	Year			Year			Six months			Six months
	Ended			ended			ended			ended
	December 31			December 31			December 31			June 30
	2007			2006			2005			2005
	As Restated			As Restated						(dollars in
										thousands, except
	(dollars in thousands, except per share amounts)									per share amounts)
Numerator:
Loss from continuing operations before minority interests	$	(96,865	)	$	(31,056	)	$	(19,168	)	$	(11,143	)
Minority interests		37,821			39,703			23,460			1,799
Net income allocated to preferred shareholders		(9,000	)		(9,000	)		(4,500	)		(4,500	)

Loss before discontinued operations		(68,044	)		(353	)		(208	)		(13,844	)
Discontinued operations, net of minority interests		26			—			27			(10,227	)

Numerator for earnings per share — loss available to common shares	$	(68,018	)	$	(353	)	$	(181	)	$	(24,071	)


Denominator:
Denominator for basic earnings per share — weighted average common shares		236,483			236,483			236,483			23,658,579
Effect of dilutive securities:
Employee stock options		—			—			—			—
Employee stock grants		—			—			—			—

Denominator for diluted earnings per share — adjusted weighted average common shares and assumed conversions		236,483			236,483			236,483			23,658,579


BASIC AND DILUTED EARNINGS AVAILABLE TO COMMON SHARES PER WEIGHTED-AVERAGE COMMON SHARE:
Loss from continuing operations after minority interests and allocation to preferred shareholders	$	(287.73	)	$	(1.49	)	$	(0.88	)	$	(0.59	)
Discontinued operations, net of minority interests		0.11			—			0.12			(0.43	)

Net loss available per weighted-average common share of beneficial interest — basic and diluted	$	(287.62	)	$	(1.49	)	$	(0.76	)	$	(1.02	)

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

F-27

11. Investments in Unconsolidated Joint Ventures

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

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

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

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

The purchase price was financed by a $120.0 million non-recourse loan to PGRT ESH from Citicorp, which loan is secured by a pledge of the membership interest and any proceeds from such interest. The loan had a maturity date of June 10, 2008, and an interest rate of 4.0% above LIBOR or 1.50% above Citicorp’s base interest rate, as selected by PGRT ESH from time to time. The loan is guaranteed by Lightstone Holdings and David Lichtenstein.

It is contemplated in the loan documents, although not required, that the loan shall be secured by pledges of additional collateral, including pledges by affiliates of Lightstone of their ownership interests in us and the Operating Partnership and pledges of other assets owned by affiliates of Lightstone LLC, but not by pledges of any of our assets or our Operating Partnership or subsidiaries assets, other than PGRT ESH’s membership interest in BHAC. The loan documents contain provisions for an increase in the interest rate and partial repayment of portions of the loan if additional collateral is not pledged pursuant to a schedule contained in the loan documents.

Our interest in BHAC at December 31, 2007 was valued at $66.0 million (included in Investments In Unconsolidated Entities). Our share of BHAC’s operations, assuming a hypothetical liquidation at December 31, 2007, was a loss of $47.8 million from inception through December 31, 2007. We received a distribution of $6.2 million in 2007 from this investment.

F-28

11. Investments in Unconsolidated Joint Ventures (continued)

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


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

Total assets	$	7,838,980


Mortgage notes and other loans payable	$	7,402,447
Other liabilities		147,947
Total members’ capital		288,586

Total liabilities and members’ capital	$	7,838,980


	For the period
	June 29, 2007
	through
	December 31, 2007
	(dollars in
	thousands)
Total revenue	$	515,364
Total expenses		(705,338	)

Net loss	$	(189,974	)

The United Building. As of December 31, 2007, we owned a 50.0% common interest in 77 West Wacker Drive, L.L.C., which owns The United Building (formerly 77 West Wacker Drive), a 959,258 square foot office building located in Chicago, Illinois. Our joint venture partner also had a 50.0% common interest and in addition has a $66.0 million preferred ownership interest with a 9.5% cumulative preferred return in this property. Our interest at December 31, 2007 was $21.8 million and at December 31, 2006 was $23.5 million (included in Investments in Unconsolidated Entities in our consolidated financial statements). At December 31, 2007, the joint venture was current with respect to the 9.5% cumulative preferred return.

The following table summarizes our share of various items:


										Predecessor
	Successor Company									Company
	Year						Six months			Six months
	ended						ended			ended
	December 31						December 31			June 30
	2007			2006			2005			2005
										(dollars in
	(dollars in thousands)									thousands)
Operations (included in loss from investments in unconsolidated joint ventures)	$	(1,772	)	$	(3,622	)	$	(1,837	)	$	855
Distributions received		—			—			—			300

F-29

11. Investments in Unconsolidated Joint Ventures (continued)

On October 24, 2003, the joint venture refinanced its existing $152.5 million first mortgage loan payable on the property with the proceeds of a new $166.0 million first mortgage loan. The new loan bears interest at a fixed rate of 5.7% and matures on November 1, 2013. The loan requires monthly payments of interest only for the first two years of the loan term and requires monthly payments of principal and interest thereafter based on a 30-year amortization schedule. As of December 31, 2007, we are in compliance with the requirements of these financial covenants.

The new loan required $0.3 million at closing and an additional $0.2 million per year to be deposited into an escrow for maintenance and repairs at the property. In addition, the loan created a rollover reserve account for future leasing costs which the joint venture deposited $8.7 million at closing and is required to deposit an additional $0.1 million per month thereafter; provided, however, in no event will the amount in the rollover reserve be required to exceed $19.7 million. In the event certain tenants do not renew their leases by certain dates or the relevant space is not re-leased, additional escrow deposits will be required. After the joint venture paid its outstanding preferred return to our partner, we and our partner each received a cash distribution of $2.4 million from the joint venture out of loan proceeds.

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


	December 31
	2007		2006
	(dollars in thousands)

Real estate, at cost (net):	$	254,685	$	257,896
Other assets		26,820		35,613

Total assets	$	281,505	$	293,509


Mortgage note payable	$	164,652	$	167,321
Other liabilities		24,896		30,687
Total members’ capital		91,957		95,501

Total liabilities and members’ capital	$	281,505	$	293,509


									Predecessor
	Successor Company								Company
	Year					Six months			Six months
	ended					ended			ended
	December 31					December 31			June 30
	2007		2006			2005			2005
									(dollars in
	(dollars in thousands)								thousands)

Total revenue	$	38,278	$	41,109		$	20,192		$	21,972
Total expenses		35,551		42,071			20,731			17,815

Net income (loss)	$	2,727	$	(962	)	$	(539	)	$	4,157

Citadel Center. On March 19, 2003, we purchased all of our prior joint venture partner’s ownership interest in the entity that owns Citadel Center which made us the sole owner of the property at that time. We paid $9.2 million for the interest, of which $0.5 million was deposited into an escrow account that was to be released to the joint venture partner upon the satisfaction of certain post-closing obligations of the joint venture partner (and in all events on the first anniversary of the closing date). The joint venture partner had continued to provide certain development services through November 3, 2003, for a monthly fee. As of December 31, 2003, the $0.5 million escrow had been released to the joint venture partner. Simultaneous with this transaction, the joint venture partner repaid us in full a loan previously made by us to them of $1.0 million, plus accrued interest of $0.2 million.

F-30

11. Investments in Unconsolidated Joint Ventures (continued)

On October 8, 2003, we closed on a transaction admitting a new 70.0% joint venture partner to our former subsidiary, Dearborn LLC, that owns the Citadel Center. At the closing, our partner made a cash contribution to the joint venture of $106.4 million (which includes $1.4 million retained by the venture as working capital) in exchange for 70.0% of the membership interests in the venture. We retained a 30.0% subordinated common interest in the joint venture. Upon closing, the venture, in turn, distributed $105.0 million to us. Under the terms of the contribution agreement, an additional $9.8 million was paid to us on January 24, 2005 upon the leasing of an additional 40,000 square feet of space in the property over and above the square footage leased in the property as of August 4, 2003. This amount was recorded as a gain on sale of real estate in our consolidated statements of operations.

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

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

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

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

F-31

11. Investments in Unconsolidated Joint Ventures (continued)

The following table summarizes our share of various items:

Predecessor

Successor Company

Company

Six months

Year ended

ended

December 31

June 30

2007

2006

2005

(dollars in

(dollars in thousands)

thousands)

Operations (included in loss from investments in unconsolidated joint ventures) (1)

—

(5,470

)

(5,193

)

(6,930

)


(1)		During the 2006 period, distributions to our partner exceeded the joint venture’s net income. As a result, income equal to the distribution was allocated to our partner and we recorded a loss in the amount of the difference between this allocation and the actual net income of the joint venture. The distribution was $9.9 million, $5.9 million, $5.7 million and $10.6 million for the year ended December 31, 2006, for the six months ended December 31, 2005 and the six months ended June 30, 2005, respectively.

The following tables represent the condensed balance sheets and income statements of Dearborn LLC on a historical cost basis:


	December 31
	2007		2006
	(dollars in thousands)
Real estate, at cost (net):	$	—	$	—
Other assets		—		386

Total assets	$	—	$	386


Mortgage note payable	$	—	$	—
Other liabilities		—		386
Total members’ capital		—		—

Total liabilities and members’ capital	$	—	$	386


							Predecessor
	Successor Company						Company
					Six months		Six months
	Year ended				ended		ended
	December 31				December 31		June 30
	2007		2006		2005		2005
							(dollars in
	(dollars in thousands)						thousands)
Total revenue	$	—	$	51,778	$	25,082	$	25,142
Total expenses		—		47,339		24,383		26,335

Net income (loss)(2)	$	—	$	4,439	$	699	$	(1,193	)


(2)		Historical income does not reflect net income from the joint venture as reported in the financial statements as a result of the difference in basis in connection with the Acquisition.

F-32

11. Investments in Unconsolidated Joint Ventures (continued)

Thistle Landing. We own a 23.1% common interest in Plumcor Thistle, LLC, (the “Plumcor/Thistle JV”) which owns a 101,006 square foot office building located in Phoenix, Arizona, that opened in late 1999. Our interest at December 31, 2007 and at December 31, 2006 was an equity investment of $0.0 million and $0.1 million (included in Investments in Unconsolidated Entities), respectively. Our share of the venture’s operations was a loss of $67,000, a loss of $53,000, a gain of $29,000 and a gain of $43,000 for the years ended December 31, 2007 and 2006, for the six months ended December 31, 2005 and the six months ended June 30, 2005, respectively (included in Income (loss) from investments in unconsolidated joint ventures). We received no distribution in 2007, 2006 or 2005, except those described below.

On August 29, 2005, we were notified by our joint venture partner of the execution of a sale agreement for three of the four buildings then owned by Plumcor/Thistle JV at Thistle Landing. The sale took place in early November and we received a distribution of $3.9 million relating to our interest on November 7, 2005.

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

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

As a result of the Acquisition, the investment in these joint ventures at December 31, 2007 of $21.8 million is approximately $4.8 million in excess of the Company’s share of the underlying historical net assets of the joint ventures. The excess of the cost of the investments acquired over the equity in the underlying net assets is ascribed to the fair values of land and buildings owned by the unconsolidated entities. The Company amortizes the excess basis related to the buildings over their estimated useful lives.

12. Stock Based Compensation

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

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

F-33

12. Stock Based Compensation (continued)

Prior to January 1, 2006, the Company accounted for share-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” (“APB No. 25”). Under APB No. 25, compensation cost was not recognized for options granted because the exercise price of options granted was equal to the market value of the Company’s common shares on the grant date.

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

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

During 2005, 938,883 options to purchase common stock expired or were terminated in connection with the Acquisition in 2005 and, prior to the Acquisition, with employees or executives who held options resigning from the Company.

The unaudited pro-forma information regarding net income and earnings per share is required by SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) and has been determined as if we had accounted for our options under the fair value method of that statement. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2003: risk-free interest rate of 2.2%; expected dividend yield of 0.0%; volatility factor of the expected market price of common shares of 0.310; and a weighted-average expected life of the options of three years for options granted. There were no options granted in 2007, 2006 or 2005. There were no Company options outstanding during 2007 and accordingly no compensation expense was recorded under SFAS No. 123R.

We did not recognize any compensation expense in 2005 related to options granted under APB No. 25. Under the fair value method of SFAS No. 123, $0.00 ($0.00 per basic and diluted common share) and $20,000 ($0.00 per basic and diluted common share) would have been recognized as additional compensation expense for the six months ended December 31, 2005 and for the six months ended June 30, 2005, respectively. For purposes of the following pro-forma disclosure, the estimated fair value of the options is amortized to expense over the vesting period of the options. On this basis, the pro-forma net loss available to common shares was $0.2 million ($0.76 per basic and diluted common shares) and $24.1 million ($1.02 per basic and diluted common share) for the six months ended December 31, 2005 and for the six months ended June 30, 2005, respectively.

The effects on unaudited pro-forma net income and pro-forma earnings per common share for the six months ended December 31, 2005 and for the six months ended June 30, 2005 of amortizing to expense the estimated fair value of share options are not necessarily representative of the effects on net income to be reported in future years due to the vesting period of the share options, and the potential for issuance of additional share options in future years. For purposes of pro-forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods.

The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.

F-34

12. Stock Based Compensation (continued)

The following is a summary of our share option activity, and related information for the years ended December 31, 2007, 2006 and 2005:


				Weighted Average
	Shares			Exercise
	Subject to			Price Per
	Option			Share
Balance at January 1, 2005		938,883		$	15.19
Options cancelled		(938,883	)		—

Balance at December 31, 2005		—			—
Options cancelled		—			—

Balance at December 31, 2006		—			—
Options cancelled		—			—

Balance at December 31, 2007		—		$	—

13. Related Party Transactions

On March 19, 2002, we entered into an agreement appointing Julien J. Studley, Inc. as our exclusive agent to lease space on our behalf related to the Citadel Reimbursement Obligation. Mr. Jacque M. Ducharme, a former trustee, was the Vice Chairman Western Region and Director of Julien J. Studley, Inc. (“Studley”), a brokerage firm that specializes in representing tenants in leasing transactions. In addition, Studley is from time-to-time engaged by third-party tenants as a tenant broker in connection with the tenants’ search for office space in Chicago. For the years ended December 31, 2007 and 2006, for the six months ended December 31, 2005 and for the six months ended June 30, 2005, Studley earned commissions of approximately $0.3 million, $0.2 million, $0.0 million and $0.4 million, respectively, from us in connection with transactions where tenants who had previously engaged Studley leased space from us. We are not involved in the selection of Studley by the third-parties as its broker, and we have been advised by Mr. Ducharme that he did not receive any portion of the commissions in connection with these transactions, other than compensation he may have received based on the general profitability of Studley.

In connection with our management of The United Building, we are entitled to receive property management fees and lease commissions for services performed and reimbursement of costs we pay on behalf of 77 West Wacker Drive, L.L.C. Such amounts are summarized as follows:


							Predecessor
	Successor Company						Company
	Year				Six months		Six months
	ended				ended		ended
	December 31				December 31		June 30
	2007		2006		2005		2005
							(dollars in
	(dollars in thousands)						thousands)

Management fees (1)	$	913	$	1,151	$	541	$	523
Payroll and other operating costs		1,339		1,397		667		674
Leasing costs (1)		867		1,298		398		42


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

F-35

13. Related Party Transactions (continued)

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


							Predecessor
	Successor Company						Company
	Year				Six months		Six months
	ended				ended		ended
	December 31				December 31		June 30
	2007		2006		2005		2005
							(dollars in
	(dollars in thousands)						thousands)

Management fees (1)	$	—	$	852	$	542	$	368
Payroll and other operating costs		—		700		375		374
Leasing costs (1)		—		36		—		1,623


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

On August 11, 2004, we made a loan in the amount of $587,771 to Dearborn LLC to cover funds required to be paid under Dearborn LLC’s redevelopment agreement with the City of Chicago. The City of Chicago determined that Dearborn LLC failed to meet certain goals contained in the redevelopment agreement which resulted in the payment of $1.0 million to the City of Chicago. The payment satisfied Dearborn LLC’s obligation under the redevelopment agreement. Our loan represented the excess of the payment over that estimated when our joint venture partner was admitted and was required to be made by us pursuant to the joint venture agreement. The interest rate on the loan is 10.0% per annum. The loan plus all accrued interest was repaid to us upon the sale of Citadel Center on November 8, 2006.

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

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

F-36

14. Fair Values of Financial Instruments

SFAS No. 107, “Disclosures About Fair Value of Financial Instruments” (“SFAS No. 107”) and SFAS No. 119, “Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments” require disclosure of the fair value of certain on- and off-balance sheet financial instruments for which it is practicable to estimate. Fair value is defined by SFAS No. 107 as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

We used the following methods and assumptions in estimating the fair value disclosures for financial instruments.

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

The carrying amount of cash and cash equivalents, restricted cash escrows, tenant accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturity of these financial instruments.

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

Mortgage and Notes Payable

The carrying amount of our variable rate borrowings approximates their fair value. The fair values of our fixed rate debt agreements are estimated using discounted cash flow analyses based upon incremental borrowing rates for similar types of borrowing arrangements.

Interest Rate Protection Agreements

The fair values of our interest rate protection agreements are based on rates offered for similar arrangements.

15. Commitments and Contingencies

Legal. On December 4, 2006, we were served with a copy of a Class Action Complaint and Demand for Jury Trial (the “Complaint”) filed by The Jolly Roger Fund LP and Jolly Roger Offshore Fund Ltd. (“Plaintiffs”) against Lightstone and us. The Complaint was filed on November 16, 2006 in the Circuit Court of Baltimore City, Maryland, Civil Division. We filed a motion to dismiss the Complaint on February 5, 2007. On March 1, 2007, Plaintiffs filed their First Amended Class Action Complaint and Demand for Jury Trial (“Amended Complaint”) and we filed a motion to dismiss the Amended Complaint on April 2, 2007.

F-37

15. Commitments and Contingencies (continued)

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

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

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

During the due diligence process in connection with the sale of certain industrial properties in October 2004, additional environmental contamination, beyond that previously identified by our environmental consultants, was discovered by the purchaser of our Chicago Enterprise Center, East Chicago Enterprise Center, and Hammond Enterprise Center facilities. As a result, we agreed to establish a $1.25 million environmental escrow at the closing, in addition to a $3.2 million reserve for use in remediation of the costs. In connection with the sale, the purchaser of these properties agreed to assume the responsibility for the environmental remediation of the property and any costs which may be incurred in excess of the amounts we placed in escrow at the closing. Any excess funds remaining in the $1.25 million escrow after the remediation of the additional environmental contamination will be returned to us. This escrow is included in our restricted cash with a corresponding liability included in other liabilities. At December 31, 2007, this escrow had a balance of $0.8 million.

F-38

15. Commitments and Contingencies (continued)

Our 330 N. Wabash Avenue office property currently contains asbestos in the form of spray—on insulation located on the decking and beams of the building. We have been informed by our environmental consultants that the asbestos in 330 N. Wabash Avenue is being properly maintained and no remediation of the asbestos is necessary. However, we have in the past and we may in the future voluntarily decide to remove or otherwise remediate some or all of this asbestos in connection with the releasing and/or redevelopment of this property. FASB Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations,” (“FIN No. 47”), clarifies the accounting for conditional asset retirement obligations as used in SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”). A conditional asset retirement obligation is an unconditional legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Therefore, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation under SFAS No. 143 if the fair value of the liability can be reasonably estimated. We recorded an asset and a liability of $4.4 million related to asbestos abatement as of December 31, 2007.

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

F-39

15. Commitments and Contingencies (continued)

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

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

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

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

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

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

F-40

15. Commitments and Contingencies (continued)

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

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

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

We have executed subleases at One North Wacker Drive for substantially all of the space to partially mitigate our obligation under the Citadel Reimbursement Obligation. As a requirement under one of the subleases for 27,826 square feet, we escrowed a total of $1.1 million with the owner of One North Wacker Drive as security for the payment of the difference between the rental amount payable under the Citadel lease and this sublease. This escrow is being returned to us pro-rata over the life of this sublease, of which $0.6 million has been received through December 31, 2007. The Citadel Reimbursement Obligation includes an estimated remaining nominal gross rental obligation of $42.9 million over the term of the lease. Although we have sold our investment in Citadel Center, we have retained 100.0% of this liability. Liabilities for leases assumed at December 31, 2007 and 2006 includes $3.5 million and $4.1 million, respectively, related to the Citadel Reimbursement Obligation, which is our estimate of the remaining gross rental obligation less estimated future sublease recoveries.

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

On November 26, 2001, we finalized a lease with a tenant for space in Continental Towers, our office buildings located in Rolling Meadows, Illinois. We have agreed to reimburse the tenant for a portion of the financial obligations consisting of base rent and the pro rata share of operating expenses and real estate taxes under the tenant’s lease for occupancy executed at an office building located in downtown Chicago, Illinois. As of December 31, 2007, this lease has a remaining estimated gross rental obligation of approximately $0.7 million. On February 14, 2003, we re-leased the space to the tenant for the remainder of the lease term of the pre-existing lease subject to the tenant’s option to terminate the lease effective as of any date after February 29, 2004, by providing us with six months prior written notice. We have approximately $0.4 million and $0.9 million in liabilities for leases assumed at December 31, 2007 and 2006, respectively, representing an estimate of our net liability related to this obligation which represents the differential between our remaining financial obligation under the pre-existing lease and the expected future rent from the tenant under the new lease.

F-41

16. Property Acquisitions, Placed in Service and Dispositions

The following properties were acquired, placed in service or sold in 2007, 2006 and 2005. The results of their operations are included or excluded in our consolidated statements of operations from their respective transaction dates.

Month

Property

Location

Sales Price

Sold

(dollars in

thousands)

2007 Sales

Office:

Narco River Business Center (1)

Calumet City, IL

7,400

May

2006 Sales

Office:

Citadel Center (2)

Chicago, IL

560,000

November

Land:

Libertyville (3)

Libertyville, IL

2,400

April

2005 Sales

Office:

208 S. LaSalle Street (4)

Chicago, IL

44,000

December

Land:

Libertyville (5)

Libertyville, IL

700

February


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

(2)		Dearborn LLC, the owner of Citadel Center and an entity in which we owned a joint venture interest, sold Citadel Center in November 2006. This property was sold by Dearborn LLC for a sales price for the entire property of $560.0 million. A subsidiary of our Operating Partnership owned a thirty percent (30%) joint venture interest in the Citadel Center property. At the closing, the Operating Partnership indemnified the purchaser against any costs or expenses in connection with the Citadel Reimbursement Obligation (as described below). The Operating Partnership previously indemnified its joint venture partner against the Citadel Reimbursement Obligation. The Citadel Reimbursement Obligation is the obligation of the joint venture under its lease with Citadel Investment Group, LLC (“Citadel”) to reimburse Citadel for the financial obligations, consisting of base rent and the pro rata share of operating expenses and real estate taxes, under Citadel’s pre-existing lease for 161,488 square feet of space at the One North Wacker Drive office building in downtown Chicago, Illinois. We have executed subleases at One North Wacker Drive for all of the space to partially mitigate our obligation under the Citadel Reimbursement Obligation. The foregoing obligations are partially secured by a total of $7.1 million held in escrow at closing.

F-42

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


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

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

(4)		We sold this property for a gross sales price of $44.0 million minus certain agreed upon closing prorations, including the assumption of the existing debt of $41.9 million on the property. After closing prorations and costs we received approximately $0.5 million in net proceeds from the sale. During the second quarter of 2005, we had recorded an asset impairment charge of $15.1 million related to this property. As a result of the revaluation of our balance sheet due to the Acquisition, no gain or loss was recorded on this sale.

(5)		Net proceeds from the sale of this property were $0.7 million. This property was unencumbered.

17. Restatements

The Company previously disclosed its intention to restate its financial statements for such periods in a Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on August 21, 2008. The Audit Committee of the Board of Trustees (the “Audit Committee”) of the Company, in consultation with members of the Company’s management, determined that the Company’s distributions to the owners of the common units of the Operating Partnership were incorrectly recorded in the Company’s consolidated financial statements. In addition, in February 2009, the Company, determined that a $4.2 million tax indemnification payment made in January 2006 was also incorrectly recorded in the Company’s consolidated financial statements. The Company did not amend its Quarterly Reports on Form 10-Q for the periods affected by the restatement in 2007 and 2006 nor its Annual Report on Form 10-K for 2006 and the financial statements and related financial information contained in such reports should no longer be relied upon.

All referenced amounts in this Annual Report for prior periods and prior period comparisons reflect the balances and amounts on a restated basis.

F-43

17. Restatements (continued)

The restatements increased the net loss by $14.2 million ($60.14 per diluted share) and $36,000 ($0.15 per diluted share) for the years ended December 31, 2007 and December 31, 2006, respectively, and increased shareholders equity by $61.1 million and $75.3 million as of December 31, 2007 and 2006, respectively. The effects of the restatements are as follows (000’s omitted):


	December 31, 2007						December 31, 2006
	As						As
	Previously			As			Previously			As
	Reported			Restated			Reported			Restated
Consolidated Balance Sheets
Building and improvements	$	351,782		$	347,582		$	345,463		$	341,263
Accumulated depreciation		(52,857	)		(52,627	)		(31,481	)		(31,366	)
Total assets		675,886			671,916			654,098			650,013
Minority interests-Operating Partnership		65,040			—			100,147			20,770
Shareholders’ equity (deficit) - Distributions in excess of earnings		(133,794	)		(72,724	)		(78,598	)		(3,306	)
Total shareholder’s equity (deficit)		(24,713	)		36,357			29,083			104,375

Consolidated Statements of Operations and Comprehensive Income (Loss)
Depreciation and amortization		32,700			32,585			34,598			34,483
Loss on tax indemnification		—			—			—			4,200
Total expenses		89,525			89,410			92,203			96,288
Operating income (loss)		1,488			1,603			5,193			1,108
Distributions and losses to minority partners in excess of basis		—			14,222			—			—
(Loss) income from continuing operations		(44,822	)		(59,044	)		8,512			8,647
Net (loss) income		(44,796	)		(59,018	)		8,683			8,647
Net loss available to common shareholders		(53,796	)		(68,018	)		(317	)		(353	)
Comprehensive (loss) income		(44,796	)		(59,018	)		8,683			8,647
Basis and diluted earnings available to common shares per weighted-average common share:
Loss from continuing operations after minority interests and allocation to preferred shareholders		(227.59	)		(287.73	)		(2.06	)		(1.49	)
Net loss available per weighted-average common share of beneficial interest		(227.48	)		(287.62	)		(1.34	)		(1.49	)

Consolidated Statements of Cash Flows
Net cash provided by operating activities		1,134			1,134			4,838			638
Net cash (used in) provided by investing activities		(129,700	)		(129,700	)		66,403			70,603

F-44

18. Interim Financial Information (unaudited) (as restated)

The following is our consolidated quarterly summary of operations for 2007:


	Year ended December 31
				Fourth			Third			Second			First
	Total			Quarter(1)			Quarter			Quarter			Quarter
	As Restated			As Restated			As Restated			As Restated			As Restated
	(dollars in thousands, except per share amounts)
Total revenue	$	91,013		$	20,508		$	21,433		$	25,155		$	23,917
Total expenses		89,410			20,857			19,850			25,725			22,978

Operating income		1,603			(349	)		1,583			(570	)		939
Loss from investments in unconsolidated joint ventures		(49,687	)		(48,274	)		(665	)		(224	)		(524	)
Interest and other income (expense)		2,961			(2,309	)		3,960			981			329
Interest:
Expense		(36,610	)		(10,263	)		(10,773	)		(7,760	)		(7,814	)
Amortization of deferred financing costs		(910	)		(229	)		(229	)		(232	)		(220	)
Distributions and losses to minority partners in excess of basis		(14,222	)		(10,172	)		(4,050	)		—			—

Loss from continuing operations before minority interests		(96,865	)		(71,596	)		(10,174	)		(7,805	)		(7,290	)
Minority interests		37,821			10,099			8,300			9,966			9,456

(Loss) income from continuing operations		(59,044	)		(61,497	)		(1,874	)		2,161			2,166
Discontinued operations, net of minority interests in the amount of $48 in the fourth quarter, $(93) in the third quarter, $(2,038) in the second quarter and $(836) in the first quarter		26			—			—			19			7

Net (loss) income		(59,018	)		(61,497	)		(1,874	)		2,180			2,173
Net income allocated to preferred shareholders		(9,000	)		(2,250	)		(2,250	)		(2,250	)		(2,250	)

Net loss available to common shareholders	$	(68,018	)	$	(63,747	)	$	(4,124	)	$	(70	)	$	(77	)


Basic and diluted earnings available to common shares per weighted average common share
Loss from continuing operations after minority interests and allocation to preferred shareholders	$	(287.73	)	$	(269.55	)	$	(17.44	)	$	(0.38	)	$	(0.36	)
Discontinued operations, net of minority interests		0.11			—			—			0.08			0.03

Net loss available per weighted-average common share of beneficial interest — basic and diluted	$	(287.62	)	$	(269.55	)	$	(17.44	)	$	(0.30	)	$	(0.33	)

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

F-45

18. Interim Financial Information (unaudited) (as restated) (continued)

The following is our consolidated quarterly summary of operations for 2006:


	Year ended December 31
				Fourth			Third			Second			First
	Total			Quarter			Quarter			Quarter			Quarter
	As Restated			As Restated			As Restated			As Restated			As Restated
	(dollars in thousands, except per share amounts)
Total revenue	$	97,396		$	24,571		$	24,446		$	24,311		$	24,068
Total expenses		96,288			21,880			23,235			23,384			27,789

Operating income		1,108			2,691			1,211			927			(3,721	)
(Loss) income from investments in unconsolidated joint ventures		(9,145	)		1,949			(3,733	)		(3,365	)		(3,996	)
Interest and other income		2,850			839			574			566			871
Interest:
Expense		(42,183	)		(13,330	)		(10,085	)		(9,763	)		(9,005	)
Amortization of deferred financing costs		(3,146	)		(2,146	)		(352	)		(351	)		(297	)
Gain on sales of real estate and joint venture interests		19,460			18,816			—			644			—

Loss from continuing operations before minority interests		(31,056	)		8,819			(12,385	)		(11,342	)		(16,148	)
Minority interests		39,703			(6,512	)		14,506			13,472			18,237

Income from continuing operations		8,647			2,307			2,121			2,130			2,089
Discontinued operations, net of minority interests in the amount of $123 in the fourth quarter, $59 in the third quarter, $(97) in the second quarter and $(40) in the first quarter		—			(1	)		—			1			—

Net income		8,647			2,306			2,121			2,131			2,089
Net income allocated to preferred shareholders		(9,000	)		(2,250	)		(2,250	)		(2,250	)		(2,250	)

Net (loss) income available to common shareholders	$	(353	)	$	56		$	(129	)	$	(119	)	$	(161	)


Basic and diluted earnings available to common shares per weighted average common share
Loss from continuing operations after minority interests and allocation to preferred shareholders	$	(1.49	)	$	0.24		$	(0.55	)	$	(0.50	)	$	(0.68	)
Discontinued operations, net of minority interests		—			—			—			—			—

Net (loss) income available per weighted-average common share of beneficial interest — basic and diluted	$	(1.49	)	$	0.24		$	(0.55	)	$	(0.50	)	$	(0.68	)

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

F-46

18. Interim Financial Information (unaudited) (continued)

(1)

As a result of a change in accounting methods for this investment from the cost method to the equity method the following fourth quarter adjustments were recorded to recognize:

Dividend income in the amount of $6.2 million previously recorded under the cost method as interest and other income was recorded as a reduction of Investments in Unconsolidated Entities.

We recognized a loss allocation, assuming a hypothetical liquidation at December 31, 2007, of approximately $47.8 million from this investment under the equity method of accounting as Loss From Investments in Unconsolidated Joint Ventures.

The restatement is (i) the result of the recognition of charges related to cash distributions to minority interest partners in excess of basis in the fourth quarter of 2007 (See Note 1 — Summary of Significant Accounting Policies — Minority Interest in Consolidated Real Estate Partnerships for further details) and (ii) the result of a charge to operations for a January 2006 tax indemnification payment (previously capitalized as building and improvements) in response to comments by the Staff of the SEC in connection with their review of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

19. Recent Accounting Pronouncements

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

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

F-47

19. Recent Accounting Pronouncements (continued)

20. Subsequent Events

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

330 N. Wabash Avenue Hotel Sale. On March 18, 2008, one of our subsidiaries, 330 N. Wabash Avenue, L.L.C. (“330 LLC”), completed the sale of Floors 2 through 13 of our 330 N. Wabash Avenue property to Modern Magic Hotel, LLC (the “Hotel Buyer”) for the purchase price of $46.0 million, subject to customary prorations and adjustments as provided in the purchase and sale agreement. The Hotel Buyer has an option to purchase the 14th Floor of our 330 N. Wabash Avenue property for $5.0 million (subject to escalation by CPI and certain other adjustments), in which case the proceeds would be used to partially prepay the mortgage loan encumbering the property. The Hotel Buyer and 330 LLC have also entered into a Declaration of Covenants, Conditions, Restrictions and Easements and various other documents that provide for necessary cross-easements and sharing of common area costs. The purchase and sale agreement includes a covenant by 330 LLC to perform certain asbestos removal, demolition and pre-construction work on all floors subject to the sale. 330 LLC deposited $10.7 million at closing into construction escrows with the title insurance company and $2.1 million with one of the mortgage lenders to be used for such costs. These obligations were recorded as a liability and charged against the gain when determining the book gain on sale. We recognized a book gain on the sale of approximately $9.8 million. The net proceeds from the Hotel sale, together with the proceeds from the loans referred to below, and a payment of $31.5 million from the Operating Partnership, were used to repay the prior debt on our 330 N. Wabash Avenue property and fund all of the escrows and cash deposit referred to above.

F-48

20. Subsequent Events (continued)

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

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

F-49

20. Subsequent Events (continued)

On April 1, 2008, we filed a Form 12b-25 with the Securities and Exchange Commission stating that we were not able to timely file our Annual Report on Form 10-K for the year ended December 31, 2007 because we did not receive audited financial statements from BHAC, an affiliate of ESH in which PGRT ESH holds a membership interest. This unconsolidated entity is considered to be a “significant subsidiary” under Rule 1-02(w) of Regulation S-X and separate audited financial statements of BHAC are required under Rule 3-09 of Regulation S-X.

In addition, on May 2, 2008, our Board declared a distribution to the holders of the 26,488,389 common units in the Operating Partnership and our 236,483 common shares, in an amount of $0.561275 per unit/share and having a record date of May 2, 2008 and a payment date of May 2, 2008.

F-50

PRIME GROUP REALTY TRUST

SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION

AS OF DECEMBER 31, 2007
As Restated

(dollars in thousands)


													Gross Amount Carried at
							Cost Capitalized						Close of Period						Accumulated
	Encumbrances(1)		Initial Cost(2)				Subsequent to Acquisition						12/31/07						Depreciation
					Buildings					Buildings					Building				at		Date of
	December 31				and					and					and				December 31		Original
	2007		Land		Improvements		Land			Improvements			Land		Improvements		Total		2007(3)		Acquisition

280 Shuman Blvd.	$	—	$	2,092	$	3,642	$	12		$	670		$	2,104	$	4,312	$	6,416	$	699	Nov. 1997
Continental Towers		115,000		12,166		122,980		363			8,192			12,529		131,172		143,701		15,820	Dec. 1997
4343 Commerce Court (4)		11,648		2,370		13,572		(8	)		1,257			2,362		14,829		17,191		1,716	Nov. 1997
800-810 Jorie Blvd.		23,276		6,265		20,187		—			800			6,265		20,987		27,252		2,927	Aug. 1999
330 N. Wabash Avenue (5)		195,000		45,582		126,397		(639	)		29,088			44,943		155,485		200,428		17,742	Dec. 1999
Brush Hill Office Court		8,157		3,456		10,295		(24	)		794			3,432		11,089		14,521		1,433	Dec. 1999
Enterprise Center II		5,971		1,659		5,272		(6	)		950			1,653		6,222		7,875		561	Jan. 2000
7100 Madison Avenue		3,897		1,268		3,663		(2	)		(26	)		1,266		3,637		4,903		365	Apr. 2000
180 North LaSalle Street		63,150		15,245		55,497		(138	)		5,625			15,107		61,122		76,229		10,972	Aug. 2000
Other Corporate Assets		138,778		—		464		—			70			—		534		534		392

Total	$	564,877	$	90,103	$	361,969	$	(442	)	$	47,420		$	89,661	$	409,389	$	499,050	$	52,627

F-51

PRIME GROUP REALTY TRUST

SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION

AS OF DECEMBER 31, 2007


(1)		See Note 4 — Mortgage Notes Payable to these consolidated financial statements for a description of our mortgage notes payable.

(2)		As a result of the Acquisition, we were required to revalue our balance sheet to reflect the fair market value of each of our assets and liabilities in accordance with SFAS No. 141.

(3)		Depreciation is calculated on the straight-line method over the estimated useful lives of assets, which are as follows:


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


(4)		This property collateralizes a mortgage note payable of $11.6 million.

(5)		A pledge of 100.0% of the ownership interest in the entity which owns this property is collateral for two mortgage notes payable totaling $195.0 million with the same lender.

The aggregate gross cost of the properties included above, for federal income tax purposes, approximated $500.6 million as of December 31, 2007. The net tax basis of our investment in unconsolidated real estate joint ventures for federal income tax purposes was $12.3 million at December 31, 2007.

The following table reconciles our historical cost for the years ended December 31, 2007, 2006 and 2005:


	Year ended December 31
	2007			2006			2005
	(dollars in thousands)
	As Restated			As Restated

Balance, beginning of period	$	482,447		$	471,892		$	619,059
Additions		21,602			14,010			18,674
Disposals		(4,999	)		—			(2,130	)
Impact of applying push down purchase accounting		—			—			(163,711	)
Property held for sale		—			(3,455	)		—

Balance, close of period	$	499,050		$	482,447		$	471,892

The following table reconciles the accumulated depreciation for the years ended December 31, 2007, 2006 and 2005:


	Year ended December 31
	2007			2006			2005
	As Restated			As Restated
	(dollars in thousands)

Balance at beginning of period	$	31,366		$	11,142		$	94,252
Depreciation and amortization		21,678			20,419			20,211
Disposals		(368	)		—			(493	)
Impact of applying push down purchase accounting		—			—			(102,828	)
Property held for sale		(49	)		(195	)		—

Balance, close of period	$	52,627		$	31,366		$	11,142

F-52

EXHIBIT 21.1

PRIME GROUP REALTY TRUST

SUBSIDIARIES OF THE REGISTRANT

DECEMBER 31, 2007

The following represents the Prime Group Realty Trust’s (the “Company”) and Prime Group Realty, L.P.’s (the “Operating Partnership”) operating subsidiaries (the Company and the Operating Partnership have a majority interest or control, except in the case of 77 West Wacker Drive, L.L.C. and Dearborn Center, L.L.C. the ownership of which are further described in the footnotes below) and related properties as of December 31, 2007:


Entity		Property
77 Fitness Center, L.P. (4)		Owner of Health Club at 77 West Wacker Drive
77 West Wacker Drive, L.L.C. (1), (2)		77 West Wacker Drive
77 West Wacker Limited Partnership (3), (4)		Sole member of 330 N. Wabash Avenue Mezzanine, L.L.C. and 99.5% owner of Brush Hill Office Center, L.L.C.
180 N. LaSalle Holdings, L.L.C. (1), (3)		Sole member of 180 N. LaSalle II, L.L.C.
180 N. LaSalle II, L.L.C. (1), (3)		180 N. LaSalle
280 Shuman Blvd., L.L.C. (1), (3)		280 Shuman Blvd. (Atrium)
330 N. Wabash Avenue, L.L.C. (1), (3)		330 N. Wabash Avenue
330 N. Wabash Mezzanine, L.L.C. (1), (3)		Sole member of 330 N. Wabash Avenue, L.L.C.
330 Redevelopment LLC (1)		Performs certain work at 330 N. Wabash Avenue
800 Jorie Blvd., L.L.C. (1), (3)		800-810 Jorie Blvd.
800 Jorie Blvd. Mezzanine, L.L.C. (1), (3)		Member owning 49.0% of 800 Jorie Blvd., L.L.C. (50.5% is owned by Prime Group Realty, L.P.)
1051 N. Kirk Road, L.L.C. (1), (3)		1051 N. Kirk Road
1600 167th Street, L.L.C. (1), (3)		Former owner of 1600-1700 167th Street (Narco River Business Center)
2305 Enterprise Drive, L.L.C. (1), (3)		2305 Enterprise Drive
4343 Commerce Court, L.L.C. (1), (3)		4343 Commerce Court (The Olympian Office Center)
7100 Madison, L.L.C. (1)		7100 Madison Avenue
Brush Hill Office Center, L.L.C. (1), (3)		Brush Hill Office Center
Dearborn Center, L.L.C. (1), (5)		Former owner of Citadel Center
LaSalle-Adams, L.L.C. (1), (3)		Former owner of 208 South LaSalle Street
Libertyville Corporate Office Park, L.L.C. (1)		Former owner of Vacant Land adjacent to 80 Pine Meadow Corporate Office Park
Libertyville Corporate Office Park II, L.L.C. (1)		Former owner of Vacant Land adjacent to 80 Pine Meadow Corporate Office Park
PGR Finance II, Inc. (6)		Member owning 1% of LaSalle-Adams, L.L.C.
PGR Finance IV, Inc. (6)		Member owning 0.1% of 1600 167^th Street., L.L.C.
PGR Finance VIII, Inc. (6)		Limited Partner owning 0.5% of 77 West Wacker Limited Partnership

F-53


Entity		Property
PGR Finance XIV, Inc. (6)		Member owning 0.1% in both 1051 N. Kirk Road, L.L.C. and 4343 Commerce Court, L.L.C.
PGR Finance XV, L.L.C. (1), (3)		Member owning 0.5% of Brush Hill Office Center, L.L.C.
PGR Finance XVII, Inc. (6)		Member owning 0.5% of 800 Jorie Blvd., L.L.C.
PGR Finance XXI, L.L.C. (1)		Member owning 0.1% of 2305 Enterprise Drive, L.L.C.
PGR Finance XXII, Inc. (6)		Member owning 1% of 180 N. LaSalle Holdings, L.L.C.
PGRLP 77 Manager LLC (1)		Manager of 77 W. Wacker Drive
PGRLP 131 Manager LLC (1)		Manager of Citadel Center, 131 S. Dearborn St.
PGRS 1407 BWAY LLC (1)		Asset and Development Manager of 1407 Broadway Avenue, New York, NY
PGRT Equity LLC (1)		Owner of (i) junior loans encumbering Continental Towers, (ii) 50% common interest in 77 West Wacker Drive, L.L.C., (iii) 280 Shuman Blvd., L.L.C., (iv) 800 Jorie Blvd. Mezzanine, L.L.C., and (v) Prime Group Management, L.L.C.
PGRT Equity II LLC (1)		Member owning 99.0% of 180 N. LaSalle Holdings, L.L.C.
PGRT ESH, Inc. (6)		Owner of interest in BHAC Capital IV, LLC
PGT Construction Co. (6)		Subsidiary of Services Company for construction work
Phoenix Office, L.L.C. (1)		Owner of 23.1% interest in Plumcor/Thistle, L.L.C., owner of a building in Thistle Landing in Phoenix, Arizona
Prime Group Management, L.L.C. (1), (3)		Manager of Continental Towers
Prime Group Realty Services, Inc. (7)		The Services Company, owner of 100% of PGT Construction Co., PRS Corporate Real Estate Services, Inc., Prime Services Holdings, Inc. and 99.9% of 77 Fitness Center, L.P.
Prime Rolling Meadows, L.L.C.(1)		Property adjacent to Continental Towers
Prime Services Holding, Inc. (6)		0.1% owner of 77 Fitness Center, L.P.
PRS Corporate Real Estate Services, Inc. (6)		Brokerage subsidiary of Services Company


(1)		Delaware Limited liability Company

(2)		PGRT Equity LLC, a subsidiary of the Operating Partnership, owns a 50% common interest, PGRLP 77 Manager LLC, a subsidiary of the Operating Partnership, manages the property and a third party owns the remaining 50% common interest.

(3)		We own both direct and indirect ownership interest in these entities through wholly owned subsidiaries listed above.

(4)		Illinois Limited Partnership

(5)		PGRT Equity LLC, a subsidiary of the Operating Partnership owns a 30% subordinated common interest, the Operating Partnership manages the property and a third party owns the remaining 70% common interest.

(6)		Delaware Corporation.

(7)		Maryland Corporation.

F-54

Report of Independent Registered Public Accounting Firm

The Board of Directors
BHAC Capital IV LLC

We have audited the accompanying consolidated balance sheet of BHAC Capital IV LLC (the Company) as of December 31, 2007, and the related consolidated statement of operations, changes in Members’ equity, and cash flows for the period from Acquisition (June 11, 2007) to December 31, 2007. Our audit also included the financial statement schedule listed in the Index at F-54. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2007, and the consolidated results of its operations, changes in Members’ equity, and cash flows for the period from Acquisition (June 11, 2007) to December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Greenville, South Carolina
May 22, 2008

F-56

BHAC Capital IV LLC

Consolidated Balance Sheet

December 31, 2007
(In Thousands)


Assets
Current assets Cash and cash equivalents	$	7,853
Accounts receivable, net of allowance for doubtful accounts of $896		19,315
Restricted cash		91,619
Other current assets		19,437
Due from affiliates		71,286

Total current assets		209,510

Property and equipment, net of accumulated depreciation of $171,151		5,683,185
Land available for sale		2,000
Deferred financing costs, net of accumulated amortization of $16,625		58,255
Trademarks		43,000
Intangible assets, net of accumulated amortization of $3,746		117,222
Goodwill		246,913
Receivable from affiliated party (mortgage and mezzanine obligation)		1,476,656
Other assets		2,239

Total assets	$	7,838,980


Liabilities and Members’ Equity
Current liabilities
Accounts payable and other accrued expenses	$	41,817
Construction and retainage payables		1,739
Accrued real estate taxes		16,887
Accrued payroll and payroll related expenses		29,776
Accrued interest payable		25,162
Subordinated notes, net of discount of $347		30,553

Total current liabilities		145,934

Mortgage payable		4,100,000
Mezzanine loans		3,295,456
Subordinated notes, net of discount of $1,158		6,991
Capital lease obligation		131
Other liabilities		485

Total liabilities		7,548,997

Commitments and contingencies

Minority interest in HVM L.L.C.		1,280
Minority interest in Extended Stay Inc.		117

Total minority interests		1,397

Members’ equity		288,586

Total liabilities and members’ equity	$	7,838,980

See accompanying notes.

F-57

BHAC Capital IV LLC

Consolidated Statement of Operations

Period from Acquisition (June 11, 2007) to December 31, 2007
(In Thousands)


Revenues:
Room revenues	$	474,016
Other property revenues		7,008
Management, administrative services, and G&A reimbursement fee income — affiliated party		10,666
Reimbursement of payroll from managed properties — affiliated party		23,674

Total revenues		515,364

Operating expenses:
Property operating expenses		202,202
Corporate operating expenses		33,701
Managed properties payroll and payroll related expense		23,674
Depreciation and amortization		184,560

Total operating expenses		444,137

Other income		484


Income from operations		71,711

Loss on interest rate caps		(2,900	)
Interest income		1,279
Interest income from affiliate		59,328
Interest and debt expense		(318,036	)

Loss from operations before minority interests		(188,618	)

Minority interest in income of HVM L.L.C.		(1,356	)


Net loss		(189,974	)

Preferred distributions		(19,257	)


Net loss allocated to common unit holders	$	(209,231	)

See accompanying notes.

F-58

BHAC Capital IV LLC

Consolidated Statement of Cash Flows

Period from Acquisition (June 11, 2007) to December 31, 2007


Operating activities
Net loss	$	(189,974	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		184,560
Amortization of deferred financing costs		16,625
Accretion of discount on subordinated notes		1,078
Loss on interest rate caps		2,900
Minority interest in income of HVM L.L.C.		1,356
Change in assets and liabilities:
Accounts receivable, net of change in allowance		1,669
Other current assets		(9,202	)
Accrued real estate taxes		(3,184	)
Accounts payable and other accrued expenses		(86	)
Accrued payroll and related expenses		(7,560	)
Accrued interest payable		17,910

Net cash provided by operating activities		16,092

Investing activities
Business combination purchase acquisition, net of cash acquired		(6,056,561	)
Building improvements and purchase of furniture, fixtures, and equipment		(25,895	)
Increase in restricted cash		(91,619	)
Other noncurrent assets		133

Net cash used in investing activities		(6,173,942	)

Financing activities
Proceeds from mortgage payable		3,284,030
Proceeds from mezzanine loans		2,644,149
Purchase of interest rate caps		(2,963	)
Deferred financing costs		(74,880	)
Repayment of mezzanine loans		(4,544	)
Issuance of series units		339,252
Minority interest distributions — Extended Stay Inc.		(8	)
Minority interest distributions and redemptions — HVM L.L.C.		(76	)
Distributions		(19,257	)

Net cash provided by financing activities		6,165,703

Net increase in cash and cash equivalents		7,853

Cash and cash equivalents:
Beginning of period		—

End of period	$	7,853


Supplemental cash flow information
Cash payments for interest	$	233,094

Income tax payments, net of refunds	$	103


Supplemental noncash disclosures
Increase in mortgage payable	$	815,970

Increase in mezzanine payable	$	655,851

Increase in accrued interest payable	$	4,835

Increase in receivable from affiliated party	$	1,476,656

Contribution of Series B equity interests	$	158,565

See accompanying notes.

F-60

BHAC Capital IV LLC

Notes to Consolidated Financial Statements

As of and for the Period Ended December 31, 2007

1. Business and Organization

General — BHAC Capital IV LLC (the Company or BHAC specifically as the parent entity within these consolidated financial statements), a Delaware limited liability company, was acquired June 11, 2007 as part of an acquisition of an affiliated group of existing hotel owner/operator companies. Upon consummation of the purchase acquisition on June 11, 2007, BHAC was owned by Prime Group Realty Trust (PGRT), Homestead Village LLC (HSD), and certain other investors. PGRT and HSD are affiliates of The Lightstone Group, a closely held real estate investment company majority-owned by David Lichtenstein.

The Company, through wholly-owned and majority-owned subsidiaries, owns and operates moderately priced, extended-stay lodging properties. The hotels are operated under the brand names “Extended Stay Deluxe,” “Extended Stay America,” “Studio Plus,” and “Crossland” in selected markets throughout the United States and Canada. The Company’s extended-stay lodging rooms are designed to appeal primarily to the corporate business traveler on temporary assignment, undergoing relocation or in training, and are located in infill locations proximate to major business centers and convenient to services desired by its customers. As of December 31, 2007 the Company had 552 hotel properties in operation in 43 U.S. states consisting of approximately 59,000 rooms and three hotels in operation in Canada consisting of 500 rooms.

Organization — BHAC owns all the outstanding common stock of Extended Stay Inc. (ESI), a real estate investment trust (REIT) which through its qualified REIT subsidiaries owns 552 hotels and an office building. ESI leases the hotel properties to its indirect wholly-owned subsidiaries organized as taxable REIT subsidiaries (TRSs) which operate the hotels.

HSD, which owns a majority interest in BHAC, owns/leases and operates 132 similar extended stay hotels. HSD is a wholly owned subsidiary of DL-DW Holdings LLC (DLDW), an investee of an affiliate of The Lightstone Group and David Lichtenstein.

Each of the hotel operating subsidiary TRSs have contracted with HVM L.L.C. (HVM), a separate, independently-owned affiliated hotel management and administrative services company, to manage the hotels and to provide certain other administrative services to the hotel ownership companies and holding companies. HVM provides the same services for the management of the hotels of HSD.

Acquisition — On June 11, 2007 DLDW and other investors acquired all of the limited liability company interests of BHAC and HSD. The acquisition was accounted for as a business combination using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. The purchase price was allocated to the assets acquired and liabilities assumed based on their fair values on the date of acquisition. The purchase price allocation is based on preliminary estimates and may be adjusted based on the finalization of certain amounts recorded in connection with the

F-61

1. Business and Organization (continued)

purchase. The purchase price for the acquisition of BHAC was $6.399 billion, which exceeded the fair value of assets acquired, resulting in the Company’s recording of goodwill of $246.9 million. Purchase price includes the assumption of working capital liabilities of $104.1 million, and assumption of subordinated debentures of $36.5 million. The purchase price was allocated as follows (in thousands):


Cash	$	43,518
Other assets		51,013
Due from affiliates		55,882
Property and equipment		5,826,163
Land available for sale		2,000
Trademarks		43,000
Intangible assets subject to amortization		130,972
Goodwill		246,913

Total allocated purchase price	$	6,399,461

The fair value of the tangible assets of acquired properties is based on appraisals and management’s determination of the relative fair values of these assets. Determination of the fair value of the identified intangible assets and liabilities of acquired properties, and the above and below market ground leases, are based on the present value, using an interest rate reflecting risks associated with the leases acquired, reflecting the difference between amounts to be paid under the leases and management’s estimate of the fair market lease rates over a period equal to the lease term, not exceeding the remaining useful life of the related building assets.

Intangible assets of trademarks, corporate customer relationships, advance booking backlog, and customer email database were valued in accordance with SFAS No. 141.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of BHAC, its subsidiary, ESI, and HVM, and are prepared in conformity with U.S. generally accepted accounting principles (US GAAP). Significant intercompany accounts and transactions have been eliminated in consolidation.

The Company’s consolidated financial statements include HVM as required under the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46 revised (FIN 46(R)). HVM is managed by HVM Manager L.L.C., an affiliate of The Lightstone Group.

The consolidated results of operations are for the period from the date of acquisition, June 11, 2007, to December 31, 2007 (the Period).

Use of Estimates

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

F-62

2. Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

The Company considers all cash on hand, demand deposits with financial institutions, credit card receivables, and short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. The Company has deposits in excess of $100,000 with a single financial institution which are not insured by the Federal Deposit Insurance Corporation.

Accounts Receivable and Allowance for Doubtful Accounts

A provision for doubtful accounts is made when collection of receivables is considered doubtful. Accounts receivable at December 31, 2007 are stated net of an allowance for doubtful accounts of $896,000. Write-offs of uncollectible accounts, net of recoveries, were $727,000 for the Period.

Restricted Cash

Restricted cash classified as current assets consists of cash (approximately $59 million) held in escrow or a cash management account for the payment of ground leases, taxes and insurance, loan service agent fee, debt service, replacement reserves, management fees, preferred return and required repairs, all as required by the mortgage and mezzanine loans and cash management agreements. Restricted cash also includes funds required to be deposited to such cash management account or in transit (approximately $12 million). Additionally, restricted cash includes a $20 million reserve fund for the preferred return to holders of the A-1 Series Units.

Property and Equipment

Property and equipment assets acquired are valued at acquisition cost based on their estimated fair values at the date of acquisition. Subsequent property and equipment additions are recorded at cost. Maintenance and repairs are charged to expense as incurred while expenditures that increase the life or utility of property or equipment are capitalized.

Depreciation is computed using the straight-line method over the following estimated useful lives:



Buildings		27 – 45 years
Building improvements		2 – 30 years
Site improvements		2 – 25 years
Furniture, fixtures, and equipment		2 – 10 years
Office equipment, computers, and computer software		3 – 10 years

The Company utilizes general contractors for the construction or major renovation of its properties. Pursuant to the terms of the Company’s contractual agreements with the general contractors, amounts are retained from payments made to them until such time as the terms of the agreement have been satisfactorily completed. Retained amounts of approximately $992,000 are included in construction and retainage payables on the consolidated balance sheet as of December 31, 2007.

F-63

2. Summary of Significant Accounting Policies (continued)

Land available for sale, comprised of land parcels not currently used in hotel operations or hotel development, are stated at acquisition cost on the consolidated balance sheet. These parcels are not currently being marketed.

Goodwill, Trademarks and Other Intangible Assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company classifies intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization, and (3) goodwill. Intangible assets with definite lives are tested for impairment if conditions exist that indicate the carrying value many not be recoverable. Impairment charges are recorded when the carrying value of the definite lived intangible assets is not recoverable by the cash flows generated from the use of the asset. No such impairments were recorded at December 31, 2007.

Intangible assets consist of trademarks, advance bookings backlog, corporate customer relationships, an email database, beneficial ground leases and goodwill. These intangibles were recorded at their estimated fair value at the date of the acquisition. Definite lived assets are amortized over a useful life of the expected period to be benefited.

The below-market lease values are amortized as an adjustment to rental expense over the remaining lease term. Amortization expense for the Period associated with below market leases was $22,000. Amortization is expected to be approximately $39,000 for the years ending December 31, 2008 — 2012.

Goodwill is recorded at the property-owning entity level and is not amortized. Goodwill is tested for impairment at least annually, and no such impairment was recorded at December 31, 2007.

Asset Impairments

In the event that facts or changes in circumstances indicate that the carrying amount of a property may be impaired, an evaluation is prepared in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In such an event, a comparison is made of the current and projected operating cash flows of each property into the foreseeable future on an undiscounted basis to the carrying amount of such property. In the event that the sum of the undiscounted cash flows is less than the carrying value of the property, the property would be adjusted to its estimated fair value. No such impairments were recorded at December 31, 2007.

Deferred Financing Costs

Deferred financing costs consist of certain costs incurred in obtaining the mezzanine and mortgage loans payable and are being amortized over the respective terms of the related components of the financings, two or five years, using the straight-line method which approximates the effective interest method. Deferred financing cost amortization was approximately $16,625,000 for the Period.

F-64

2. Summary of Significant Accounting Policies (continued)

Supplies

Supplies of approximately $9,809,000 at December 31, 2007, included in other current assets, consists of linens, room supplies and hotel supplies that are periodically replenished as they are consumed and are recorded at the lower of average cost or fair value.

Revenue Recognition

Room revenue and other income are recognized when earned as stays occur, using the accrual method of accounting. Amounts paid in advance are deferred until earned. Other revenue primarily consists of revenue derived from telephone, vending, guest laundry and other miscellaneous fees or services. Sales tax collected from customers is not included in revenues.

Advertising Costs

Advertising costs are expensed as incurred and are classified in corporate operating expenses on the consolidated statement of operations. Advertising costs were approximately $3,490,000 for the Period.

Operating Leases

Operating ground leases provide periods of escalating rent. Rental expense is recognized on a straight-line basis over the life of the related leases.

Fair Value of Financial Instruments

The fair value of all financial instruments reflected in the accompanying consolidated balance sheet is evaluated periodically based upon an interpretation of available market information and valuation methodologies that are considered appropriate for the individual instruments. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition of the Company’s financial instruments.

Cash and cash equivalents, restricted cash, accounts receivable and accounts payable are carried at cost, which approximates fair value based on their short-term, highly liquid nature. The fair value of the Company’s mortgages payable, mezzanine loans and subordinated notes is evaluated and disclosed in note 12. Their fair value has been estimated based on current rates available to the Company for debt of the same remaining maturities with comparable collateralizing assets, where applicable. Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

Derivative Instruments

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, establishes accounting and reporting standards requiring every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative instrument’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company does not enter into financial instruments for trading or speculative purposes. The Company entered into interest rate cap agreements, considered to be derivative instruments, which cap the interest on its mezzanine and mortgage loans payable.

F-65

2. Summary of Significant Accounting Policies (continued)

Insurance Reserves

The Company has various high deductible insurance programs which require estimates in determining the ultimate liability for claims arising under these programs. These insurance reserves are estimated by management using actuarial evaluations based on historical and projected claims and medical cost trends. At December 31, 2007, $20,208,000 of reserves for such programs are included in the consolidated balance sheet in accrued payroll and related expenses and in accounts payable and other accrued expenses, of which approximately $14,239,000 is related to HVM’s obligations for workers’ compensation and health insurance programs and approximately $5,969,000 is related to the Company’s property damage and general liability programs.

Variable Interest Entity

FIN 46(R) requires that, if an entity is deemed to be the primary beneficiary in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity.

ESI holds a significant variable interest in its management company, HVM—see note 8. HVM is consolidated with ESI as ESI represents approximately 70% of the business conducted by HVM and is the primary beneficiary of HVM. ESI’s maximum exposure to loss as a result of its involvement with HVM is related to the need to secure alternative management services and systems support if HVM were ever unable to fulfill its management agreement with ESI. ESI has no equity interest in HVM; therefore, the entire results of operations and members’ capital are reported as minority interest in HVM.

HVM is a company that provides hotel and administrative management services, including supervision, direction and control of the operations, management and promotion of the properties, in a manner associated with extended-stay hotels of similar size, type or usage in similar locations. HVM has total assets of approximately $46 million at December 31, 2007 and revenues of approximately $143 million for the Period.

Income Taxes

The Company (BHAC), as well as HVM, are limited liability companies which are not subject to federal income taxes; accordingly, federal income taxes have not been recorded in the accompanying consolidated financial statements. For federal income tax purposes, the operating results of BHAC and HVM are reportable by each limited liability company’s members. The Company is subject to state and local taxes in certain jurisdictions.

ESI, the REIT subsidiary of BHAC, is generally not subject to federal corporate income tax on its separately filed federal tax return as long as ESI complies with various requirements to maintain REIT status. ESI, however, is subject to state and local taxes in certain jurisdictions. The TRSs are subject to federal and state income taxes on their separate tax returns.

F-66

2. Summary of Significant Accounting Policies (continued)

Recently Issued Accounting Standards

In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. FIN 48 provides guidance for the recognition, de-recognition and measurement in financial statements of tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns. FIN 48 requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company will be required to adopt FIN 48 for its fiscal year beginning January 1, 2008. The Company is currently reviewing the provisions of FIN 48 to determine the impact on its consolidated operating results, consolidated financial position, and cash flows.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 provides guidance to simplify the accounting for certain hybrid instruments by permitting fair value re-measurement for any hybrid financial instrument that contains an embedded derivative, as well as to clarify that beneficial interests in securitized financial assets are subject to SFAS No. 133. In addition, SFAS No. 155 eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity may hold under SFAS No. 140. SFAS No. 155 was effective for the Company for all financial instruments acquired, issued or subject to a new basis occurring after January 1, 2007. Adopting this standard did not have an impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 clarifies the definition of exchange price as the price between market participants in an orderly transaction to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. SFAS No. 157 is effective for the fiscal years beginning after November 15, 2007, which will be the year ending December 31, 2008. The Company is currently reviewing the provisions of SFAS No. 157 to determine the impact on its consolidated operating results, consolidated financial position, and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently reviewing the provisions of SFAS No. 159 to determine the impact on its consolidated operating results, consolidated financial position, and cash flows.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS 141R replaces SFAS 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. This standard is effective for fiscal years beginning after December 15, 2008.

F-67

2. Summary of Significant Accounting Policies (continued)

In December 2007, the FASB issued SFAS No. 160, Accounting for Noncontrolling Interests. SFAS No. 160 clarifies the classification of noncontrolling interests in consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently reviewing the provisions of SFAS No. 160 to determine the impact on its consolidated operating results, consolidated financial position, and cash flows.

3. Property and Equipment

Net investment in property and equipment as of December 31, 2007, consists of the following (in thousands):


	December 31,
	2007

Hotel operating facilities:
Land	$	989,918
Site improvements		244,793
Building and improvements		4,394,854
Furniture, fixtures, and equipment		210,437

Total hotel operating facilities		5,840,002


Office:
Site improvements		18
Building and improvements		10,835
Fixtures and equipment		3,481

Total office		14,334


Land available for sale		2,000

Less accumulated depreciation		(171,151	)


Total property and equipment	$	5,685,185

F-68

3. Property and Equipment (continued)

The office building and all but two of the hotels are pledged as security for the Company’s debt—see note 5.

A portion of the office building is leased from ESI to BHAC for a term of five years, which in turn leases a majority of its leased space to HVM for corporate offices. ESI received rent income of approximately $591,000 from BHAC and HVM paid BHAC rent expense of approximately $626,000 for the Period under these leases; these amounts have been eliminated in consolidation. Additionally, ESI received lease income from other tenants of approximately $398,000 for the Period. In connection with the office building, ESI leases a portion of a parking garage under a lease agreement that terminates in May 2018. The Company is also a tenant under long-term leases for ground leases on two hotel properties. The lease agreements terminate in September 2016 and April 2031. As of December 31, 2007, future minimum cash lease payments under the long-term operating leases are as follows (in thousands):


Years Ending December 31:
2008		368
2009		369
2010		389
2011		397
2012		398
Thereafter		6,636

Total	$	8,557

Rent expense recognized on a straight-line basis for the Period was approximately $220,000.

The Company is also a tenant under a long-term ground lease for the corporate office building. This lease is classified as a capital lease and requires payments through March 2022 aggregating approximately $370,000.

Land available for sale was comprised of one parcel of land with a carrying value of $1,500,000 and two parcels of land adjacent to existing operating hotel properties with an aggregate carrying value of $500,000.

F-69

4. Intangible Assets, Deferred Financing Costs and Goodwill

The following table summarizes the intangible assets, deferred financing costs and goodwill as of December 31, 2007 (in thousands):


	December 31, 2007
		Gross
		Carrying		Accumulated
	Useful Life	Amount		Amortization			Net Value

Valuation of customer relationships	18 yrs.	$	120,814	$	(3,729	)	$	117,085
Valuation of customer email database	5 yrs.		154		(17	)		137
Valuation of advance booking backlog	1 yr.		10,004		(9,670	)		334

Total amortizable intangibles			130,972		(13,416	)		117,556
Deferred financing costs	2–5 yrs.		74,880		(16,625	)		58,255

Total amortizable intangibles and deferred financing costs		$	205,852	$	(30,041	)	$	175,811

Intangible assets not subject to amortization:
Trademarks		$	43,000				$	43,000

Goodwill		$	246,913				$	246,913

The weighted average amortization period for the amortizable intangible assets is approximately seventeen years.

The following table summarizes the estimated future amortization of the intangible assets subject to amortization and the deferred financing costs, as of December 31, 2007 (in thousands):


	Intangibles		Deferred
	Subject to		Financing
	Amortization		Costs		Total
Years Ending December 31:
2008	$	7,077	$	29,810	$	36,887
2009		6,743		16,078		22,821
2010		6,743		5,059		11,802
2011		6,743		5,059		11,802
2012		6,725		2,249		8,974
Thereafter		83,525		—		83,525

Total	$	117,556	$	58,255	$	175,811

F-70

5. Debt

June 2007 Mortgage Payable—$4.1 billion

The June 11, 2007 mortgage payable secured by 664 hotels and one office building was issued as part of the acquisition of BHAC and HSD. Subsidiaries of ESI participated with subsidiaries of HSD as co-borrowers in obtaining the mortgage debt. The mortgage security collateral pool of properties include properties of ESI (550 hotel properties and one office building) and of HSD (114 hotel properties). ESI and HSD are jointly and severally liable on the full mortgage debt. Mortgage payable amounts recorded in the financial statements of the Company represent the full mortgage amounts based upon ESI’s obligation for the full debt. A receivable from affiliated party of $815.9 million has been recorded, which represents the mortgage amounts allocated to HSD as per the loan documents for the per property release prices and allocated loan amounts, which were based on underwritten property cash flows of the collateral owned by HSD. ESI believes, based on financial performance information and projections of HSD, that HSD is fully capable of meeting its allocated obligations of $815.9 million.

The mortgage consists of components, of which $2.5 billion are fixed rate debt with interest rates ranging from 5.67995% to 6.32995% and floating rate components aggregating $900 million which bear interest at Libor plus spreads ranging from 0.45545% to 1.50545%. The remaining $700 million is floating rate debt bearing interest at Libor plus spreads ranging from 1.50545% to 4.05478%. All interest is calculated based on actual days over 360, with interest only payments due monthly on the 12^th, the loan payment date. The weighted-average interest rate at December 31, 2007 was 6.18%.

The $2.5 billion of fixed rate debt matures June 2012. The $1.6 billion of floating rate debt matures June 2009, but with 3 one-year options to extend at the Company’s option. Amortizing payments would be required if certain debt yield thresholds are not met and an extension period is elected. The second extension election requires a fee payment of $1.2 million. The third extension election requires a fee payment of 0.125% of the outstanding balance of the loan.

Properties may be released as collateral after prepayment of a portion of the mortgage loan, but would require that debt yield calculations of remaining mortgaged properties meet certain thresholds and that mezzanine debt also be prepaid in a release amount applicable to such properties.

The floating rate components of the mortgage loan may not be voluntarily prepaid in whole or in part prior to the payment date in January 2008. From January 2008 through March 2008 the floating rate components of the loan may be prepaid with payment of a premium of 1.9688% of the prepaid loan balance. After March 2008 and through June 2008 the prepayment premium on the floating rate components is 1.7188%, and none thereafter. The fixed rate components may not be voluntarily prepaid before March 2012. The fixed rate components may be defeased upon the earlier of 2 years after a securitization which includes the fixed components or 3 years from the funding of the loans. Voluntary prepayments and defeasance require that no event of default exists and notice of the prepayment be given. Notwithstanding the above prepayment terms of the loan, the Company can prepay up to $373,986,486 at any time without a prepayment premium.

The mortgage is guaranteed, under limited circumstances, by ESI, HSD, Lightstone Holdings LLC (an affiliate of The Lightstone Group and an investor in DLDW) and David Lichtenstein. The properties are collateral for the mortgage loan and generally are the only recourse to secure the loan; however, under limited circumstances of default, recourse may be obtained from the guarantors up to a maximum of $100 million.

F-71

5. Debt (continued)

Under the terms of the mortgage loan agreement and a cash management agreement, all receipts of the mortgaged properties are to be deposited into a Cash Management Account (CMA) in the control of the loan service agent. The loan service agent applies the receipts to subaccounts of the CMA each month beginning on the payment date until that month’s subaccount allocation is fulfilled. Monies are escrowed with respect to the mortgaged properties for the payment of ground leases of five properties, property taxes, insurance premiums, loan service agent fees, mortgage debt service, a reserve for replacements, operating expenses, mezzanine debt service, management fees, and a preferred return fund. Additionally, funds were escrowed at the acquisition date for required repairs. Operating expense funds are released to the Company twice a week until the full month’s allocation is met. Management fees are released to the Company on the loan payment date for the Company to make payments to HVM.

The ground lease reserve fund is for the ground rents on two hotel properties. The tax escrow fund is for taxes and other charges payable and requires a monthly deposit of one-twelfth of annual taxes, assessments and other charges. The insurance premium reserve requires a monthly deposit of one-twelfth of the annual estimate of property and general liability insurance premiums, and HVM’s worker compensation premiums. The mortgage and mezzanine debt service escrow funds are for all contractual debt service payments required under the mortgage and mezzanine loan agreements. The replacements reserve is for the replacement of fixtures, furniture, equipment, and other replacements and repairs, and requires a monthly deposit of 4% of gross revenues from operations of the mortgaged properties. The management fee fund is for the approximate 4% of revenues for management fees owed to HVM. The preferred return fund requires the lesser of a calculation of 8% of the liquidation value of the Series A-1 units of BHAC or a minimum of $1.25 million per month. The required repair escrow, which was initially funded from the proceeds of the borrowing in the amount of $2,863,000, is for certain repairs, capital improvements and replacements.

The excess cash flow reserve provisions of the agreement require the deposit of funds only if excess cash flow, as defined, is available and the occurrence of (i) a mortgage loan event of default; (ii) an event of default under any of the June 2007 mezzanine loan documents; (iii) bankruptcy action involving the hotel manager (HVM); or (iv) a debt yield event. These events are defined as “cash trap events.” A debt yield event means failing to meet certain trailing debt yield benchmarks, as defined, during the loan period or extensions of the loan period. Such debt yield calculation includes, on an aggregate basis, the earnings before interest, taxes, depreciation, and amortization operating results (EBITDA) of both the 664 hotel properties and the office building securing the mortgage payable. EBITDA, less management fees and reserve for replacements, divided by outstanding mortgage and mezzanine debt, equals debt yield.

For the trailing twelve months ended December 31, 2007, the Company’s debt yield calculation did not meet the minimum requirement and a debt yield event is considered to have occurred. A cash trap became effective and will continue until the Company satisfies a debt yield cure minimum for 6 consecutive months. Funds held in the excess cash flow reserve are held as additional collateral for the mortgage loan during the cash trap period. Upon achievement of a debt yield cure, the trapped funds would be applied to the “waterfall” of escrows and any remaining excess funds would then be available and released to the Company.

F-72

5. Debt (continued)

As of December 31, 2007, amounts held in escrow and the CMA for the benefit of ESI were as follows (in thousands):


Debt service	$	17,529
Taxes and insurance		23,139
Replacements reserve		8,469
Operating expenses and management fees		7,608
Ground leases		117
Required repairs		2,427

Total	$	59,289

Also included in restricted cash is a preferred return reserve account with a balance of $20 million at December 31, 2007 which was established under the terms of the BHAC limited liability company agreement. The preferred return reserve funds are held for the benefit of the BHAC Series A-1 Unit holders, who may instruct the escrow agent to disburse a monthly distribution of up to 10% per annum towards the 12% preferred return due the BHAC Series A-1 Unit holders if BHAC does not disburse at a 10% per annum level. BHAC may also, with permission of the Series A-1 Unit holders, access the fund to make disbursements to the holders up to the 10% per annum rate. BHAC under the limited liability company agreement is obligated to replenish the reserve back up to $20 million if reserve funds are used to make any distributions to the Series A-1 Unit holders.

June 2007 Mezzanine Loans—$3.3 Billion

Mezzanine debt of $3.3 billion was issued as part of the acquisition of BHAC and HSD on June 11, 2007. The mezzanine debt consists of 10 mezzanine notes, which are floating rate debt, bearing interest at Libor plus spreads ranging from 1.5% to 7.0%. All interest is calculated based on actual days over 360, with interest-only payments due monthly on the 12th, the loan payment date. The weighted-average interest rate at December 31, 2007 was 7.916%.

The mezzanine debt represents a joint obligation of wholly owned mezzanine loan borrower subsidiaries of both ESI and HSD. The receivable from affiliated party of $655.9 million recorded in the financial statements represents the allocation of the mezzanine loans based on the same loan allocations described above. ESI believes HSD is fully capable of meeting its allocated mezzanine obligations.

The mezzanine debt matures June 2009, but with three one-year options to extend at the Company’s option, if the mortgage extension options are also exercised.

Each mezzanine borrower is the legal and beneficial owner of the next most senior mezzanine borrower, with the most senior mezzanine borrower being the legal and beneficial owner of the mortgagors under the June 2007 mortgage payable. Each borrower has pledged all its regular membership or limited partnership interests or all its shares of capital stock in the mortgagors and certain other rights and all cash flow proceeds available from each more senior subsidiary borrower as security for its mezzanine loan. With respect to the June 2007 mezzanine loans, the June 2007 mortgagors are required to distribute the cash flow from the mortgaged properties, in excess of amounts due on the mortgage loan, amounts required to be deposited into reserve accounts and operating expenses for the mortgaged properties, to the mezzanine borrowers. Such excess cash flow is then required to be applied by each of the mezzanine borrowers in order of seniority to pay debt service on the related mezzanine loan.

F-73

5. Debt (continued)

The mezzanine loans may not be voluntarily prepaid in whole or in part prior to the payment date in January 2008. From January 2008 through March 2008 the loans may be prepaid with payment of a premium of 0.50% of the prepaid loan balance. After March 2008 and through June 2008, the prepayment premium on the loans is 0.25%, and none thereafter. Voluntary prepayments require that no event of default exists and notice of the prepayment be given. Notwithstanding the above prepayment terms of the loan, the Company can prepay up to $27,364,865 at any time without a prepayment premium.

Subordinated Notes due March 2008

In conjunction with the purchase acquisition on June 11, 2007, $30.9 million principal face amount of subordinated notes (the 2008 Notes) were assumed. The 2008 Notes were originally issued in March 1998, bear interest at an annual rate of 9.15%, and are payable semiannually on March 15 and September 15 of each year and mature on March 15, 2008. The 2008 Notes are redeemable at 100% of face principal amount, plus accrued interest.

On June 11, 2007, as part of the purchase acquisition, the 2008 Notes were recorded at approximately $29.6 million, net of a discount of $1.3 million. The Notes were fair valued at a discount to yield of 15.3%. The discount is being amortized by the interest method as part of interest expense over the remaining term of the 2008 Notes. The carrying amount of the 2008 Notes at December 31, 2007 was $30,553,000, net of unamortized discount of $347,000.

Holders of the 2008 Notes previously consented to proposed amendments to the 2008 Notes and to the indentures governing the notes, which eliminated substantially all of the restrictive covenants contained in the indentures and shortened certain notice periods for the redemption of notes. The notes are unsecured and subordinated to the Company’s other secured indebtedness. The 2008 Notes are pari passu with the 2011 Notes. See note 13 for subsequent events related to the 2008 Notes.

Subordinated Notes due June 2011

In conjunction with the purchase acquisition on June 11, 2007, $8.149 million principal face amount of subordinated notes (the 2011 Notes) were assumed. The 2011 Notes were originally issued in June 2001, bear interest at an annual rate of 9.875% payable semiannually on June 15 and December 15 of each year and mature on June 15, 2011.

The 2011 Notes were redeemable beginning on June 15, 2006, at 104.938% of face principal amount, plus accrued interest. The redemption price declines each year after 2006 and is 100% of face principal amount, plus accrued interest, beginning June 15, 2009.

F-74

5. Debt (continued)

On June 11, 2007, as part of the purchase acquisition, the 2011 Notes were recorded at approximately $6.9 million net of a discount of approximately $1.3 million. The Notes were fair valued at a discount to yield of 15.3%. The discount is being amortized by the interest method as part of interest expense over the remaining term of the 2011 Notes. The carrying amount of the 2011 Notes at December 31, 2007 was $6,991,000, net of unamortized discount of $1,158,000.

Holders of the 2011 Notes previously consented to proposed amendments to the 2011 Notes and to the indentures governing the 2011 Notes, which eliminated substantially all of the restrictive covenants contained in the indentures and shortened certain notice periods for the redemption of the 2011 Notes. The 2011 Notes are unsecured and subordinated to the Company’s other secured indebtedness. The 2011 Notes are pari passu with the 2008 Notes.

Advance From Affiliate

A TRS of ESI owes an advance of $6.5 million to BHAC. Interest expense is calculated at federal funds daily rate plus 0.75%, and interest for the Period was $202,294. At December 31, 2007 accrued interest payable is $1.2 million. These amounts have been eliminated in consolidation.

Interest Rate Caps

The June 2007 mortgage and mezzanine loan agreements require that the borrowers enter into interest rate protection agreements. The borrowers are required to maintain interest rate caps or swaps or replacement interest rate cap or swap agreements until the initial maturity date, as applicable, for each mortgage component and mezzanine loan. The effect of the interest rate protection agreements will be to limit the maximum interest rate exposure with respect to increases in Libor through the maturity dates. On June 11, 2007 the Company acquired interest rate caps at an allocated cost of approximately $2,963,000. The interest rate cap agreements are with providers who are expected to fully perform under the terms of the agreements.

The following table summarizes the terms of the interest rate cap agreements, their allocated fair values as of December 31, 2007, and the allocated gain (loss) for the Period (in thousands):


															Weighted
	Allocated														Avg.
Debt	Notional		Strike			Effective		Maturity		Fair		Allocated			Interest
Obligation	Amount		Price			Dates		Dates		Value		Gain/(Loss)			Rate

Mortgage loan	$	1,281,000		6	%		6/11/2007		6/15/2009		21					6.784	%
Mezzanine		1,762,000		6	%		6/11/2007		6/15/2009		28					7.908	%
Mezzanine		881,000		6	%		6/8/2007		6/15/2009		14					7.983	%

Totals	$	3,924,000									63	$	(2,900	)

F-75

5. Debt (continued)

Interest Expense

Interest expense is comprised of stated interest, amortization of deferred financing costs, amortization of premiums and accretion of discounts for the Period as follows (in thousands):


				Principal
				Outstanding
	Original			as of			Interest
	Principal			December 31,			Expense for
	Amount			2007			the Period

June 2007 Financing:
Mortgage payable	$	4,100,000		$	4,100,000		$	151,904
Mezzanine loans		3,300,000			3,295,456			162,828


Subtotal — June 2007 financing		7,400,000			7,395,456			314,732

Subordinated Notes:
2008 Notes		30,900			30,900			1,571
2011 Notes		8,149			8,149			447
Discount on 2008 and 2011 Notes		(2,583	)		(1,505	)		1,078
Letters of credit fees and bank fees		—			—			208


Total	$	7,436,466		$	7,433,000		$	318,036

The future maturities of long-term debt, at December 31, 2007, are as follows (in thousands):


	Debt		Discount			Total
	Payments		Accretion			Obligation
Years Ending December 31:
2008	$	30,900	$	(624	)	$	30,276
2009		4,895,456		(321	)		4,895,135
2010		—		(371	)		(371	)
2011		8,149		(189	)		7,960
2012		2,500,000		—			2,500,000
Thereafter		—		—			—

Total	$	7,434,505	$	(1,505	)	$	7,433,000

6. Income Taxes

BHAC and HVM are limited liability companies and are not subject to federal income taxes. For federal income tax purposes, the operating results of BHAC and HVM are reportable by each limited liability company’s members. Accordingly, federal income taxes have not been recorded in the accompanying consolidated financial statements for the operations of the Company.

F-76

6. Income Taxes (continued)

ESI has elected to be taxed as a REIT under the Internal Revenue Code (Code). To qualify as a REIT, ESI must meet a number of organizational and operational requirements, including a requirement that ESI distribute at least 90% of its taxable income to its stockholders. ESI intends to adhere to these requirements and maintain its REIT status. If ESI were to fail to qualify as a REIT in any taxable year, it would be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not qualify as a REIT for four subsequent taxable years. Even in qualifying as a REIT, ESI is subject to certain state and local income taxes, and may be subject to federal income and excise taxes on undistributed income. In addition, ESI is subject to rules which may impose corporate income tax on certain built-in gains recognized upon the disposition of assets that were acquired in connection with the acquisition of ESI. These rules apply only if the disposition occurs prior to 2015. Also, the net operating loss (NOL) and AMT credit carryforwards of ESI are available as a deduction and credit against these built-in gains and related tax. ESI believes it has met all requirements to qualify as a REIT for 2007 and intends to continue to qualify as a REIT under applicable provisions of the Code, as amended. Accordingly, no provision for federal income tax is made in the accompanying financial statements. The tax basis of the property assets acquired has carried over to ESI, as well as ESI’s NOL carryforwards and alternative minimum tax (AMT) credit carryforwards. NOL carryforwards aggregate approximately $220 million and AMT credit carryforwards aggregate approximately $29 million at December 31, 2007. As ESI has elected to be taxed as a REIT and intends to meet the distribution requirements, deferred tax liabilities (e.g., relating to fixed asset basis differences) and assets (e.g., related to net operating loss carryforwards) have not been recorded. The NOLs will begin to expire in 2024 if not utilized.

In 2007, ESI paid an aggregate of $59,746,000 in dividends to its stockholders ($19,257,000 for the Period), all of which are considered nontaxable distribution to the stockholders.

ESI as a REIT leases its hotel properties to TRSs which operate the hotels. The TRSs are subject to federal and state income taxes. The TRSs had NOL carryforwards of approximately $53,444,000 which expire from 2024 to 2027 and AMT credit carryforwards of approximately $132,000 at December 31, 2007, which do not expire. A valuation allowance has been recorded for the full amount of the loss carryforwards and AMT credit carryforwards at December 31, 2007, as management has determined it is more likely than not that these loss carryforwards will not be utilized.

7. Equity

BHAC’s limited liability company agreement provides for nine classes of member interests designated as Series A-1 Units, Series A-2 Units, Series A-3 Units, and Series B Units, collectively the “Series Units,” and as Common A-1 Units, Common A-2 Units, Common A-3 Units, Common B Units, and Common J Units, collectively the “Common Units”. The Series A-1, A-2, and B Units generally have no voting rights (except as to matters of changing the organization of the Company, changes in authorized units, or rights in securities offerings), no stated maturity or mandatory redemption, and are not convertible into other securities. The Series A-1 Units may designate one board member, with the right to add additional board members under certain circumstances. Series A-3 Units have one vote for each unit for election of members to the board and any matters before the board. The Series A-3 Units have no stated maturity or mandatory redemption and are not convertible into other securities.

F-77

7. Equity (continued)

The Series Units have a preferential return of 12% in order of seniority from noncapital proceeds or capital proceeds such as from a sale of the Company. Seniority is in the order of Series A-1 Units, Series A-2 Units, Series A-3 Units, and Series B Units. In the case of a capital proceeds event, after satisfaction of the 12% preferential return, the Series Units have a liquidation preference in the same order of seniority.

The number of authorized Series A-1 Units is 210, of which 210 units with a liquidation value of $1,000,000 per unit are issued and outstanding. The number of authorized Series A-2 Units is 146, of which 71.180412 units with a liquidation value of $1,000,000 per unit are issued and outstanding. The Series A-2 Units are owned by PGRT. The number of authorized Series A-3 Units is 157, of which 58.071353 units with a liquidation value of $1,000,000 per unit are issued and outstanding. The Series A-3 Units are owned by HSD. The number of authorized Series B Units is 158.565910, of which 158.565910 units with a liquidation value of $1,000,000 per unit are issued and outstanding. The Series B Units are owned by HSD. Under Emerging Issues Task Force No. 88-16, Basis in Leveraged Buyout Transactions, if a seller meets certain criteria regarding the portion of their remaining ownership after an acquisition and criteria regarding control of the affairs of the company sold, then in purchase accounting the retained share of ownership may be accounted for at fair value. Such criteria were met in this transaction.

Assuming a hypothetical liquidation at December 31, 2007, the cumulative unpaid 12% preferential return for the Series A-1 Units, Series A-2 Units, Series A-3 Units, and Series B Units would be approximately $1.2 million, $2.0 million, $0.6 million, and $10.8 million, respectively.

The Common A-1, A-2, A-3, and B Units generally have no voting rights (except as to matters of changing the organization of the Company, changes in authorized units, or rights in securities offerings), no stated maturity or mandatory redemption, and are not convertible into other securities. The number of authorized Common A-1 Units is 210, of which 210 are issued and outstanding. The number of authorized Common A-2 Units is 146, of which 71.180412 units are issued and outstanding. The number of authorized Common A-3 Units is 157, of which 58.071353 units are issued and outstanding. The number of authorized Common B Units is 158.565910, of which 158.565910 units are issued and outstanding. The number of authorized Common J Units is 14.2464, of which 14.2464 units are issued and outstanding. In general the Common Units rank pari passu with all other Common Units. The Common Units are allocated noncapital proceeds after deduction for the preferential 12% return of the Series Units. In the case of a capital proceeds event, after satisfaction of the Series Units’ 12% preferential return and the Series Units’ liquidation preference, the Common Units are generally allocated capital proceeds pari passu with the other Common Units.

The investors in DLDW and BHAC entered into a securityholders’ agreement which sets forth certain understandings and agreements among the securityholders in regards to voting of their interests, rights under security offerings, prohibitions and conditions on transfers of ownership, and other matters. The members are not required to make any additional capital contributions.

The minority interest in BHAC in the consolidated balance sheet consists of the ESI preferred shareholders’ interest and the equity interests of the members of HVM.

F-78

7. Equity (continued)

Under the terms of the limited liability company agreement of the Company, The Lightstone Group and its affiliates may earn fees of up to $1 million per year for advisement and consultation services to the Company. Such aggregate fees of approximately $306,000 for the Period are included in corporate operating expenses in the accompanying consolidated statement of operations.

Changes in the capital accounts of the members under a hypothetical liquidation at book values would be as follows for the Period (in thousands):


	Series Units:												Common Units:
	A-1			A-2			A-3			B			A-1		A-2		A-3		B		J

Preferential return of 12% of liquidation value	$	14,280		$	8,160		$	629		$	10,782			N/A		N/A		N/A		N/A		N/A
Less cash distributions paid		(13,090	)		(6,167	)		—			—			—		—		—		—		—
Adjustment of liquidation preference for losses		—			(56,008	)		(9,252	)		(158,566	)		N/A		N/A		N/A		N/A		N/A

Net change		1,190			(54,015	)		(8,623	)		(147,784	)		—		—		—		—		—
Capital accounts, beginning of period		210,000			120,000			9,252			158,566			—		—		—		—		—

Capital accounts, end of period	$	211,190		$	65,985		$	629		$	10,782		$	—	$	—	$	—	$	—	$	—

8. Related Party Transactions

Hotel Management Agreements

ESI’s TRS subsidiaries and HSD have hotel management agreements with HVM with respect to all of the hotels which provide for management services including supervision, direction and control of the operation, and management and promotion of the hotel properties in a manner normally associated with extended-stay hotels of similar size, type, or usage in similar locations. As hotel manager, HVM is entitled to receive a management fee ranging from 3.75% to 4.0% of property revenues for management of the properties of the TRS subsidiaries and from 3.75% for owned properties to 6%, plus an incentive fee, for the capital leased properties for management of the properties of HSD. The fees are based on a percentage of all receipts, revenues, income and proceeds of sales of every kind received by the hotel properties, including, without limitation: room rentals, rent or other payments received from subtenants, licensees, and occupants of commercial and retail space located in the related properties. Hotel management fees for all management activities were approximately $18,563,000 for the TRS entities and $6,280,000 for HSD for the Period, which amounts have been eliminated in consolidation.

In conjunction with the hotel management agreements, HVM is reimbursed on a regular basis for total aggregate compensation, including salary and fringe benefits payable with respect to onsite personnel employed by HVM at the properties of the TRS subsidiaries and HSD. HVM was reimbursed for payroll and payroll-related amounts totaling $85,928,000 from the TRS subsidiaries and approximately $23,674,000 from HSD for the Period, which amounts have been eliminated in consolidation.

F-79

8. Related Party Transactions (continued)

The hotel management agreements for the TRS entities expire on either December 31, 2024 or 2025, and the hotel management agreements with HSD expire on December 31, 2053; these agreements may be terminated by either party at any time for any reason.

Service Agreements

ESI and HSD have service agreements with HVM whereby HVM provides services for certain administrative, legal, financial, accounting and related services, including services related to property acquisitions and oversight and procurement of capital assets. Fees consist of HVM’s cost of providing the services plus 6%. The service agreements expire January 1, 2026, but may be terminated by either party at any time for any reason upon written notice. HVM earned $982,000 from ESI and $436,000 from HSD during the Period, which amounts have been eliminated in consolidation.

G&A Expense Reimbursement Agreements

ESI’s TRS subsidiaries and HSD also have a G&A Expense Reimbursement Agreement with HVM under which HVM receives a reimbursement of 106% of HVM’s general and administrative (G&A) expenses, as defined, to the extent HVM incurs allocated G&A expenses in excess of HVM’s management fee income and services fee income from ESI, the TRS subsidiaries and HSD. For the Period HVM recorded approximately $3,556,000 reimbursement earned from ESI’s TRS subsidiaries and approximately $3,781,000 from HSD, which amounts are eliminated in consolidation. The G&A Expense Reimbursement Agreements expire December 31, 2024, but may be terminated by ESI or HSD for any reason at any time, provided however that each receives the consent of the other.

Services to Affiliates

HVM obtained hotel management agreements to manage the operations of two hotels owned and operated by Lightstone Value Plus REIT (LVP), an affiliate of The Lightstone Group. The management agreement provides for a management fee of 5% of revenues and a fee for reservation services, travel agent commissions, and marketing and advertising of 2.5% of revenues. HVM is also reimbursed for the payroll and related costs of on-site personnel. Management agreement fees aggregated $39,551 and payroll and related reimbursement aggregated $114,000 for the Period. Additionally, BHAC licenses trademarks for use at the two hotels for a fee of 0.2% of revenues or $1,000 for the Period. At December 31, 2007 LVP owed approximately $316,000 for reimbursement of capital assets purchased, which is included in accounts receivable.

9. Trademark Licenses

BHAC is the owner of the trademarks “Extended Stay Deluxe,” “Extended Stay America,” “Studio Plus,” and “Crossland.” BHAC has licensed the use of the trademarks to its TRS subsidiaries. One license was granted for a 20-year period and previously paid for by the TRS with an issuance of a note and preferred stock. Interest on the note at 10% aggregated $447,000 for the Period. Preferred dividends aggregated $81,000 for the Period. Such interest and preferred dividends have been eliminated in consolidation.

F-80

9. Trademark Licenses (continued)

The other TRS subsidiaries license the trademarks under agreements with BHAC which provide for a trademark fee of 0.2% of revenues. Trademark fees under this agreement were $644,000 for the Period, which amount has been eliminated in consolidation.

10. Commitments and Contingencies

In periods prior to these consolidated financial statements, ESI settled a series of product liability cases with a window manufacturer and certain of its insurers over defects in windows installed at a number of hotels. The amount recovered was approximately $25 million. That settlement included the entry of a consent judgment for an additional $30 million to be executed only against the proceeds available under the insurance policies issued by three non-settling insurers. ESI, as a judgment creditor, has filed a garnishment action against the insurers. ESI believes it has a strong case and the case is in the discovery stage. No estimate of recovery is available at this time.

The Company is not a party to any other litigation or claims, other than routine matters arising out of the ordinary course of business, that are incidental to the operation of the business of the Company. The Company believes that the results of all claims and litigation, individually or in the aggregate, will not have a material adverse effect on its business, financial position or results of operations.

11. Employee Benefit Plans

HVM has a savings plan that qualifies under Section 401(k) of the Code covering substantially all employees. The plan has an employer matching contribution of 50% of the first 6% of an employee’s contribution, which vests over an employee’s initial five-year service period. The plan also provides for contributions up to 100% of eligible employee pretax salary, subject to the Internal Revenue Service’s annual deferral limit of $15,500 in 2007. Employer contributions totaled approximately $620,000 for the Period.

12. Fair Value of Financial Instruments

Fair values of the Company’s mortgage payable, mezzanine loans and subordinated notes were estimated using discounted cash flows based on current market conditions for comparable financial instruments, including market interest rates and credit spreads. As of December 31, 2007, the carrying values and estimated fair values of the Company’s mortgage payable, mezzanine loans and subordinated notes are as follows (in thousands):


	December 31, 2007
	Carrying		Estimated
	Value		Fair Value

Mortgage payable, mezzanine loans and subordinated notes	$	7,434,505	$	7,331,430

Fair values presented in the above table are based on estimates that consider the terms of the individual instruments. Considerable judgment is required to interpret market data to develop estimates of fair value. However, there is not an active market for these instruments. Therefore, the estimated fair values do not necessarily represent the amounts at which these instruments could be purchased, sold, or settled. The use of different market assumptions and/or estimation methodologies may have a material effect on estimates of fair value.

F-81

13. Subsequent Events

On February 14, 2008, a subsidiary of the Company mortgaged 2 hotels for $8.5 million. The mortgage is secured by land, building and furniture and fixtures of these hotels and is guaranteed by ESI. The mortgage has an initial maturity date of February 2010 with an option to extend for six months given certain conditions are met and an extension fee of 0.125% of outstanding principal balance is paid. Interest expense is calculated using the one month Libor rate plus a margin of 2.85%. The mortgage also requires compliance with certain financial tests and maintenance of certain financial ratios. The Company has not complied with certain of the financial tests and ratios. The lenders thus have rights to pursue actions under the mortgage. Management of the Company is in discussion with the lenders, which may result in revisions of the loan terms or loan balance.

On April 15, 2008, an amendment to the mortgage and mezzanine loan agreements was entered into by the borrowers which prohibits future distributions from the borrowing entities to the investors of DLDW and BHAC except for $1,250,000 per month of preferred dividends to the Series A-1 unit holders of BHAC permitted by the loan agreement. The amendment was entered into upon the Company’s resolution of the sourcing of funds to pay all amounts owed on the 2008 Notes and revision of budgeted expenditures for 2008.

On April 16, 2008, DLDW secured a loan from affiliated investees of the Company (the lender) in the amount of $22 million. The note is guaranteed by BHAC, secured by the DLDW Libor floor certificates, bears interest at 25%, matures on May 1, 2011 and requires principal and interest payments throughout the term of the note. The DLDW Libor floor certificates are also pledged to the lender, and consequently the cash income generated from the certificates is being sent by the trustee directly to the lender for payment of the required principal and interest payments, with any excess to be held by the lender in a separate cash collateral account. The Company used the proceeds of the note, together with $10,724,000 of the Company’s funds, to repay the 2008 Notes on April 16, 2008 in total. Payoff of the 2008 Notes, which had matured March 15, 2008, included $30,900,000 of principal together with accrued interest of approximately $1,724,000 ($1,414,000 of which was due at maturity and $310,000 of which accrued on the principal and accrued interest from the maturity date to April 16, 2008), and approximately $100,000 of professional fees. Upon this repayment of the 2008 Notes, the Company has no further obligation related to the 2008 Notes.

F-82


	PAGE
PART I

Item 1. Business		5

Item 1A. Risk Factors		13

Item 1B. Unresolved Staff Comments		23

Item 2. Properties		23

Item 3. Legal Proceedings		25

Item 4. Submission of Matters to a Vote of Security Holders		26

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		27

Item 6. Selected Financial Data		29

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		31

Item 7A. Quantitative and Qualitative Disclosures About Market Risk		53

Item 8. Financial Statements and Supplementary Data		54

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		54

Item 9A. Controls and Procedures		54

Item 9B. Other Information		56

PART III

Item 10. Directors and Executive Officers of the Registrant		57

Item 11. Executive Compensation		61

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		67

Item 13. Certain Relationships and Related Transactions		68

Item 14. Principal Accountant Fees and Services		69

PART IV

Item 15. Exhibits and Financial Statement Schedules		71

Signatures		82

Exhibit 10.81
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2


Report of Independent Registered Pubic Accounting Firm			F-56

Consolidated Financial Statements:

Consolidated Balance Sheet			F-57

Consolidated Statement of Operations			F-58

Consolidated Statement of Changes in Members’ Equity			F-59

Consolidated Statement of Cash Flows			F-60

Notes to Consolidated Financial Statements			F-61

Financial Statement Schedule
Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2007			F-83


			Accumulated			Total
	Members’		Deficit and			Members’
	Capital		Distributions			Equity

Contribution of capital June 11, 2007	$	497,817	$	—		$	497,817
Preferred distributions		—		(19,257	)		(19,257	)
Net loss		—		(189,974	)		(189,974	)

Balance—December 31, 2007	$	497,817	$	(209,231	)	$	288,586