Real Estate Investments

12 Months Ended

Dec. 31, 2011

Real Estate Investments

3. Real Estate Investments

Real estate held for investment and related intangible liabilities on real estate investments consisted of the following at December 31, 2011 and December 31, 2010:

	December 31,
	2011			2010
Real estate investments:
Land	$	203,184		$	190,521
Building and improvements		1,304,655			1,268,320
Construction in progress, land		2,345			951
Construction in progress, building and improvements		6,277			5,557
Intangible assets		165,963			183,543
Less: Accumulated depreciation and amortization		(280,898	)		(250,493	)
Real estate investments, net	$	1,401,526		$	1,398,399
Intangible liabilities on real estate investments:
Intangible liabilities	$	47,908		$	47,908
Less: Accumulated amortization		(12,689	)		(10,503	)
Intangible liabilities on real estate investments, net	$	35,219		$	37,405

During the three months ended December 31, 2011, the Company completed the following real estate acquisition:

				Purchase			Net Rentable
Month Acquired		Tenant or Guarantor	Location		Price	Lease Expires		Square Feet
November	Lowes Companies, Inc.		2401/2501 Elysian Fields Ave., New Orleans, LA	$	28,474	May 2030		133,841

The above acquisition was funded with $11,697 of cash and the assumption on in-place mortgage financing in the outstanding principal amount of $16,777.

There were no acquisition costs or interest charges capitalized as part of buildings and improvements for the above acquisition.

Development Activities

During July 2011, the Company entered into a joint venture that is developing a 17 story office building primarily on a build-to-suit basis for Cimarex Energy Co. with a project budget of $51,837. The Company owns a 99% ownership interest in and is obligated to fund approximately one-half of the costs of the project, with the other half of the project costs to be funded by Bank of Oklahoma pursuant to a loan agreement it has entered into with the Company’s 99% owned joint venture entity. The Company consolidates the joint venture for financial accounting purposes.

Construction activity and funding of the project commenced during the third quarter of 2011.

The table below details the Company’s construction in progress associated with the Cimarex joint venture as of December 31, 2011. The information included in the table below represents management’s estimates and expectations at December 31, 2011 which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual results.

				Lease	Investment	Estimated	Estimated	Estimated
		Property	Approximate	Term	through	Remaining	Total	Completion
Location	Tenant	Type	Square Feet	(years)(1)	12/31/11	Funding(2)	Investment(3)	Date
Tulsa, Oklahoma	Cimarex Energy Co.	Office Building	324,000	12	$8,159	$46,841	$55,000	Q1 2013

(1) The lease is in force and rent will commence as building floors are completed and delivered to the tenant and the 12 year lease term will commence upon completion and delivery of all building floors to the tenant.

(2) The Company has entered into a construction/term loan with Bank of Oklahoma to fund a portion of the total investment. Upon completion of construction, up to $31,000 is expected to have been funded from borrowings under the loan agreement with Bank of Oklahoma. See Note 9.

(3) Interest and fees the Company will earn during the construction period are expected to reduce the total investment to $53,000.

Straight-Line Rent Adjustment

As described under “Revenue Recognition” in Note 2 above, the Company recognizes rental revenue from its owned properties on a straight-line basis as required by relevant accounting guidance. The impact of the straight-line rent adjustment on rental revenue may be recorded on the Company’s Consolidated Balance Sheet through accrued rental income and deferred rental income. Amounts for accrued rental income and deferred rental income as of December 31, 2011 and December 31, 2010, were as follows:

	December 31,
	2011		2010
Accrued Rental Income	$	41,387	$	39,506
Deferred Rental Income		2		-

Accrued rental income is included in “Other assets” on the Company’s Consolidated Balance Sheet. See Note 8. Deferred rental income is included in “Accounts payable and other liabilities” on the Company’s Consolidated Balance Sheet. See Note 10.

Depreciation and Amortization Expense

Depreciation expense and amortization of intangible assets and liabilities on real estate investments for the years ended December 31, 2011, December 31, 2010 and December 31, 2009, were as follows:

	December 31,
	2011		2010		2009
Depreciation on real estate (included in depreciation and amortization expense)	$	33,208	$	32,105	$	32,738
Amortization of in-place leases (included in depreciation and amortization expense)		15,936		15,976		18,517
Amortization of above-market leases (included as a reduction of rental revenue)		3,461		3,849		3,849
Amortization of below-market leases (included as an increase to rental revenue)		2,187		2,186		1,593

As of December 31, 2011, the Company’s weighted average amortization period on intangible assets was 7.6 years, and the weighted average amortization period on intangible liabilities was 25.6 years.

Scheduled amortization on existing intangible assets and liabilities on real estate investments as of December 31, 2011 was as follows:

	Intangible		Intangible
	Assets		Liabilities
2012	$	15,064	$	2,186
2013		9,392		2,051
2014		9,034		1,954
2015		8,375		1,678
2016		6,789		1,614
Thereafter		19,398		25,736
Total	$	68,052	$	35,219

Owned Property Investment and Financing Strategy

Nearly all of the Company’s owned properties are subject to financing and have been pledged as collateral to the Company’s lender that has provided the applicable financing. In order to further reduce leverage, the Company may increase the number of properties it owns without financing in place in the future. When it decides to finance a property, the Company’s strategy is to own and finance on a long-term basis such property through a separate and distinct special purpose entity, or SPE, with the property and the related lease or leases on the property generally representing the sole assets of the SPE and the sole collateral available to the Company’s lender in the event the Company defaults on the debt that finances the property. Also see Note 9.

Annual Impairment Testing

The Company evaluated its owned property portfolio for impairment at December 31, 2011, and determined that no impairment losses were appropriate other than as set forth below.

Hartford, Connecticut Property

The lease and non-recourse mortgage debt on the Company’s property in Hartford, Connecticut matured during October 2011. During December 2011, the property was transferred to the lender in full satisfaction of the mortgage debt. During the year ended December 31, 2011, the Company recorded impairment losses of $16,423 and gain on debt extinguishment of $18,861, related to the disposition of the property to the lender.

Johnston, Rhode Island Property

The Company recognized an impairment loss on its Johnston, Rhode Island property as of December 31, 2009. The Company estimated the fair value of the property based on a variety of assumptions, including the time expected to lease up the building, expected rents and operating expenses, an estimate of amounts the Company expects to invest to improve the building, and an estimate of sale proceeds in connection with a potential sale of the property at a future date. These estimates are highly subjective and could differ materially from actual results. Based on the Company’s impairment analysis, it recognized an impairment loss of $11,923 on this property which is included in “Loss on investments” in the Consolidated Statement of Operations for the year ended December 31, 2009.

As of December 31, 2011, the Company performed an impairment analysis of its Johnston, Rhode Island property and concluded that no further impairment losses were necessary as the estimated future cash flows from the property are in excess of the Company’s applicable carry value of $25,493.