8-K

                    SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT
                     Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934



      Date of Report (Date of earliest event reported): September 11, 2001



                         CarrAmerica Realty Corporation
             (Exact name of registrant as specified in its charter)



          Maryland                 1-11706                 52-1796339
(State or other jurisdiction     (Commission             (IRS Employer
       of incorporation)         File Number)        Identification Number)



      1850 K Street, NW, Suite 500
             Washington, DC                                20006
(Address of principal executive offices)                 (Zip Code)


               Registrant's telephone number, including area code:
                                 (202) 729-7500


                                 Not applicable
          (Former name or former address, if changed since last report)


Item 5.   Other Events

          This Current Report on Form 8-K is being filed to provide information
to investors regarding the expected impact on us of the recent terrorist attacks
on New York and Washington, updated tax disclosure and an update on certain
litigation matters that we have previously discussed in our public reports.


Effect of Terrorist Attacks
---------------------------

          We own controlling interests in nine office buildings located in
downtown Washington, D.C. that contain approximately 2.1 million net rentable
square feet, representing approximately 10.6% of the total net rentable square
feet of our consolidated portfolio.  These properties contributed approximately
15% of our property operating income for the first six months of 2001.  Most of
these properties (like most Class A office buildings in downtown Washington,
D.C.) are located within a one-mile radius of the White House.

          While the barbaric attacks on the World Trade Center and the Pentagon
may have taken a severe emotional toll on U.S. citizens, including our
employees, we do not believe that these attacks will have a material adverse
effect on our financial condition or results of operations.  In the short term,
it is possible that there may be some uncertainty in terms of rents that are
achieved with respect to newly leased space in downtown Washington, D.C.
properties, in light of these properties' proximity to major U.S. landmarks,
such as the White House.  Additional uncertainty may result from the potential
continued closure of Ronald Reagan Washington National Airport, due to security
concerns. No official announcement has yet been made on whether the airport will
reopen, and, as a result, the potential adverse impact on the downtown
Washington, D.C. office market is unclear. However, in the long term, we
continue to believe that the downtown Washington, D.C. office market will be an
extremely attractive market, because of a number of factors that contribute to
long-term stability. These factors include the city's status as the nation's
capital, as well as the major presence of the Federal government, international
agencies and private-sector professional organizations, including law firms. As
a result, the tragic events of September 11 will not have any significant effect
on our investment decisions regarding the downtown Washington, D.C. market, and
we remain committed to maintaining a significant investment in this market.

Updated Tax Disclosure
----------------------

          As part of an ongoing desire to provide information about us in a
manner that is easier to update on a regular basis, we are filing with this
report a

                                      -2-


description of the material U.S. federal income tax consequences relating to the
taxation of us as a REIT and the ownership and sale of our securities. This
replaces and supersedes prior descriptions of the federal income tax treatment
of us and our stockholders to the extent that they are inconsistent with the
description contained in this Form 8-K.

Updated Litigation Disclosure
-----------------------------

          In addition, we are updating in this Form 8-K our previous disclosure
with respect to litigation matters, including certain litigation involving us
and two stockholders of HQ Global Holdings, Inc. ("HQ Global"), a company in
which we currently hold an approximate 17% interest (14% on a fully diluted
basis). This replaces and supersedes prior disclosure regarding this litigation
to the extent it is inconsistent with the disclosure contained in this Form 8-K.

          We are currently involved in two separate lawsuits with two
stockholders of HQ Global. The first lawsuit involves the September 1998
conversion of an approximately $111 million loan that we made to HQ Global into
stock of HQ Global. We, along with HQ Global, initiated this lawsuit in the
United States District Court for the District of Columbia in February 1999,
asking the court to declare that the terms of the debt conversion were fair,
after two minority stockholders threatened to challenge the terms of the
conversion. These stockholders had claimed that both the conversion price used
and the methods by which the conversion price was agreed upon between HQ Global
and us were not fair to HQ Global or these stockholders. Thereafter, these two
stockholders filed their own counterclaims against HQ Global, the board of
directors of HQ Global and us. The stockholders asked the court to declare the
conversion void, or in the alternative for compensatory and punitive damages.

          On September 12, 2001, the trial court granted these stockholders'
motion for summary judgment, declaring that the shares issued in connection with
the conversion were null and void. While we believe that the trial court
incorrectly interpreted Delaware law in this case and intend to appeal this
decision, we recognize that, in light of the trial court's finding, there is a
reasonable possibility that we will be unsuccessful in overturning the court's
decision. In that event, there are a number of possible outcomes, including a
reduction in our equity interest in HQ Global or a cash payment by us to these
stockholders. We currently believe that the value of any loss we may incur from
this decision should not exceed $10 million. We are still assessing the
possible impact of this decision (if it should stand) on our overall investment
in HQ Global, but at this time we do not believe it will have a material adverse
impact on our overall interest in HQ Global or result in material liability for
us to other third parties, although we cannot assure you that this will be the
case.

                                      -3-


          The second lawsuit involves claims filed by these two stockholders in
April 2000 arising out of the June 2000 merger transaction involving HQ Global
and VANTAS Incorporated. In this lawsuit, these two stockholders have brought
claims against HQ Global, the board of directors of HQ Global, FrontLine Capital
Group and us in Delaware Chancery Court. The two stockholders allege that, in
connection with the merger transaction, we breached our fiduciary duties to the
two stockholders and breached a contract with the stockholders. The claim
relates principally to the allocation of consideration paid to us with respect
to our interest in an affiliate of HQ Global that conducts international
executive suites operations. The stockholders asked the court to rescind the
transaction, or in the alternative for compensatory and rescissory damages. The
court recently determined that it would not rescind the merger transaction, but
held open the possibility that compensatory damages could be awarded or that
another equitable remedy might be available. We believe that these claims are
without merit and that we will ultimately prevail in this action, although we
cannot assure you that the court will not find in favor of these stockholders.
We continue to believe, however, that, even if the court finds in favor of these
stockholders, any such adverse result will not have a material adverse effect on
our financial condition or results of operations.

          We also are a party to a variety of other legal proceedings in the
ordinary course of business. All of these matters, taken together, are not
expected to have a material adverse impact on us.


Item 7.   Exhibits

          The following exhibit is filed as part of this report:

  99.1    Description of material U.S. federal income tax consequences relating
          to the taxation of CarrAmerica Realty Corporation as a REIT and the
          ownership and disposition of CarrAmerica Realty Corporation common
          stock

                                      -4-


                                   SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

                                     CarrAmerica Realty Corporation


Date:  September 26, 2001            By: /s/ Thomas A. Carr
                                         --------------------------------------
                                         Thomas A. Carr
                                         President and Chief Executive Officer;
                                         Chairman of the Board of Directors

                                      -5-


                                 EXHIBIT INDEX
                                 -------------



     Exhibit                  Document
     -------                  --------

     99.1      Description of material U.S. federal income tax consequences
               relating to the taxation of CarrAmerica Realty Corporation as a
               REIT and the ownership and disposition of CarrAmerica Realty
               Corporation common stock

EX-99.1

                                                                    Exhibit 99.1


                       FEDERAL INCOME TAX CONSIDERATIONS

     The following discussion describes the material U.S. federal income tax
consequences relating to the taxation of CarrAmerica as a REIT and the ownership
and disposition of CarrAmerica common stock.

     Because this is a summary that is intended to address only federal income
tax consequences relating to the ownership and disposition of CarrAmerica common
stock that will apply to all holders, it may not contain all the information
that may be important to you.  As you review this discussion, you should keep in
mind that:

     .  the tax consequences to you may vary depending on your particular tax
        situation;

     .  special rules that are not discussed below may apply to you if, for
        example, you are a tax-exempt organization, a broker-dealer, a non-U.S.
        person, a trust, an estate, a regulated investment company, a financial
        institution, an insurance company, or otherwise subject to special tax
        treatment under the Internal Revenue Code;

     .  this summary does not address state, local or non-U.S. tax
        considerations;

     .  this summary deals only with CarrAmerica common stockholders that hold
        common stock as a "capital asset," within the meaning of Section 1221 of
        the Internal Revenue Code; and

     .  this discussion is not intended to be, and should not be construed as,
        tax advice.

     You are urged both to review the following discussion and to consult with
your own tax advisor to determine the effect of ownership and disposition of
CarrAmerica common stock on your individual tax situation, including any state,
local or non-U.S. tax consequences.

     The information in this section is based on the current Internal Revenue
Code, current, temporary and proposed Treasury regulations, the legislative
history of the Internal Revenue Code, current administrative interpretations and
practices of the Internal Revenue Service, including its practices and policies
as endorsed in private letter rulings, which are not binding on the Internal
Revenue Service, and existing court decisions. Future legislation, regulations,
administrative interpretations and court decisions could change current law or
adversely affect existing interpretations of current law. Any change could apply
retroactively. CarrAmerica has not obtained


a ruling from the Internal Revenue Service regarding its qualification as a REIT
generally. Thus, it is possible that the Internal Revenue Service could
challenge the statements in this discussion, which do not bind the Internal
Revenue Service or the courts, and that a court could agree with the Internal
Revenue Service.

     As used in this disclosure, "CarrAmerica" refers solely to CarrAmerica
Realty Corporation.

Taxation of CarrAmerica as a REIT

     General.  CarrAmerica has elected to be taxed as a REIT under the Internal
Revenue Code. A REIT generally is not subject to federal income tax on the
income that it distributes to stockholders if it meets the applicable REIT
distribution requirements and other requirements for qualification.

     CarrAmerica believes that it is organized and has operated, and CarrAmerica
intends to continue to operate, in a manner to qualify as a REIT, but there can
be no assurance that CarrAmerica will qualify or remain qualified as a REIT.
Qualification and taxation as a REIT depend upon CarrAmerica's ability to meet,
through actual annual (or in some cases quarterly) operating results,
requirements relating to income, asset ownership, distribution levels and
diversity of share ownership, and the various other REIT qualification
requirements imposed under the Internal Revenue Code. Given the complex nature
of the REIT qualification requirements, the ongoing importance of factual
determinations and the possibility of future changes in the circumstances of
CarrAmerica, CarrAmerica cannot provide any assurance that its actual operating
results will satisfy the requirements for taxation as a REIT under the Internal
Revenue Code for any particular taxable year.

     So long as CarrAmerica qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income tax on its net income that is
distributed currently to its stockholders. This treatment substantially
eliminates "double taxation" (that is, taxation at both the corporate and
stockholder levels) that generally results from an investment in a regular
corporation. However, CarrAmerica will be subject to federal income tax as
follows:

     .  CarrAmerica will be taxed at regular corporate rates on any
        undistributed "REIT taxable income." REIT taxable income is the taxable
        income of the REIT subject to specified adjustments, including a
        deduction for dividends paid.

     .  Under some circumstances, CarrAmerica may be subject to the "alternative
        minimum tax" on its items of tax preference.

     .  If CarrAmerica has net income from the sale or other disposition of
        "foreclosure property" that is held primarily for sale to customers in
        the


        ordinary course of business, or other nonqualifying income from
        foreclosure property, it will be subject to tax at the highest corporate
        rate on this income.

     .  CarrAmerica's net income from "prohibited transactions" will be subject
        to a 100% tax. In general, prohibited transactions are sales or other
        dispositions of property held primarily for sale to customers in the
        ordinary course of business other than foreclosure property.

     .  If CarrAmerica fails to satisfy either the 75% gross income test or the
        95% gross income test discussed below, but nonetheless maintains its
        qualification as a REIT because other requirements are met, it will be
        subject to a tax equal to the gross income attributable to the greater
        of either (1) the amount by which 75% of its gross income exceeds the
        amount of its income qualifying under the 75% test for the taxable year
        or (2) the amount by which 90% of its gross income exceeds the amount of
        its income qualifying for the 95% income test for the taxable year,
        multiplied by a fraction intended to reflect CarrAmerica's
        profitability.

     .  CarrAmerica will be subject to a 4% excise tax on the excess of the
        required distribution over the sum of amounts actually distributed and
        amounts retained for which federal income tax was paid, if CarrAmerica
        fails to distribute during each calendar year at least the sum of:

        - 85% of its REIT ordinary income for the year;

        - 95% of its REIT capital gain net income for the year; and

        - any undistributed taxable income from prior taxable years.

     .  CarrAmerica will be subject to a 100% penalty tax on some payments it
        receives (or on certain expenses deducted by a taxable REIT subsidiary)
        if arrangements among CarrAmerica, its tenants, and its taxable REIT
        subsidiaries are not comparable to similar arrangements among unrelated
        parties.

     .  If CarrAmerica were to acquire any asset from a taxable "C" corporation
        in a carry-over basis transaction, it could be liable for specified tax
        liabilities inherited from that "C" corporation with respect to that
        corporation's "built-in gain" in its assets. Built-in gain is the amount
        by which an asset's fair market value exceeds its adjusted tax basis.
        Applicable Treasury regulations, however, allow an acquiring REIT to
        make an election to avoid the recognition of gain and the imposition of
        corporate level tax with respect to a built-in gain asset acquired in a


        carry-over basis transaction from a "C" corporation unless and until the
        REIT disposes of that built-in gain asset during the 10-year period
        following its acquisition, at which time the REIT would recognize, and
        would be subject to the highest regular corporate rate of tax on, the
        built-in gain.

     Requirements for qualification as a REIT.  The Internal Revenue Code
defines a REIT as a corporation, trust or association:

         (1) that is managed by one or more trustees or directors;

         (2) the beneficial ownership of which is evidenced by transferable
         shares, or by transferable certificates of beneficial interest;

         (3) that would be taxable as a domestic corporation, but for Sections
         856 through 859 of the Internal Revenue Code;

         (4) that is neither a financial institution nor an insurance company
         subject to applicable provisions of the Internal Revenue Code;

         (5) the beneficial ownership of which is held by 100 or more persons;

         (6) during the last half of each taxable year not more than 50% in
         value of the outstanding shares of which is owned directly or
         indirectly by five or fewer individuals, as defined in the Internal
         Revenue Code to include specified entities;

         (7) that makes an election to be taxable as a REIT, or has made this
         election for a previous taxable year which has not been revoked or
         terminated, and satisfies all relevant filing and other administrative
         requirements established by the Internal Revenue Service that must be
         met to elect and maintain REIT status;

         (8) that uses a calendar year for federal income tax purposes and
         complies with the recordkeeping requirements of the Internal Revenue
         Code and the Treasury regulations promulgated thereunder; and

         (9) that meets other applicable tests, described below, regarding the
         nature of its income and assets and the amount of its distributions.

     Conditions (1), (2), (3) and (4) above must be met during the entire
taxable year and condition (5) above must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. For purposes of determining stock ownership under condition
(6) above, a


supplemental unemployment compensation benefits plan, a private foundation or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally are considered an individual. However, a trust that is a
qualified trust under Internal Revenue Code Section 401(a) generally is not
considered an individual, and beneficiaries of a qualified trust are treated as
holding shares of a REIT in proportion to their actuarial interests in the trust
for purposes of condition (6) above.

     CarrAmerica believes that it has issued sufficient shares of capital stock
with sufficient diversity of ownership to allow it to satisfy conditions (5) and
(6) above. In addition, CarrAmerica's Articles of Incorporation contain
restrictions regarding the transfer of shares of capital stock that are intended
to assist CarrAmerica in continuing to satisfy the share ownership requirements
described in conditions (5) and (6) above. These restrictions, however, may not
ensure that CarrAmerica will be able to satisfy these stock ownership
requirements. If CarrAmerica fails to satisfy these stock ownership
requirements, it will fail to qualify as a REIT.

     To monitor its compliance with condition (6) above, a REIT is required to
send annual letters to its stockholders requesting information regarding the
actual ownership of its capital stock. If CarrAmerica complies with the annual
letters requirement and it does not know or, exercising reasonable diligence,
would not have known of its failure to meet condition (6) above, then it will be
treated as having met condition (6) above.

     To qualify as a REIT, CarrAmerica cannot have at the end of any taxable
year any undistributed earnings and profits that are attributable to a non-REIT
taxable year.  CarrAmerica has elected to be taxed as a REIT beginning in 1993,
the first year of its existence.  Therefore, CarrAmerica has not had any
undistributed non-REIT earnings and profits of its own.  CarrAmerica does not
believe that it has acquired any non-REIT earnings and profits from any other
sources.  However, the Internal Revenue Service could determine otherwise.

     If the Internal Revenue Service did determine that CarrAmerica inherited
undistributed non-REIT earnings and profits and CarrAmerica did not distribute
the non-REIT earnings and profits by the end of that taxable year, it appears
that CarrAmerica could avoid disqualification as a REIT by using "deficiency
dividend" procedures to distribute the non-REIT earnings and profits. The
deficiency dividend procedures would require CarrAmerica to make a distribution
to stockholders, in addition to the regularly required REIT distributions,
within 90 days of the Internal Revenue Service determination. In addition,
CarrAmerica would have to pay to the Internal Revenue Service interest on 50% of
the non-REIT earnings and profits that were not distributed prior to the end of
the taxable year in which CarrAmerica inherited the undistributed non-REIT
earnings and profits. If, however, CarrAmerica were considered to be a
"successor" under the applicable Treasury


regulations to a corporation that had failed to qualify as a REIT at the time of
its merger with CarrAmerica, CarrAmerica could fail to qualify as a REIT and
could be prevented from reelecting REIT status for up to four years after such
failure to qualify.

     Qualified REIT Subsidiaries. If a REIT owns a corporate subsidiary that is
a "qualified REIT subsidiary," the separate existence of that subsidiary will be
disregarded for federal income tax purposes. Generally, a qualified REIT
subsidiary is a corporation, other than a taxable REIT subsidiary (discussed
below), all of the capital stock of which is owned by the REIT and that has not
elected to be a "taxable REIT subsidiary" of that REIT. All assets, liabilities
and items of income, deduction and credit of the qualified REIT subsidiary will
be treated as assets, liabilities and items of income, deduction and credit of
the REIT itself. A qualified REIT subsidiary of CarrAmerica will not be subject
to federal corporate income taxation, although it may be subject to state and
local taxation in some states.

     Taxable REIT Subsidiaries. A "taxable REIT subsidiary" of CarrAmerica is a
corporation in which CarrAmerica directly or indirectly owns stock and that
elects, together with CarrAmerica, to be treated as a taxable REIT subsidiary
under Section 856(l) of the Internal Revenue Code. In addition, if a taxable
REIT subsidiary of CarrAmerica owns, directly or indirectly, securities
representing 35% or more of the vote or value of a subsidiary corporation, that
subsidiary will also be treated as a taxable REIT subsidiary of CarrAmerica. A
taxable REIT subsidiary is a corporation subject to federal income tax, and
state and local income tax where applicable, as a regular "C" corporation.

     Generally, a taxable REIT subsidiary can perform impermissible tenant
services without causing CarrAmerica to receive impermissible tenant services
income under the REIT income tests.  However, several provisions regarding the
arrangements between a REIT and its taxable REIT subsidiaries ensure that a
taxable REIT subsidiary will be subject to an appropriate level of federal
income taxation.  For example, a taxable REIT subsidiary is limited in its
ability to deduct interest payments made to CarrAmerica.  In addition,
CarrAmerica will be obligated to pay a 100% penalty tax on some payments that it
receives or on certain expenses deducted by the taxable REIT subsidiary if the
economic arrangements between CarrAmerica, CarrAmerica's tenants and the taxable
REIT subsidiary are not comparable to similar arrangements among unrelated
parties.

     CarrAmerica Development, Inc., Carr Real Estate Services, Inc. and HQ
Global Holdings, Inc. are referred to as the corporate subsidiaries.  Each of
the corporate subsidiaries is taxable as a regular "C" corporation and has
elected, together with CarrAmerica, to be treated as a taxable REIT subsidiary
of CarrAmerica, or is treated as a taxable REIT subsidiary under the 35%
subsidiary rule discussed above.  In addition, CarrAmerica has elected, together
with several


other corporations in which it owns stock, for those corporations to be treated
as taxable REIT subsidiaries.

     Ownership of partnership interests by a REIT. A REIT that is a partner in a
partnership will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to earn its proportionate share of the
partnership's income. The assets and gross income of the partnership retain the
same character in the hands of the REIT for purposes of the gross income and
asset tests applicable to REITs as described below. Thus, CarrAmerica's
proportionate share of the assets and items of income of CarrAmerica Realty,
L.P. and Carr Realty L.P., including CarrAmerica Realty, L.P. and Carr Realty
L.P.'s share of assets and items of income of any subsidiaries that are
partnerships or limited liability companies, are treated as assets and items of
income of CarrAmerica for purposes of applying the asset and income tests.
CarrAmerica has control over CarrAmerica Realty, L.P. and Carr Realty L.P. and
many of the partnership and limited liability company subsidiaries of
CarrAmerica Realty, L.P. and Carr Realty L.P. and intends to operate them in a
manner that is consistent with the requirements for qualification of CarrAmerica
as a REIT.

     Income tests applicable to REITs. To qualify as a REIT, CarrAmerica must
satisfy two gross income tests. First, at least 75% of CarrAmerica's gross
income, excluding gross income from prohibited transactions, for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property, including "rents from real property,"
gains on the disposition of real estate, dividends paid by another REIT and
interest on obligations secured by mortgages on real property or on interests in
real property, or from some types of temporary investments. Second, at least 95%
of CarrAmerica's gross income, excluding gross income from prohibited
transactions, for each taxable year must be derived from any combination of
income qualifying under the 75% test and dividends, interest, some payments
under hedging instruments and gain from the sale or disposition of stock or
securities and some hedging instruments.

     Rents received by CarrAmerica will qualify as rents from real property in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term rents from real property
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Second, rents received from a "related party tenant" will not qualify
as rents from real property in satisfying the gross income tests unless the
tenant is a taxable REIT subsidiary and at least 90% of the property is leased
to unrelated tenants and the rent paid by the taxable REIT subsidiary is
substantially comparable to the rent paid by the unrelated tenants for
comparable space. A tenant is a related party tenant if the REIT, or one or more
actual or constructive owners of 10% or more of the REIT,


actually or constructively owns 10% or more of the tenant. Third, if rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to the personal property will not qualify as
rents from real property.

     Generally, for rents to qualify as rents from real property for the purpose
of satisfying the gross income tests, CarrAmerica is only allowed to provide
directly services that are "usually or customarily rendered" in connection with
the rental of real property and not otherwise considered rendered primarily for
the convenience of the tenants. If CarrAmerica provides "impermissible services"
to tenants (other than through an "independent contractor" from whom CarrAmerica
derives no revenue or through a taxable REIT subsidiary), CarrAmerica will be
considered to have derived "impermissible tenant service income," which is
deemed to be not less than 150% of CarrAmerica's direct cost of providing the
service. If the impermissible tenant service income from a property exceeds 1%
of CarrAmerica's total income from that property, then all of the income from
that property will fail to qualify as rents from real property. If the total
amount of impermissible tenant service income from a property does not exceed 1%
of CarrAmerica's total income from the property, the services will not "taint"
the other income from the property (that is, it will not cause the rent paid by
tenants of that property to fail to qualify itself as rents from real property),
but the impermissible tenant service income will not qualify as rents from real
property.

     Unless CarrAmerica determines that the resulting nonqualifying income under
any of the following situations, taken together with all other nonqualifying
income earned by CarrAmerica in the taxable year, will not jeopardize
CarrAmerica's status as a REIT, CarrAmerica does not and does not intend to:

     .  charge rent for any property that is based in whole or in part on the
        income or profits of any person, except by reason of being based on a
        fixed percentage or percentages of receipts or sales, as described
        above;

     .  rent any property to a related party tenant, including a taxable REIT
        subsidiary;

     .  derive rental income attributable to personal property other than
        personal property leased in connection with the lease of real property,
        the amount of which is less than 15% of the total rent received under
        the lease; or

     .  directly perform (or provide through a contractor that is not a
        qualifying independent contractor or a taxable REIT subsidiary) services
        considered to be noncustomary or rendered to the occupant of the
        property.


     CarrAmerica monitors (and intends to continue to monitor) the activities
provided at, and the nonqualifying income arising from, its properties and
believes that it has not provided services that will cause it to fail to meet
the income tests. CarrAmerica provides services and provides access to third
party service providers at some or all of its properties. Based upon
CarrAmerica's experience in the office rental markets where the properties are
located, CarrAmerica believes that all access to service providers and services
provided to tenants by CarrAmerica (other than through a qualified independent
contractor or a taxable REIT subsidiary) either are usually or customarily
rendered in connection with the rental of real property and not otherwise
considered rendered to the occupant, or, if considered impermissible services,
will not result in an amount of impermissible tenant service income that will
cause CarrAmerica to fail to meet the income test requirements. However,
CarrAmerica cannot provide any assurance that the Internal Revenue Service will
agree with these positions.

     In this regard, at some of its properties, CarrAmerica has entered into
arrangements with third party contractors under which the third party
contractors operate food service facilities and CarrAmerica bears part or all of
the expenses incurred in connection with the operation of those facilities.
Under the applicable Treasury regulations, if the REIT bears the expenses of the
service provided by a third-party contractor, that third party will be a
qualified independent contractor only if the service is customarily provided to
tenants of buildings of a similar class in the relevant geographic area.
CarrAmerica believes that it is customary to provide food services facilities
for tenants of similar buildings in the key geographic areas in which
CarrAmerica has entered into the arrangements described above and CarrAmerica
has collected information to support those beliefs with respect to those key
geographic areas. Although the Internal Revenue Service has issued several
private letter rulings to taxpayers (including one that was issued to
CarrAmerica in 1993) approving similar economic arrangements in other arguably
analogous areas, such as parking, where it has agreed that the provision of such
facilities by landlords was customary, the Internal Revenue Service has not
published any such rulings with respect to food service facilities. (Private
letter rulings are binding on the Internal Revenue Service only with respect to
the taxpayer to which the letter ruling is issued and only with respect to the
facts addressed in that letter.) In 1998, CarrAmerica requested a private letter
ruling from the Internal Revenue Service with respect to a proposed national
arrangement with a third-party contractor to operate food service facilities at
CarrAmerica's properties across the country (including several of those
described above), on terms similar to the arrangements described above. The
Internal Revenue Service initially indicated that it was not inclined to issue
that ruling, but it then agreed to issue a different ruling related to
below-market leases to food service operators. Accordingly, CarrAmerica withdrew
its initial request.


     As stated above, CarrAmerica believes that similar food service facilities
are customarily provided to tenants of similar buildings in the key geographic
areas described above. In that regard, CarrAmerica believes that there are
substantial facts that support this position that were not developed and
provided to the Internal Revenue Service as part of the ruling process. There
can be no assurance, however, that CarrAmerica's position would be upheld by a
court in the event that the Internal Revenue Service were to challenge
CarrAmerica's position. In the event that the Internal Revenue Service were to
challenge CarrAmerica's position and a court were to determine that the food
service facilities were not customary, CarrAmerica would have impermissible
tenant service income because the third-party operators would not qualify as
independent contractors as a result of the expense-bearing arrangements. At some
properties where the food service facilities are located, the amount of any
resulting impermissible tenant service income could exceed the "de minimis"
limit described above, depending upon the actual facts relevant to the affected
properties. Depending upon which properties were determined to exceed the "de
minimis" limit, CarrAmerica could fail to satisfy the 95% gross income test for
the years 1999, 2000, and possibly 2001. In that event, the IRS could assert
that CarrAmerica fails to qualify as a REIT for one or more of those years,
although the IRS also could agree that CarrAmerica has demonstrated that any
failure to meet the 95% income test was due to reasonable cause and not willful
neglect, in which event CarrAmerica would continue to qualify as a REIT for the
years in question. If the reasonable cause exception applied and CarrAmerica
were not disqualified as a REIT, it would be required to pay some taxes based on
the amount of income that did not qualify for the 95% income test, which
CarrAmerica believes would not be material to its financial position. For a
description of the applicable tax provisions, see "--Taxation of CarrAmerica as
a REIT," above.

     "Interest" generally will be nonqualifying income for purposes of the 75%
or 95% gross income tests if it depends in whole or in part on the income or
profits of any person. However, interest based on a fixed percentage or
percentages of receipts or sales may still qualify under the gross income tests.
CarrAmerica does not expect to derive significant amounts of interest that will
not qualify under the 75% and 95% gross income tests.

     CarrAmerica's share of any dividends received from the corporate
subsidiaries (and from other corporations in which CarrAmerica owns an interest)
will qualify for purposes of the 95% gross income test but not for purposes of
the 75% gross income test. CarrAmerica does not anticipate that it will receive
sufficient dividends to cause it to exceed the limit on nonqualifying income
under the 75% gross income test.

     If CarrAmerica fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for that year
if it is entitled to relief under the Internal Revenue Code. These relief
provisions generally


will be available if CarrAmerica's failure to meet the tests is due to
reasonable cause and not due to willful neglect, CarrAmerica attaches a schedule
of the sources of its income to its federal income tax return and any incorrect
information on the schedule is not due to fraud with intent to evade tax. It is
not possible, however, to state whether in all circumstances CarrAmerica would
be entitled to the benefit of these relief provisions. For example, if
CarrAmerica fails to satisfy the gross income tests because nonqualifying income
that CarrAmerica intentionally incurs exceeds the limits on nonqualifying
income, the Internal Revenue Service could conclude that the failure to satisfy
the tests was not due to reasonable cause. If these relief provisions are
inapplicable to a particular set of circumstances involving CarrAmerica,
CarrAmerica will fail to qualify as a REIT. As discussed under "-- Taxation of
CarrAmerica as a REIT -- General" even if these relief provisions apply, a tax
would be imposed based on the amount of nonqualifying income.

     In addition to the 75% and 95% gross income tests, CarrAmerica had to meet
a 30% gross income test for its taxable years that ended prior to January 1,
1998. The 30% gross income test required that short-term gain from the sale or
other disposition of stock or securities, gain from prohibited transactions and
gain on the sale or other disposition of real property held for less than four
years, apart from involuntary conversions and sales of foreclosure property,
represent less than 30% of CarrAmerica's gross income, including gross income
from prohibited transactions. The 30% gross income test is not applicable for
taxable years starting on or after January 1, 1998.

     Prohibited Transactions Tax. Any gain realized by CarrAmerica on the sale
of any property held as inventory or other property held primarily for sale to
customers in the ordinary course of business, including CarrAmerica's share of
this type of gain realized by CarrAmerica Realty, L.P. and Carr Realty L.P. and
any other partnership or limited liability company subsidiaries, will be treated
as income from a prohibited transaction that is subject to a 100% penalty tax.
Under existing law, whether property is held as inventory or primarily for sale
to customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances of a particular transaction.
CarrAmerica intends to hold its properties for investment with a view to long-
term appreciation, to engage in the business of acquiring, developing, owning
and operating properties, and to make occasional sales of properties as are
consistent with CarrAmerica's investment objectives. CarrAmerica cannot provide
any assurance, however, that the Internal Revenue Service might not contend that
one or more of these sales are subject to the 100% penalty tax.

     Asset Tests Applicable to REITs. At the close of each quarter of its
taxable year, CarrAmerica must satisfy four tests relating to the nature of its
assets:


         (1) at least 75% of the value of CarrAmerica's total assets must be
         represented by real estate assets, cash, cash items and government
         securities. CarrAmerica's real estate assets include, for this purpose,
         its allocable share of real estate assets held by CarrAmerica Realty,
         L.P. and Carr Realty L.P. and their partnership and limited liability
         subsidiaries, as well as stock or debt instruments held for less than
         one year purchased with the proceeds of an offering of stock or
         long-term debt of CarrAmerica;

         (2) not more than 25% of CarrAmerica's total assets may be represented
         by securities other than those in the 75% asset class;

         (3) except for equity investments in REITs, qualified REIT
         subsidiaries, or taxable REIT subsidiaries or other securities that
         qualify as "real estate assets" for purposes of the test described in
         clause (1):

         .  the value of any one issuer's securities owned by CarrAmerica may
            not exceed 5% of the value of CarrAmerica's total assets;

         .  CarrAmerica may not own more than 10% of any one issuer's
            outstanding voting securities; and

         .  CarrAmerica may not own more than 10% of the value of the
            outstanding securities of any one issuer; and

         (4) not more than 20% of CarrAmerica's total assets may be represented
         by securities of one or more taxable REIT subsidiaries.

     Securities for purposes of the asset tests may include debt securities.
However, debt of an issuer will not count as a security for purposes of the 10%
value test if the debt securities are "straight debt" as defined in Section 1361
of the Internal Revenue Code and (1) the issuer is an individual, (2) the only
securities of the issuer that the REIT holds are straight debt or (3) if the
issuer is a partnership, the REIT holds at least a 20% profits interest in the
partnership.

     CarrAmerica believes that the aggregate value of its taxable REIT
subsidiaries does not exceed 20% of the aggregate value of its gross assets.  As
of each relevant testing date prior to the election to treat each corporate
subsidiary of CarrAmerica or any other corporation in which CarrAmerica owns an
interest as a taxable REIT subsidiary, which election first became available as
of January 1, 2001, CarrAmerica believes it did not own more than 10% of the
voting securities of any such entity.  In addition, CarrAmerica believes that as
of each relevant testing date prior to the election to treat each corporate
subsidiary of CarrAmerica or any other corporation in which CarrAmerica owns an
interest as a taxable REIT subsidiary of


CarrAmerica, CarrAmerica's pro rata share of the value of the securities,
including debt, of any such corporation or other issuer did not exceed 5% of the
total value of CarrAmerica's assets.

     With respect to each issuer in which CarrAmerica currently owns an interest
that does not qualify as a REIT, a qualified REIT subsidiary or a taxable REIT
subsidiary, CarrAmerica believes that its pro rata share of the value of the
securities, including debt, of any such issuer does not exceed 5% of the total
value of CarrAmerica's assets and that it complies with the 10% voting
securities limitation and 10% value limitation with respect to each such issuer.
In this regard, however, CarrAmerica cannot provide any assurance that the
Internal Revenue Service might not disagree with CarrAmerica's determinations.

     After initially meeting the asset tests at the close of any quarter,
CarrAmerica will not lose its status as a REIT if it fails to satisfy the 25%,
20%, and 5% asset tests and the 10% value limitation at the end of a later
quarter solely by reason of changes in the relative values of its assets.  If
the failure to satisfy the 25%, 20%, or 5% asset tests or the 10% value
limitation results from an acquisition of securities or other property during a
quarter, the failure can be cured by disposition of sufficient nonqualifying
assets within 30 days after the close of that quarter.  CarrAmerica intends to
maintain adequate records of the value of its assets to ensure compliance with
the asset tests and to take any available actions within 30 days after the close
of any quarter as may be required to cure any noncompliance with the 25%, 20%,
or 5% asset tests or 10% value limitation.  If CarrAmerica were to fail to cure
noncompliance with the asset tests within this time period, CarrAmerica would
cease to qualify as a REIT.

     Annual distribution requirements applicable to REITs. To qualify as a REIT,
CarrAmerica is required to distribute dividends, other than capital gain
dividends, to its stockholders each year in an amount at least equal to (1) the
sum of (a) 90% of CarrAmerica's REIT taxable income, computed without regard to
the dividends paid deduction and its net capital gain, and (b) 90% of the net
income, after tax, from foreclosure property, minus (2) the sum of certain
specified items of noncash income. In addition, if CarrAmerica recognizes any
built-in gain, CarrAmerica will be required, under Treasury regulations, to
distribute at least 90% of the built-in gain, after tax, recognized on the
disposition of the applicable asset. See "-- Taxation of CarrAmerica as a REIT
-- General" for a discussion of the possible recognition of built-in gain. These
distributions must be paid either in the taxable year to which they relate, or
in the following taxable year if declared before CarrAmerica timely files its
tax return for the prior year and if paid with or before the first regular
dividend payment date after the declaration is made.

     CarrAmerica intends to make timely distributions sufficient to satisfy its
annual distribution requirements.  It is expected that CarrAmerica's REIT
taxable


income generally will be less than its cash flow due to the allowance of
depreciation and other noncash charges in computing REIT taxable income.
Accordingly, CarrAmerica anticipates that it generally will have sufficient cash
or liquid assets to enable it to satisfy the distribution requirements described
above. It is possible, however, that CarrAmerica, from time to time, may not
have sufficient cash or other liquid assets to meet these distribution
requirements. In this event, CarrAmerica may find it necessary to arrange for
short-term, or possibly long-term, borrowings to fund the required
distributions.

     Under some circumstances, CarrAmerica may be able to rectify a failure to
meet the distribution requirement for a year by paying deficiency dividends to
stockholders in a later year, which may be included in CarrAmerica's deduction
for dividends paid for the earlier year. Thus, CarrAmerica may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, CarrAmerica
will be required to pay interest based upon the amount of any deduction taken
for deficiency dividends.

     To the extent that CarrAmerica does not distribute all of its net capital
gain or distributes at least 90%, but less than 100%, of its REIT taxable
income, as adjusted, it is subject to tax on these amounts at regular corporate
tax rates.

     CarrAmerica will be subject to a 4% excise tax on the excess of the
required distribution over the sum of amounts actually distributed and amounts
retained for which federal income tax was paid, if CarrAmerica fails to
distribute during each calendar year at least the sum of:

          (1) 85% of its REIT ordinary income for the year;

          (2) 95% of its REIT capital gain net income for the year; and

          (3) any undistributed taxable income from prior taxable years.

     A REIT may elect to retain rather than distribute all or a portion of its
net capital gains and pay the tax on the gains.  In that case, a REIT may elect
to have its stockholders include their proportionate share of the undistributed
net capital gains in income as long-term capital gains and receive a credit for
their share of the tax paid by the REIT.  For purposes of the 4% excise tax
described above, any retained amounts would be treated as having been
distributed.

     Record-Keeping Requirements.  CarrAmerica is required to comply with
applicable record-keeping requirements.  Failure to comply could result in
monetary fines.


     Failure of CarrAmerica to qualify as a REIT. If CarrAmerica fails to
qualify for taxation as a REIT in any taxable year, and if relief provisions do
not apply, CarrAmerica will be subject to tax, including any applicable
alternative minimum tax, on its taxable income at regular corporate rates. If
CarrAmerica fails to qualify as a REIT, CarrAmerica will not be required to make
any distributions to stockholders and any distributions that are made to
stockholders will not be deductible by CarrAmerica. As a result, CarrAmerica's
failure to qualify as a REIT would significantly reduce the cash available for
distributions by CarrAmerica to its stockholders. In addition, if CarrAmerica
fails to qualify as a REIT, all distributions to stockholders will be taxable as
ordinary income to the extent of CarrAmerica's current and accumulated earnings
and profits, whether or not attributable to capital gains of CarrAmerica, and
corporate stockholders may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, CarrAmerica also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. There can be no
assurance that CarrAmerica would be entitled to any statutory relief.

Taxation of U.S. Stockholders

     As used in the remainder of this discussion, the term "U.S. stockholder"
means a beneficial owner of CarrAmerica common stock that is, for United States
federal income tax purposes:

          (1) a citizen or resident, as defined in Section 7701(b) of the
          Internal Revenue Code, of the United States;

          (2) a corporation or partnership, or other entity treated as a
          corporation or partnership for federal income tax purposes, created or
          organized under the laws of the United States, any state or the
          District of Columbia;

          (3) an estate the income of which is subject to federal income
          taxation regardless of its source; or

          (4) in general, a trust subject to the primary supervision of a United
          States court and the control of one or more United States persons.

     Generally, in the case of a partnership that holds CarrAmerica common
stock, any partner that would be a U.S. stockholder if it held the CarrAmerica
common stock directly is also a U.S. stockholder. A "non-U.S. stockholder" is a
holder, including any partner in a partnership that holds CarrAmerica common
stock, that is not a U.S. stockholder.


     Distributions by CarrAmerica. So long as CarrAmerica qualifies as a REIT,
distributions to U.S. Stockholders out of its current or accumulated earnings
and profits that are not designated as capital gain dividends will be taxable as
ordinary income and will not be eligible for the dividends received deduction
generally available for corporations. Distributions in excess of its current and
accumulated earnings and profits will not be taxable to a U.S. stockholder to
the extent that the distributions do not exceed the adjusted tax basis of the
stockholder's stock. Rather, such distributions will reduce the adjusted basis
of such stock. Distributions that exceed the U.S. stockholder's adjusted basis
in its stock will be taxable as capital gains if the stock is held as a capital
asset. If CarrAmerica declares a dividend in October, November, or December of
any year with a record date in one of these months and pays the dividend on or
before January 31 of the following year, CarrAmerica will be treated as having
paid the dividend, and the stockholder will be treated as having received the
dividend, on December 31 of the year in which the dividend was declared.

     CarrAmerica may elect to designate distributions of its net capital gain as
"capital gain dividends."  Capital gain dividends are taxed to stockholders as
gain from the sale or exchange of a capital asset held for more than one year,
without regard to how long the U.S. stockholder has held its stock.
Designations made by CarrAmerica will be effective only to the extent that they
comply with Revenue Ruling 89-81, which requires that distributions made to
different classes of shares be composed proportionately of dividends of a
particular type.  If CarrAmerica designates any portion of a dividend as a
capital gain dividend, a U.S. stockholder will receive an Internal Revenue
Service Form 1099-DIV indicating the amount that will be taxable to the
stockholder as capital gain.  Corporate stockholders, however, may be required
to treat up to 20% of capital gain dividends as ordinary income.

     Instead of paying capital gain dividends, CarrAmerica may designate all or
part of its net capital gain as "undistributed capital gain."  CarrAmerica will
be subject to tax at regular corporate rates on any undistributed capital gain.

     A U.S. stockholder:

          (1) will include in its income as long-term capital gains its
          proportionate share of such undistributed capital gains and

          (2) will be deemed to have paid its proportionate share of the tax
          paid by CarrAmerica on such undistributed capital gains and receive a
          credit or refund to the extent that the tax paid by CarrAmerica
          exceeds the U.S. stockholder's tax liability on the undistributed
          capital gain.

A U.S. stockholder will increase the basis in its common stock by the
difference between the amount of capital gain included in its income and the
amount of tax it is


deemed to have paid. The earnings and profits of CarrAmerica will be adjusted
appropriately.

     CarrAmerica will classify portions of any designated capital gain  dividend
or undistributed capital gain as either:

     (1)  a 20% rate gain distribution, which would be taxable to non-corporate
          U.S. Stockholders at a maximum rate of 20%; or

     (2)  an "unrecaptured Section 1250 gain" distribution, which would be
          taxable to non-corporate U.S. Stockholders at a maximum rate of 25%.

CarrAmerica must determine the maximum amounts that it may designate as 20% and
25% rate capital gain dividends by performing the computation required by the
Internal Revenue Code as if the REIT were an individual whose ordinary income
were subject to a marginal tax rate of at least 28%.

     Distributions made by CarrAmerica and gain arising from the sale or
exchange by a U.S. stockholder of common stock will not be treated as passive
activity income, and as a result, U.S. Stockholders generally will not be able
to apply any "passive losses" against this income or gain. In addition, taxable
distributions from CarrAmerica generally will be treated as investment income
for purposes of the investment interest limitations. A U.S. stockholder may
elect to treat capital gain dividends and capital gains from the disposition of
common stock as investment income for purposes of the investment interest
limitation, in which case the applicable capital gains will be taxed at ordinary
income rates. CarrAmerica will notify stockholders regarding the portions of
distributions for each year that constitute ordinary income, return of capital
and capital gain. U.S. stockholders may not include in their individual income
tax returns any net operating losses or capital losses of CarrAmerica.
CarrAmerica's operating or capital losses would be carried over by CarrAmerica
for potential offset against future income, subject to applicable limitations.

     Sales of Shares. Upon any taxable sale or other disposition of shares, a
U.S. stockholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between:

     (1) the amount of cash and the fair market value of any property received
on the sale or other disposition; and

     (2) the holder's adjusted basis in the shares for tax purposes.

     This gain or loss will be a capital gain or loss if the shares have been
held by the U.S. stockholder as a capital asset. The applicable tax rate will
depend on the


stockholder's holding period in the asset (generally, if an asset has been held
for more than one year it will produce long-term capital gain) and the
stockholder's tax bracket. The Internal Revenue Service has the authority to
prescribe, but has not yet prescribed, regulations that would apply a capital
gain tax rate of 25% (which is generally higher than the long-term capital gain
tax rates for noncorporate stockholders) to a portion of capital gain realized
by a noncorporate stockholder on the sale of REIT shares that would correspond
to the REIT's "unrecaptured Section 1250 gain." Stockholders are urged to
consult with their own tax advisors with respect to their capital gain tax
liability. A corporate U.S. stockholder will be subject to tax at a maximum rate
of 35% on capital gain from the sale of CarrAmerica stock held for more than 12
months. In general, any loss recognized by a U.S. stockholder upon the sale or
other disposition of shares of common stock that have been held for six months
or less, after applying the holding period rules, will be treated as a long-term
capital loss, to the extent of distributions received by the U.S. stockholder
from CarrAmerica that were required to be treated as long-term capital gains.

Taxation of Tax-Exempt Stockholders

     Provided that a tax-exempt stockholder has not held its common stock as
"debt financed property" within the meaning of the Internal Revenue Code, the
dividend income from CarrAmerica will not be unrelated business taxable income,
referred to as UBTI, to a tax-exempt stockholder.  Similarly, income from the
sale of stock will not constitute UBTI unless the tax-exempt stockholder has
held its shares as debt financed property within the meaning of the Internal
Revenue Code or has used the stock in a trade or business.

     However, for tax-exempt stockholders that are social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts and
qualified group legal services plans exempt from federal income taxation under
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code,
respectively, income from an investment in CarrAmerica will constitute UBTI
unless the organization properly sets aside or reserves such amounts for
purposes specified in the Internal Revenue Code.  These tax-exempt stockholders
should consult their own tax advisors concerning these "set aside" and reserve
requirements.

     Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" are treated as UBTI if received by any trust which is
described in Section 401(a) of the Internal Revenue Code, is tax-exempt under
Section 501(a) of the Internal Revenue Code, and holds more than 10%, by value,
of the interests in the REIT.  Tax-exempt pension funds that are described in
Section 401(a) of the Internal Revenue Code are referred to below as "pension
trusts."

     A REIT is a pension held REIT if it meets the following two tests:


     (1)  it qualified as a REIT only by reason of Section 856(h)(3) of the
          Internal Revenue Code, which provides that stock owned by pension
          trusts will be treated, for purposes of determining if the REIT is
          closely held, as owned by the beneficiaries of the trust rather than
          by the trust itself; and

     (2)  either (a) at least one pension trust holds more than 25% of the value
          of the REIT's stock, or (b) a group of pension trusts each
          individually holding more than 10% of the value of the REIT's shares,
          collectively owns more than 50% of the value of the REIT's shares.

     The percentage of any REIT dividend treated as UBTI is equal to the ratio
of the UBTI earned by the REIT, treating the REIT as if it were a pension trust
and therefore subject to tax on UBTI, to the total gross income of the REIT.  An
exception applies where the percentage is less than 5% for any year.  The
provisions requiring pension trusts to treat a portion of REIT distributions as
UBTI will not apply if the REIT is able to satisfy the "not closely held
requirement" without relying upon the "look-through" exception with respect to
pension trusts.  Based on both its current capital stock ownership and the
limitations on transfer and ownership of capital stock contained in its Articles
of Incorporation, CarrAmerica does not expect to be classified as a pension held
REIT.

U.S. Taxation of Non-U.S. Stockholders

     Distributions by CarrAmerica. Distributions by CarrAmerica to a non-U.S.
stockholder that are neither attributable to gain from sales or exchanges by
CarrAmerica of "U.S. real property interests" nor designated by CarrAmerica as
capital gains dividends will be treated as dividends of ordinary income to the
extent that they are made out of CarrAmerica's current or accumulated earnings
and profits. These distributions ordinarily will be subject to withholding of
U.S. federal income tax on a gross basis at a rate of 30%, or a lower rate as
permitted under an applicable income tax treaty, unless the dividends are
treated as effectively connected with the conduct by the non-U.S. stockholder of
a U.S. trade or business. Under some treaties, however, lower withholding rates
generally applicable to dividends do not apply to dividends from REITs.
Applicable certification and disclosure requirements must be satisfied to be
exempt from withholding under the effectively connected income exemption.
Dividends that are effectively connected with a trade or business will be
subject to tax on a net basis, that is, after allowance for deductions, at
graduated rates, in the same manner as U.S. Stockholders are taxed with respect
to these dividends, and are generally not subject to withholding. Any dividends
received by a corporate non-U.S. stockholder that is engaged in a U.S. trade or
business also may be subject to an additional branch profits tax at a 30% rate,
or lower applicable treaty rate.


     Distributions in excess of current and accumulated earnings and profits
that exceed the non-U.S. stockholder's basis in its CarrAmerica common stock
will be taxable to a non-U.S. stockholder as gain from the sale of common stock,
which is discussed below.  Distributions in excess of current or accumulated
earnings and profits of CarrAmerica that do not exceed the adjusted basis of the
non-U.S. stockholder in its common stock will reduce the non-U.S. stockholder's
adjusted basis in its common stock and will not be subject to U.S. federal
income tax, but will be subject to U.S. withholding tax as described below.

     CarrAmerica expects to withhold U.S. income tax at the rate of 30% on any
dividend distributions (including distributions that later may be determined to
have been in excess of current and accumulated earnings and profits) made to a
non-U.S. stockholder unless:

     (1)  a lower treaty rate applies and the non-U.S. stockholder files an
          Internal Revenue Service Form W-8BEN evidencing eligibility for that
          reduced treaty rate with CarrAmerica; or

     (2)  the non-U.S. stockholder files an Internal Revenue Service Form W-8ECI
          with CarrAmerica claiming that the distribution is effectively
          connected income.

     CarrAmerica may be required to withhold at least 10% of any distribution in
excess of its current and accumulated earnings and profits, even if a lower
treaty rate applies and the non-U.S. stockholder is not liable for tax on the
receipt of that distribution.  However, a non-U.S. stockholder may seek a refund
of these amounts from the Internal Revenue Service if the non-U.S. stockholder's
U.S. tax liability with respect to the distribution is less than the amount
withheld.

     Distributions to a non-U.S. stockholder that are designated by CarrAmerica
at the time of the distribution as capital gain dividends, other than those
arising from the disposition of a U.S. real property interest, generally should
not be subject to U.S. federal income taxation unless:

     (1)  the investment in the common stock is effectively connected with the
          non-U.S. stockholder's U.S. trade or business, in which case the non-
          U.S. stockholder will be subject to the same treatment as U.S.
          stockholders with respect to any gain, except that a stockholder that
          is a foreign corporation also may be subject to the 30% branch profits
          tax, as discussed above, or

     (2)  the non-U.S. stockholder is a nonresident alien individual who is
          present in the U.S. for 183 days or more during the taxable year and


          has a "tax home" in the U.S., in which case the nonresident alien
          individual will be subject to a 30% tax on the individual's capital
          gains.

     Under the Foreign Investment in Real Property Tax Act, which is referred to
as "FIRPTA," distributions to a non-U.S. stockholder that are attributable to
gain from sales or exchanges by CarrAmerica of U.S. real property interests,
whether or not designated as a capital gain dividend, will cause the non-U.S.
stockholder to be treated as recognizing gain that is income effectively
connected with a U.S. trade or business. Non-U.S. Stockholders will be taxed on
this gain at the same rates applicable to U.S. Stockholders, subject to a
special alternative minimum tax in the case of nonresident alien individuals.
Also, this gain may be subject to a 30% branch profits tax in the hands of a
non-U.S. stockholder that is a corporation.

     CarrAmerica will be required to withhold and remit to the Internal Revenue
Service 35% of any distributions to non-U.S. stockholders that are designated as
capital gain dividends, or, if greater, 35% of a distribution that could have
been designated as a capital gain dividend. Distributions can be designated as
capital gains to the extent of CarrAmerica's net capital gain for the taxable
year of the distribution. The amount withheld is creditable against the non-
U.S. stockholder's U.S. federal income tax liability.

     Although the law is not clear on the matter, it appears that amounts
designated by CarrAmerica as undistributed capital gains in respect of the
common stock held by U.S. Stockholders generally should be treated with respect
to non-U.S. stockholders in the same manner as actual distributions by
CarrAmerica of capital gain dividends.  Under that approach, the non-U.S.
stockholders would be able to offset as a credit against their U.S. federal
income tax liability resulting therefrom their proportionate share of the tax
paid by CarrAmerica on the undistributed capital gains, and to receive from the
Internal Revenue Service a refund to the extent their proportionate share of
this tax paid by CarrAmerica were to exceed their actual United States federal
income tax liability.

     Sale of Common stock.  Gain recognized by a non-U.S. stockholder upon the
sale or exchange of CarrAmerica common stock generally would not be subject to
U.S. taxation unless:

     (1)  the investment in the CarrAmerica common stock is effectively
          connected with the non-U.S. stockholder's U.S. trade or business, in
          which case the non-U.S. stockholder will be subject to the same
          treatment as domestic Stockholders with respect to any gain;

     (2)  the non-U.S. stockholder is a nonresident alien individual who is
          present in the United States for 183 days or more during the taxable
          year and has a tax home in the United States, in which case the


          nonresident alien individual will be subject to a 30% tax on the
          individual's net capital gains for the taxable year; or

     (3)  the CarrAmerica common stock constitute a U.S. real property interest
          within the meaning of FIRPTA, as described below.

          The CarrAmerica common stock will not constitute a United States real
property interest if CarrAmerica is a domestically controlled REIT.  CarrAmerica
will be a domestically-controlled REIT if, at all times during a specified
testing period, less than 50% in value of its stock is held directly or
indirectly by non-U.S. Stockholders.

     CarrAmerica believes that, currently, it is a domestically controlled REIT
and, therefore, that the sale of CarrAmerica common stock would not be subject
to taxation under FIRPTA.  In addition, CarrAmerica's charter contains ownership
limitations designed to help prevent CarrAmerica from failing to qualify as a
domestically controlled REIT.  Because CarrAmerica common stock is publicly
traded, however, CarrAmerica cannot guarantee that it is or will continue to be
a domestically controlled REIT.

     Even if CarrAmerica does not qualify as a domestically-controlled REIT at
the time a non-U.S. stockholder sells its CarrAmerica common stock, gain arising
from the sale still would not be subject to FIRPTA tax if:

     (1)  the class or series of stock sold is considered regularly traded under
          applicable Treasury regulations on an established securities market,
          such as the NYSE; and

     (2)  the selling non-U.S. stockholder owned, actually or constructively, 5%
          or less in value of the outstanding class or series of stock being
          sold throughout the five-year period ending on the date of the sale or
          exchange.

     If gain on the sale or exchange of CarrAmerica common stock were subject to
taxation under FIRPTA, the non-U.S. stockholder would be subject to regular U.S.
income tax with respect to any gain in the same manner as a taxable U.S.
stockholder, subject to any applicable alternative minimum tax and special
alternative minimum tax in the case of nonresident alien individuals.

Information Reporting and Backup Withholding Tax Applicable to Stockholders

     U.S. Stockholders.  In general, information-reporting requirements will
apply to payments of distributions on CarrAmerica common stock and payments of


the proceeds of the sale of CarrAmerica common stock to some Stockholders,
unless an exception applies.  Further, the payer will be required to withhold
backup withholding tax at the rate of 31% if:

     (1)  the payee fails to furnish a taxpayer identification number, or TIN,
          to the payer or to establish an exemption from backup withholding;

     (2)  the Internal Revenue Service notifies the payer that the TIN furnished
          by the payee is incorrect;

     (3)  there has been a notified payee under-reporting with respect to
          interest, dividends or original issue discount described in Section
          3406(c) of the Internal Revenue Code; or

     (4)  there has been a failure of the payee to certify under the penalty of
          perjury that the payee is not subject to backup withholding under the
          Internal Revenue Code.

     Some Stockholders, including corporations, will be exempt from backup
withholding. Any amounts withheld under the backup withholding rules from a
payment to a stockholder will be allowed as a credit against the stockholder's
U.S. federal income tax liability and may entitle the stockholder to a refund,
provided that the required information is furnished to the Internal Revenue
Service.

     Non-U.S. Stockholders. Generally, information reporting will apply to
payments of distributions on CarrAmerica common stock, and backup withholding at
a rate of 31% may apply, unless the payee certifies that it is not a U.S. person
or otherwise establishes an exemption.

     The payment of the proceeds from the disposition of CarrAmerica common
stock to or through the U.S. office of a U.S. or foreign broker will be subject
to information reporting and, possibly, backup withholding unless the non-U.S.
stockholder certifies as to its non-U.S. status or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
stockholder is a U.S. person or that the conditions of any other exemption are
not, in fact, satisfied. The proceeds of the disposition by a non-U.S.
stockholder of CarrAmerica common stock to or through a foreign office of a
broker generally will not be subject to information reporting or backup
withholding. However, if the broker is a U.S. person, a controlled foreign
corporation for U.S. tax purposes, or a foreign person 50% or more of whose
gross income from all sources for specified periods is from activities that are
effectively connected with a U.S. trade or business, information reporting
generally will apply unless the broker has documentary evidence as to the non-
U.S. stockholder's foreign status and has no actual knowledge to the contrary.


     Applicable Treasury regulations provide presumptions regarding the status
of stockholders when payments to the Stockholders cannot be reliably associated
with appropriate documentation provided to the payer.  Under these Treasury
regulations, some stockholders are required to have provided new certifications
with respect to payments made after December 31, 2000.  Because the application
of the these Treasury regulations varies depending on the stockholder's
particular circumstances, you are urged to consult your tax advisor regarding
the information reporting requirements applicable to you.

Tax Aspects of CarrAmerica's Ownership of Interests in Partnerships

     General. A substantial portion of CarrAmerica's investments are held
indirectly through CarrAmerica Realty, L.P., Carr Realty, L.P., and other
partnerships and LLCs. In general, partnerships and limited liability companies
are "pass-through" entities that are not subject to federal income tax. Rather,
partners or members are allocated their proportionate shares of the items of
income, gain, loss, deduction and credit of the pass-through entity, and are
potentially subject to tax thereon, without regard to whether the partners or
members receive a distribution from the partnership. CarrAmerica includes in its
income its proportionate share of the foregoing partnership items for purposes
of the various REIT income tests and in the computation of its REIT taxable
income. Moreover, for purposes of the REIT asset tests, CarrAmerica includes its
proportionate share of assets held through CarrAmerica Realty, L.P., Carr
Realty, L.P., and other partnerships and LLCs. See "-- Requirements for
Qualification as a REIT -- Ownership of Partnership Interests by a REIT" above.

     Entity Classification. CarrAmerica believes that CarrAmerica Realty, L.P.
and Carr Realty, L.P. and each partnership in which CarrAmerica owns an interest
will be treated as a partnership for federal income tax purposes and not as an
association taxable as a corporation. CarrAmerica believes that each LLC in
which CarrAmerica owns an interest will be treated as a partnership or
disregarded for federal income tax purposes. If any of these partnerships or
LLCs were treated as an association, the entity would be taxable as a
corporation and therefore would be subject to an entity level tax on its income.
In such a situation, the character of CarrAmerica's assets and items of gross
income would change and could preclude CarrAmerica from qualifying as a REIT
(see "-- Requirements for Qualification as a REIT - Asset Tests Applicable to
REITs" and "-- Income Tests Applicable to REITs" above).

     Prior to January 1, 1997, an organization formed as a partnership or a
limited liability company was treated as a partnership for federal income tax
purposes rather than as a corporation only if it had no more than two of the
four corporate characteristics that the regulations in effect at that time used
to distinguish a partnership from a corporation for tax purposes. These four


characteristics were (i) continuity of life, (ii) centralization of management,
(iii) limited liability and (iv) free transferability of interests. Under final
Internal Revenue Service regulations which became effective January 1, 1997, the
four factor test has been eliminated and an entity formed as a partnership or as
a limited liability will be taxed as a partnership for federal income tax
purposes, unless it specifically elects otherwise. The regulations provide that
the Internal Revenue Service will not challenge the classification of an
existing partnership or limited liability company for tax periods prior to
January 1, 1997 so long as:

     (1) the entity had a reasonable basis for its claimed classification,

     (2) the entity and all its members recognized the federal income tax
consequences of any changes in the entity's classification within the 60 months
prior to January 1, 1997, and

     (3) neither the entity nor any member of the entity had been notified in
writing on or before May 8, 1996 that the classification of the entity was under
examination by the Internal Revenue Service.

     Allocations of Partnership Income, Gain, Loss and Deduction. Although a
partnership agreement will generally determine the allocation of income and loss
among partners, such allocations will be disregarded for tax purposes if they do
not comply with the provisions of Section 704(b) of the Internal Revenue Code
and the applicable regulations. Generally, Section 704(b) and the applicable
regulations require that partnership allocations respect the economic
arrangement of the partners.

     If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The allocations of taxable income and
loss provided for in the CarrAmerica Realty, L.P. and Carr Realty, L.P.
partnership agreements are intended to comply with the requirements of Section
704(b) of the Internal Revenue Code and the regulations promulgated thereunder.

     Tax Allocations with Respect to the Properties. Pursuant to Section 704(c)
of the Internal Revenue Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated in a manner such
that the contributing partner is charged with, or benefits from, respectively,
the difference between the adjusted tax basis and the fair market value of such
property at the time of contribution. The difference is known as the book-tax
difference. Such allocations are solely for federal income tax purposes and do
not


affect the book capital accounts or other economic or legal arrangements among
the partners. Under regulations promulgated under Section 704 of the Internal
Revenue Code, similar rules apply when a partnership elects to "revalue" its
assets in certain situations, such as when a contribution of property is made to
a partnership by a new partner.

     In general, if any asset contributed to or revalued by a partnership is
determined to have a fair market value that is greater than its adjusted tax
basis, certain partners, including CarrAmerica, will be allocated lower amounts
of depreciation deductions as to certain properties for tax purposes and
increased taxable income and gain on sale. Such allocations will tend to
eliminate the book-tax difference over the life of the partnership. However, the
special allocation rules of Section 704(c) of the Internal Revenue Code do not
always entirely rectify the book-tax difference on an annual basis or with
respect to a specific transaction such as a sale. Thus, CarrAmerica may be
allocated lower depreciation and other deductions, and possibly greater amounts
of taxable income in the event of a sale of contributed assets, and such amounts
may be in excess of the economic or book income allocated to it as a result of
such sale. Such an allocation might cause CarrAmerica to recognize taxable
income in excess of cash proceeds, which might adversely affect CarrAmerica's
ability to comply with the REIT distribution requirements. In this regard, it
should be noted that as the general partner of CarrAmerica Realty, L.P. and Carr
Realty, L.P., CarrAmerica will determine when and whether to sell any given
property. See " -- Requirements for Qualification as a REIT -- Annual
Distribution Requirements Applicable to REITs."

Other Tax Consequences for CarrAmerica and Its Stockholders

     CarrAmerica and its stockholders are subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of CarrAmerica
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders of CarrAmerica should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in CarrAmerica. In this regard, the District of Columbia
imposes an unincorporated business income tax on the "District of Columbia
taxable income" of partnerships doing business in the District of Columbia.
Because many of the properties owned by Carr Realty, L.P. are located in the
District of Columbia, CarrAmerica's share of the District of Columbia taxable
income of Carr Realty, L.P. will be subject to this tax. Carr Realty, L.P. has
taken steps to attempt to reduce the amount of income that is considered
District of Columbia taxable income, but it is likely that at least some portion
of the income attributable to the properties located in the District of Columbia
will be subject to the District of Columbia tax. This tax would not apply if
CarrAmerica were to own and operate its assets directly, rather than through
Carr


Realty, L.P.; however, CarrAmerica's ability to eliminate Carr Realty, L.P. and
thus own directly the assets currently owned by Carr Realty, L.P. is severely
limited.

     A portion of the cash to be used by CarrAmerica to fund distributions comes
from payments received from CarrAmerica's taxable REIT subsidiaries. The taxable
REIT subsidiaries are subject to federal and state income tax at the full
applicable corporate rates. In addition, a taxable REIT subsidiary will be
limited in its ability to deduct interest payments made to CarrAmerica.

     To the extent that CarrAmerica and its subsidiaries are required to pay
federal, state or local taxes, CarrAmerica will have less cash available for
distribution to stockholders.