Note 6. Commitments and Contingencies

Construction in Progress

As of June 30, 2011, the Company had three medical office buildings under construction with estimated completion dates ranging from the fourth quarter of 2011 to the first quarter of 2012. During the second quarter of 2011, construction of a parking garage associated with the two medical office buildings under construction in Colorado was substantially completed totaling approximately $10.6 million and was placed into service. The table below details the Company’s construction in progress and land held for development as of June 30, 2011. The information included in the table below represents management’s estimates and expectations at June 30, 2011 which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual results.


	Estimated		Property					CIP at		Estimated		Estimated
	Completion		Type			Approximate		June 30,		Remaining		Total
State	Date		(1)	Properties		Square Feet		2011		Funding		Investment
(Dollars in thousands)
Under construction:
Washington		4Q 2011	MOB		1		191,051	$	63,175	$	29,025	$	92,200
Colorado		4Q 2011	MOB		1		96,093		10,982		11,676		22,658
Colorado		1Q 2012	MOB		1		90,579		9,811		11,786		21,597

Land held for development:
Texas					—		—		20,773		—		—

					3		377,723	$	104,741	$	52,487	$	136,455


(1)		MOB-Medical office building.

Other Construction

The Company had approximately $29.3 million in various first-generation tenant improvement budgeted amounts remaining as of June 30, 2011 related to properties that were developed by the Company.

In late June 2011, the Company became aware of the financial instability of the general contractor on a development project in South Dakota being funded by the Company under a construction mortgage loan to an affiliate of the general contractor. As a result, the Company took control of the project in July 2011, engaged an unrelated third-party contractor and will continue to fund the ongoing development. The Company has identified unpaid subcontractors and advanced billings by the previous general contractor that may result in duplicative payments needed to complete the project of up to $4.3 million. The Company has a variable interest in the borrower of the mortgage loan and has concluded that it became the primary beneficiary of the VIE upon the change in control in July 2011. Therefore, the Company will begin consolidating the construction project in July 2011, resulting in a reclassification of the project to construction in progress from a mortgage note receivable. Upon consolidating the construction project, the Company will be required to record the project at fair value. To the extent the fair value of the construction related assets differs from the amount drawn on the mortgage note, the Company would be required to record a loss or gain. The project is 100% leased to an AA- rated health system and the lease commences upon completion of the construction. The fair value recorded by the Company will not impact the Company’s expectations that the project will generate a yield within historic ranges for investments of this type.

In addition, the same general contractor served in the same capacity on the two wholly-owned medical office buildings in Colorado included in construction in progress. In July 2011, the Company also engaged an unrelated third-party contractor to oversee the remaining construction of the two projects. The Company has identified approximately $0.9 million of advanced contractor billings and is currently assessing whether all funds advanced were appropriately applied to work invoiced subsequent to the advance. The Company has not yet concluded whether duplicative payments will be needed to complete the projects which, if occurs, would result in a loss. The Company expects these projects will generate a positive yield within historical ranges for similar projects.

The Company had remaining funding commitments totaling $217.8 million on eight construction loans as of June 30, 2011, including commitments on the South Dakota construction loan discussed above. The Company expects that the remaining commitments on the loans will be funded during the remainder of 2011 through 2013.

Legal Proceedings

Two affiliates of the Company, HR Acquisition of Virginia Limited Partnership and HRT Holdings, Inc., were defendants in a lawsuit brought by Fork Union Medical Investors Limited Partnership, Goochland Medical Investors Limited Partnership, and Life Care Centers of America, Inc., as plaintiffs, in the Circuit Court of Davidson County, Tennessee. The plaintiffs alleged that they overpaid rent between 1991 and 2003 under leases for two skilled nursing facilities in Virginia and sought a refund of such overpayments. Plaintiffs were seeking up to $2.0 million, plus pre- and post-judgment interest and attorneys’ fees. The two leases were terminated by agreement in 2003. The Company denied that it was liable to the plaintiffs and filed a motion for summary judgment seeking dismissal of the case. The court granted the Company’s motion for summary judgment at a hearing on June 3, 2011 and the case was dismissed with prejudice by order entered on July 20, 2011. The plaintiffs may appeal the dismissal of the case by filing a notice of appeal with the Tennessee Court of Appeals on or before August 19, 2011.

The Company is, from time to time, involved in litigation arising out of the ordinary course of business or which is expected to be covered by insurance. The Company is not aware of any other pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.