Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies [Abstract]

Commitments and Contingencies

14. Commitments and Contingencies

Development Activity

The Company had several development projects ongoing at December 31, 2011, including three construction projects, four construction mortgage loans and 10 properties in the process of stabilization subsequent to construction.

(Dollars in thousands)	Number of Properties		Amount Funded During Twelve Months Ended Dec. 31, 2011		Total Amount Funded Through Dec. 31, 2011		Estimated Remaining Fundings		Estimated Total Investment		Approximate Square Feet
Construction in progress (1)		3	$	57,547	$	61,152	$	22,130	$	83,282		300,614
Construction mortgage loans		4		48,609		51,472		165,722		217,194		473,431
Stabilization in progress		10		53,550		333,370		26,288		359,658		1,095,284
Land held for development		—		4,403		25,176		—		—		—
Total		17	$	164,109	$	471,170	$	214,140	$	660,134		1,869,329

(1) Includes one construction mortgage loan that the Company was consolidating under consolidation accounting principles. The building under construction was sold by the owner in January 2012.

Construction in Progress

During 2011, the Company initiated construction of a 96,433 square foot, on-campus medical office building and parking garage with significant pre-leasing (45% at December 31, 2011) in The Woodlands, Texas for an estimated total budget of approximately $18.1 million and an estimated completion date in the third quarter of 2012. This building is adjacent to a medical office building that the Company acquired in late 2010 as part of a five-building portfolio. Also, during 2011, the Company took control of a construction project in South Dakota and began consolidating the construction in progress that the Company was funding through a mortgage note agreement. The total budget for the South Dakota project was approximately $43.6 million with an estimated completion date of March 31, 2012. The Company’s consolidated investment in the construction project at December 31, 2011 was approximately $38.0 million, and the Company’s mortgage note balance, which was being eliminated in consolidation, was approximately $34.9 million. In January 2012, the South Dakota asset that secured the Company’s mortgage note was sold by the owner. In connection with the sale of the building, the Company’s mortgage note was repaid in full.

During 2011, one building located in Washington that was previously under construction commenced operations. The Company is in the process of leasing this building and anticipates an aggregate investment of approximately $92.2 million upon completion of tenant improvements. Also during 2011, one building and a garage located in Colorado that were previously under construction commenced operations. The Company is in process of leasing this building and anticipates an aggregate investment of approximately $22.7 million upon completion of tenant improvements.

During 2011, the Company took ownership of two parcels of land that secured two of the Company’s construction mortgage notes receivable with principal balances totaling approximately $4.4 million. The Company plans to construct outpatient facilities on the two sites. As such, the value of the land parcels is included in land held for development which is included in construction in progress on the Company’s Consolidated Balance Sheet.

As of December 31, 2011, the Company had two medical office buildings and one inpatient facility under construction with estimated completion dates in the first and third quarters of 2012. The table below details the Company’s construction in progress and land held for development at 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 and leasing may not reflect actual results.

State	Estimated Completion Date		Property Type (1)	Properties		Approximate Square Feet		CIP at Dec. 31, 2011		Estimated Remaining Fundings		Estimated Total Investment
(Dollars in thousands)
Under construction:
Colorado		1Q 2012	MOB		1		90,579	$	15,408	$	6,189	$	21,597
South Dakota (2)		1Q 2012	Inpatient		1		113,602		37,974		5,626		43,600
Texas		3Q 2012	MOB		1		96,433		7,770		10,315		18,085
Land held for development:
Iowa									4,403
Texas									20,773
					3		300,614	$	86,328	$	22,130	$	83,282

(1) MOB-Medical office building

(2) This building was being consolidated by the Company under variable interest accounting principles and was sold by the owner in January 2012.

Construction Mortgage Loans

The Company expects that the remaining funding commitments totaling $165.7 million on the four construction loans at December 31, 2011, of which $162.2 million relates to the two mortgage notes affiliated with Mercy Health, will be funded through 2013.

Stabilization in Progress

At December 31, 2011 and 2010, the Company had ten and nine properties, respectively, that it had previously developed that are in the process of stabilization. In the aggregate, the properties were approximately 40% leased and 21% occupied at December 31, 2011 and 31% leased and 23% occupied at December 31, 2010, with tenant improvement activities occurring in suites that were leased but not yet occupied by the tenants. The Company’s remaining funding commitments on these properties at December 31, 2011 relate to tenant improvements. Because these properties are not stabilized, they generated an aggregate net operating loss of approximately $4.0 million and $2.5 million, respectively, for twelve months ended December 31, 2011 and 2010.

During 2011, the Company placed two properties into service that it had previously developed with aggregate budgets totaling approximately $114.9 million that are now in the process of stabilization. Also during 2011, the Company moved one property out of stabilization with a budget totaling approximately $24.9 million.

In accordance with the capitalized interest accounting standards, the Company may continue to capitalize interest on properties in stabilization, subsequent to being placed into service, for up to one year. Subsequently, the capitalization of interest must cease. During August 2011, the Company ceased capitalizing interest on one property in which the Company had a gross investment of approximately $87.6 million at December 31, 2011.

Operating Leases

As of December 31, 2011, the Company was obligated under operating lease agreements consisting primarily of the Company’s corporate office lease and ground leases related to 44 real estate investments with expiration dates through 2101. The Company’s corporate office lease covers approximately 30,934 square feet of rented space and expires on October 31, 2020. Annual base rent on the corporate office lease increases approximately 3.25% annually with an additional base rental increase possible in the fifth year depending on changes in CPI. The Company’s ground leases generally increase annually based on increases in CPI. Rental expense relating to the operating leases for the years ended December 31, 2011, 2010 and 2009 was $4.3 million, $4.0 million and $3.8 million, respectively. The Company prepaid certain of its ground leases which represented approximately $0.3 million of the Company’s rental expense for each of the three years ended December 31, 2011. The Company’s future minimum lease payments for its operating leases, excluding leases that the Company has prepaid and leases in which an operator pays or fully reimburses the Company, as of December 31, 2011 were as follows (in thousands):

2012	$	4,366
2013		4,379
2014		4,455
2015		4,525
2016		4,581
2017 and thereafter		252,331
	$	274,637

Legal Proceedings

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.