First Potomac Realty Trust (FPO) 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014.

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

For the transition period from to .

Commission File Number 1-31824

FIRST POTOMAC REALTY TRUST

(Exact name of registrant as specified in its charter)

MARYLAND	37-1470730
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7600 Wisconsin Avenue, 11th Floor, Bethesda, MD 20814

(Address of principal executive offices) (Zip Code)

(301) 986-9200

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

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

Large Accelerated Filer	x	Accelerated Filer	¨
Non-Accelerated Filer	¨	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO   x

As of October 22, 2014, there were 58,824,061 common shares, par value $0.001 per share, outstanding.

FIRST POTOMAC REALTY TRUST

FORM 10-Q

INDEX

		Page
Part I:	Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Consolidated balance sheets as of September 30, 2014 (unaudited) and December 31, 2013	4
	Consolidated statements of operations (unaudited) for the three and nine months ended September 30, 2014 and 2013	5
	Consolidated statements of comprehensive income (loss) (unaudited) for the three and nine months ended September 30, 2014 and 2013	6
	Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2014 and 2013	7
	Notes to condensed consolidated financial statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56
Item 4.	Controls and Procedures	57
Part II:	Other Information
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	59
	Signatures	60

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Certain factors that could cause actual results to differ materially from the Company’s expectations include changes in general or regional economic conditions; the Company’s ability to timely lease or re-lease space at current or anticipated rents; changes in interest rates; changes in operating costs; the Company’s ability to complete acquisitions and, if applicable, dispositions on acceptable terms; the Company’s ability to manage its current debt levels and repay or refinance its indebtedness upon maturity or other required payment dates; the Company’s ability to maintain financial covenant compliance under its debt agreements; the Company’s ability to maintain effective internal controls over financial reporting and disclosure controls and procedures; any impact of the informal inquiry initiated by the U.S. Securities and Exchange Commission (the “SEC”); the Company’s ability to obtain debt and/or financing on attractive terms, or at all; and other risks detailed under “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013 and in the other documents the Company files with the SEC. Many of these factors are beyond the Company’s ability to control or predict. Forward-looking statements are not guarantees of performance. For forward-looking statements herein, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this discussion, or elsewhere, might not occur.

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FIRST POTOMAC REALTY TRUST

Consolidated Balance Sheets

(Amounts in thousands, except per share amounts)

	September 30, 2014			December 31, 2013
	(unaudited)
Assets:
Rental property, net	$	1,342,280		$	1,203,299
Assets held-for-sale	12,757			45,861
Cash and cash equivalents	11,993			8,740
Escrows and reserves	3,870			7,673
Accounts and other receivables, net of allowance for doubtful accounts of $1,440 and $1,181, respectively	11,029			12,384
Accrued straight-line rents, net of allowance for doubtful accounts of $276 and $92, respectively	31,906			30,332
Notes receivable, net	63,719			54,696
Investment in affiliates	48,008			49,150
Deferred costs, net	43,824			43,198
Prepaid expenses and other assets	8,856			8,279
Intangible assets, net	50,495			38,848
Total assets	$	1,628,737		$	1,502,460
Liabilities:
Mortgage loans	$	301,422		$	274,648
Unsecured term loan	300,000			300,000
Unsecured revolving credit facility	213,000			99,000
Accounts payable and other liabilities	38,936			41,296
Accrued interest	1,743			1,663
Rents received in advance	7,158			6,118
Tenant security deposits	6,649			5,666
Deferred market rent, net	3,575			1,557
Total liabilities	872,483			729,948
Noncontrolling interests in the Operating Partnership	32,802			33,221
Equity:
Preferred Shares, $0.001 par value, 50,000 shares authorized;
Series A Preferred Shares, $25 per share liquidation preference, 6,400 shares issued and outstanding	160,000			160,000
Common shares, $0.001 par value, 150,000 shares authorized; 58,815 and 58,704 shares issued and outstanding, respectively	59			59
Additional paid-in capital	913,601			911,533
Noncontrolling interests in a consolidated partnership	942			781
Accumulated other comprehensive loss	(2,777		)	(3,836		)
Dividends in excess of accumulated earnings	(348,373		)	(329,246		)
Total equity	723,452			739,291
Total liabilities, noncontrolling interests and equity	$	1,628,737		$	1,502,460

See accompanying notes to condensed consolidated financial statements.

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FIRST POTOMAC REALTY TRUST

Consolidated Statements of Operations

(unaudited)

(Amounts in thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues:
Rental	$	33,432		$	31,137		$	98,503		$	92,917
Tenant reimbursements and other	8,571			8,112			26,105			24,322
Total revenues	42,003			39,249			124,608			117,239
Operating expenses:
Property operating	11,222			10,431			34,989			30,174
Real estate taxes and insurance	4,203			4,062			12,844			12,549
General and administrative	4,955			6,346			15,370			16,598
Acquisition costs	1,488			173			2,667			173
Depreciation and amortization	16,000			14,343			46,714			42,538
Impairment of rental property	—			—			3,956			—
Contingent consideration related to property acquisition	—			—			—			75
Total operating expenses	37,868			35,355			116,540			102,107
Operating income	4,135			3,894			8,068			15,132
Other expenses (income)
Interest expense	6,182			7,726			18,096			27,036
Interest and other income	(1,684		)	(1,696		)	(5,112		)	(4,800		)
Equity in earnings of affiliates	(412		)	(19		)	(385		)	(54		)
Gain on sale of rental property	—			—			(21,230		)	—
Loss on debt extinguishment / modification	—			123			—			324
Total other expenses (income)	4,086			6,134			(8,631		)	22,506
Income (loss) from continuing operations	49			(2,240		)	16,699			(7,374		)
Discontinued operations:
Income (loss) from operations	—			107			(1,096		)	7,147
Loss on debt extinguishment	—			—			—			(4,414		)
Gain on sale of rental property	—			416			1,338			19,363
Income from discontinued operations	—			523			242			22,096
Net income (loss)	49			(1,717		)	16,941			14,722
Less: Net loss (income) attributable to noncontrolling interests	131			211			(327		)	(196		)
Net income (loss) attributable to First Potomac Realty Trust	180			(1,506		)	16,614			14,526
Less: Dividends on preferred shares	(3,100		)	(3,100		)	(9,300		)	(9,300		)
Net (loss) income attributable to common shareholders	$	(2,920	)	$	(4,606	)	$	7,314		$	5,226
Basic and diluted earnings per common share:
(Loss) income from continuing operations	$	(0.05	)	$	(0.09	)	$	0.12		$	(0.30	)
Income from discontinued operations	—			0.01			—			0.39
Net (loss) income	$	(0.05	)	$	(0.08	)	$	0.12		$	0.09
Weighted average common shares outstanding:
Basic	58,167			57,969			58,137			54,014
Diluted	58,167			57,969			58,209			54,014

See accompanying notes to condensed consolidated financial statements.

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FIRST POTOMAC REALTY TRUST

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

(Amounts in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net income (loss)	$	49		$	(1,717	)	$	16,941		$	14,722
Unrealized gain on derivative instruments	1,910			157			1,231			6,051
Unrealized loss on derivative instruments	—			(1,164		)	(125		)	—
Total comprehensive income (loss)	1,959			(2,724		)	18,047			20,773
Net loss (income) attributable to noncontrolling interests	131			211			(327		)	(196		)
Net (gain) loss from derivative instruments attributable to noncontrolling interests	(82		)	43			(47		)	(284		)
Comprehensive income (loss) attributable to First Potomac Realty Trust	$	2,008		$	(2,470	)	$	17,673		$	20,293

See accompanying notes to condensed consolidated financial statements.

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FIRST POTOMAC REALTY TRUST Consolidated Statements of Cash Flows (Unaudited, amounts in thousands)
	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Net income	$	16,941		$	14,722
Adjustments to reconcile net income to net cash provided by operating activities:
Discontinued operations:
Gain on sale of rental property	(1,338		)	(19,363		)
Loss on debt extinguishment	—			4,414
Depreciation and amortization	496			5,281
Impairment of rental property	—			1,921
Depreciation and amortization	47,514			43,289
Share based compensation	2,817			3,696
Bad debt expense	918			557
Amortization of deferred market rent, net	(43		)	29
Amortization of financing costs and discounts	1,073			2,328
Equity in earnings of affiliates	(385		)	(54		)
Distributions from investments in affiliates	1,229			1,813
Contingent consideration related to acquisition of property	—			75
Contingent consideration payments in excess of fair value at acquisition date	—			(987		)
Gain on sale of rental property	(21,230		)	—
Loss on debt extinguishment	—			324
Impairment of rental property	3,956			—
Changes in assets and liabilities:
Escrows and reserves	3,809			4,003
Accounts and other receivables	583			2,078
Accrued straight-line rents	(4,893		)	(6,267		)
Prepaid expenses and other assets	(736		)	418
Tenant security deposits	868			876
Accounts payable and accrued expenses	431			(1,605		)
Accrued interest	79			(956		)
Rents received in advance	931			(2,927		)
Deferred costs	(7,606		)	(8,242		)
Total adjustments	28,473			30,701
Net cash provided by operating activities	45,414			45,423
Cash flows from investing activities:
Investment in note receivable	(9,000		)	—
Purchase deposit on future acquisition	—			(2,000		)
Proceeds from sale of rental property	85,284			213,145
Principal payments from note receivable	129			60
Change in escrow and reserve accounts	—			(28,175		)
Additions to rental property and furniture, fixtures and equipment	(25,464		)	(33,477		)
Additions to development and redevelopment	(9,295		)	(14,252		)
Acquisition of rental property and associated intangible assets	(150,731		)	—
Contributions to investment in affiliates	(1,653		)	(391		)
Distributions from investment in affiliates	1,951			—
Net cash (used in) provided by investing activities	(108,779		)	134,910
Cash flows from financing activities:
Financing costs	(496		)	(2,324		)
Issuance of common shares, net	—			105,085
Issuance of debt	209,794			132,199
Payment of deferred acquisition costs and contingent consideration	—			(9,036		)
Repayments of debt	(106,127		)	(364,367		)
Dividends to common shareholders	(26,391		)	(24,128		)
Dividends to preferred shareholders	(9,300		)	(9,300		)
Contributions from consolidated joint venture partners	161			250
Distributions to noncontrolling interests in the Operating Partnership	(1,183		)	(1,168		)
Operating partnership unit redemption	—			(95		)
Stock option exercises	160			148
Net cash provided by (used in) financing activities	66,618			(172,736		)
Net increase in cash and cash equivalents	3,253			7,597
Cash and cash equivalents, beginning of period	8,740			9,374
Cash and cash equivalents, end of period	$	11,993		$	16,971

See accompanying notes to condensed consolidated financial statements.

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FIRST POTOMAC REALTY TRUST

Consolidated Statements of Cash Flows – Continued

(unaudited)

Supplemental disclosure of cash flow information for the nine months ended September 30 is as follows (dollars in thousands):

	2014			2013
Cash paid for interest, net	$	16,606		$	26,489
Non-cash investing and financing activities:
Debt assumed in connection with the acquisition of rental property	37,269			—
Value of common shares retired to settle employee income tax obligations	383			537
Change in fair value of the outstanding common Operating Partnership units	350			332
Issuance of common Operating Partnership units in connection with the acquisition of rental property	40			—
Changes in accruals:
Additions to rental property and furniture, fixtures and equipment	(290		)	(3,206		)
Additions to development and redevelopment	(782		)	(974		)

Cash paid for interest on indebtedness is net of capitalized interest of $2.8 million and $1.5 million for the nine months ended September 30, 2014 and 2013, respectively.

During the nine months ended September 30, 2014, we acquired three properties at an aggregate purchase price of $188.0 million, including the assumption of a $37.3 million mortgage loan.

Certain of our employees surrendered common shares owned by them valued at $0.4 million and $0.5 million during the nine months ended September 30, 2014 and 2013, respectively, to satisfy their statutory minimum federal income tax obligations associated with the vesting of restricted common shares of beneficial interest.

Noncontrolling interests in the Operating Partnership are presented at the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests’ share of net income or losses available to common shareholders, other comprehensive income or losses, distributions received or additional contributions. We account for issuances of common Operating Partnership units individually, which could result in some portion of our noncontrolling interests being carried at fair value with the remainder being carried at historical cost. At September 30, 2014 and 2013, we recorded adjustments of $3.7 million and $3.9 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.

During the nine months ended September 30, 2014, we issued 3,125 common Operating Partnership units at a fair value of $40 thousand to the seller of 840 First Street, NE to satisfy our contingent consideration obligation related to the acquisition of the property. No common Operating Partnership units were required to be issued to satisfy our contingent consideration obligation during the nine months ended September 30, 2013.

During the nine months ended September 30, 2014 and 2013, we accrued $8.2 million and $9.9 million, respectively, of capital expenditures related to rental property and furniture, fixtures and equipment in accounts payable. During the nine months ended September 30, 2014 and 2013, we accrued $0.8 million and $3.6 million, respectively, of capital expenditures related to development and redevelopment in accounts payable.

8

FIRST POTOMAC REALTY TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Description of Business

First Potomac Realty Trust (the “Company”) is a leader in the ownership, management, development and redevelopment of office and business park properties in the greater Washington, D.C. region. The Company separates its properties into four distinct reporting segments, which it refers to as the Washington, D.C., Maryland, Northern Virginia and Southern Virginia reporting segments. The Company strategically focuses on acquiring and redeveloping properties that it believes can benefit from its intensive property management, leasing expertise, market knowledge and established relationships, and seeks to reposition these properties to increase their profitability and value. The Company’s portfolio primarily contains a mix of single-tenant and multi-tenant office properties and business parks. Office properties are single-story and multi-story buildings that are primarily for office use; and business parks contain buildings with office features combined with some industrial property space.

References in these unaudited condensed consolidated financial statements to “we,” “our,” “us,” “the Company” or “First Potomac,” refer to the Company and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

We conduct our business through First Potomac Realty Investment Limited Partnership, our operating partnership (the “Operating Partnership”). We are the sole general partner of, and, as of September 30, 2014, owned 100% of the preferred interest and 95.7% of the common interest in the Operating Partnership. The remaining common interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests, some of which are owned by two of our executive officers who contributed properties and other assets to us upon our formation, and the remainder of which are owned by other unrelated parties.

At September 30, 2014, we wholly-owned or had a controlling interest in properties totaling 8.9 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.9 million square feet through five unconsolidated joint ventures. We also owned land that can support approximately 1.4 million square feet of additional development. Our consolidated properties were 87.0% occupied by 581 tenants at September 30, 2014. We did not include square footage that was in development or redevelopment, which totaled 0.3 million square feet at September 30, 2014, in our occupancy calculation. We derive substantially all of our revenue from leases of space within our properties. As of September 30, 2014, our largest tenant was the U.S. Government, which along with government contractors, accounted for 26% of our total annualized cash basis rent. We operate so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

(2) Summary of Significant Accounting Policies

(a) Principles of Consolidation

Our unaudited condensed consolidated financial statements include the accounts of our Company and the accounts of the Operating Partnership and the subsidiaries in which we or our Operating Partnership has a controlling interest, which includes First Potomac Management LLC, a wholly-owned subsidiary that manages the majority of our properties. All intercompany balances and transactions have been eliminated in consolidation.

We have condensed or omitted certain information and note disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”) in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2013 and as updated from time to time in other filings with the U.S. Securities and Exchange Commission (the “SEC”).

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals necessary to present fairly our financial position as of September 30, 2014 and the results of our operations and our comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013 and our cash flows for the nine months ended September 30, 2014 and 2013. Interim results are not necessarily indicative of full-year performance due, in part, to the timing of transactions and the impact of acquisitions and dispositions throughout the year as well as the seasonality of certain operating expenses such as utilities expense and snow and ice removal costs.

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(b) Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires our management team to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Estimates include the amount of accounts receivable that may be uncollectible; recoverability of notes receivable, future cash flows, discount and capitalization rate assumptions used to fair value acquired properties and to test impairment of certain long-lived assets and goodwill; derivative valuations; market lease rates, lease-up periods, leasing and tenant improvement costs used to fair value intangible assets acquired and probability weighted cash flow analysis used to fair value contingent liabilities. Actual results could differ from those estimates.

(c) Application of New Accounting Standards

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which states that a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. ASU 2014-08 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2014. Early adoption is permitted, but only for a disposal (or classification as held-for-sale) that has not been reported in financial statements previously issued or available for issuance. ASU 2014-08 must be applied prospectively. We adopted ASU 2014-08 in the second quarter of 2014. The adoption of ASU 2014-08 did not have a material impact on our condensed consolidated financial statements, though it did and will continue to impact the extent and frequency of presenting discontinued operations within our consolidated statements of operations and note disclosures. The operations of all properties that were sold prior to the adoption of ASU 2014-08 and two other properties, West Park and Patrick Center, which were classified as held-for-sale in previously issued financial statements prior to our adoption of ASU 2014-08 and were subsequently sold, are reflected within discontinued operations in our consolidated statements of operations for all periods presented. For more information, see note 8, Dispositions. All property operations that have been classified as discontinued operations will remain classified within discontinued operations in any future presentation of our consolidated statements of operations.

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance when it becomes effective on January 1, 2017. Early adoption is not permitted. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition method and are evaluating the impact that ASU 2014-09 will have on our consolidated financial statements and related disclosures.

On August 27, 2014, the FASB issued Accounting Standards Update 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (“ASU 2014-15”), which requires an entity to evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. The guidance will become effective January 1, 2017. The adoption of ASU 2014-15 will not have an impact on our consolidated financial position, results of operations or cash flows.

(d) Rental Property

Rental property is initially recorded at fair value, if acquired in a business combination, or initial cost when constructed or acquired in an asset purchase. Improvements and replacements are capitalized at cost when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of our assets, by class, are as follows:

Buildings	39 years
Building improvements	5 to 20 years
Furniture, fixtures and equipment	5 to 15 years
Lease related intangible assets	The term of the related lease
Tenant improvements	Shorter of the useful life of the asset or the term of the related lease

We regularly review market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible

10

impairment of the carrying value of a property, an impairment analysis is performed. We assess potential impairments based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the property’s use and eventual disposition. This estimate is based on projections of future revenues, expenses, capital improvement costs to maintain the operating capacity, expected holding periods and capitalization rates. These cash flows consider factors such as expected market trends and leasing prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment based on forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Further, we will record an impairment loss if we expect to dispose of a property, in the near term, at a price below carrying value. In such an event, we will record an impairment loss based on the difference between a property’s carrying value and our projected sales price less any estimated costs to sell.

We will classify a building as held-for-sale in accordance with GAAP in the period in which we have made the decision to dispose of the building, our Board of Trustees or a designated delegate has approved the sale, there is a high likelihood a binding agreement to purchase the property will be signed under which the buyer will be required to commit a significant amount of nonrefundable cash and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. We will cease recording depreciation on a building once it has been classified as held-for-sale. In the second quarter of 2014, we prospectively adopted ASU 2014-08, which impacts the presentation of operations and gains or losses from disposed properties and properties classified as held-for-sale. For more information, see note 2(c), Summary of Significant Accounting Policies - Application of New Accounting Standards.

If the building does not qualify as a discontinued operation under ASU 2014-08, we will classify the building’s operating results, together with any impairment charges and any gains or losses on the sale of the building, in continuing operations for all periods presented in our consolidated statements of operations. We will classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheet for the period the held-for-sale criteria were met.

If the building does qualify as a discontinued operation under ASU 2014-08, we will classify the building’s operating results, together with any impairment charges and any gains or losses on the sale of the building, in discontinued operations in our consolidated statements of operations for all periods presented and classify the assets and related liabilities related to the building as held-for-sale in our consolidated balance sheets for the periods presented. Interest expense is reclassified to discontinued operations only to the extent the held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by us after the disposition.

We recognize the fair value, if sufficient information exists to reasonably estimate the fair value, of any liability for conditional asset retirement obligations when assumed or incurred, which is generally upon acquisition, construction, development or redevelopment and/or through the normal operation of the asset.

We capitalize interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment, which include our investment in assets owned through unconsolidated joint ventures that are under development or redevelopment, while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. We will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress. We also capitalize direct compensation costs of our construction personnel who manage the development and redevelopment projects, but only to the extent the employee’s time can be allocated to a project. Any portion of construction management costs not directly attributable to a specific project are recognized as general and administrative expense in the period incurred. We do not capitalize any other general and administrative costs such as office supplies, office rent expense or an overhead allocation to our development or redevelopment projects. Capitalized compensation costs were immaterial for the three and nine months ended September 30, 2014 and 2013. Capitalization of interest ends when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity, if the property is not occupied. We place redevelopment and development assets into service at this time and commence depreciation upon the substantial completion of tenant improvements and the recognition of revenue. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.

(e) Notes Receivable

We provide loans to the owners of real estate properties, which can be collateralized by interest in the real estate property. We record these loans as “Notes receivable, net” in our consolidated balance sheets. The loans are recorded net of any discount or issuance costs, which are amortized over the life of the respective note receivable using the effective interest method. We record interest earned from notes receivable and amortization of any discount or issuance costs within “Interest and other income” in our consolidated statements of operations.

We will establish a provision for anticipated credit losses associated with our notes receivable when we anticipate that we may be unable to collect any contractually due amounts. This determination is based upon such factors as delinquencies, loss

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experience, collateral quality and current economic or borrower conditions. Our collectability of our notes receivable may be adversely impacted by the financial stability of the Washington, D.C. region and the ability of the underlying assets to keep current tenants or attract new tenants. Estimated losses are recorded as a charge to earnings to establish an allowance for credit losses that we estimate to be adequate based on these factors. Based on the review of the above criteria, we did not record an allowance for credit losses for our notes receivable during the three and nine months ended September 30, 2014 and 2013.

(f) Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation as a result of reclassifying the operating results of several properties as discontinued operations. For more information, see note 8, Dispositions. In the second quarter of 2014, we prospectively adopted the requirements under ASU 2014-08, which impacts the presentation of operations and gains or losses from disposed properties. For more information, see note 2(c), Summary of Significant Accounting Policies - Application of New Accounting Standards.

(3) Earnings Per Common Share

Basic earnings or loss per common share (“EPS”) is calculated by dividing net income or loss attributable to common shareholders by the weighted average common shares outstanding for the periods presented. Diluted EPS is computed after adjusting the basic EPS computation for the effect of dilutive common equivalent shares outstanding during the periods presented, which include stock options, non-vested shares and preferred shares. We apply the two-class method for determining EPS as our outstanding unvested shares with non-forfeitable dividend rights are considered participating securities. Our excess of distributions over earnings related to participating securities is shown as a reduction in total earnings attributable to common shareholders in our computation of EPS.

The following table sets forth the computation of our basic and diluted earnings per common share (amounts in thousands, except per share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Numerator for basic and diluted earnings per common share:
Income (loss) from continuing operations	$	49		$	(2,240	)	$	16,699		$	(7,374	)
Income from discontinued operations	—			523			242			22,096
Net income (loss)	49			(1,717		)	16,941			14,722
Less: Net loss (income) from continuing operations attributable to noncontrolling interests	131			233			(317		)	770
Less: Net income from discontinued operations attributable to noncontrolling interests	—			(22		)	(10		)	(966		)
Net income (loss) attributable to First Potomac Realty Trust	180			(1,506		)	16,614			14,526
Less: Dividends on preferred shares	(3,100		)	(3,100		)	(9,300		)	(9,300		)
Net (loss) income attributable to common shareholders	(2,920		)	(4,606		)	7,314			5,226
Less: Allocation to participating securities	(80		)	(103		)	(235		)	(309		)
Net (loss) income attributable to common shareholders	$	(3,000	)	$	(4,709	)	$	7,079		$	4,917
Denominator for basic and diluted earnings per common share:
Weighted average common shares outstanding:
Basic	58,167			57,969			58,137			54,014
Diluted	58,167			57,969			58,209			54,014
Basic and diluted earnings per common share:
(Loss) income from continuing operations	$	(0.05	)	$	(0.09	)	$	0.12		$	(0.30	)
Income from discontinued operations	—			0.01			—			0.39
Net (loss) income	$	(0.05	)	$	(0.08	)	$	0.12		$	0.09

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In accordance with GAAP regarding earnings per common share, we did not include the following potential weighted average common shares in our calculation of diluted earnings per common share as they are anti-dilutive for the periods presented (amounts in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2014	2013	2014	2013
Stock option awards	1,103	1,397	1,143	1,455
Non-vested share awards	433	513	401	528
Series A Preferred Shares(1)	12,356	12,183	12,438	11,613
	13,892	14,093	13,982	13,596

⁽¹⁾  Our Series A Preferred Shares are only convertible into our common shares upon certain changes in control of our Company. The dilutive shares are calculated as the daily average of the face value of the Series A Preferred Shares divided by the outstanding common share price.

(4) Rental Property

Rental property represents buildings and related improvements, net of accumulated depreciation, and developable land that are wholly-owned or owned by an entity in which we have a controlling interest. All of our rental properties are located within the greater Washington, D.C. region. Rental property, excluding properties classified as held-for-sale, consists of the following (dollars in thousands):

	September 30, 2014			December 31, 2013
Land and land improvements	$	332,466		$	294,753
Buildings and improvements	970,832			868,027
Construction in process	102,618			93,269
Tenant improvements	161,006			146,176
Furniture, fixtures and equipment	5,153			5,047
	1,572,075			1,407,272
Less: accumulated depreciation	(229,795		)	(203,973		)
	$	1,342,280		$	1,203,299

Development and Redevelopment Activity

We will place redevelopment and development assets into service at the earlier of one year after major construction activity is deemed to be substantially complete or upon occupancy. We construct office buildings and business parks on a build-to-suit basis or with the intent to lease upon completion of construction. We own developable land that can accommodate 1.4 million square feet of additional building space, of which 0.7 million is located in the Washington, D.C. reporting segment, 0.1 million in the Maryland reporting segment, 0.5 million in the Northern Virginia reporting segment and 0.1 million in the Southern Virginia reporting segment.

During the third quarter of 2014, we signed a lease for 167,000 square feet at a to-be-constructed building in our Northern Virginia reporting segment on vacant land that we have in our portfolio. We currently anticipate investing approximately $36 million to construct the new building, which excludes approximately $11 million of tenant improvements and approximately $2 million of combined leasing commissions and capitalized interest costs. We currently expect to complete construction of the new building in the fourth quarter of 2016. However, we can provide no assurance regarding the timing, costs or results of the project. At September 30, 2014, our total investment in the development project was $5.4 million, which included the original cost basis

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of the applicable portion of the vacant land of $5.2 million. The majority of the costs incurred as of September 30, 2014 in excess of the original cost basis of the land relate to site preparation costs.

On August 4, 2011, we formed a joint venture, in which we have a 97% interest, with an affiliate of Perseus Realty, LLC to acquire Storey Park in our Washington, D.C. reporting segment. At the time, the site was leased to Greyhound Lines, Inc. (“Greyhound”), which subsequently relocated its operations. Greyhound’s lease expired on August 31, 2013, at which time the property was placed into development. The joint venture anticipates developing a mixed-use project on the 1.6 acre site, which can accommodate up to 712,000 square feet. At September 30, 2014, the total investment in the development project was $54.6 million, which included the original cost basis of the property of $43.3 million. The majority of the costs in excess of the original cost basis relate to capitalized architectural fees and site preparation costs. We are currently exploring our options related to this property; however, until a definitive plan for the property has been reached and we begin significant development activities, we cannot determine the total cost of the project or the anticipated completion date.

On December 28, 2010, we acquired 440 First Street, NW, a vacant eight-story office building in our Washington, D.C. reporting segment. In October 2013, we substantially completed the redevelopment of the 139,000 square foot property. At September 30, 2014, we had placed into service 38,000 square feet of the redeveloped space at the property. At September 30, 2014, our total investment in the redevelopment project was $55.4 million, which included the original cost basis of the property of $23.6 million. We will place the remaining 101,000 square feet of vacant space in-service in the fourth quarter of 2014.

Other than the 101,000 square feet of redevelopment at 440 First Street, NW, we had no additional square feet of redevelopment yet to be placed into service at September 30, 2014. At September 30, 2014, we had no completed development that had yet to be placed into service.

(5) Acquisitions

On September 24, 2014, we acquired 11 Dupont Circle, NW, a 153,000 square foot, nine-story, office building in downtown Washington, D.C. for $89.0 million. The acquisition was funded with a draw under our unsecured revolving credit facility.

The fair values of the assets acquired and liabilities assumed in the 11 Dupont Circle, NW acquisition are as follows (dollars in thousands):

	September 30, 2014
Land	$	15,835
Acquired tenant improvements	3,374
Building and improvements	63,957
In-place leases	3,873
Acquired leasing commissions	1,678
Legal leasing fees	80
Above-market leases acquired	1,420
Total assets acquired	90,217
Below-market leases assumed	(1,217		)
Net assets acquired	$	89,000

The fair values of the assets acquired and liabilities assumed in 2014 are preliminary as we continue to finalize their acquisition date fair value determination.

At September 30, 2014, our consolidated intangible assets related to 11 Dupont Circle, NW in 2014 were comprised of the following categories: acquired tenant improvements; in-place leases; acquired leasing commissions; legal expenses; and above-market leases, which had an aggregate weighted average amortization period of 5.6 years.

During the second quarter of 2014, we acquired the following properties (dollars in thousands):

Property	Reporting Segment	Acquisition Date	Property Type	Square Feet	Contractual Purchase Price
1401 K Street, NW(1)	Washington, DC	April 8, 2014	Office	117,378	$58,000
1775 Wiehle Avenue	Northern Virginia	June 25, 2014	Office	130,048	$41,000

⁽¹⁾  The purchase price for 1401 K Street, NW includes the assumption of a $37.3 million mortgage loan.

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For the three and nine months ended September 30, 2014, we included $2.7 million and $4.0 million of revenues, and $0.4 million and $1.1 million of net loss, respectively, in our consolidated statements of operations related to the acquisition of 1401 K Street, NW, 1775 Wiehle Avenue and 11 Dupont Circle, NW. We incurred $1.5 million and $2.7 million of acquisition-related due diligence and closing costs during the three and nine months ended September 30, 2014, respectively, and $0.2 million for both the three and nine months ended September 30, 2013.

Pro Forma Financial Information (unaudited)

The unaudited pro forma financial information set forth below presents results for the nine months ended September 30, 2014 and 2013 as if the acquisitions of 1401 K Street, NW, 1775 Wiehle Avenue and 11 Dupont Circle, NW had occurred on January 1, 2013. The pro forma information is not necessarily indicative of the results that actually would have occurred nor does it intend to indicate future operating results (dollars in thousands, except per share amounts):

	2014		2013
Pro forma total revenues	$	136,743	$	133,411
Pro forma net income	$	19,691	$	9,914
Pro forma net income per share - basic and diluted	$	0.17	$	0.01

(6) Notes Receivable

Below is a summary of our notes receivable (dollars in thousands):

Balance at September 30, 2014
Face Amount		Unamortized Origination Fees			Balance		Interest Rate		Property
$	34,000	$	—		$	34,000	9.75	%	950 F Street, NW
29,767		(48		)	29,719		9.0	%	America’s Square
$	63,767	$	(48	)	$	63,719

Balance at December 31, 2013
Face Amount		Unamortized Origination Fees			Balance		Interest Rate		Property
$	25,000	$	(130	)	$	24,870	12.5	%	950 F Street, NW
29,896		(70		)	29,826		9.0	%	America’s Square
$	54,896	$	(200	)	$	54,696

In April 2011, we provided a $30.0 million mezzanine loan to the owners of America’s Square, a 461,000 square-foot office complex located in Washington, D.C. that is secured by a portion of the owners’ interest in the property. The loan is repayable in full at any time, subject to yield maintenance. The loan matures on May 1, 2016 and required monthly interest-only payments until May 2013, at which time the loan began requiring monthly principal and interest payments through its maturity date. The interest rate on the loan is constant throughout the life of the loan.

In December 2010, we provided a $25.0 million mezzanine loan to the owners of 950 F Street, NW, a ten-story, 287,000 square-foot office/retail building located in Washington, D.C. that is secured by a portion of the owners’ interest in the property. The loan requires monthly interest-only payments with a constant interest rate over the life of the loan. On January 10, 2014, we amended the loan to increase the outstanding balance to $34.0 million and reduce the fixed interest rate from 12.5% to 9.75%. The amended mezzanine loan matures on April 1, 2017 and is repayable in full on or after December 21, 2015.

We recorded interest income of $1.5 million and $4.5 million related to our notes receivable for the three and nine months ended September 30, 2014, respectively, and $1.5 million and $4.4 million for the three and nine months ended September 30, 2013, respectively, which is included within “Interest and other income” in our consolidated statements of operations.

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We recorded income from the amortization of origination fees of $7 thousand and $25 thousand for the three and nine months ended September 30, 2014, respectively, and $17 thousand and $52 thousand for the three and nine months ended September 30, 2013, respectively. During the first quarter of 2014, we wrote-off $0.1 million of unamortized fees related to the original 950 F Street, NW mezzanine loan. The amortization and write-off of unamortized fees are recorded within “Interest and other income” in our consolidated statements of operations.

(7) Investment in Affiliates

We own an interest in several joint ventures that own properties. We do not control the activities that are most significant to the joint ventures. As a result, the assets, the liabilities and the operating results of these noncontrolled joint ventures are not consolidated within our unaudited condensed consolidated financial statements. Our investments in these joint ventures are recorded as “Investment in affiliates” in our consolidated balance sheets. Our investment in affiliates consisted of the following (dollars in thousands):

	Reporting Segment	Ownership Interest		September 30, 2014		December 31, 2013
Prosperity Metro Plaza	Northern Virginia	51	%	$	25,466	$	24,735
1750 H Street, NW	Washington, D.C.	50	%	14,732		16,780
Aviation Business Park	Maryland	50	%	5,524		5,008
RiversPark I and II(1)	Maryland	25	%	2,286		2,627
				$	48,008	$	49,150

⁽¹⁾RiversPark I and RiversPark II are owned through two separate joint ventures.

The net assets of our unconsolidated joint ventures consisted of the following (dollars in thousands):

	September 30, 2014		December 31, 2013
Assets:
Rental property, net	$	194,075	$	194,240
Cash and cash equivalents	3,686		3,680
Other assets	17,529		15,585
Total assets	215,290		213,505
Liabilities:
Mortgage loans(1)(2)	108,456		106,384
Other liabilities	7,793		5,046
Total liabilities	116,249		111,430
Net assets	$	99,041	$	102,075

⁽¹⁾  Of the total mortgage debt that encumbers our unconsolidated properties, $2.8 million is recourse to us. We believe the fair value of the potential liability to us under this guaranty is inconsequential as the likelihood of our need to perform under the debt agreement is remote.

⁽²⁾  Includes the unamortized fair value adjustments recorded at acquisition upon the assumption of mortgage loans.

On July 10, 2014, our 50% owned unconsolidated joint venture repaid a $27.9 million mortgage loan that encumbered 1750 H Street, NW, a ten-story, 113,000 square-foot office building located in Washington, D.C. Simultaneously with the repayment, the joint venture entered into a new $32.0 million mortgage loan that has a fixed interest rate of 3.92%, a maturity date of August 1, 2024, and is repayable in full without penalty on or after August 1, 2021. The new loan requires monthly interest-only payments with a constant interest rate over the life of the loan.

On September 26, 2014, our 25% owned unconsolidated joint venture amended a $28.0 million mortgage loan that encumbers Rivers Park I and II, a six-building, 308,000 square-foot business park located in Columbia, Maryland. The amended mortgage loan reduced the variable interest rate spread by 60 basis points and reduced the amount of outstanding principal recourse to us from 25% to 10%. The amended loan matures on September 26, 2017 and is repayable in full without penalty at any time during the term of the loan.

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Our share of earnings or losses related to our unconsolidated joint ventures is recorded in our consolidated statements of operations as “Equity in earnings of affiliates.”

The following table summarizes the results of operations of our unconsolidated joint ventures, which due to our varying ownership interests in the joint ventures and the varying operations of the joint ventures may or may not be reflective of the amounts recorded in our consolidated statements of operations (dollars in thousands):

	Three Months Ended   September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Total revenues	$	5,713		$	6,035		$	17,245		$	18,046
Total operating expenses	(1,818		)	(1,879		)	(5,738		)	(5,649		)
Net operating income	3,895			4,156			11,507			12,397
Depreciation and amortization	(2,256		)	(2,887		)	(7,323		)	(8,681		)
Other expenses, net	(890		)	(1,091		)	(2,978		)	(3,254		)
Net income	$	749		$	178		$	1,206		$	462

We earn various fees from several of our joint ventures, which include management fees, leasing commissions and construction management fees. We recognize fees only to the extent of the third party ownership interest in our unconsolidated joint ventures. We recognized fees from our unconsolidated joint ventures of $0.2 million and $0.5 million for the three and nine months ended September 30, 2014 and 2013, respectively, which are reflected within “Tenant reimbursements and other revenues” in our consolidated statements of operations.

(8) Dispositions

During the second quarter of 2014, we prospectively adopted ASU 2014-08, which states that a component of an entity or a group of components of an entity is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. For more information, see note 2(c), Summary of Significant Accounting Policies - Application of New Accounting Standards.

(a) Disposed or Held-for-Sale Properties within Continuing Operations

The following table is a summary of completed property dispositions whose operating results are included in continuing operations in our consolidated statements of operations for the periods presented:

	Reporting Segment	Disposition Date	Property Type	Square Feet
Owings Mills Business Park	Maryland	10/16/2014	Business Park	180,475
Corporate Campus at Ashburn Center	Northern Virginia	6/26/2014	Business Park	194,184

On October 16, 2014, we sold the four remaining buildings at Owings Mills Business Park for net proceeds of $12.4 million. We recorded an impairment charge of $4.0 million in the second quarter of 2014. We had previously sold two buildings at Owings Mills Business Park in 2012. At September 30, 2014, the four buildings at Owings Mills Business Park met our held-for-sale criteria and, therefore, the assets of the buildings were classified within “Assets held-for-sale” and the liabilities of the buildings, which totaled $0.2 million, were classified within “Accounts payable and other liabilities” in our consolidated balance sheet. The majority of the assets classified within “Assets held-for sale” as of September 30, 2014, consisted of $2.7 million in land, $11.8 million in building, $1.5 million in tenant improvements and accumulated depreciation of $3.5 million.  The remaining $0.3 million classified within “Assets held-for sale” consisted of accrued straight-line rents, net of allowance for doubtful accounts, deferred costs, net of accumulated amortization, and prepaid expenses and other assets.

In accordance with ASU 2014-08, which we prospectively adopted during the second quarter of 2014, the operating results and gain on sale of Corporate Campus at Ashburn Center and the operating results and impairment of Owings Mills Business Park are reflected in continuing operations in our consolidated statements of operations for each of the periods presented. The following

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table summarizes the aggregate results of operations for two properties that are included in continuing operations for the periods presented (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues	$	119		$	1,317		$	2,914		$	3,959
Property operating expenses	(155		)	(364		)	(1,104		)	(1,137		)
Depreciation and amortization	(209		)	(349		)	(977		)	(1,050		)
Impairment of rental property	—			—			(3,956		)	—
(Loss) income from operations of disposed property	(245		)	604			(3,123		)	1,772
Gain on sale of rental property	—			—			21,230			—
Net (loss) income from continuing operations	$	(245	)	$	604		$	18,107		$	1,772

(b) Discontinued Operations

All properties classified within discontinued operations were sold prior to our adoption of ASU 2014-08 or classified as held-for-sale in previously issued consolidated financial statements prior to our adoption of ASU 2014-08.

The following table is a summary of completed property dispositions whose operating results are reflected as discontinued operations in our consolidated statements of operations for the periods presented:

	Reporting Segment	Disposition Date	Property Type	Square Feet
Patrick Center	Maryland	4/16/2014	Office	66,269
West Park	Maryland	4/2/2014	Office	28,333
Girard Business Center and Gateway Center	Maryland	1/29/2014	Business Park and Office	341,973
Worman’s Mill Court	Maryland	11/19/2013	Office	40,099
Triangle Business Center	Maryland	9/27/2013	Business Park	74,429
4200 Tech Court	Northern Virginia	8/15/2013	Office	33,875
Industrial Portfolio(1)	Various	May/June 2013	Industrial	4,280,985
4212 Tech Court	Northern Virginia	6/5/2013	Office	32,055

⁽¹⁾  During the second quarter of 2013, we sold 24 industrial properties, which consisted of two separate transactions. On May 7, 2013, we sold I-66 Commerce Center, a 236,000 square foot industrial property in Haymarket, Virginia. On June 18, 2013, we completed the sale of the remaining 23 industrial properties.

We have had, and will have, no continuing involvement with any of our disposed properties subsequent to their disposal. The operations of the disposed properties were not subject to any income based taxes. We did not dispose of or enter into any binding agreements to sell any other properties during the nine months ended September 30, 2014 and 2013.

The following table summarizes the results of operations of properties included in discontinued operations (dollars in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014			2013
Revenues	$	—	$	1,907	$	867		$	22,081
Net income (loss), before taxes(1)	—		107		(1,096		)	2,733
Gain on sale of rental property	—		416		1,338			19,363

⁽¹⁾  During the first quarter of 2014, we accelerated $1.0 million of unamortized straight-line rent and deferred abatement costs related to the sale of Girard Business Center and Gateway Center.

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(9) Debt

Our borrowings consisted of the following (dollars in thousands):

	September 30, 2014		December 31, 2013
Mortgage loans, effective interest rates ranging from 4.40% to 6.63%, maturing at various dates through June 2023(1)	$	301,422	$	274,648
Unsecured term loan, effective interest rates ranging from LIBOR plus 1.45% to LIBOR plus 1.90%, with staggered maturity dates ranging from October 2018 to October 2020(1)	300,000		300,000
Unsecured revolving credit facility, effective interest rate of LIBOR plus 1.50%, maturing October 2017(1)	213,000		99,000
	$	814,422	$	673,648

⁽¹⁾  At September 30, 2014, LIBOR was 0.16%. All references to LIBOR in the condensed consolidated financial statements refer to one-month LIBOR.

(a) Mortgage Loans

The following table provides a summary of our mortgage debt at September 30, 2014 and December 31, 2013 (dollars in thousands):

Encumbered Property	Contractual Interest Rate	Effective Interest Rate			Maturity Date	September 30, 2014			December 31, 2013
Annapolis Business Center(1)	5.74%	6.25	%		June 2014	$	—		$	8,076
Storey Park(2)(3)	LIBOR + 2.75%	5.80	%		October 2014	22,000			22,000
Jackson National Life Loan(4)	5.19%	5.19	%		August 2015	65,242			66,116
Hanover Business Center Building D	8.88%	6.63	%		August 2015	142			252
Chesterfield Business Center Buildings C, D, G and H	8.50%	6.63	%		August 2015	399			681
440 First Street, NW Construction Loan(2)	LIBOR + 2.50%	4.78	%		May 2016	23,493			21,699
Gateway Centre Manassas Building I	7.35%	5.88	%		November 2016	484			638
Hillside I and II	5.75%	4.62	%		December 2016	13,051			13,349
Redland Corporate Center Buildings II & III	4.20%	4.64	%		November 2017	66,127			67,038
Hanover Business Center Building C	7.88%	6.63	%		December 2017	543			653
840 First Street, NE	5.72%	6.01	%		July 2020	36,694			37,151
Battlefield Corporate Center	4.26%	4.40	%		November 2020	3,732			3,851
Chesterfield Business Center Buildings A,B,E and F	7.45%	6.63	%		June 2021	1,725			1,873
Airpark Business Center	7.45%	6.63	%		June 2021	941			1,022
1211 Connecticut Avenue, NW	4.22%	4.47	%		July 2022	29,833			30,249
1401 K Street, NW	4.80%	4.93	%		June 2023	37,016			—
		5.06	%	(5)		301,422			274,648
Unamortized fair value adjustments						(500		)	(663		)
Total contractual principal balance						$	300,922		$	273,985

⁽¹⁾  The loan was prepaid, without penalty, on May 1, 2014 with borrowings under our unsecured revolving credit facility.

⁽²⁾  At September 30, 2014, LIBOR was 0.16%.

⁽³⁾  The loan was repaid on October 16, 2014. Simultaneously with the repayment, our 97% owned consolidated joint venture entered into a new $22.0 million land loan with an applicable interest rate of LIBOR plus 2.50%, which matures on October 16, 2016, with a one-year extension at our option.

⁽⁴⁾  At September 30, 2014, the loan was secured by the following properties: Plaza 500, Van Buren Office Park, Rumsey Center, Snowden Center, Greenbrier Technology Center II and Norfolk Business Center. The terms of the loan allow us to substitute collateral, as long as

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certain debt-service coverage and loan-to-value ratios are maintained, or to prepay a portion of the loan, with a prepayment penalty, subject to a debt-service yield.

⁽⁵⁾  Weighted average interest rate on total mortgage debt.

Land Loan

On October 16, 2014, our 97% owned consolidated joint venture that owns Storey Park repaid a $22.0 million loan that encumbered the Storey Park land and was subject to a 5.0% interest rate floor. Simultaneously with the repayment, the joint venture entered into a new $22.0 million land loan with a variable interest rate of LIBOR plus 2.50%. The new loan matures on October 16, 2016, with a one-year extension at our option, and is repayable in full without penalty at any time during the term of the loan. Per the terms of the loan agreement, $6.0 million of the outstanding principal balance and all of the outstanding accrued interest is recourse to us.

Construction Loan

On June 5, 2013, we entered into a construction loan (the “Construction Loan”) that is collateralized by our 440 First Street, NW property, which underwent a major redevelopment that was substantially completed in October 2013. The Construction Loan has a borrowing capacity of up to $43.5 million, of which we initially borrowed $21.7 million in the second quarter of 2013 and borrowed an additional $1.8 million in January 2014. The Construction Loan has a variable interest rate of LIBOR plus a spread of 2.5% and matures in May 2016, with two one-year extension options at our discretion. We can repay all or a portion of the Construction Loan, without penalty, at any time during the term of the loan. At September 30, 2014, per the terms of the loan agreement, 50% of the outstanding principal balance and all of the outstanding accrued interest were recourse to us. The percentage of outstanding principal balance that is recourse to us can be reduced upon the property achieving certain operating thresholds. As of September 30, 2014, we were in compliance with all the financial covenants of the Construction Loan.

(b) Unsecured Term Loan

The table below shows the outstanding balances and the interest rates of the three tranches of the $300.0 million unsecured term loan at September 30, 2014 (dollars in thousands):

	Maturity Date	Amount		Interest Rate(1)
Tranche A	October 2018	$	100,000	LIBOR, plus 145 basis points
Tranche B	October 2019	100,000		LIBOR, plus 160 basis points
Tranche C	October 2020	100,000		LIBOR, plus 190 basis points
		$	300,000

⁽¹⁾  At September 30, 2014, LIBOR was 0.16%. The interest rate spread is subject to change based on our maximum total indebtedness ratio. Based on our maximum total indebtedness ratio at September 30, 2014, the applicable interest rate spreads on Tranche A, Tranche B and Tranche C of the unsecured term loan will increase by 20 basis points, 20 basis points and 15 basis points, respectively, in November 2014. For more information, see note 9(e) Debt – Financial Covenants.

The term loan agreement contains various restrictive covenants substantially identical to those contained in our unsecured revolving credit facility, including with respect to liens, indebtedness, investments, distributions, mergers and asset sales. In addition, the agreement requires that we satisfy certain financial covenants that are also substantially identical to those contained in our unsecured revolving credit facility. The agreement also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of our Company under the agreement to be immediately due and payable. As of September 30, 2014, we were in compliance with all the financial covenants of the unsecured term loan.

(c) Unsecured Revolving Credit Facility

During the third quarter of 2014, we borrowed $105.0 million under the unsecured revolving credit facility, of which $89.0 million was used to fund the acquisition of 11 Dupont Circle, NW and $16.0 million was used for general corporate purposes. During the third quarter of 2014, we repaid an additional $8.0 million of the outstanding balance under the unsecured revolving credit facility with our portion of the proceeds from the new 1750 H Street, NW mortgage loan and available cash. For the three and nine months ended September 30, 2014, our weighted average borrowings under the unsecured revolving credit facility were $125.9 million and $112.0 million, respectively, with a weighted average interest rate of 1.6% and 1.7%, respectively, compared with weighted average borrowings of $50.4 million and $154.9 million, with a weighted average interest rate of 2.6% and 2.8%, respectively, for the three and nine months ended September 30, 2013, respectively. Our maximum outstanding borrowings were $216.0 million for both the three and nine months ended September 30, 2014 compared with $83.0 million and $245.0 million

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for the three and nine months ended September 30, 2013, respectively. At September 30, 2014, outstanding borrowings under the unsecured revolving credit facility were $213.0 million with a weighted average interest rate of 1.7%. At September 30, 2014, LIBOR was 0.16% and the applicable spread on our unsecured revolving credit facility was 150 basis points. The available capacity under the unsecured revolving credit facility was $97.1 million as of the date of this filing. We are required to pay an annual commitment fee of 0.25% based on the amount of unused capacity under the unsecured revolving credit facility. Based on our leverage ratio at September 30, 2014, the applicable interest rate spread on the unsecured revolving credit facility will increase by 20 basis points in November 2014. For more information, see note 9(e) Debt – Financial Covenants. As of September 30, 2014, we were in compliance with all the financial covenants of the unsecured revolving credit facility.

(d) Interest Rate Swap Agreements

At September 30, 2014, we fixed LIBOR, at a weighted average interest rate of 1.5%, on $300.0 million of our variable rate debt through eleven interest rate swap agreements. See note 10, Derivative Instruments, for more information about our interest rate swap agreements.

(e) Financial Covenants

Our outstanding corporate debt agreements contain specific financial covenants that may impact future financing decisions made by us or may be impacted by a decline in operations. These covenants relate to our allowable leverage, minimum tangible net worth, fixed charge coverage and other financial metrics. As of September 30, 2014, we were in compliance with the covenants of our unsecured term loan and unsecured revolving credit facility and any such financial covenants of our mortgage debt (including the Construction Loan).

Our continued ability to borrow under the unsecured revolving credit facility is subject to compliance with financial and operating covenants, and a failure to comply with any of these covenants could result in a default under the credit facility. These debt agreements also contain cross-default provisions that would be triggered if we were in default under other loans, including mortgage loans, in excess of certain amounts. In the event of a default, the lenders could accelerate the timing of payments under the debt obligations and we may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on our liquidity, financial condition, results of operations and ability to make distributions to our shareholders.

Our unsecured revolving credit facility and unsecured term loan are subject to interest rate spreads that float based on the quarterly measurement of our maximum consolidated total indebtedness to gross asset value ratio. Based on our leverage ratio at September 30, 2014, the applicable interest rate spread on the unsecured revolving credit facility will increase by 20 basis points and the applicable interest rate spreads on Tranche A, Tranche B and Tranche C of our unsecured term loan will increase by 20 basis points, 20 basis points and 15 basis points, respectively, in November 2014.

(10) Derivative Instruments

We are exposed to certain risks arising from business operations and economic factors. We use derivative financial instruments to manage exposure that arise from business activities in which our future exposure to interest rate fluctuations is unknown. The objective in the use of an interest rate derivative is to add stability to interest expenses and manage exposure to interest rate changes. We do not use derivatives for trading or speculative purposes and intend to enter into derivative agreements only with counterparties that we believe have a strong credit rating to mitigate the risk of counterparty default or insolvency. No hedging activity can completely insulate us from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:

• available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection;

• the duration of the hedge may not match the duration of the related liability;

• the party owing money in the hedging transaction may default on its obligation to pay; and

• the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction.

We enter into interest rate swap agreements to hedge our exposure on our variable rate debt against fluctuations in prevailing interest rates. The interest rate swap agreements fix LIBOR to a specified interest rate; however, the swap agreements do not affect the contractual spreads associated with each variable debt instrument’s applicable interest rate.

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At September 30, 2014, we fixed LIBOR at a weighted average interest rate of 1.5% on $300.0 million of our variable rate debt through eleven interest rate swap agreements that are summarized below (dollars in thousands):

Effective Date	Maturity Date	Notional Amount	Interest Rate Contractual Component	Fixed LIBOR Interest Rate
July 2011	July 2016	$35,000	LIBOR	1.754%
July 2011	July 2016	25,000	LIBOR	1.763%
July 2011	July 2017	30,000	LIBOR	2.093%
July 2011	July 2017	30,000	LIBOR	2.093%
September 2011	July 2018	30,000	LIBOR	1.660%
January 2012	July 2018	25,000	LIBOR	1.394%
March 2012	July 2017	25,000	LIBOR	1.129%
March 2012	July 2017	12,500	LIBOR	1.129%
March 2012	July 2018	12,500	LIBOR	1.383%
June 2012	July 2017	50,000	LIBOR	0.955%
June 2012	July 2018	25,000	LIBOR	1.135%
	Total/Weighted Average	$300,000		1.505%

Our interest rate swap agreements are designated as cash flow hedges and we record any unrealized gains associated with the change in fair value of the swap agreements within “Accumulated other comprehensive loss” and “Prepaid expenses and other assets” and any unrealized losses within “Accumulated other comprehensive loss” and “Accounts payable and other liabilities” on our consolidated balance sheets. We record our proportionate share of any unrealized gains or losses on our cash flow hedges associated with our unconsolidated joint ventures within “Accumulated other comprehensive loss” and “Investment in affiliates” on our consolidated balance sheets. We record any gains or losses incurred as a result of each interest rate swap agreement’s fixed rate deviating from our respective loan’s contractual rate within “Interest expense” in our consolidated statements of operations. We did not have any material ineffectiveness associated with our cash flow hedges during the three and nine months ended September 30, 2014 and 2013.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to “Interest expense” on our consolidated statements of operations as interest payments are made on our variable-rate debt. We reclassified accumulated other comprehensive loss as an increase to interest expense of $1.0 million and $1.2 million for the three months ended September 30, 2014 and 2013, respectively, and $3.1 million and $3.5 million for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, we estimated that $2.8 million of our accumulated other comprehensive loss will be reclassified as an increase to interest expense over the following twelve months.

(11) Fair Value Measurements

We apply GAAP that outlines a valuation framework and creates a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The required disclosures increase the consistency and comparability of fair value measurements and the related disclosures. Fair value is identified, under the standard, as the price that would be received to sell an asset or paid to transfer a liability between willing third parties at the measurement date (an exit price). In accordance with GAAP, certain assets and liabilities must be measured at fair value, and we provide the necessary disclosures that are required for items measured at fair value as outlined in the accounting requirements regarding fair value.

Financial assets and liabilities, as well as those non-financial assets and liabilities requiring fair value measurement, are measured using inputs from three levels of the fair value hierarchy.

The three levels are as follows:

Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

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Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).

Level 3—Unobservable inputs, only used to the extent that observable inputs are not available, reflect our assumptions about the pricing of an asset or liability.

In accordance with accounting provisions and the fair value hierarchy described above, the following table shows the fair value of our consolidated assets and liabilities that are measured on a non-recurring and recurring basis as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	Balance at September 30, 2014		Level 1		Level 2		Level 3
Non-recurring Measurements:
Impaired real estate assets	$	12,500	$	—	$	12,500	$	—
Recurring Measurements:
Derivative instrument-swap assets	451		—		451		—
Derivative instrument-swap liabilities	3,371		—		3,371		—
	Balance at December 31, 2013		Level 1		Level 2		Level 3
Non-recurring Measurements:
Impaired real estate assets	$	2,909	$	—	$	2,909	$	—
Recurring Measurements:
Derivative instrument-swap assets	551		—		551		—
Derivative instrument-swap liabilities	4,576		—		4,576		—

We did not re-measure or complete any transactions involving non-financial assets or non-financial liabilities that are measured at fair value on a recurring basis during the three and nine months ended September 30, 2014 and 2013. Also, no transfers into or out of fair value measurement levels for assets or liabilities that are measured on a recurring basis occurred during the nine months ended September 30, 2014 and 2013.

Impairment of Real Estate Assets

We regularly review market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of a property, an impairment analysis is performed.

On October 16, 2014, we sold the four remaining buildings at Owings Mills Business Park, which was located in our Maryland reporting segment. Based on the anticipated sales price of the four buildings that were subsequently sold, we recorded an impairment charge of $4.0 million in the second quarter of 2014.

Interest Rate Derivatives

The interest rate derivatives are fair valued based on prevailing market yield curves on the measurement date and also take into consideration the credit valuation adjustment of the counter-party in determining the fair value of counterparty credit risk associated with our interest rate swap agreements. We use a third party to assist in valuing our interest rate swap agreements. A daily “snapshot” of the market is taken to obtain close of business rates. The snapshot includes over 7,500 rates including LIBOR fixings, Eurodollar futures, swap rates, exchange rates, treasuries, etc. This market data is obtained via direct feeds from Bloomberg and Reuters and from Inter-Dealer Brokers. The selected rates are compared to their historical values. Any rate that has changed by more than normal mean and related standard deviation would be considered an outlier and flagged for further investigation. The rates are then compiled through a valuation process that generates daily valuations, which are used to value our interest rate swap agreements. Our interest rate swap derivatives are effective cash flow hedges and the effective portion of the change in fair value is recorded in the equity section of our consolidated balance sheets as “Accumulated other comprehensive loss.”

Financial Instruments

The carrying amounts of cash equivalents, accounts and other receivables, accounts payable and other liabilities, with the exception of any items listed above, approximate their fair values due to their short-term maturities. We determine the fair value of our notes receivable and debt instruments by discounting future contractual principal and interest payments using prevailing market rates for securities with similar terms and characteristics at the balance sheet date. We deem the fair value measurement

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of our debt instruments as a Level 2 measurement as we use quoted interest rates for similar debt instruments to value our debt instruments. We also use quoted market interest rates to value our notes receivable, which we consider a Level 2 measurement as we do not believe notes receivable trade in an active market.

The carrying value and estimated fair value of our financial assets and liabilities are as follows (dollars in thousands):

	September 30, 2014				December 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Notes receivable(1)	$	63,719	$	63,767	$	54,696	$	56,812
Financial Liabilities:
Mortgage debt	$	301,422	$	289,647	$	274,648	$	262,873
Unsecured term loan	300,000		300,000		300,000		300,000
Unsecured revolving credit facility	213,000		213,000		99,000		99,000
Total	$	814,422	$	802,647	$	673,648	$	661,873

⁽¹⁾  The principal amount of our notes receivable was $63.8 million and $54.9 million at September 30, 2014 and December 31, 2013, respectively. On January 10, 2014, we amended the 950 F Street, NW mezzanine loan and increased the outstanding balance to $34.0 million.

(12) Equity

On October 21, 2014, we declared a dividend of $0.15 per common share, equating to an annualized dividend of $0.60 per common share. The dividend will be paid on November 17, 2014 to common shareholders of record as of November 6, 2014. We also declared a dividend of $0.484375 per share on our Series A Preferred Shares. The dividend will be paid on November 17, 2014 to preferred shareholders of record as of November 6, 2014.

On July 22, 2014, we declared a dividend of $0.15 per common share, equating to an annualized dividend of $0.60 per common share. The dividend was paid on August 15, 2014 to common shareholders of record as of August 6, 2014. We also declared a dividend of $0.484375 per share on our Series A Preferred Shares. The dividend was paid on August 15, 2014 to preferred shareholders of record as of August 6, 2014. Dividends on all non-vested share awards are recorded as a reduction of shareholders’ equity. For each dividend paid by us on our common and preferred shares, the Operating Partnership distributes an equivalent distribution on our common and preferred Operating Partnership units, respectively.

Our unsecured revolving credit facility, unsecured term loan and the Construction Loan contain certain restrictions that include, among other things, requirements to maintain specified coverage ratios and other financial covenants, which may limit our Company’s ability to make distributions to our common and preferred shareholders. Further, distributions with respect to our common shares are subject to our ability to first satisfy our obligations to pay distributions to the holders of our Series A Preferred Shares.

As a result of the redemption feature of the Operating Partnership units, the noncontrolling interests associated with the Operating Partnership are recorded outside of permanent equity. Our equity and redeemable noncontrolling interests are as follows (dollars in thousands):

	First Potomac Realty Trust			Non-redeemable noncontrolling interests		Total Equity			Redeemable noncontrolling interests
Balance at December 31, 2013	$	738,510		$	781	$	739,291		$	33,221
Net income	16,614			—		16,614			327
Changes in ownership, net	2,018			161		2,179			390
Distributions to owners	(35,691		)	—		(35,691		)	(1,183		)
Other comprehensive income	1,059			—		1,059			47
Balance at September 30, 2014	$	722,510		$	942	$	723,452		$	32,802

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	First Potomac Realty Trust			Non-redeemable noncontrolling interests			Total Equity			Redeemable noncontrolling interests
Balance at December 31, 2012	$	658,765		$	3,728		$	662,493		$	34,367
Net income (loss)	14,526			(20		)	14,506			216
Changes in ownership, net	107,836			249			108,085			273
Distributions to owners	(33,428		)	—			(33,428		)	(1,168		)
Other comprehensive income	5,767			—			5,767			284
Balance at September 30, 2013	$	753,466		$	3,957		$	757,423		$	33,972

A summary of our accumulated other comprehensive loss is as follows (dollars in thousands):

	2014			2013
Beginning balance at January1,	$	(3,836	)	$	(10,917	)
Net unrealized gain on derivative instruments	1,106			6,051
Net gain attributable to noncontrolling interests	(47		)	(284		)
Ending balance at September 30,	$	(2,777	)	$	(5,150	)

(13) Noncontrolling Interests

(a) Noncontrolling Interests in the Operating Partnership

Noncontrolling interests relate to the common interests in the Operating Partnership not owned by us. Interests in the Operating Partnership are owned by limited partners who contributed buildings and other assets to the Operating Partnership in exchange for common Operating Partnership units. Limited partners have the right to tender their units for redemption in exchange for, at our option, our common shares on a one-for-one basis or cash based on the fair value of our common shares at the date of redemption. Unitholders receive a distribution per unit equivalent to the dividend per common share. Differences between amounts paid to redeem noncontrolling interests and their carrying values are charged or credited to equity. As a result of the redemption feature of the Operating Partnership units, the noncontrolling interests are recorded outside of permanent equity.

Noncontrolling interests are presented at the greater of their fair value or their cost basis, which is comprised of their fair value at issuance, subsequently adjusted for the noncontrolling interests’ share of net income or losses available to common shareholders, other comprehensive income or losses, distributions received or additional contributions. We account for issuances of common Operating Partnership units individually, which could result in some portion of our noncontrolling interests being carried at fair value with the remainder being carried at historical cost. Based on the closing price of our common shares at September 30, 2014, the cost to acquire, through cash purchase or issuance of our common shares, all of the outstanding common Operating Partnership units not owned by us would be approximately $30.9 million. At September 30, 2014 and December 31, 2013, we recorded adjustments of $3.7 million and $3.3 million, respectively, to present certain common Operating Partnership units at the greater of their carrying value or redemption value.

At December 31, 2013, 2,627,452 of the total common Operating Partnership units, or 4.3%, were not owned by us. During the first quarter of 2014, we issued 3,125 common Operating Partnership units at a fair value of $40 thousand to the seller of 840 First Street, NE to satisfy our contingent consideration obligation related to the acquisition of the property. As a result, 2,630,577 of the total common Operating Partnership units, or 4.3%, were not owned by us at September 30, 2014. There were no common Operating Partnership units redeemed for common shares or cash during the nine months ended September 30, 2014.

(b) Noncontrolling Interests in a Consolidated Partnership

When we are deemed to have a controlling interest in a partially-owned entity, we will consolidate all of the entity’s assets, liabilities and operating results within our condensed consolidated financial statements. The net assets contributed to the consolidated entity by the third party, if any, will be reflected within permanent equity in our consolidated balance sheets to the

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extent they are not mandatorily redeemable. The amount will be recorded based on the third party’s initial investment in the consolidated entity and will be adjusted to reflect the third party’s share of earnings or losses in the consolidated entity and any distributions received or additional contributions made by the third party. The earnings or losses from the entity attributable to the third party are recorded as a component of “Net loss (income) attributable to noncontrolling interests” in our consolidated statements of operations.

On August 4, 2011, we formed a joint venture, in which we have a 97% interest, with an affiliate of Perseus Realty, LLC to acquire Storey Park in our Washington, D.C. reporting segment. At the time, the site was leased to Greyhound, which subsequently relocated its operations. Greyhound’s lease expired on August 31, 2013, at which time the property was placed into development. The joint venture anticipates developing a mixed-use project on the 1.6 acre site, which can accommodate up to 712,000 square feet. At September 30, 2014, the total investment in the development project was $54.6 million, which included the original cost basis of the property of $43.3 million. The majority of the costs in excess of the original cost basis relate to capitalized architectural fees and site preparation costs. We are currently exploring our options related to this property; however, until a definitive plan for the property has been reached and we begin significant development activities, we cannot determine the total cost of the project or the anticipated completion date.

(14) Segment Information

Our reportable segments consist of four distinct reporting and operational segments within the greater Washington, D.C. region in which we operate: Washington, D.C., Maryland, Northern Virginia and Southern Virginia. We evaluate the performance of our segments based on the operating results of the properties located within each segment, which excludes large non-recurring gains and losses, gains or losses from sale of rental property, interest expense, general and administrative costs, acquisition costs or any other indirect corporate expense to the segments. In addition, the segments do not have significant non-cash items other than straight-line and deferred market rent amortization reported in their operating results. There are no inter-segment sales or transfers recorded between segments.

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The results of operations of our four reporting segments for the three and nine months ended September 30, 2014 and 2013 are as follows (dollars in thousands):

	Three Months Ended September 30, 2014
	Washington, D.C.(1)			Maryland			Northern Virginia			Southern Virginia			Consolidated
Number of buildings	6			42			49			38			135
Square feet	815,093			2,179,366			3,020,975			2,852,212			8,867,646
Total revenues	$	8,489		$	11,154		$	13,309		$	9,051		$	42,003
Property operating expense	(2,496		)	(2,540		)	(3,121		)	(3,065		)	(11,222		)
Real estate taxes and insurance	(1,278		)	(956		)	(1,228		)	(741		)	(4,203		)
Total property operating income	$	4,715		$	7,658		$	8,960		$	5,245		$	26,578
Depreciation and amortization expense													(16,000		)
General and administrative													(4,955		)
Acquisition costs													(1,488		)
Other expenses													(4,086		)
Net income													$	49
Capital expenditures(2)	$	5,320		$	1,875		$	1,516		$	2,001		$	10,767
	Three Months Ended September 30, 2013
	Washington, D.C.(3)			Maryland			Northern Virginia			Southern Virginia			Consolidated
Number of buildings	3			53			51			38			145
Square feet	502,690			2,544,481			3,085,740			2,852,240			8,985,151
Total revenues	$	6,963		$	10,207		$	13,231		$	8,848		$	39,249
Property operating expense	(1,591		)	(2,775		)	(3,088		)	(2,977		)	(10,431		)
Real estate taxes and insurance	(1,151		)	(837		)	(1,372		)	(702		)	(4,062		)
Total property operating income	$	4,221		$	6,595		$	8,771		$	5,169		$	24,756
Depreciation and amortization expense													(14,343		)
General and administrative													(6,346		)
Acquisition costs													(173		)
Other expenses													(6,134		)
Income from discontinued operations													523
Net loss													$	(1,717	)
Capital expenditures(2)	$	4,758		$	2,662		$	2,798		$	1,979		$	12,609

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	Nine Months Ended September 30, 2014
	Washington, D.C.(1)			Maryland			Northern Virginia			Southern Virginia			Consolidated
Total revenues	$	23,256		$	34,025		$	40,122		$	27,205		$	124,608
Property operating expense	(6,889		)	(8,913		)	(10,203		)	(8,984		)	(34,989		)
Real estate taxes and insurance	(3,579		)	(2,934		)	(4,217		)	(2,114		)	(12,844		)
Total property operating income	$	12,788		$	22,178		$	25,702		$	16,107		$	76,775
Depreciation and amortization expense													(46,714		)
General and administrative													(15,370		)
Acquisition costs													(2,667		)
Impairment of rental property													(3,956		)
Other income													8,631
Income from discontinued operations													242
Net income													$	16,941
Total assets(4)(5)	$	501,536		$	375,399		$	437,909		$	228,655		$	1,628,737
Capital expenditures(2)	$	16,702		$	6,966		$	3,876		$	6,173		$	34,410
	Nine Months Ended September 30, 2013
	Washington, D.C.(3)			Maryland			Northern Virginia			Southern Virginia			Consolidated
Total revenues	$	21,730		$	30,828		$	38,589		$	26,092		$	117,239
Property operating expense	(4,831		)	(7,873		)	(9,222		)	(8,248		)	(30,174		)
Real estate taxes and insurance	(3,746		)	(2,473		)	(4,302		)	(2,028		)	(12,549		)
Total property operating income	$	13,153		$	20,482		$	25,065		$	15,816		$	74,516
Depreciation and amortization expense													(42,538		)
General and administrative													(16,598		)
Acquisition costs													(173		)
Contingent consideration related to acquisition of property													(75		)
Other expenses													(22,506		)
Income from discontinued operations													22,096
Net income													$	14,722
Total assets(4)(5)	$	334,427		$	406,789		$	426,839		$	230,390		$	1,511,283
Capital expenditures(2)	$	17,543		$	10,597		$	11,100		$	7,513		$	47,729

⁽¹⁾  Includes occupied space at 440 First Street, NW and excludes Storey Park, which was placed in development in the third quarter of 2013.

⁽²⁾  Capital expenditures for corporate assets not allocated to any of our reportable segments totaled $55 and $412 for the three months ended September 30, 2014 and 2013, respectively, and $693 and $976 for the nine months ended September 30, 2014 and 2013, respectively.

⁽³⁾  Excludes 440 First Street, NW, which has been in redevelopment since its acquisition in 2010.

⁽⁴⁾  Total assets include our investment in properties that are owned through joint ventures that are not consolidated within our condensed consolidated financial statements. For more information on our unconsolidated investments, including location within our reportable segments, see note 7, Investment in Affiliates.

⁽⁵⁾  Corporate assets not allocated to any of our reportable segments totaled $85,238 and $112,838 at September 30, 2014 and 2013, respectively.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The discussion and analysis is derived from the consolidated operating results and activities of First Potomac Realty Trust. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. The Company’s actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and included elsewhere in this Quarterly Report on Form 10-Q. See “Special Note About Forward-Looking Statements” above.

References in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” the “Company” or “First Potomac,” refer to First Potomac Realty Trust and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

Overview

We are a leader in the ownership, management, development and redevelopment of office and business park properties in the greater Washington, D.C. region. We separate our properties into four distinct reporting segments, which we refer to as the Washington, D.C., Maryland, Northern Virginia and Southern Virginia reporting segments. We strategically focus on acquiring and redeveloping properties that we believe can benefit from our intensive property management, leasing expertise, market knowledge and established relationships, and seek to reposition these properties to increase their profitability and value. Our portfolio primarily contains a mix of single-tenant and multi-tenant office properties and business parks. Office properties are single-story and multi-story buildings that are primarily for office use; and business parks contain buildings with office features combined with some industrial property space.

We conduct our business through First Potomac Realty Investment Limited Partnership, our operating partnership (the “Operating Partnership”). We are the sole general partner of, and, as of September 30, 2014, owned 100% of the preferred interest and 95.7% of the common interest in the Operating Partnership. The remaining common interests in the Operating Partnership, which are presented as noncontrolling interests in the Operating Partnership in the accompanying unaudited condensed consolidated financial statements, are limited partnership interests, some of which are owned by two of our executive officers who contributed properties and other assets to us upon our formation, and the remainder of which are owned by other unrelated parties.

At September 30, 2014, we wholly-owned or had a controlling interest in properties totaling 8.9 million square feet and had a noncontrolling ownership interest in properties totaling an additional 0.9 million square feet through five unconsolidated joint ventures. We also owned land that can support approximately 1.4 million square feet of additional development. Our consolidated properties were 87.0% occupied by 581 tenants at September 30, 2014. We did not include square footage that was in development or redevelopment in our occupancy calculation, which totaled 0.3 million square feet at September 30, 2014. We derive substantially all of our revenue from leases of space within our properties. We operate so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

The primary source of our revenue is rent received from tenants under long-term (generally three to ten years) operating leases at our properties, including reimbursements from tenants for certain operating costs. Additionally, we may generate earnings from the sale of assets to third parties or contributed into joint ventures.

Our long-term growth will principally be driven by our ability to:

• maintain and increase occupancy rates and/or increase rental rates at our properties;

• continue to grow our portfolio through acquisitions of new properties, potentially through joint ventures;

• sell non-core assets to third parties, or contribute properties to joint ventures, at favorable prices;

• develop and redevelop existing assets; and

• execute initiatives designed to increase balance sheet capacity and expand the potential sources of capital.

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Executive Summary

For the three months ended September 30, 2014, we had net income of $49 thousand compared with a net loss of $1.7 million for the same period in 2013. For the nine months ended September 30, 2014, net income was $16.9 million, which was due to a $21.2 million gain on the sale of Corporate Campus at Ashburn Center in the second quarter of 2014, compared with net income of $14.7 million for the nine months ended September 30, 2013, which was due to a $19.2 million gain on the sale of our industrial portfolio in the second quarter of 2013.

Funds From Operations (“FFO”) increased for the three months ended September 30, 2014 compared with the same period in 2013 due to an increase in net operating income and a reduction in interest expense, as we decreased the weighted average interest rate on our total outstanding debt by 95 basis points since September 30, 2013. FFO decreased for the nine months ended September 30, 2014 compared with the same period in 2013 due to a reduction in net operating income, primarily as a result of selling our industrial portfolio. The reduction in net operating income from the industrial portfolio sale for the nine months ended September 30, 2014 was partially offset by improvements in net operating income on a same-property basis.

FFO is a non-GAAP financial measure. For a description of FFO, including why we believe our presentation is useful and a reconciliation of FFO to net income attributable to First Potomac Realty Trust, see “Funds From Operations.”

Significant Activity

• Executed 733,000 square feet of leases, including 389,000 square feet of new leases.

• Increased leased percentage in consolidated portfolio to 90.6% from 87.4% at September 30, 2013.

• In September, acquired 11 Dupont Circle, NW, a 153,000 square foot, nine-story, fully leased office building located in downtown Washington, D.C., for $89.0 million, bringing the aggregate purchase price of acquisitions for the year to $188.0 million.

• In October, sold the four remaining buildings at Owings Mills Business Park, which totaled 180,500 square feet, for net proceeds of $12.4 million, bringing aggregate net proceeds from dispositions for the year to $97.7 million.

Richmond Portfolio Sale

Consistent with our previously disclosed capital recycling strategy, we are actively marketing our Richmond, Virginia portfolio for sale, which includes Chesterfield Business Center, Hanover Business Center, Park Central, and Virginia Technology Center, and in the aggregate is comprised of 19 buildings totaling 828,000 square feet. We anticipate closing the sale late in the fourth quarter of 2014 or early 2015. However, we can provide no assurances regarding the timing or pricing of the sale of the Richmond Portfolio, or that the sale will occur at all.

Informal SEC Inquiry

As previously disclosed in our Annual Reports on Form 10-K for the years ended December 31, 2013 and 2012, we were informed that the SEC initiated an informal inquiry relating to the matters that were the subject of the Audit Committee’s internal investigation regarding the material weakness previously identified in our Annual Report on Form 10-K for the year ended December 31, 2011. The SEC staff has informed us that this inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred, nor considered a reflection upon any person, entity or security. We have been, and intend to continue, voluntarily cooperating fully with the SEC. The scope and outcome of this matter cannot be determined at this time.

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Properties:

The following sets forth certain information about our properties by segment as of September 30, 2014 (including properties in development and redevelopment, dollars in thousands):

WASHINGTON, D.C. REGION

Property	Buildings	Sub-Market(1)	Square Feet	Annualized Cash Basis Rent(2)		Leased at September 30, 2014(3)		Occupied at September 30, 2014(3)
Office
440 First Street, NW(4)	1	Capitol Hill	37,996	$	1,145	100.0	%	100.0	%
500 First Street, NW	1	Capitol Hill	129,035	4,647		100.0	%	100.0	%
840 First Street, NE	1	NoMA	248,536	7,161		97.7	%	97.7	%
1211 Connecticut Avenue, NW	1	CBD	129,298	3,513		90.5	%	64.0	%
1401 K Street, NW	1	East End	117,378	3,438		90.8	%	88.1	%
11 Dupont Circle, NW	1	CBD	152,850	5,317		100.0	%	100.0	%
Total/Weighted Average	6		815,093	25,221		96.5	%	91.9	%
Development and Redevelopment
440 First Street, NW(4)	—	Capitol Hill	101,271	—
Storey Park(5)	—	NoMA	—	—
Total Development and Redevelopment	—		101,271	—
Unconsolidated Joint Venture
1750 H Street, NW	1	CBD	113,235	3,916		100.0	%	95.8	%
Region Total/Weighted Average	7		1,029,599	$	29,137	96.9	%	92.4	%

⁽¹⁾  CBD refers to Central Business District; NoMA refers to North of Massachusetts Avenue.

⁽²⁾  Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the leases, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of our full-service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽³⁾  Does not include space in development or redevelopment.

⁽⁴⁾  On October 25, 2013, we substantially completed the redevelopment of the property. At September 30, 2014, we had placed in-service approximately 38,000 square feet of the redeveloped space. The property has approximately 101,000 square feet remaining in redevelopment, which will be placed in-service in the fourth quarter of 2014.

⁽⁵⁾  The property was acquired through a consolidated joint venture in which we have a 97% controlling economic interest. The property was placed into development on September 1, 2013. The joint venture anticipates developing a mixed-used project on the 1.6 acre site, which can accommodate up to 712,000 square feet. We are currently exploring our options related to this property; however, until a definitive plan for the property has been reached and we begin significant development activities, we cannot determine the total cost of the project or the anticipated completion date.

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MARYLAND REGION

Property	Buildings	Location	Square Feet	Annualized Cash Basis Rent(1)		Leased at September 30, 2014		Occupied at September 30, 2014
Business Park
Ammendale Business Park(2)	7	Beltsville	312,846	$	4,188	100.0	%	100.0	%
Gateway 270 West	6	Clarksburg	253,916	3,161		88.5	%	74.0	%
Owings Mills Business Park(3)	4	Owings Mills	180,475	1,136		53.7	%	53.7	%
Rumsey Center	4	Columbia	135,047	1,409		94.7	%	92.1	%
Snowden Center	5	Columbia	145,267	2,316		100.0	%	100.0	%
Total Business Park	26		1,027,551	12,210		88.3	%	84.4	%
Office
Annapolis Business Center	2	Annapolis	101,113	1,937		100.0	%	100.0	%
Metro Park North	4	Rockville	191,211	2,782		87.3	%	87.3	%
Cloverleaf Center	4	Germantown	173,766	2,185		73.0	%	73.0	%
Hillside I and II(4)	2	Columbia	63,709	598		67.5	%	62.2	%
TenThreeTwenty	1	Columbia	138,854	1,974		96.0	%	81.9	%
Redland Corporate Center	3	Rockville	483,162	12,248		100.0	%	100.0	%
Total Office	16		1,151,815	21,724		91.5	%	89.5	%
Total Consolidated	42		2,179,366	33,934		90.0	%	87.1	%
Unconsolidated Joint Ventures
Aviation Business Park	3	Glen Burnie	120,285	1,179		66.2	%	42.3	%
RiversPark I and II	6	Columbia	307,984	4,177		94.7	%	94.7	%
Total Joint Ventures	9		428,269	5,356		86.7	%	80.0	%
Region Total/Weighted Average	51		2,607,635	39,290		89.5	%	86.0	%

⁽¹⁾  Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the lease, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of our full-service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽²⁾  Ammendale Business Park consists of the following properties: Ammendale Commerce Center and Indian Creek Court.

⁽³⁾  Owings Mills Business Park consists of the following properties: Owings Mills Business Center and Owings Mills Commerce Center. On October 16, 2014, we sold the four remaining buildings at Owings Mills Business Park for net proceeds of $12.4 million.

⁽⁴⁾  Excludes 21,922 square feet of space that was placed into redevelopment during the first quarter of 2014.

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NORTHERN VIRGINIA REGION

Property	Buildings	Location	Square Feet	Annualized Cash Basis Rent(1)		Leased at September 30, 2014		Occupied at September 30, 2014
Business Park
Gateway Centre Manassas	3	Manassas	102,446	$	856	86.6	%	60.5	%
Linden Business Center	3	Manassas	109,787	1,048		96.2	%	96.2	%
Prosperity Business Center	1	Merrifield	71,373	794		92.5	%	92.5	%
Sterling Park Business Center(2)	7	Sterling	471,835	4,387		96.5	%	94.8	%
Total Business Park	14		755,441	7,085		94.7	%	90.1	%
Office
Atlantic Corporate Park(3)	2	Sterling	219,374	3,191		81.3	%	43.9	%
Cedar Hill	2	Tysons Corner	102,632	2,198		100.0	%	100.0	%
Herndon Corporate Center	4	Herndon	127,887	1,589		84.9	%	84.9	%
Enterprise Center	4	Chantilly	189,331	2,921		88.4	%	85.7	%
One Fair Oaks	1	Fairfax	214,214	5,422		100.0	%	100.0	%
Reston Business Campus	4	Reston	82,398	798		66.1	%	53.7	%
1775 Wiehle Avenue	1	Reston	130,048	2,796		100.0	%	100.0	%
Three Flint Hill	1	Oakton	180,819	3,405		96.3	%	96.3	%
Van Buren Office Park	5	Herndon	106,873	869		66.7	%	66.7	%
Windsor at Battlefield	2	Manassas	155,511	2,082		92.0	%	92.0	%
Total Office	26		1,509,087	25,271		89.1	%	82.6	%
Industrial
Newington Business Park Center	7	Lorton	255,567	2,373		85.0	%	82.0	%
Plaza 500	2	Alexandria	500,880	5,177		96.7	%	96.7	%
Total Industrial	9		756,447	7,550		92.7	%	91.7	%
Total Consolidated	49		3,020,975	39,906		91.4	%	86.8	%
Development
Northern Virginia land(4)	—		167,360	—
Unconsolidated Joint Venture
Prosperity Metro Plaza	2	Merrifield	326,519	7,348		93.0	%	93.0	%
Region Total/Weighted Average	51		3,514,854	47,254		91.5	%	87.4	%

⁽¹⁾  Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the leases, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of our full-service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽²⁾  Sterling Park Business Center consists of the following properties: 403/405 Glenn Drive, Davis Drive and Sterling Park Business Center.

⁽³⁾  In March 2014, we signed a lease for 82,000 square feet with a government tenant to occupy an entire building that was vacant at acquisition. We currently expect the tenant to move into the space in early 2015.

⁽⁴⁾  During the third quarter of 2014, we signed a lease for 167,000 square feet at a to-be-constructed building in Northern Virginia on vacant land that we have in our portfolio. We currently expect to complete construction of the new building in the fourth quarter of 2016. However, we can provide no assurance regarding the timing, costs or results of the project.

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SOUTHERN VIRGINIA REGION

Property	Buildings	Location	Square Feet	Annualized Cash Basis Rent(1)		Leased at September 30, 2014		Occupied at September 30, 2014
RICHMOND(2)
Business Park
Chesterfield Business Center(3)	11	Richmond	320,189	$	1,854	86.2	%	74.5	%
Hanover Business Center	4	Ashland	184,032	865		70.0	%	68.5	%
Park Central	3	Richmond	204,696	2,196		93.3	%	93.3	%
Virginia Technology Center	1	Glen Allen	118,983	1,290		79.1	%	79.1	%
Total Richmond	19		827,900	6,205		83.3	%	78.5	%
NORFOLK
Business Park
Battlefield Corporate Center	1	Chesapeake	96,720	811		100.0	%	100.0	%
Crossways Commerce Center(4)	9	Chesapeake	1,082,753	11,338		94.8	%	94.8	%
Greenbrier Business Park(5)	4	Chesapeake	411,253	4,066		81.9	%	72.6	%
Norfolk Commerce Park(6)	3	Norfolk	262,010	2,643		94.0	%	92.3	%
Total Business Park	17		1,852,736	18,858		92.1	%	89.8	%
Office
Greenbrier Towers	2	Chesapeake	171,576	1,637		76.9	%	75.4	%
Total Norfolk	19		2,024,312	20,495		90.8	%	88.5	%
Region Total/Weighted Average	38		2,852,212	26,700		88.6	%	85.6	%

⁽¹⁾  Annualized cash basis rent, which is calculated as the contractual rent due under the terms of the leases, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of our full-service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽²⁾  We are actively marketing our Richmond, Virginia portfolio for sale. We anticipate closing the sale late in the fourth quarter of 2014 or early 2015. However, we can provide no assurances regarding the timing or pricing of the sale of the Richmond Portfolio, or that the sale will occur at all.

⁽³⁾  Chesterfield Business Center consists of the following properties: Airpark Business Center, Chesterfield Business Center and Pine Glen.

⁽⁴⁾  Crossways Commerce Center consists of the following properties: Coast Guard Building, Crossways Commerce Center I, Crossways Commerce Center II, Crossways Commerce Center IV and 1434 Crossways Boulevard.

⁽⁵⁾  Greenbrier Business Park consists of the following properties: Greenbrier Technology Center I, Greenbrier Technology Center II and Greenbrier Circle Corporate Center.

⁽⁶⁾  Norfolk Commerce Park consists of the following properties: Norfolk Business Center, Norfolk Commerce Park II and Gateway II.

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Development and Redevelopment Activity

We place redevelopment and development assets into service at the earlier of one year after major construction activity is deemed to be substantially complete or upon occupancy. We construct office buildings and business parks on a build-to-suit basis or with the intent to lease upon completion of construction. We own developable land that can accommodate 1.4 million square feet of additional building space, of which, 0.7 million is located in the Washington, D.C. reporting segment, 0.1 million in the Maryland reporting segment, 0.5 million in the Northern Virginia reporting segment and 0.1 million in the Southern Virginia reporting segment.

During the third quarter of 2014, we signed a lease for 167,000 square feet at a to-be-constructed building in our Northern Virginia reporting segment on vacant land that we have in our portfolio. We currently anticipate investing approximately $36 million to construct the new building, which excludes approximately $11 million of tenant improvements and approximately $2 million of combined leasing commissions and capitalized interest costs. We expect to complete construction of the new building in the fourth quarter of 2016. However, we can provide no assurance regarding the timing, costs or results of the project. At September 30, 2014, our total investment in the development project was $5.4 million, which included the original cost basis of the applicable portion of the vacant land of $5.2 million. The majority of the costs incurred as of September 30, 2014 in excess of the original cost basis of the land relate to site preparation costs.

On August 4, 2011, we formed a joint venture, in which we have a 97% interest, with an affiliate of Perseus Realty, LLC to acquire Storey Park in our Washington, D.C. reporting segment. At the time, the site was leased to Greyhound Lines, Inc. (“Greyhound”), which subsequently relocated its operations. Greyhound’s lease expired on August 31, 2013, at which time the property was placed into development. The joint venture anticipates developing a mixed-use project on the 1.6 acre site, which can accommodate up to 712,000 square feet. At September 30, 2014, the total investment in the development project was $54.6 million, which included the original cost basis of the property of $43.3 million. The majority of the costs in excess of the original cost basis relate to capitalized architectural fees and site preparation costs. We are currently exploring our options related to this property; however, until a definitive plan for the property has been reached and we begin significant development activities, we cannot determine the total cost of the project or the anticipated completion date.

On December 28, 2010, we acquired 440 First Street, NW, a vacant eight-story office building in our Washington, D.C. reporting segment. In October 2013, we substantially completed the redevelopment of the 139,000 square foot property. At September 30, 2014, we had placed into service 38,000 square feet of the redeveloped space at the property. At September 30, 2014, our total investment in the redevelopment project was $55.4 million, which included the original cost basis of the property of $23.6 million. We will place the remaining 101,000 square feet of vacant space into service in the fourth quarter of 2014.

Other than the 101,000 square feet of redevelopment at 440 First Street, NW, we had no additional square feet of redevelopment yet to be placed in service at September 30, 2014. At September 30, 2014, we had no completed development that had yet to be placed in service.

Lease Expirations

Approximately 0.8% of our annualized cash basis rent, excluding month-to-month leases (which represent 0.2% of our annualized cash basis rent), is scheduled to expire during the remainder of 2014. We expect replacement rents on leases expiring in the last quarter of 2014 to decrease on a cash basis relative to the current rental rates being paid by tenants. Current tenants are not obligated to renew their leases upon the expiration of their terms. If non-renewals or terminations occur, we may not be able to locate qualified replacement tenants and, as a result, could lose a significant source of revenue while remaining responsible for the payment of our financial obligations. Moreover, the terms of a renewal or new lease, including the amount of rent, may be less favorable to us than the current lease terms, or we may be forced to provide tenant improvements at our expense or provide other concessions or additional services to maintain or attract tenants. We continually strive to increase our portfolio occupancy, and the amount of vacant space in our portfolio at any given time may impact our willingness to reduce rental rates or provide greater concessions to retain existing tenants and attract new tenants. We continually monitor our portfolio on a regional and per property basis to assess market trends, including vacancy, comparable deals and transactions, and other business and economic factors that may influence our leasing decisions. Prior to signing a lease with a tenant, we generally assess the prospective tenant’s credit quality through review of its financial statements and tax returns, and the result of that review is a factor in establishing the rent to be charged and/or level of security deposit required. Over the course of our leases, we monitor our tenants to stay aware of any material changes in credit quality. The metrics we use to evaluate a significant tenant’s liquidity and creditworthiness depend on facts and circumstances specific to that tenant and to the industry in which it operates and include the tenant’s credit history and economic conditions related to the tenant, its operations and the markets in which it operates.  These factors may change over time. In addition, our property management personnel have regular contact with tenants and tenant employees, and, where the terms of the lease permit and we deem it prudent we may request tenant financial information for periodic review, review publicly-available financial statements in the case of public company tenants and monitor news and rating agency reports regarding our tenants (or

35

their parent companies) and their underlying businesses. In addition, we regularly analyze account receivable balances as part of the ongoing monitoring of the timeliness of rent collections from tenants.

During the third quarter of 2014, we delivered positive net absorption of approximately 108,000 square feet and had a tenant retention rate of 79%. After reflecting all the renewal leases on a triple-net equivalent basis to allow for comparability, the weighted average rental rate of our renewed leases increased 5.5% and 4.0% for the three and nine months ended September 30, 2014, respectively, compared with the expiring leases on a U.S. generally accepted accounting principles (“GAAP”) basis. During the third quarter of 2014, we executed new leases for 389,000 square feet, of which less than half contained rent escalations, which was primarily due to a 167,000 square foot lease with the U.S. Government at a to-be-constructed building in Northern Virginia on vacant land that we have in our portfolio.

The following table sets forth tenant improvement and leasing commission costs on a rentable square foot basis for all new and renewal leases signed during the nine months ended September 30, 2014:

	New	Renewal
Tenant improvements (per rentable square foot)	$32.13	$4.42
Leasing commissions (per rentable square foot)	$8.73	$1.97

The following table sets forth a summary schedule of the lease expirations at our consolidated properties for leases in place as of September 30, 2014 (dollars in thousands, except per square foot data):

Year of Lease Expiration(1)	Number of Leases Expiring	Leased Square Feet	% of Leased Square Feet		Annualized Cash Basis Rent(2)		% of Annualized Cash Basis Rent		Average Base Rent per Square Foot(2)(3)
MTM	4	21,927	0.3	%	$	239	0.2	%	$	10.91
2014	16	77,373	1.0	%	1,047		0.8	%	13.54
2015	106	611,883	7.6	%	9,029		7.2	%	14.76
2016	107	800,220	10.0	%	13,358		10.6	%	16.69
2017	114	1,351,580	16.8	%	20,699		16.5	%	15.31
2018	87	932,679	11.6	%	13,524		10.8	%	14.50
2019	89	1,006,178	12.5	%	13,661		10.9	%	13.58
2020	72	1,146,782	14.3	%	15,942		12.7	%	13.90
2021	32	293,658	3.7	%	4,056		3.2	%	13.81
2022	34	291,917	3.6	%	4,413		3.5	%	15.12
2023	18	558,597	7.0	%	11,989		9.5	%	21.46
Thereafter	66	943,928	11.6	%	17,805		14.1	%	18.86
Total / Weighted Average	745	8,036,722	100.0	%	$	125,762	100.0	%	$	15.65

⁽¹⁾  We classify leases that expired or were terminated on the last day of the quarter as leased square footage since the tenant is contractually entitled to the space.

⁽²⁾  Annualized Cash Basis Rent, which is calculated as the contractual rent due under the terms of the leases, without taking into account rent abatements, is reflected on a triple-net equivalent basis, by deducting operating expense reimbursements that are included, along with base rent, in the contractual payments of our full-service leases. The operating expense reimbursements primarily relate to real estate taxes and insurance expenses.

⁽³⁾  Represents Annualized Cash Basis Rent at September 30, 2014 divided by the square footage of the expiring leases.

Critical Accounting Policies and Estimates

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Our consolidated financial statements are prepared in accordance with GAAP that require us to make certain estimates and assumptions. Critical accounting policies and estimates are those that require subjective or complex judgments and are the policies and estimates that we deem most important to the portrayal of our financial condition, results of operations and cash flows. It is possible that the use of different reasonable estimates or assumptions in making these judgments could result in materially different amounts being reported in our consolidated financial statements. Our critical accounting policies and estimates relate to revenue recognition, including evaluation of the collectability of accounts and notes receivable, impairment of long-lived assets, purchase accounting for acquisitions of rental property, derivative instruments and share-based compensation.

The following is a summary of certain aspects of these critical accounting policies and estimates.

Revenue Recognition

We generate substantially all of our revenue from leases on our properties. We recognize rental revenue on a straight-line basis over the term of our leases, which includes fixed-rate renewal periods leased at below market rates at acquisition or inception. Accrued straight-line rents represent the difference between rental revenue recognized on a straight-line basis over the term of the respective lease agreements and the rental payments contractually due for leases that contain abatement or fixed periodic increases. We consider current information, credit quality, historical trends, economic conditions and other events regarding the tenants’ ability to pay their obligations in determining if amounts due from tenants, including accrued straight-line rents, are ultimately collectible. The uncollectible portion of the amounts due from tenants, including accrued straight-line rents, is charged to property operating expense in the period in which the determination is made.

Tenant leases generally contain provisions under which the tenants reimburse us for a portion of property operating expenses and real estate taxes we incur. Such reimbursements are recognized in the period in which the expenses are incurred. We record a provision for losses on estimated uncollectible accounts receivable based on our analysis of risk of loss on specific accounts. Lease termination fees are recognized on the date of termination when the related lease or portion thereof is cancelled, the collectability of the fee is reasonably assured and we have possession of the terminated space.

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance when it becomes effective on January 1, 2017. Early adoption is not permitted. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition method and are evaluating the impact that ASU 2014-09 will have on our consolidated financial statements and related disclosures.

Accounts and Notes Receivable

We must make estimates of the collectability of our accounts and notes receivable related to minimum rent, deferred rent, tenant reimbursements, lease termination fees and interest and other income. We specifically analyze accounts receivable and historical bad debt experience, tenant concentrations, tenant creditworthiness and current economic trends when evaluating the adequacy of our allowance for doubtful accounts receivable. These estimates have a direct impact on our net income as a higher required allowance for doubtful accounts receivable will result in lower net income. The uncollectible portion of the amounts due from tenants, including straight-line rents, is charged to property operating expense in the period in which the determination is made. We consider similar criteria in assessing impairment associated with outstanding loans or notes receivable and whether any allowance for anticipated credit loss is appropriate.

Investments in Real Estate and Real Estate Entities

Rental property is initially recorded at fair value, if acquired in a business combination, or initial cost when constructed or acquired in an asset purchase. Improvements and replacements are capitalized at cost when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives of our assets, by class, are as follows:

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Buildings	39 years
Building improvements	5 to 20 years
Furniture, fixtures and equipment	5 to 15 years
Lease related intangible assets	The term of the related lease
Tenant improvements	Shorter of the useful life of the asset or the term of the related lease

We regularly review market conditions for possible impairment of a property’s carrying value. When circumstances such as adverse market conditions, changes in management’s intended holding period or potential sale to a third party indicate a possible impairment of the carrying value of a property, an impairment analysis is performed. We assess potential impairments based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the property’s use and eventual disposition. This estimate is based on projections of future revenues, expenses, capital improvement costs to maintain the operating capacity, expected holding periods and capitalization rates. These cash flows consider factors such as expected market trends and leasing prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment based on forecasted undiscounted cash flows, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Further, we will record an impairment loss if we expect to dispose of a property, in the near term, at a price below carrying value. In such an event, we will record an impairment loss based on the difference between a property’s carrying value and its projected sales price less any estimated costs to sell.

We will classify a building as held-for-sale in accordance with GAAP in the period in which we have made the decision to dispose of the building, our Board of Trustees or a designated delegate has approved the sale, there is a high likelihood a binding agreement to purchase the property will be signed under which the buyer will be required to commit a significant amount of nonrefundable cash and no significant financing contingencies exist that could cause the transaction not to be completed in a timely manner. We will cease recording depreciation on a building once it has been classified as held-for-sale. We prospectively adopted ASU 2014-08, which impacts the presentation of operations and gains or losses from disposed properties and properties classified as held-for-sale. For more information, see note 2(c), Summary of Significant Accounting Policies - Application of New Accounting Standards, in the notes to our condensed consolidated financial statements.

If the building does not qualify as a discontinued operation under ASU 2014-08 we will classify the building’s operating results, together with any impairment charges and any gains or losses on the sale of the building, in continuing operations for all periods presented in our consolidated statements of operations. We will classify the assets and related liabilities related to the building as held-for-sale in our consolidated balance sheet for the period the held-for-sale criteria were met.

If the building does qualify as a discontinued operation under ASU 2014-08, we will classify the building’s operating results, together with any impairment charges and any gains or losses on the sale of the building, in discontinued operations in our consolidated statements of operations for all periods presented and classify the assets and liabilities related to the building as held-for-sale in our consolidated balance sheets for the periods presented. Interest expense is reclassified to discontinued operations only to the extent the held-for-sale property is secured by specific mortgage debt and the mortgage debt will not be assigned to another property owned by us after the disposition.

We recognize the fair value, if sufficient information exists to reasonably estimate the fair value, of any liability for conditional asset retirement obligations when incurred, which is generally upon acquisition, construction, development or redevelopment and/or through the normal operation of the asset.

We capitalize interest costs incurred on qualifying expenditures for real estate assets under development or redevelopment, which include our investments in assets owned through unconsolidated joint ventures that are under development or redevelopment, while being readied for their intended use in accordance with accounting requirements regarding capitalization of interest. We will capitalize interest when qualifying expenditures for the asset have been made, activities necessary to get the asset ready for its intended use are in progress and interest costs are being incurred. Capitalized interest also includes interest associated with expenditures incurred to acquire developable land while development activities are in progress. We also capitalize direct compensation costs of our construction personnel who manage the development and redevelopment projects, but only to the extent the employee’s time can be allocated to a project. Any portion of construction management costs not directly attributable to a specific project are recognized as general and administrative expense in the period incurred. We do not capitalize any other general administrative costs such as office supplies, office rent expense or an overhead allocation to our development or redevelopment projects. Capitalized compensation costs were immaterial during the three and nine months ended September 30, 2014 and 2013. Capitalization of interest ends when the asset is substantially complete and ready for its intended use, but no later than one year from completion of major construction activity, if the property is not occupied. We place redevelopment and development assets

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into service at this time and commence depreciation upon the substantial completion of tenant improvements and the recognition of revenue. Capitalized interest is depreciated over the useful life of the underlying assets, commencing when those assets are placed into service.

Purchase Accounting

Acquisitions of rental property, including any associated intangible assets, are measured at fair value at the date of acquisition. Any liabilities assumed or incurred are recorded at their fair value at the time of acquisition. The fair value of the acquired property is allocated between land and building (on an as-if vacant basis) based on management’s estimate of the fair value of those components for each type of property and to tenant improvements based on the depreciated replacement cost of the tenant improvements, which approximates their fair value. The fair value of the in-place leases is recorded as follows:

• the fair value of leases in-place on the date of acquisition is based on absorption costs for the estimated lease-up period in which vacancy and foregone revenue are avoided due to the presence of the acquired leases;

• the fair value of above and below-market in-place leases based on the present value (using a discount rate that reflects the risks associated with the acquired leases) of the difference between the contractual rent amounts to be paid under the assumed lease and the estimated market lease rates for the corresponding spaces over the remaining non-cancelable terms of the related leases, which range from one to fifteen years; and

• the fair value of intangible tenant or customer relationships.

Our determination of these fair values requires us to estimate market rents for each of the leases and make certain other assumptions. These estimates and assumptions affect the rental revenue, and depreciation and amortization expense recognized for these leases and associated intangible assets and liabilities.

Derivative Instruments

We are exposed to certain risks arising from business operations and economic factors. We use derivative financial instruments to manage exposures that arise from business activities in which our future exposure to interest rate fluctuations is unknown. The objective in the use of an interest rate derivative is to add stability to interest expenses and manage exposure to interest rate changes. We do not use derivatives for trading or speculative purposes and we intend to enter into derivative agreements only with counterparties that we believe have a strong credit rating to mitigate the risk of counterparty default or insolvency. No hedging activity can completely insulate us from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:

• available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection;

• the duration of the hedge may not match the duration of the related liability;

• the party owing money in the hedging transaction may default on its obligation to pay; and

• the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign its side of the hedging transaction.

We may designate a derivative as either a hedge of the cash flows from a debt instrument or anticipated transaction (cash flow hedge) or a hedge of the fair value of a debt instrument (fair value hedge). All derivatives are recognized as assets or liabilities at fair value. For effective hedging relationships, the effective portion of the change in the fair value of the assets or liabilities is recorded within equity (cash flow hedge) or through earnings (fair value hedge). Ineffective portions of derivative transactions will result in changes in fair value recognized in earnings. For a cash flow hedge, we record our proportionate share of unrealized gains or losses on our derivative instruments associated with our unconsolidated joint ventures within equity and “Investment in affiliates.” We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual inputs and guarantees.

Share-Based Payments

We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. For options awards, we use a Black-Scholes option-pricing model. Expected volatility is based on an assessment of our realized volatility over the preceding period that is equivalent to the award’s expected life. The expected term

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represents the period of time the options are anticipated to remain outstanding as well as our historical experience for groupings of employees that have similar behavior and considered separately for valuation purposes. For non-vested share awards that vest over a predetermined time period, we use the outstanding share price at the date of issuance to fair value the awards. For non-vested shares awards that vest based on performance conditions, we use a Monte Carlo simulation (risk-neutral approach) to determine the value and derived service period of each tranche. The expense associated with the share-based awards will be recognized over the period during which an employee is required to provide services in exchange for the award - the requisite service period (usually the vesting period). The fair value for all share-based payment transactions are recognized as a component of income or loss from continuing operations.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2014with the Three and Nine Months Ended September 30, 2013

During the nine months ended September 30, 2014, we acquired 11 Dupont Circle, NW, 1775 Wiehle Avenue and 1401 K Street, NW for an aggregate purchase price of $188.0 million. During 2013, we acquired a building at Redland Corporate Center for $30.0 million. For the discussion below, these four properties will collectively be referred to as the “Acquired Properties.”

During the second quarter of 2014, we sold Corporate Campus at Ashburn Center, which was subsequent to our adoption of ASU 2014-08. In accordance with ASU 2014-08, the operating results and gain on sale of Corporate Campus at Ashburn Center are reflected in continuing operations in our consolidated statements of operations. In August 2013, we placed Storey Park into development at the conclusion of its sole tenant’s lease. In October 2013, we substantially completed the redevelopment of 440 First Street, NW, a 139,000 square foot property. As of September 30, 2014, we had placed into service 38,000 square feet of the redeveloped space at 440 First Street, NW. For the discussion below, Corporate Campus at Ashburn Center, Storey Park and 440 First Street, NW are collectively referred to as the “Non-Comparable Properties.”

The term “Comparable Portfolio” refers to all consolidated properties owned by us, with operating results reflected in our continuing operations, for the entirety of the periods presented.

For discussion of the operating results of our reporting segments, the terms “Washington, D.C.”, “Maryland”, “Northern Virginia” and “Southern Virginia” will be used to describe the respective reporting segments.

In the tables below, the designation “NM” is used to refer to a percentage that is not meaningful.

Total Revenues

Total revenues are summarized as follows:

									Three Months				Nine Months
	Three Months Ended September 30,				Nine Months Ended September 30,						Percent				Percent
(dollars in thousands)	2014		2013		2014		2013		Change		Change		Change		Change
Rental	$	33,432	$	31,137	$	98,503	$	92,917	$	2,295	7	%	$	5,586	6	%
Tenant reimbursements and other	$	8,571	$	8,112	$	26,105	$	24,322	$	459	6	%	$	1,783	7	%

Rental Revenue

Rental revenue is comprised of contractual rent, the impact of straight-line revenue and the amortization of deferred market rent assets and liabilities representing above and below market rate leases at acquisition. Rental revenue increased $2.3 million and $5.6 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013 due to the Acquired Properties, which contributed $3.3 million and $6.1 million of additional rental revenue for the three and nine months ended September 30, 2014, respectively. The increase in rental revenue attributable to the Acquired Properties was partially offset by a decrease in rental revenue from the Non-Comparable Properties, which had a decrease in rental revenue of $0.8 million and $1.5 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. Rental revenue for the Comparable Portfolio decreased $0.2 million for the three months ended September 30, 2014 compared with 2013 due to the accelerated amortization of straight-line rents and deferred abatement costs due to the impending sale of Owings Mills Business Park, which was subsequently sold on October 16, 2014, and increased $1.0 million for the nine months

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ended September 30, 2014 compared with 2013 due to an increase in occupancy in the Comparable Portfolio. The weighted average occupancy of the Comparable Portfolio was 85.8% and 85.7% for the three and nine months ended September 30, 2014, respectively, compared with 84.6% and 83.3%, respectively, for the same periods in 2013.

The increase in rental revenue for the three and nine months ended September 30, 2014 compared with the same periods in 2013 includes $1.2 million and $1.8 million, respectively, for Washington, D.C., $0.8 million and $2.4 million, respectively, for Maryland, and $0.4 million and $1.1 million, respectively, for Northern Virginia. Rental revenue for Southern Virginia decreased $0.1 million for the three months ended September 30, 2014 compared with 2013 and increased $0.3 million for the nine months ended September 30, 2014 compared with 2013. Due to the timing of acquisitions and dispositions in 2014, which may or may not occur for the remainder of 2014, we cannot determine if rental revenue will continue to increase during 2014 compared with 2013.

Tenant Reimbursements and Other Revenues

Tenant reimbursements and other revenues include operating and common area maintenance costs reimbursed by our tenants as well as other incidental revenues such as lease termination payments, parking revenue, and joint venture and construction related management fees. Tenant reimbursements and other revenues increased $0.5 million and $1.8 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. For the three and nine months ended September 30, 2014, the Acquired Properties contributed an additional $0.5 million and $1.3 million, respectively, in tenant reimbursements and other revenues compared with the same periods in 2013. Tenant reimbursements and other revenues decreased $0.3 million and $0.7 million for the Non-Comparable Properties for the three and nine months ended September 30, 2014, respectively, compared with 2013. For the three and nine months ended September 30, 2014, tenant reimbursements and other revenues for the Comparable Portfolio increased $0.3 million, due to a termination fee received in 2014, and $1.2 million, due to an increase in recoverable snow and ice removal costs in the first quarter of 2014, respectively.

The increase in tenant reimbursements and other revenues for the three and nine months ended September 30, 2014 compared with the same periods in 2013 includes $0.2 million and $0.8 million, respectively, for Maryland, and $0.3 million and $0.8 million, respectively, for Southern Virginia. Tenant reimbursements and other revenues for Washington, D.C. increased $0.3 million for the three months ended September 30, 2014 compared with 2013 and decreased $0.3 million for the nine months ended September 30, 2014 compared with 2013, as a tenant at Storey Park vacated in August 2013 and the property was subsequently placed into development. Tenant reimbursements and other revenues for Northern Virginia decreased $0.3 million for the three months ended September 30, 2014 compared with 2013 and increased $0.5 million for the nine months ended September 30, 2014 compared with 2013. We anticipate full-year tenant reimbursements and other revenues will be greater than full-year 2013 tenant reimbursements and other revenues due to an increase in recoverable snow and ice removal costs during the first quarter of 2014.

Total Expenses

Property Operating Expenses

Property operating expenses are summarized as follows:

									Three Months				Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,						Percent				Percent
(dollars in thousands)	2014		2013		2014		2013		Change		Change		Change		Change
Property operating	$	11,222	$	10,431	$	34,989	$	30,174	$	791	8	%	$	4,815	16	%
Real estate taxes and insurance	$	4,203	$	4,062	$	12,844	$	12,549	$	141	3	%	$	295	2	%

Property operating expenses increased $0.8 million and $4.8 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. The increase is due to the Acquired Properties, which contributed $1.1 million and $2.4 million of additional property operating expenses for the three and nine months ended September 30, 2014, respectively. For the Non-Comparable Properties, property operating expense increased $0.1 million and $0.7 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. For the Comparable Portfolio, property operating expenses decreased $0.4 million for the three months ended September 30, 2014 compared with 2013 due to a decrease in utility expense as a result of a decrease in utility usage at certain properties. Property operating expenses increased $1.7 million for the Comparable Portfolio for the nine months ended September 30, 2014 compared with 2013 primarily due to an increase in snow and ice removal costs and an increase in utility costs related to the colder temperatures during the first quarter of 2014.

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The increase in property operating expenses for the three and nine months ended September 30, 2014 compared with the same periods in 2013 includes $0.9 million and $2.1 million, respectively, for Washington, D.C., $0.1 million and $1.0 million, respectively, for Northern Virginia, and $0.1 million and $0.7 million, respectively, for Southern Virginia. Property operating expenses for Maryland decreased $0.3 million for the three months ended September 30, 2014 compared with 2013 and increased $1.0 million for the nine months ended September 30, 2014 compared with 2013. We anticipate full-year 2014 property operating expenses will be greater than full-year 2013 property operating expenses due to the increase in snow and ice removal costs during the first quarter of 2014.

Real estate taxes and insurance expense increased $0.1 million and $0.3 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. The Acquired Properties contributed $0.4 million and $0.9 million of additional real estate taxes and insurance expense for the three and nine months ended September 30, 2014, respectively. Real estate taxes and insurance expense for the Non-Comparable Properties decreased $0.2 million and $0.6 million for the three and nine months ended September 30, 2014, respectively, compared with 2013. For the Comparable Portfolio, real estate taxes and insurance expense decreased $0.1 million for the three months ended September 30, 2014 compared with 2013, due to lower real estate tax assessments in the Northern Virginia region, and remained relatively flat for the nine months ended September 30, 2014 compared with 2013.

Real estate taxes and insurance expense for Maryland increased $0.1 million and $0.5 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. Real estate taxes and insurance expense for Southern Virginia slightly increased for the three months ended September 30, 2014 compared with 2013 and increased $0.1 million for the nine months ended September 30, 2014 compared with 2013. Real estate taxes and insurance expense for Northern Virginia decreased $0.1 million for both the three and nine months ended September 30, 2014 compared with 2013. Real estate taxes and insurance expense for Washington, D.C. increased $0.1 million for the three months ended September 30, 2014 compared with 2013 and decreased $0.2 million for the nine months ended September 30, 2014 compared with 2013. Due to the timing of acquisitions and dispositions in 2014, which may or may not occur for the remainder of 2014, we cannot determine if real estate taxes and insurance expense will continue to increase during 2014 compared with 2013.

Other Operating Expenses

General and administrative expenses are summarized as follows:

									Three Months					Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,							Percent					Percent
(dollars in thousands)	2014		2013		2014		2013		Change			Change		Change			Change
	$	4,955	$	6,346	$	15,370	$	16,598	$	(1,391	)	(22	)%	$	(1,228	)	(7	)%

General and administrative expenses decreased $1.4 million and $1.2 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013, primarily due to personnel separation costs of $1.8 million incurred during both the three and nine months ended September 30, 2013. The decrease in general and administrative expenses for the nine months ended September 30, 2014 compared with 2013 was also attributed to a decrease in legal fees as we incurred $0.3 million of legal fees associated with an informal SEC inquiry during the first quarter of 2013. The decrease in general and administrative expenses for the three and nine months ended September 30, 2014 compared with 2013 was partially offset by an increase in employee compensation costs. We currently anticipate that general and administrative expenses will continue to decrease in 2014 compared with 2013 as we expect an overall decline in legal fees in 2014 compared with 2013 and do not expect to incur any personnel separation costs in 2014. However, the informal inquiry initiated by the SEC could result in increased legal and/or accounting fees in 2014.

Acquisition costs are summarized as follows:

									Three Months			Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,						Percent			Percent
(dollars in thousands)	2014		2013		2014		2013		Change		Change	Change		Change
	$	1,488	$	173	$	2,667	$	173	$	1,315	NM	$	2,494	NM

Acquisition costs increased $1.3 million and $2.5 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. During the third quarter of 2014, we acquired an office building in

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Washington, D.C. for $89.0 million. During the second quarter of 2014, we acquired two office buildings, one located in Washington D.C. and the other located in Northern Virginia, for an aggregate purchase price of $99.0 million. We did not acquire any properties during the three and nine months ended September 30, 2013. However, we incurred acquisition costs during the three and nine months ended September 30, 2013 for a building at Redland Corporate Center, which was acquired on October 1, 2013.

Depreciation and amortization expense is summarized as follows:

									Three Months				Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,						Percent				Percent
(dollars in thousands)	2014		2013		2014		2013		Change		Change		Change		Change
	$	16,000	$	14,343	$	46,714	$	42,538	$	1,657	12	%	$	4,176	10	%

Depreciation and amortization expense includes depreciation of rental property and amortization of intangible assets and leasing commissions. Depreciation and amortization expense increased $1.7 million and $4.2 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013 due to the Acquired Properties, which contributed additional depreciation and amortization expense of $2.0 million and $3.9 million, respectively. Depreciation and amortization expense related to the Non-Comparable Properties decreased $0.6 million and $1.7 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. For the Comparable Portfolio, depreciation and amortization expense increased $0.3 million and $2.0 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013 due to additional leasing and tenant improvement costs related to the increase in occupancy in our portfolio. Due to the timing of acquisitions and dispositions in 2014, which may or may not occur for the remainder of 2014, we cannot determine if depreciation expense will continue to increase during 2014 compared with 2013.

Impairment of rental property is summarized as follows:

									Three Months			Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,						Percent			Percent
(dollars in thousands)	2014		2013		2014		2013		Change		Change	Change		Change
	$	—	$	—	$	3,956	$	—	$	—	—	$	3,956	—

On October 16, 2014, we sold the four remaining buildings at Owings Mills Business Park, which is located in our Maryland reporting segment. We recorded an impairment charge of $4.0 million in the second quarter of 2014. We did not record any other impairment charges within continuing operations for the three and nine months ended September 30, 2014 and 2013.

Contingent consideration related to acquisition of property is summarized as follows:

									Three Months			Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,						Percent				Percent
(dollars in thousands)	2014		2013		2014		2013		Change		Change	Change			Change
	$	—	$	—	$	—	$	75	$	—	—	$	(75	)	(100	)%

As part of the consideration for our 2009 acquisition of Corporate Campus at Ashburn Center, we recorded a contingent consideration obligation arising from a fee agreement entered into with the seller pursuant to which we were obligated to pay additional consideration if certain returns were achieved over the five-year term of the agreement or if the property was sold within the term of the five-year agreement. During June 2013, we achieved the specified returns and increased our liability to the seller. We paid the seller of Corporate Campus at Ashburn Center $1.7 million during the third quarter of 2013 to fulfill the obligation. The property was subsequently sold in June 2014.

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Other Expenses (Income)

Interest expense is summarized as follows:

									Three Months					Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,							Percent					Percent
(dollars in thousands)	2014		2013		2014		2013		Change			Change		Change			Change
	$	6,182	$	7,726	$	18,096	$	27,036	$	(1,544	)	(20	)%	$	(8,940	)	(33	)%

At September 30, 2014, we had $814.4 million of debt outstanding with a weighted average interest rate of 3.6% compared with $659.0 million of debt outstanding with a weighted average interest rate of 4.5% at September 30, 2013.

Interest expense decreased $1.5 million and $8.9 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013, primarily due to decreasing the weighted average interest rate on our total outstanding debt by 95 basis points from September 30, 2013. We amended and restated our unsecured revolving credit facility and unsecured term loan in October 2013, which reduced our LIBOR spreads to current market rates. For the three and nine months ended September 30, 2014, our weighted average borrowings under the unsecured revolving credit facility and the unsecured term loan totaled $425.9 million and $412.0 million, respectively, with a weighted average interest rate of 1.8% for both periods, compared with weighted average borrowings of $350.4 million and $454.9 million for the three and nine months ended September 30, 2013, respectively, with a weighted average interest rate of 2.5% and 2.6%, respectively. In addition, interest expense decreased for the three and nine months ended September 30, 2014 due to a decrease in mortgage interest expense as we have repaid over $100 million of mortgage debt since January 1, 2013 and reduced the weighted average interest rate applicable to our existing mortgage debt.

We anticipate that interest expense will continue to decline in 2014 compared with 2013 as a result of reducing both our weighted average debt outstanding and the applicable interest rates associated with our unsecured revolving credit facility and our unsecured term loan.

Interest and other income are summarized as follows:

									Three Months					Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,							Percent				Percent
(dollars in thousands)	2014		2013		2014		2013		Change			Change		Change		Change
	$	1,684	$	1,696	$	5,112	$	4,800	$	(12	)	(1	)%	$	312	7	%

In December 2010, we provided a $25.0 million mezzanine loan to the owners of 950 F Street, NW, a ten-story, 287,000 square-foot office/retail building located in Washington, D.C., which is secured by a portion of the owners’ interest in the property. On January 10, 2014, we amended and restated the loan to increase the outstanding balance to $34.0 million, and reduced the fixed interest rate from 12.5% to 9.75%. As part of amending the loan, we wrote-off $0.1 million of unamortized financing fees related to the origination of the mezzanine loan, which increased interest and other income for the nine months ended September 30, 2014 compared with the same period in 2013. In April 2011, we provided a $30.0 million mezzanine loan to the owners of America’s Square, a 461,000 square foot office complex in Washington, D.C., which has a fixed interest rate of 9.0%. In May 2013, the loan began requiring monthly principal payments, which will reduce the outstanding balance of the loan. We recorded interest and other income related to these loans of $1.6 million and $4.7 million for the three and nine months ended September 30, 2014, respectively, compared with $1.5 million and $4.5 million for the three and nine months ended September 30, 2013, respectively.

In January 2013, we subleased 5,000 square feet of our corporate headquarters, and subleased an additional 2,700 square feet of our corporate headquarters at the end of the first quarter of 2014. We recognized income of $0.1 million and $0.2 million for both the three and nine months ended September 30, 2014 and 2013 associated with these subleases, which is reflected within “Interest and other income” in our consolidated statements of operations.

We anticipate interest and other income will continue to increase in 2014 compared with 2013 due to a full-year impact of the higher outstanding balance on the 950 F Street, NW mezzanine loan and the subleasing of additional corporate office space in 2014.

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Equity in earnings of affiliates is summarized as follows:

									Three Months			Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,						Percent			Percent
(dollars in thousands)	2014		2013		2014		2013		Change		Change	Change		Change
	$	412	$	19	$	385	$	54	$	393	NM	$	331	NM

Equity in earnings of affiliates reflects our aggregate ownership interest in the operating results of the properties in which we do not have a controlling interest. The increase in income from our unconsolidated joint ventures is due to an increase in income from Prosperity Metro Plaza, which was due to an increase in occupancy, and Aviation Business Park, which recorded a gain from the reversal of a potential contingent consideration obligation as the time period contractually prescribed to achieve the metric creating the obligation had expired.

Gain on sale of rental property is summarized as follows:

									Three Months			Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,						Percent			Percent
(dollars in thousands)	2014		2013		2014		2013		Change		Change	Change		Change
	$	—	$	—	$	21,230	$	—	$	—	—	$	21,230	—

On June 26, 2014, we sold Corporate Campus at Ashburn Center, a three-building, 194,000 square foot single-story business park, which is located in Ashburn, Virginia, for net proceeds of $39.9 million and reported a gain on the sale of the property of $21.2 million in the second quarter. We used the net proceeds from the sale, together with available cash, to acquire 1775 Wiehle Avenue. In accordance with new accounting standards, the operating results and gain on the sale of the Corporate Campus at Ashburn Center are reflected in continuing operations in our consolidated statements of operations for each of the periods presented. We did not record any gain on sale of rental property within continuing operations during the three and nine months ended September 30, 2013.

Loss on debt extinguishment / modification is summarized as follows:

									Three Months					Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,							Percent					Percent
(dollars in thousands)	2014		2013		2014		2013		Change			Change		Change			Change
	$	—	$	123	$	—	$	324	$	(123	)	(100	)%	$	(324	)	(100	)%

On September 30, 2013, we repaid a $53.9 million mortgage loan that encumbered 840 First Street, NE, which was scheduled to mature on October 1, 2013. 840 First Street, NE is subject to a tax protection agreement, which requires that we maintain a specified minimum amount of debt on the property through March 2018.  As a result of this requirement, simultaneously with the repayment of the mortgage debt, we encumbered 840 First Street, NE with a $37.3 million mortgage loan that had previously encumbered 500 First Street, NW. During the third quarter of 2013, we incurred $0.1 million in debt modification charges related to the transfer of the loan and the collateral under such loan. During the second quarter of 2013, we recorded a loss on debt extinguishment / modification of $0.2 million that was associated with the prepayment of our secured term loan, our secured bridge loan and a $16.4 million mortgage loan encumbered by Cloverleaf Center.

Income from Discontinued Operations

Income from discontinued operations is summarized as follows:

45

									Three Months					Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,							Percent					Percent
(dollars in thousands)	2014		2013		2014		2013		Change			Change		Change			Change
	$	—	$	523	$	242	$	22,096	$	(523	)	(100	)%	$	(21,854	)	(99	)%

Discontinued operations for the periods presented reflects disposed properties that were previously classified as discontinued operations or held-for-sale in previously filed condensed consolidated financial statements prior to our adoption of ASU 2014-08. During the first quarter of 2014, we sold a portfolio of properties that consisted of Girard Business Center and Gateway Center, which were both located in our Maryland reporting segment. We recorded a gain on the sale of the portfolio of $0.1 million during the first quarter of 2014. During the second quarter of 2014, we sold our Patrick Center and West Park properties, which were both located in our Maryland reporting segment, and recorded a net gain of $1.3 million in the second quarter of 2014. During the second quarter of 2013, we sold the majority of our industrial portfolio, which was comprised of 24 industrial properties. We recognized an $18.9 million gain on the sale of the industrial properties. As part of the sale of the industrial properties, we incurred $4.4 million of debt extinguishment charges related to debt that was encumbered by the sold properties. We have had, and will have, no continuing involvement with these properties subsequent to their disposal. For more information about our discontinued operations, see note 8 – Dispositions, in the notes to our condensed consolidated financial statements.

Net loss (income) attributable to noncontrolling interests

Net loss (income) attributable to noncontrolling interests is summarized as follows:

											Three Months					Nine Months
	Three Months Ended  September 30,				Nine Months Ended September 30,									Percent				Percent
(dollars in thousands)	2014		2013		2014			2013			Change			Change		Change		Change
	$	131	$	211	$	(327	)	$	(196	)	$	(80	)	(38	)%	$	131	67	%

Net loss (income) attributable to noncontrolling interests reflects the ownership interests in our net income or loss, less amounts owed to our preferred shareholders, to parties other than us. During the three and nine months ended September 30, 2014, we had net income of $49 thousand and $16.9 million, respectively, compared with a net loss of $1.7 million for the three months ended September 30, 2013 and net income of $14.7 million for the nine months ended September 30, 2013. The weighted average percentage of the common Operating Partnership units held by third parties increased to 4.3% at September 30, 2014 compared with 4.2% at September 30, 2013, as we issued 35,911 common Operating Partnership units in December 2013 and 3,125 common Operating Partnership units in February 2014, in each case to the seller of 840 First Street, NE to satisfy our contingent consideration obligation related to the acquisition of the property.

At September 30, 2014, we consolidated the operating results of one joint venture and recognized our joint venture partner’s percentage of gains or losses within net loss (income) attributable to noncontrolling interests. On November 8, 2013, we acquired the remaining interest, which was owned by an unrelated third party for the three and nine months ended September 30, 2013, in a consolidated partnership that owns two buildings at Redland Corporate Center for $4.6 million.

Same Property Net Operating Income

Same Property Net Operating Income (“Same Property NOI”), defined as operating revenues (rental, tenant reimbursements and other revenues) less operating expenses (property operating expenses, real estate taxes and insurance) from the properties whose period-over-period operations can be viewed on a comparative basis (i.e., those consolidated properties owned and in-service for the entirety of the periods presented), is a primary performance measure we use to assess the results of operations at our properties. Same Property NOI is a non-GAAP measure. As an indication of our operating performance, Same Property NOI should not be considered an alternative to net income calculated in accordance with GAAP. A reconciliation of our Same Property NOI to net income from our consolidated statements of operations is presented below. The Same Property NOI results exclude corporate-level expenses, as well as certain transactions, such as the collection of termination fees, as these items vary significantly period-over-period and thus impact trends and comparability. Also, we eliminate depreciation and amortization expense, which are property level expenses, in computing Same Property NOI because these are non-cash expenses that are based on historical cost accounting assumptions and management believes these expenses do not offer the investor significant insight into the operations of the property. This presentation allows management and investors to distinguish whether growth or declines in net operating income are a result of increases or decreases in property operations or the acquisition of additional properties. While this presentation provides useful information to management and investors, the results below should be read in conjunction with the results from the consolidated statements of operations to provide a complete depiction of total Company performance.

46

Comparison of the Three and Nine Months Ended September 30, 2014 with the Three and Nine Months Ended September 30, 2013

The following table of selected operating data provides the basis for our discussion of Same Property NOI for the periods presented:

CONSOLIDATED

	Three Months Ended  September 30,											Nine Months Ended September 30,
(dollars in thousands)	2014			2013			$ Change			% Change		2014			2013			$ Change		% Change
Number of buildings(1)	130			130			—			—		130			130			—		—
Same property revenues
Rental	$	29,991		$	29,983		$	8		—		$	90,281		$	89,056		$	1,225	1.4
Tenant reimbursements and other	7,407			7,400			7			0.1		23,227			21,772			1,455		6.7
Total same property revenues	37,398			37,383			15			—		113,508			110,828			2,680		2.4
Same property operating expenses
Property	9,325			9,604			(279		)	(2.9	)	29,733			27,935			1,798		6.4
Real estate taxes and insurance	3,727			3,773			(46		)	(1.2	)	11,647			11,449			198		1.7
Total same property operating expenses	13,052			13,377			(325		)	(2.4	)	41,380			39,384			1,996		5.1
Same property net operating income	$	24,346		$	24,006		$	340		1.4		$	72,128		$	71,444		$	684	1.0
Reconciliation to net income (loss):
Same property net operating income	$	24,346		$	24,006							$	72,128		$	71,444
Non-comparable net operating income(2)	2,232			750								4,647			3,072
General and administrative expenses	(4,955		)	(6,346		)						(15,370		)	(16,598		)
Depreciation and amortization	(16,000		)	(14,343		)						(46,714		)	(42,538		)
Other(3)	(5,574		)	(6,307		)						2,008			(22,754		)
Discontinued operations	—			523								242			22,096
Net income (loss)	$	49		$	(1,717	)						$	16,941		$	14,722

	Weighted Average Occupancy For Three Months Ended September 30,				Weighted Average Occupancy For the Nine Months Ended September 30,
	2014		2013		2014		2013
Same Properties	85.8	%	84.6	%	85.7	%	83.3	%

⁽¹⁾  Same-property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented. Same-property results exclude the operating results of the following non-comparable properties: 440 First Street, NW, Storey Park, 1401 K Street, NW, 1775 Wiehle Avenue, 11 Dupont Circle, NW, and a building at Redland Corporate Center.

⁽²⁾  Non-comparable property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

⁽³⁾  Combines acquisition costs, impairment of rental property, contingent consideration related to acquisition of property and total other expenses (income) from our consolidated statements of operations.

Same Property NOI increased $0.3 million and $0.7 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. Total same property revenues slightly increased for the three months ended September 30, 2014 compared with 2013 and increased $2.7 million for the nine months ended September 30, 2014 compared with 2013, primarily due to an increase in occupancy and an increase in recoverable snow and ice removal costs that were incurred in the first quarter of 2014. Total same property operating expenses decreased $0.3 million for the three months ended September 30, 2014 compared with the same period in 2013 due to a decrease in utility expenses as a result of a decrease in usage at certain properties, which was partially offset by an increase in anticipated bad debt reserves. For the nine months ended September 30, 2014, total same property operating expenses increased $2.0 million compared with the same period in 2013 due to higher occupancy and an increase in snow and ice removal costs that were incurred in the first quarter of 2014.

47

Washington, D.C.

	Three Months Ended  September 30,									Nine Months Ended September 30,
(dollars in thousands)	2014		2013		$ Change			% Change		2014		2013		$ Change			% Change
Number of buildings(1)	3		3		—			—		3		3		—			—
Same property revenues
Rental	$	4,238	$	4,411	$	(173	)	(3.9	)	$	13,136	$	13,222	$	(86	)	(0.7	)
Tenant reimbursements and other	1,959		1,958		1			0.1		5,879		6,078		(199		)	(3.3	)
Total same property revenues	6,197		6,369		(172		)	(2.7	)	19,015		19,300		(285		)	(1.5	)
Same property operating expenses
Property	1,540		1,377		163			11.8		4,552		4,310		242			5.6
Real estate taxes and insurance	1,017		1,001		16			1.6		3,071		3,085		(14		)	(0.5	)
Total same property operating expenses	2,557		2,378		179			7.5		7,623		7,395		228			3.1
Same property net operating income:	$	3,640	$	3,991	$	(351	)	(8.8	)	$	11,392	$	11,905	$	(513	)	(4.3	)
Reconciliation to total property operating income
Same property net operating income	$	3,640	$	3,991						$	11,392	$	11,905
Non-comparable net operating income(2)	1,075		230							1,396		1,248
Total property operating income	$	4,715	$	4,221						$	12,788	$	13,153

	Weighted Average Occupancy For Three Months Ended September 30,				Weighted Average Occupancy For Nine Months Ended September 30,
	2014		2013		2014		2013
Same Properties	88.2	%	94.9	%	90.8	%	97.1	%

⁽¹⁾  Same-property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented. Same-property results exclude the operating results of the following non-comparable properties: 440 First Street, NW, Storey Park, 1401 K Street, NW, and 11 Dupont Circle, NW.

⁽²⁾  Non-comparable property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI for the Washington, D.C. properties decreased $0.4 million and $0.5 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. Total same property revenues decreased $0.2 million and $0.3 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013 as a result of a decrease in occupancy due to known move-outs at 1211 Connecticut Avenue, NW. Total same property operating expenses increased $0.2 million for both the three and nine months ended September 30, 2014 compared with 2013 due to reimbursable repair and maintenance costs associated with one tenant, which was partially offset by a decrease in other recoverable operating expenses as a result of a decrease in occupancy.

48

Maryland

	Three Months Ended  September 30,									Nine Months Ended September 30,
(dollars in thousands)	2014		2013		$ Change			% Change		2014		2013		$ Change			% Change
Number of buildings(1)	41		41		—			—		41		41		—		��	—
Same property revenues
Rental	$	8,627	$	8,383	$	244		2.9		$	25,725	$	25,370	$	355		1.4
Tenant reimbursements and other	1,340		1,481		(141		)	(9.5	)	4,663		4,255		408			9.6
Total same property revenues	9,967		9,864		103			1.0		30,388		29,625		763			2.6
Same property operating expenses
Property	2,087		2,651		(564		)	(21.3	)	7,436		7,370		66			0.9
Real estate taxes and insurance	834		790		44			5.6		2,550		2,320		230			9.9
Total same property operating expenses	2,921		3,441		(520		)	(15.1	)	9,986		9,690		296			3.1
Same property net operating income	$	7,046	$	6,423	$	623		9.7		$	20,402	$	19,935	$	467		2.3
Reconciliation to total property operating income:
Same property net operating income	$	7,046	$	6,423						$	20,402	$	19,935
Non-comparable net operating income(2)	612		172							1,776		547
Total property operating income	$	7,658	$	6,595						$	22,178	$	20,482

	Weighted Average Occupancy For Three Months Ended September 30,				Weighted Average Occupancy For Nine Months Ended September 30,
	2014		2013		2014		2013
Same Properties	85.5	%	82.4	%	84.5	%	82.1	%

⁽¹⁾  Same-property comparisons are based upon those consolidated properties owned or in-service for the entirety of the periods presented. Same-property results exclude the operating results of the following non-comparable properties: A building at Redland Corporate Center.

⁽²⁾  Non-comparable property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI for the Maryland properties increased $0.6 million and $0.5 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. Total same property revenues increased $0.1 million and $0.8 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013 due to an increase in occupancy. Also, total same property revenues increased for the nine months ended September 30, 2014 compared with the same period in 2013 due to an increase in recoverable snow and ice removal costs in the first quarter of 2014. Total same property operating expenses decreased $0.5 million for the three months ended September 30, 2014 compared with 2013 due to a decrease in utility expense as a result of a decrease in usage at certain properties. Total same property operating expenses increased $0.3 million for the nine months ended September 30, 2014 compared with 2013 due to an increase in snow and ice removal costs in the first quarter of 2014 and higher real estate tax assessments.

49

Northern Virginia

	Three Months Ended  September 30,									Nine Months Ended September 30,
(dollars in thousands)	2014		2013		$ Change			% Change		2014		2013		$ Change			% Change
Number of buildings(1)	48		48		—			—		48		48		—			—
Same property revenues
Rental	$	9,859	$	9,855	$	4		—		$	29,435	$	28,785	$	650		2.3
Tenant reimbursements and other	2,333		2,463		(130		)	(5.3	)	7,558		7,116		442			6.2
Total same property revenues	12,192		12,318		(126		)	(1.0	)	36,993		35,901		1,092			3.0
Same property operating expenses
Property	2,777		2,816		(39		)	(1.4	)	9,293		8,527		766			9.0
Real estate taxes and insurance	1,138		1,285		(147		)	(11.4	)	3,924		4,029		(105		)	(2.6	)
Total same property operating expenses	3,915		4,101		(186		)	(4.5	)	13,217		12,556		661			5.3
Same property net operating income	$	8,277	$	8,217	$	60		0.7		$	23,776	$	23,345	$	431		1.8
Reconciliation to total property operating income:
Same property net operating income	$	8,277	$	8,217						$	23,776	$	23,345
Non-comparable net operating income(2)	683		554							1,926		1,720
Total property operating income	$	8,960	$	8,771						$	25,702	$	25,065

	Weighted Average Occupancy For Three Months Ended September 30,				Weighted Average Occupancy For Nine Months Ended September 30,
	2014		2013		2014		2013
Same Properties	85.9	%	83.1	%	85.4	%	77.8	%

⁽¹⁾  Same-property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented. Same-property results exclude the operating results of the following non-comparable properties: 1775 Wiehle Avenue.

⁽²⁾  Non-comparable property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI for the Northern Virginia properties increased $0.1 million and $0.4 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013. Total same property revenues decreased $0.1 million for the three months ended September 30, 2014 compared with 2013 due to a decrease in recoverable real estate tax expense as a result of lower real estate tax assessments. Total same property revenues increased $1.1 million for nine months ended September 30, 2014 compared with 2013 due to an increase in occupancy and an increase in recoverable snow and ice removal costs in the first quarter of 2014. Total same property operating expenses decreased $0.2 million for the three months ended September 30, 2014 compared with 2013 due to lower real estate tax assessments and increased $0.7 million for the nine months ended September 30, 2014 compared with 2013 due to an increase in snow and ice removal costs in the first quarter of 2014.

50

Southern Virginia

	Three Months Ended  September 30,											Nine Months Ended September 30,
(dollars in thousands)	2014			2013			$ Change			% Change		2014			2013			$ Change		% Change
Number of buildings(1)	38			38			—			—		38			38			—		—
Same property revenues
Rental	$	7,267		$	7,334		$	(67	)	(0.9	)	$	21,985		$	21,679		$	306	1.4
Tenant reimbursements and other	1,775			1,498			277			18.5		5,127			4,323			804		18.6
Total same property revenues	9,042			8,832			210			2.4		27,112			26,002			1,110		4.3
Same property operating expenses
Property	2,921			2,760			161			5.8		8,452			7,728			724		9.4
Real estate taxes and insurance	738			697			41			5.9		2,102			2,015			87		4.3
Total same property operating expenses	3,659			3,457			202			5.8		10,554			9,743			811		8.3
Same property net operating income	$	5,383		$	5,375		$	8		0.1		$	16,558		$	16,259		$	299	1.8
Reconciliation to total property operating income:
Same property net operating income	$	5,383		$	5,375							$	16,558		$	16,259
Non-comparable net operating loss(2)	(138		)	(206		)						(451		)	(443		)
Total property operating income	$	5,245		$	5,169							$	16,107		$	15,816

	Weighted Average Occupancy For Three Months Ended September 30,				Weighted Average Occupancy For Nine Months Ended September 30,
	2014		2013		2014		2013
Same Properties	85.6	%	85.9	%	85.8	%	85.3	%

⁽¹⁾  Same-property comparisons are based upon those consolidated properties owned and in-service for the entirety of the periods presented. Same-property results do not exclude the operating results of any non-comparable properties during each of the periods presented.

⁽²⁾  Non-comparable property NOI has been adjusted to reflect a normalized management fee percentage in lieu of an administrative overhead allocation for comparative purposes.

Same Property NOI for the Southern Virginia properties slightly increased for the three months ended September 30, 2014 compared with 2013 and increased $0.3 million for the nine months ended September 30, 2014 compared with 2013. Total same property revenues increased $0.2 million and $1.1 million for the three and nine months ended September 30, 2014, respectively, compared with the same periods in 2013 due to an increase in recoverable operating expenses. Total same property revenues also increase for the nine months ended September 30, 2014, due to an increase in recoverable snow and ice removal costs, in particular, incurred in the first quarter of 2014. Total same property operating expenses increased $0.2 million and $0.8 million for the three and nine months ended September 30, 2014 compared with 2013 due an increase in anticipated bad debt reserves. Total same property operating expenses also increased for the nine months ended September 30, 2014 due to an increase in snow and ice removal costs in the first quarter of 2014.

51

Liquidity and Capital Resources

Overview

We seek to maintain a flexible balance sheet, with an appropriate balance of cash, debt, equity and available funds under our unsecured revolving credit facility, to readily provide access to capital given the volatility of the market and to position us to take advantage of potential growth opportunities. In January 2013, we provided an updated strategic and capital plan, which included the marketing of our industrial properties, the execution of steps designed to increase balance sheet flexibility, reduce leverage and a rightsizing of our quarterly dividend. We have executed on several key components of our updated strategic and capital plan, including the industrial portfolio sale, which generated total gross proceeds of $259.0 million; the issuance of 7,475,000 common shares, the net proceeds of which were primarily used to repay outstanding debt; and a 25% reduction in the quarterly dividend beginning in the first quarter of 2013. Consistent with our previously disclosed capital recycling strategy, we are actively marketing our Richmond, Virginia portfolio for sale. We anticipate closing the sale late in the fourth quarter of 2014 or in early 2015. However, we can provide no assurances regarding the timing or pricing of the sale, or that the sale will occur at all. We intend to use net proceeds from the potential sale of the Richmond Portfolio to pay down debt.

During the nine months ended September 30, 2014, we sold eleven buildings in our Maryland reporting segment for net proceeds of $45.4 million and three buildings (Corporate Campus at Ashburn Center) in our Northern Virginia reporting segment for net proceeds of $39.9 million. On October 16, 2014, we sold the four remaining buildings at Owings Mills Business Park, which was located in our Maryland reporting segment, for net proceeds of $12.4 million. During the nine months ended September 30, 2014, we acquired two buildings in Washington D.C. (1401 K Street, NW and 11 Dupont Circle, NW) and one building in Northern Virginia (1775 Wiehle Avenue). In April 2014, we acquired 1401 K Street, NW for $58.0 million, which was funded with the assumption of a $37.3 million mortgage loan, a $20.0 million draw under our unsecured revolving credit facility and available cash. In September 2014, we acquired 11 Dupont Circle, NW for $89.0 million, which was funded with a draw under our unsecured revolving credit facility. In addition, in June 2014, we acquired 1775 Wiehle Avenue in Northern Virginia for $41.0 million, which was funded with proceeds from the sale of Corporate Campus at Ashburn Center and available cash. We expect to meet short-term liquidity requirements generally through working capital, net cash provided by operations, and, if necessary, borrowings on our unsecured revolving credit facility. Our short-term obligations consist primarily of the lease for our corporate headquarters, normal recurring operating expenses, regular debt payments, recurring expenditures for corporate and administrative needs, non-recurring expenditures such as capital improvements, tenant improvements and redevelopments, leasing commissions and dividends to preferred and common shareholders.

At September 30, 2014, we had $213.0 million outstanding under our unsecured revolving credit facility. As of the date of this filing, we had $201.0 million outstanding and $97.1 million of availability under our unsecured revolving credit facility. In the next 12 months, we have $64.3 million of consolidated debt maturing, all of which matures in August 2015. In October 2014, we repaid a $22.0 million land loan that encumbered Storey Park, which was scheduled to mature on October 16, 2014. Simultaneously with the repayment, we entered into a new $22.0 million land loan that matures on October 15, 2016 with a one-year extension option.

Over the next twelve months, we believe that we will generate sufficient cash flow from operations and have access to the capital resources, through debt and equity markets, necessary to expand and develop our business, to fund our operating and administrative expenses, to continue to meet our debt service obligations and to pay distributions in accordance with REIT requirements. However, our cash flow from operations and ability to access the debt and equity markets could be adversely affected due to uncertain economic factors and volatility in the financial and credit markets. In particular, we cannot assure that our tenants will not default on their leases or fail to make full rental payments if their businesses are challenged due to, among other things, the economic conditions (particularly if the tenants are unable to secure financing to operate their businesses). This may be particularly true for our tenants that are smaller companies. Further, approximately 6.1% of our annualized cash basis rent (excluding month-to-month leases) is scheduled to expire during the next twelve months and, if we are unable to renew these leases or re-lease the space, our cash flow could be negatively impacted.

We also believe, based on our historical experience and forecasted operations, that we will have sufficient cash flow or access to capital to meet our obligations over the next five years. We intend to meet our long-term funding requirements for property acquisitions, development, redevelopment and other non-recurring capital improvements through net cash provided from operations, long-term secured and unsecured indebtedness, including borrowings under our unsecured revolving credit facility and unsecured term loan, proceeds from disposal of strategically identified assets (outright or through joint ventures) and the issuance of equity and debt securities. In the process of exploring different financing options, we actively monitor the impact that each potential financing decision will have on our financial covenants in order to avoid any issues of non-compliance with the terms of our existing financial covenants.

Our ability to raise funds through sales of debt and equity securities and access other third party sources of capital in the future will be dependent on, among other things, general economic conditions, general market conditions for REITs, rental rates, occupancy levels, market perceptions and the trading price of our shares. We will continue to analyze which sources of capital are

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most advantageous to us at any particular point in time, but the capital markets may not be consistently available on terms we deem attractive, or at all.

Financial Covenants

Our outstanding corporate debt agreements contain specific financial covenants that may impact future financing decisions made by us or may be impacted by a decline in operations. As of September 30, 2014, we were in compliance with the covenants of our amended and restated unsecured term loan, amended and restated unsecured revolving credit facility and construction loan.

Our continued ability to borrow under the amended and restated unsecured revolving credit facility is subject to compliance with financial and operating covenants, and a failure to comply with any of these covenants could result in a default under the credit facility. These debt agreements also contain cross-default provisions that would be triggered if we are in default under other loans, including mortgage loans, in excess of certain amounts. In the event of a default, the lenders could accelerate the timing of payments under the debt obligations and we may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on our liquidity, financial condition, results of operations and ability to make distributions to our shareholders.

Below is a summary of certain financial covenants associated with these debt agreements (dollars in thousands):

Unsecured Revolving Credit Facility, Unsecured Term Loan and Construction Loan

Covenants	Quarter Ended September 30, 2014	Covenant
Consolidated Total Leverage Ratio(1)	47.2%	≤ 60%
Tangible Net Worth(1)	$968,866	≥ $601,202
Fixed Charge Coverage Ratio(1)	2.12x	≥ 1.50x
Maximum Dividend Payout Ratio	70.6%	≤ 95%
Restricted Investments:
Joint Ventures	5.2%	≤ 15%
Real Estate Assets Under Development	3.5%	≤ 15%
Undeveloped Land	1.0%	≤ 5%
Structured Finance Investments	3.5%	≤ 5%
Total Restricted Investments	7.9%	≤ 25%
Restricted Indebtedness:
Maximum Secured Debt	19.0%	≤ 40%
Unencumbered Pool Leverage(1)	50.1%	≤ 60%
Unencumbered Pool Interest Coverage Ratio(1)	5.73x	≥ 1.75x

⁽¹⁾  These are the only covenants that apply to our 440 First Street, NW construction loan, which are calculated in accordance with the amended and restated unsecured revolving credit facility.

Cash Flows

Due to the nature of our business, we rely on working capital and net cash provided by operations and, if necessary, borrowings under our unsecured revolving credit facility to fund our short-term liquidity needs. Net cash provided by operations is substantially dependent on the continued receipt of rental payments and other expenses reimbursed by our tenants. The ability of tenants to meet their obligations, including the payment of rent contractually owed to us, and our ability to lease space to new or replacement tenants on favorable terms, could affect our cash available for short-term liquidity needs. We intend to meet short and long term funding requirements for debt maturities, interest payments, dividend distributions and capital expenditures through cash flow provided by operations, long-term secured and unsecured indebtedness, including borrowings under our unsecured revolving credit facility, proceeds from asset disposals and the issuance of equity and debt securities. However, we may not be able to obtain capital from such sources on favorable terms, in the time period we desire, or at all. In addition, our continued ability to borrow under our existing debt instruments is subject to compliance with our financial and operating covenants and a failure to comply with such covenants could cause a default under the applicable debt agreement. In the event of a default, we may be required to repay

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such debt with capital from other sources, which may not be available on attractive terms, or at all.

We may also fund building acquisitions, development, redevelopment and other non-recurring capital improvements through additional borrowings, issuance of common Operating Partnership units or sales of assets, outright or through joint ventures.

Consolidated cash flow information is summarized as follows:

	Nine Months Ended September 30,
(dollars in thousands)	2014			2013			Change
Net cash provided by operating activities	$	45,414		$	45,423		$	(9	)
Net cash (used in) provided by investing activities	(108,779		)	134,910			(243,689		)
Net cash provided by (used in) financing activities	66,618			(172,736		)	239,354

Net cash provided by operating activities decreased slightly for the nine months ended September 30, 2014 compared with the same period in 2013, primarily due to a decrease in net operating income as the result of the sale of our industrial portfolio in June 2013. Additionally, there was a decrease in cash received form our accounts and other receivables for the nine months ended September 30, 2014 compared with the same period in 2013. The decrease in net cash provided by operating activities was partially offset by an increase in rents received in advance for the nine months ended September 30, 2014 compared with the same period in 2013.

Net cash used in investing activities was $108.8 million for the nine months ended September 30, 2014 compared with net cash provided by investing activities of $134.9 million for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, we acquired three properties for an aggregate purchase price of $150.7 million, which excludes the assumption of a $37.3 million mortgage loan, and sold four properties for aggregate net proceeds of $85.3 million. For the nine months ended September 30, 2013, we did not acquire any properties and sold 27 properties for aggregate net proceeds of $213.1 million, $28.2 million of which was held by a qualified intermediary in order to facilitate a potential tax-free exchange. During the fourth quarter of 2013, we used the proceeds held by a qualified intermediary and available cash to acquire a building at Redland Corporate Center. During the nine months ended September 30, 2014, we increased our loan to the owners of 950 F Street, NW by $9.0 million, which was provided by a draw under our unsecured revolving credit facility. For the nine months ended September 30, 2014, aggregate cash used for additions to rental property and furniture, fixtures and equipment, and additions to development and redevelopment decreased $13.0 million compared with the same period in 2013 due to the completion of redevelopment of 440 First Street, NW in the third quarter of 2013 and to lower tenant improvement costs.

Net cash provided by financing activities was $66.6 million for the nine months ended September 30, 2014 compared with net cash used in financing activities of $172.7 million for the same period in 2013. We issued $209.8 million of debt and repaid $106.1 million of outstanding debt during the nine months ended September 30, 2014 compared with the issuance of $132.2 million of debt and the repayment of $364.4 million of outstanding debt during the nine months ended September 30, 2013. The decrease in cash used in financing activities for the nine months ended September 30, 2014 compared with the same period in 2013 was also due to an aggregate $9.0 million payment made in the third quarter of 2013 toward the deferred purchase price obligation related to the acquisition of Storey Park in 2011 and toward a contingent consideration obligation established at the acquisition of Corporate Campus at Ashburn Center, which we sold in the second quarter of 2014. In May 2013, we issued 7.5 million common shares for net proceeds of $105.1 million. The increase in outstanding common shares resulted in an increase in dividends paid to common shareholders of $2.3 million for the nine months ended September 30, 2014 compared with the same period in 2013.

Contractual Obligations

As of September 30, 2014, we had contractual construction in progress obligations, which included amounts accrued at September 30, 2014, of $2.1 million. The amount of contractual construction in progress obligations primarily related to development activities at Storey Park, which is located in our Washington, D.C. reporting segment. As of September 30, 2014, we had contractual rental property and furniture, fixtures and equipment obligations of $8.5 million outstanding, which included amounts accrued at September 30, 2014. The amount of contractual rental property and furniture, fixtures and equipment obligations at September 30, 2014 included a major renovation at 1211 Connecticut Avenue, NW, which is located in our Washington, D.C. reporting segment. We anticipate meeting our contractual obligations related to our construction activities with cash from our

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operating activities. In the event cash from our operating activities is not sufficient to meet our contractual obligations, we can access additional capital through our unsecured revolving credit facility.

We remain liable, solely to the extent of our proportionate ownership percentage, to fund any capital shortfalls or commitments from properties owned through unconsolidated joint ventures.

We have various obligations to certain local municipalities associated with our development projects that will require completion of specified site improvements, such as sewer and road maintenance, grading and other general landscaping work. As of September 30, 2014, we remained liable to those local municipalities for $0.1 million in the event that we do not complete the specified work. We intend to complete the improvements in satisfaction of these obligations.

We had no other material contractual obligations as of September 30, 2014.

Distributions

We are required to distribute at least 90% of our REIT taxable income to our shareholders in order to maintain qualification as a REIT, including some types of taxable income we recognize for tax purposes but with regard to which we do not receive corresponding cash. In addition, we must distribute 100% of our taxable income to our shareholders to eliminate our U.S. federal income tax liability. The funds we use to pay dividends on our common and preferred shares are provided through distributions from the Operating Partnership. For each of our common and preferred shares, the Operating Partnership has issued a corresponding common and preferred unit to us. We are the sole general partner of and, as of September 30, 2014, owned 100% of the preferred interest and 95.7% of the common interest in the Operating Partnership. The remaining common interests in the Operating Partnership are limited partnership interests, some of which are owned by several of our executive officers who contributed properties and other assets to us upon our formation, and the remainder of which are owned by other unrelated parties. The Operating Partnership is required to make cash distributions to us in an amount sufficient to meet our distribution requirements. The cash distributions by the Operating Partnership reduce the amount of cash that is available for general corporate purposes, which includes repayment of debt, funding acquisitions or construction activities, and for other corporate operating activities.

On a quarterly basis, our management team recommends a distribution amount that must then be approved by our Board of Trustees in its sole discretion. The amount of future distributions will be at the discretion of our Board of Trustees and will be based on, among other things: (i) the taxable income and cash flow generated by our operating activities; (ii) cash generated by, or used in, our financing and investing activities; (iii) the annual distribution requirements under the REIT provisions of the Internal Revenue Code; and (iv) such other factors as the Board of Trustees deems relevant. Our ability to make cash distributions will also be limited by the covenants contained in our Operating Partnership agreement and our financing arrangements as well as limitations imposed by state law and the agreements governing any future indebtedness. See “—Financial Covenants” above and “Item 1A – Risk Factors – Risks Related to Our Business and Properties – Covenants in our debt agreements could adversely affect our liquidity and financial condition” in Part I, Item 1A in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2013 for additional information regarding the financial covenants.

Dividends

On October, 21, 2014, we declared a dividend of $0.15 per common share, equating to an annualized dividend of $0.60 per common share. The dividend will be paid on November 17, 2014 to common shareholders of record as of November 6, 2014. We also declared a dividend of $0.484375 per share on our Series A Preferred Shares. The dividend will be paid on November 17, 2014 to preferred shareholders of record as of November 6, 2014.

Funds From Operations

Funds from operations (“FFO”) is a non-GAAP measure used by many investors and analysts that follow the real estate industry. We consider FFO a useful measure of performance for an equity REIT because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assume that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO provides a meaningful indication of our performance. We also consider FFO an appropriate supplemental performance measure given its wide use by and relevance to investors and analysts. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assume that the value of real estate diminishes predictably over time.

FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), represents net income (computed in accordance with GAAP), excluding gains (losses) on sales of rental property and impairments of rental property, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We compute FFO in accordance with NAREIT’s definition, which may differ from the methodology for calculating FFO, or similarly titled measures,

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used by other companies and this may not be comparable to those presentations. Our methodology for computing FFO adds back noncontrolling interests in the income from our Operating Partnership in determining FFO. We believe this is appropriate as common Operating Partnership units are presented on an as-converted, one-for-one basis for shares of stock in determining FFO per diluted share.

FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments and uncertainties, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. We present FFO per diluted share calculations that are based on the outstanding dilutive common shares plus the outstanding common Operating Partnership units for the periods presented. Our presentation of FFO in accordance with NAREIT’s definition, or as adjusted by us, should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity.

The following table presents a reconciliation of net (loss) income attributable to common shareholders to FFO available to common shareholders and unitholders (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Net income (loss) attributable to First Potomac Realty Trust	$	180		$	(1,506	)	$	16,614		$	14,526
Less: Dividends on preferred shares	(3,100		)	(3,100		)	(9,300		)	(9,300		)
Net (loss) income attributable to common shareholders	(2,920		)	(4,606		)	7,314			5,226
Add: Depreciation and amortization:
Rental property	16,000			14,343			46,714			42,538
Discontinued operations	—			573			496			5,281
Unconsolidated joint ventures	1,004			1,332			3,306			4,001
Consolidated joint ventures	—			(46		)	—			(150		)
Impairment of rental property(1)	—			474			3,957			1,921
Gain on sale of rental property(2)	—			(416		)	(22,568		)	(19,363		)
Net (loss) income attributable to noncontrolling interests in the Operating Partnership	(131		)	(203		)	327			216
FFO available to common shareholders and unitholders	13,953			11,451			39,546			39,670
Dividends on preferred shares	3,100			3,100			9,300			9,300
FFO	$	17,053		$	14,551		$	48,846		$	48,970
Weighted average common shares and Operating Partnership units outstanding – diluted	60,882			60,628			60,839			56,701

⁽¹⁾  Impairment charges of $4.0 million are included in continuing operations in our consolidated statements of operations for the nine months ended September 30, 2014. Impairment charges of $0.5 million and $1.9 million are included in discontinued operations in our consolidated statements of operations for the three and nine months ended September 30, 2013.

⁽²⁾  During the nine months ended September 30, 2014, we recorded a $21.2 million gain on the sale of Corporate Campus at Ashburn Center, which is reflected in continuing operations in our consolidated statements of operations. The remaining gains on sale of rental property for each of the periods presented are included in discontinued operations in our consolidated statements of operations.

Off-Balance Sheet Arrangements

We are secondarily liable for $2.8 million of mortgage debt, which represents our proportionate share of the mortgage debt that is secured by two properties we own through unconsolidated joint ventures. Management believes the fair value of the potential liability to us is inconsequential as the likelihood of our need to perform under the debt agreement is remote. See note 7, Investment in Affiliates, in the notes to our condensed consolidated financial statements for more information.

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ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. In the normal course of business, we are exposed to the effect of interest rate changes. We have historically entered into derivative agreements to mitigate exposure to unexpected changes in interest. Market risk refers to the risk of loss from adverse changes in market interest rates. We periodically use derivative financial instruments to seek to manage, or hedge, interest rate risks related to our borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. We intend to enter into derivative agreements only with counterparties that we believe have a strong credit rating to mitigate the risk of counterparty default or insolvency.

We had $814.4 million of debt outstanding at September 30, 2014, of which $255.9 million was fixed rate debt and $300.0 million was hedged variable rate debt. The remainder of our debt, $258.5 million, was unhedged variable rate debt that consisted of $213.0 million under the unsecured revolving credit facility, a $22.0 million loan that encumbers the Storey Park land and the $23.5 million outstanding balance under a construction loan. At September 30, 2014, the $22.0 million loan had a contractual interest rate of LIBOR plus 2.75%, with a 5.0% floor and the construction loan had a contractual interest rate of LIBOR plus 2.50%. At September 30, 2014, LIBOR was 0.16%. A change in interest rates of 1% would result in an increase or decrease of $2.4 million in interest expense on our unhedged variable rate debt on an annualized basis. In October 2014, we repaid the $22.0 million loan that was subject to a 5.0% interest rate floor. Simultaneously with the repayment, we entered into a new $22.0 million land loan with a variable interest rate of LIBOR plus 2.50%.

The table below summarizes our interest rate swap agreements as of September 30, 2014 (dollars in thousands):

Effective Date	Maturity Date	Notional Amount	Interest Rate Contractual Component	Fixed LIBOR Interest Rate
July 2011	July 2016	$35,000	LIBOR	1.754	%
July 2011	July 2016	25,000	LIBOR	1.763	%
July 2011	July 2017	30,000	LIBOR	2.093	%
July 2011	July 2017	30,000	LIBOR	2.093	%
September 2011	July 2018	30,000	LIBOR	1.660	%
January 2012	July 2018	25,000	LIBOR	1.394	%
March 2012	July 2017	25,000	LIBOR	1.129	%
March 2012	July 2017	12,500	LIBOR	1.129	%
March 2012	July 2018	12,500	LIBOR	1.383	%
June 2012	July 2017	50,000	LIBOR	0.955	%
June 2012	July 2018	25,000	LIBOR	1.135	%
Total/Weighted Average		$300,000		1.505	%

For fixed rate debt, changes in interest rates generally affect the fair value of debt but not our earnings or cash flow. See note 11, Fair Value Measurements, in the notes to our condensed consolidated financial statements for more information on the fair value of our debt.

ITEM 4: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our periodic reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.

We carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based upon this evaluation,

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our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to legal proceedings and claims arising in the ordinary course of our business. In the opinion of our management, as of September 30, 2014, we were not involved in any material litigation, nor, to management’s knowledge, is any material litigation threatened against us or the Operating Partnership.

Item 1A. Risk Factors

As of September 30, 2014, there were no material changes to our risk factors previously disclosed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

We did not sell any unregistered equity securities during the nine months ended September 30, 2014. During the nine months ended September 30, 2014, no common Operating Partnership units were redeemed for either an equivalent number of our common shares or available cash.

During the nine months ended September 30, 2014, we issued 3,125 common Operating Partnership units to the seller of 840 First Street, NE, which we acquired in 2011. The issuance of the 3,125 common Operating Partnership units satisfied our remaining contingent consideration obligation to the seller of 840 First Street, NE. These common Operating Partnership units were issued in reliance upon exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and/or Regulation D promulgated under the Securities Act (“Regulation D”). Each of the limited partners represented to the Operating Partnership that it was an “accredited investor” as defined in Regulation D and that it was acquiring the common Operating Partnership units for investment purposes. The Operating Partnership issued the units only to the former owners of the property and did not engage in a general solicitation in connection with the issuance.

Issuer Purchases of Equity Securities

During the three months ended September 30, 2014, we did not repurchase any equity securities registered pursuant to Section 12 of the Exchange Act.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item  5. Other Information

Not applicable.

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Item 6. Exhibits

No.	Description
10.1*+	Offer Letter between First Potomac Realty Trust and Robert Milkovich, dated May 7, 2014.
10.2*+	Offer Letter between First Potomac Realty Trust and Samantha Sacks Gallagher, dated September 16, 2014.
31.1*	Section 302 Certification of Chief Executive Officer.
31.2*	Section 302 Certification of Chief Financial Officer.
32.1**	Section 906 Certification of Chief Executive Officer.
32.2**	Section 906 Certification of Chief Financial Officer.

101* XBRL (Extensible Business Reporting Language). The following materials from the First Potomac Realty Trust’s Quarterly Report on Form 10-Q for the period ended September 30, 2014, formatted in XBRL: (i) Consolidated balance sheets as of September 30, 2014 (unaudited) and December 31, 2013; (ii) Consolidated statements of operations (unaudited) for the three and nine months ended September 30, 2014 and 2013; (iii) Consolidated statements of comprehensive income (unaudited) for the three and nine months ended September 30, 2014 and 2013; (iv) Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2014 and 2013; and (v) Notes to condensed consolidated financial statements (unaudited).

*	Filed herewith.
**	Furnished herewith.
+	Indicates management contract or compensatory plan or arrangement

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SIGNATURES

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

	FIRST POTOMAC REALTY TRUST
Date: October 23, 2014	/s/ Douglas J. Donatelli
	Douglas J. Donatelli
	Chairman of the Board and Chief Executive Officer
Date: October 23, 2014	/s/ Andrew P. Blocher
	Andrew P. Blocher
	Executive Vice President and Chief Financial Officer

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