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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number: 0-50261

G REIT, Inc.

(877) 888-7348

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Title of Class:

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 þ          No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

          As of April 9, 2004, the aggregate market value of the shares of common stock held by non-affiliates of the registrant was approximately $277,571,250 (based on the price for which each share was sold).

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)     Yes o          No þ

          As of June 30, 2003, there were approximately 7,251,894 shares of common stock of G REIT, Inc. outstanding.

G REIT, INC.

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PART I

Our Company

      G REIT, Inc. was formed as a Virginia corporation in December of 2001 and has qualified and elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. Our company was organized to acquire and manage a diversified real estate portfolio composed of office, industrial and service properties located throughout the United States with a primary focus on properties that have a government orientation as a result of substantial space being leased to government tenants. For this purpose, government tenants include the United States federal government and governmental authorities, state, local and other governments and governmental authorities, quasi-governmental authorities, government contractors and service providers, parties who provide service to the public or others in connection with government programs, government licensees and certain tax-exempt organizations.

      As of December 31, 2003, we owned interests in 13 properties aggregating to a total gross leasable area, or GLA, of approximately 2.8 million square feet. Tenants with a government orientation occupied approximately 39% of the total GLA of these properties. As of December 31, 2003, approximately 88% of the total GLA in these properties was leased. We may lease our properties to tenants under gross or net leases.

      We conduct business and own properties through our operating partnership, G REIT, L.P., which was formed as a Virginia limited partnership in December of 2001. We are the sole general partner of our operating partnership and have control over the affairs of our operating partnership.

      Our day to day operations are managed by our advisor, Triple Net Properties, LLC, under an advisory agreement. Our advisor engages affiliated entities, including Triple Net Properties Realty, Inc., or Realty, a real estate brokerage and management company, to provide various services for the properties. Our advisor and Realty were formed in 1998 to serve as an asset and property manager for real estate investment trusts, syndicated real estate limited partnerships, limited liability companies and similar real estate entities.

      Our principal executive offices are located at 1551 N. Tustin Avenue, Suite 200, Santa Ana, California 92705 and our telephone number is (877) 888-7348. We make our periodic and current reports available on our website at www.1031nnn.com after these materials are filed with the Securities and Exchange Commission. They are also available in print to any shareholder upon request.

Our Public Offerings

      On July 22, 2002, our registration statement for our initial public offering of shares of our common stock was declared effective by the Securities and Exchange Commission. In our initial offering, we offered for the sale to the public on a “best efforts” basis a maximum of 20,000,000 shares of our common stock at a purchase price of $10.00 per share and up to an additional 1,000,000 additional shares through our dividend reinvestment plan. As of December 31, 2003, we sold 17,339,249 shares of our common stock under our initial offering, issued an additional 251,540 shares to shareholders participating in our dividend reinvestment plan and repurchased 28,342 shares under our repurchase plan. As a result, 17,562,457 shares were outstanding at December 31, 2003, which generated gross proceeds of approximately $175,000,000. Effective February 9, 2004, we terminated our initial offering. Of the 21,000,000 shares registered in the initial offering, 19,987,934 were sold and 357,381 were issued in accordance with our dividend reinvestment plan. On February 17, 2004, we filed a post-effective amendment to deregister 654,685 shares of our common stock.

      On January 23, 2004, our registration statement for our second offering of shares of our common stock was declared effective by the Securities and Exchange Commission. In our second offering, we are offering for sale to the public on a “best efforts” basis a maximum of 27,000,000 shares of our common

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      Management anticipates that approximately 87.5% of the gross offering proceeds of both our initial and second offerings will be used to acquire real estate and the balance will be used to pay various fees and expenses.

2003 Year Highlights

	•	The gross offering proceeds from our initial offering at December 31, 2003 were approximately $175,000,000 as compared to approximately $21,500,000 at December 31, 2002.
	•	We increased our property portfolio from two consolidated office properties totaling approximately 235,000 sq. ft. at December 31, 2002 to 11 consolidated office properties totaling approximately 2,100,000 square feet and investments in two unconsolidated office properties totaling approximately 648,000 square feet at December 31, 2003.
	•	As of December 31, 2003, the total purchase price of our acquisitions of consolidated properties was approximately $300,000,000, total debt was approximately $179,000,000 and acquisition loan-to-value was approximately 60%. In comparison, as of December 31, 2002, the total purchase price of our acquisitions of consolidated properties was approximately $24,000,000, total debt was approximately $17,000,000 and acquisition loan-to-value was approximately 71%.
	•	We diversified our portfolio and at December 31, 2003 owned properties in Southern and Northern California, Texas, Illinois, Florida, Delaware, Nevada, Nebraska and Washington.
	•	The percentage of government tenants in our properties at year end was approximately 39%. Our government tenants, among others, include the General Services Administration, Internal Revenue Service, Federal Bureau of Investigation, Federal Aviation Agency, U.S. Bankruptcy Court, U.S. Customs Trade Office, U.S. Department of Treasury, Department of Defense, Florida, Nebraska, Nevada and Texas state agencies, and government contractors Lockheed Martin and Boeing.
	•	We currently pay monthly distributions to our shareholders at an annual rate of 7.50%. We have increased our distribution rate twice since we began paying distributions in September 2002: from 7.00% to 7.25% effective January 2003 and from 7.25% to 7.50% effective June 2003.
	•	We obtained a new credit facility through LaSalle Bank National Association in the amount of $25,000,000 in January 2003. The amount we may borrow under the credit line was increased to $115,000,000 at December 31, 2003.

Investment Objectives and Policies

General

      Our company’s primary investment objective is to obtain current income from investments in real estate, including real estate that has a government orientation.

      Additionally, we intend to:

	•	invest in income producing real property generally through equity investments in a manner which permits us to continue to qualify as a REIT for federal income tax purposes;
	•	generate cash available for distribution to our shareholders;
	•	preserve and protect shareholder capital; and
	•	realize capital appreciation upon the ultimate sale of our properties.

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      To the extent feasible, we will strive to invest in a diversified portfolio of properties, in terms of geography, type of property and types of tenants, that will satisfy our investment objectives. However, we cannot assure you that we will attain these objectives or that our shareholder capital will not decrease.

Acquisition Strategies

      Our primary acquisition strategy is to acquire and manage, through entities owned or controlled directly or indirectly by us, office, industrial and service properties that have a government orientation as a result of substantial space being leased to government tenants. In general, we define government tenants to include:

	•	U.S. federal government departments and agencies;
	•	state, local and other government departments and agencies;
	•	quasi-governmental agencies;
	•	government contractors and service providers;
	•	governmental licensees; and
	•	health care, medical insurance, grant research and similar companies.

      We primarily acquire property through wholly-owned subsidiaries of our operating partnership. We also may acquire undivided tenant in common interests in real properties and real properties subject to long-term ground leases. As of December 31, 2003, we have acquired 11 consolidated properties and interests in two unconsolidated properties as undivided tenants in common. We may purchase tenant in common interests in properties where the other tenants in common are participating in tax-free exchanges arranged by our advisor. Other methods of acquiring a property may be used when advantageous. For example, we may acquire properties through a joint venture or the acquisition of substantially all of the interests of an entity that in turn owns a real property.

      We typically acquire properties with cash and mortgage or other debt but may acquire properties free and clear of permanent mortgage indebtedness by paying the entire purchase price for such property in cash or in units of limited partnership interest in our operating partnership. With properties purchased on an all-cash basis, we may later incur mortgage indebtedness by obtaining loans secured by selected properties, if favorable financing terms are available. The proceeds from such loans will primarily be used to acquire additional properties in support of our investment objectives. Management does not intend to incur indebtedness in excess of 60% of the aggregate fair market value of all our properties and a maximum of 80% of the fair market value of any one property, as determined at the end of each calendar year.

      We intend to utilize one or more sources of capital for future growth, which may include borrowings under our secured credit facility with LaSalle, the issuance of equity or debt securities and other bank or institutional borrowings. There is no assurance, however, that we will be able to obtain capital on favorable terms or at all.

      Although our geographic area of operations is not limited, management intends that a significant portion of our properties will be in the District of Columbia and the following states: California, Colorado, Florida, Illinois, Maryland, Nevada, Texas, Virginia and Washington. Properties may be located in or near the U.S. capital and state capitals, near military bases and other federal, state or local government, agency or authority installations or centers of government. As of December 31, 2003, four of our properties were located in California, three in Texas and one each in Florida, Delaware, Illinois, Nebraska, Nevada and Washington.

      As of December 31, 2003, our consolidated properties were approximately 88% leased. Most of our leases are “gross” leases with terms of 5 years or more, usually providing for a base minimum annual rent with periodic increases. Our gross leases typically require that we pay all or a majority of the operating expenses, including real estate taxes, special assessments, utilities, insurance and building repairs related to

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      To assist us, our advisor and its affiliates may purchase properties in their own name, assume loans in connection with the purchase of properties and temporarily hold title to such properties for the purpose of facilitating the acquisition of such property, borrowing money or obtaining financing, completing construction of the property or for any other purpose related to our business. We may also acquire properties from our advisor, affiliates of our advisor and entities advised or managed by our advisor. Such acquisitions must be approved by a majority of our directors, including a majority of our independent directors, and supported by an independent appraisal prepared by an appraiser who is a member in good standing of the American Institute of Real Estate Appraisers or similar national organization selected by the independent directors.

Acquisition Standards

      We believe, based on our advisor’s prior real estate experience, that we have the ability to identify properties capable of meeting our investment objectives. In evaluating potential acquisitions, the primary factor we consider is the property’s current and projected cash flow. We also consider a number of other factors, including a property’s:

	•	geographic location and type;
	•	construction quality and condition;
	•	potential for capital appreciation;
	•	ability of tenants to pay scheduled rent;
	•	lease terms and rent roll, including the potential for rent increases;
	•	potential for economic growth in the tax and regulatory environment of the community in which the property is located;
	•	potential for expanding the physical layout of the property;
	•	occupancy and demand by tenants for properties of a similar type in the same geographic vicinity;
	•	prospects for liquidity through sale, financing or refinancing of the property;
	•	competition from existing properties and the potential for the construction of new properties in the area; and
	•	treatment under applicable federal, state and local tax and other laws and regulations.

Our advisor has substantial discretion with respect to the selection of specific properties.

      We will not close the purchase of any property unless and until we obtain an environmental assessment, a minimum of Phase I review, for each property purchased and are generally satisfied with the environmental status of the property.

      In purchasing properties, we will be subject to risks generally incident to the ownership of real estate, including:

	•	changes in general economic or local conditions;
	•	changes in supply of or demand for similar competing properties in an area;
	•	changes in interest rates and availability of permanent mortgage funds which may render the sale of a property difficult or unattractive;
	•	changes in tax, real estate, environmental and zoning laws;

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	•	periods of high interest rates and tight money supply which may make the sale of properties more difficult;
	•	tenant turnover; and
	•	general overbuilding or excess supply in the market area.

Operating Strategies

      Our primary operating strategy is to acquire properties with a government orientation that meet our acquisition standards and then to enhance the performance and value of those properties through strategies designed to address the needs of current and prospective tenants. Our management strategies include:

	•	aggressively leasing available space through targeted marketing augmented, where possible, by our advisor’s local asset and property management offices;
	•	re-positioning properties, for example, shifting from single to multi-tenant use in order to maximize desirability and utility for prospective tenants;
	•	controlling operating expenses by centralization of asset and property management, leasing, marketing, financing, accounting, renovation and data processing activities;
	•	emphasizing regular maintenance and periodic renovation to meet the needs of tenants and to maximize long-term returns; and
	•	financing acquisitions and refinancing properties when favorable terms are available to increase cash flow.

Tax Status

      We qualified and elected to be taxed as a REIT for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code, or Code. So long as we qualify for taxation as a REIT, we generally will not be subject to federal income tax to the extent we distribute at least 90% of our REIT taxable income to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless entitled to relief under specific statutory provisions, we will also be disqualified for taxation as a REIT for the four taxable years following the year in which we lose our qualification. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property and to federal income and excise taxes on our undistributed income.

Competition

      In seeking new investment opportunities, we compete with other real estate investors, including pension funds, insurance companies, foreign investors, real estate partnerships, other public and private real estate investment trusts, private individuals and other domestic real estate companies, many of which have greater financial and other resources than our company. With respect to properties presently owned or to be owned by us, we compete with other owners of like properties for tenants.

Government Regulations

      Many laws and government regulations are applicable to our properties and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently.

      Costs of Compliance with the Americans with Disabilities Act. Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations must meet federal requirements for access and use by disabled persons. Although we believe that we are in substantial compliance with present requirements of the ADA, none of our properties have been audited, nor have investigations of its properties been conducted to determine compliance. We may incur additional costs in connection with the ADA. Additional federal, state and local laws also may require modifications to our properties or restrict

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      Costs of Government Environmental Regulation and Private Litigation. Environmental laws and regulations hold us liable for the costs of removal or remediation of certain hazardous or toxic substances on our properties. These laws could impose liability without regard to whether we are responsible for the presence or release of the hazardous materials. Government investigations and remediation actions may have substantial costs and the presence of hazardous substances on a property could result in personal injury or similar claims by private plaintiffs. Various laws also impose liability on persons who arrange for the disposal or treatment of hazardous or toxic substances for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. As the owner and operator of our properties, we may be deemed to have arranged for the disposal or treatment of hazardous or toxic substances.

      Use of Hazardous Substances by Some of Our Tenants. Some of our tenants routinely handle hazardous substances and wastes on our properties as part of their routine operations. Environmental laws and regulations subject these tenants, and potentially our company, to liability resulting from such activities. We require our tenants, in their leases, to comply with these environmental laws and regulations and to indemnify us for any related liabilities. Management is unaware of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our properties.

      Other Federal, State and Local Regulations. Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these various requirements, we may incur governmental fines or private damage awards. While management believes that our properties are currently in material compliance with all of these regulatory requirements, management does not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will adversely affect its ability to make distributions to our shareholders. Management believes, based in part on engineering reports which are generally obtained at the time the properties are acquired, that all of our properties comply in all material respects with current regulations. However, if we were required to make significant expenditures under applicable regulations, our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations and to pay distributions could be adversely affected.

Significant Tenants

      As of December 31, 2003, none of our tenants accounted for 10% or more of our aggregate annual rental income. However, separate agencies of the General Services Administration had seven leases at four of our consolidated properties which accounted for approximately 22% of our aggregate annual rental income at December 31, 2003.

      Our ten largest tenants at our consolidated properties, based upon our aggregate annual rental income, accounted for approximately 39% of our aggregate annual rental income at December 31, 2003. These tenants are:

	•	General Services Administration (IRS) at North Pointe Corporate Center: 7.4%
	•	General Services Administration (U.S. Bankruptcy Court) at 824 Market Street: 5.6%
	•	General Services Administration (U.S. Customs, DOD and Exim Bank) at One World Trade Center: 4.6%
	•	United Space Alliance at Gemini Plaza: 4.3%

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	•	State of Florida (Dept. of Children & Family Services) at Department of Children & Families Campus: 4.2%
	•	General Services Administration (FBI) at One World Trade Center: 3.0%
	•	Patient Accounting Service Center at Centerpoint Corporate Park: 2.9%
	•	Lockheed Engineeering at Two Corporate Plaza: 2.8%
	•	Good Guys at Bay View Plaza: 2.0%
	•	Nebraska Department of Environmental Quality at Atrium Building: 1.8%

The loss of any of the above-mentioned tenants or their inability to pay rent could have a material adverse effect on our business and results of operations.

      We also are subject to a concentration of regional economic exposure as approximately 49.5% of our aggregate annual rental income is generated by our consolidated properties located in California. Regional economic downturns in this state could adversely impact our operations.

Employees

      We have no employees and our company’s executive officers are all employees of our advisor. Substantially all work of our company is performed by employees of our advisor and its affiliates.

Financial Information About Industry Segments

      We are in the business of owning, managing, operating, leasing, acquiring, developing, investing in and disposing of office, industrial and service properties. We internally evaluate all properties as one industry segment and accordingly do not report segment information.

      As of December 31, 2003, we owned 11 consolidated office properties located in six states with an aggregate GLA of approximately 2.1 million square feet. We also owned interests in two unconsolidated office properties with an aggregate GLA of approximately 648,073 square feet. As of December 31, 2003, approximately 39% of our aggregate GLA was leased to government-oriented tenants.

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      The following table presents certain additional information about our consolidated properties at December 31, 2003:

(1)	Annualized rental income based on contractual base rent from leases in force at December 31, 2003.
(2)	Physical occupancy at December 31, 2003. As of December 31, 2003, approximately 88% of the total GLA in our consolidated properties was leased.
(3)	Average annual rent per square foot at December 31, 2003.

      The following information generally applies to our properties:

	•	We believe all of the properties are adequately covered by insurance and are suitable for their intended purposes.
	•	We have no plans for any material renovations, improvements or development of the properties.
	•	Our properties are located in urban markets where we are subject to competition for attracting new and retaining current tenants.
	•	Depreciation is provided on a straight-line basis over the estimated useful lives of the buildings and improvements, ranging primarily from 15 to 39 years.

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Lease Expiration Table

      The following schedule presents the sensitivity of our annual base rent due to lease expirations for the next 10 years at our consolidated properties as of December 31, 2003, by number, percentage of total aggregate GLA and annual base rent.

Concentration of Tenants

      The following table sets forth information as to the ten largest tenants at our consolidated properties as of December 31, 2003, based upon aggregate annual rental income.

(1)	Government entity or government contractor.

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Geographic Diversification/Concentration Table

      The following table lists the states where the consolidated properties we owned as of December 31, 2003 are located and provides certain information regarding our portfolio’s geographic diversification/concentration.

Indebtedness

      At December 31, 2003, we had secured mortgage loans outstanding on four of our consolidated properties, representing aggregate indebtedness of approximately $97,300,000. In addition, at December 31, 2003, advances under our credit facility with LaSalle in the amount of approximately $81,500,000 were collateralized by certain of our consolidated properties. See Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 5 and 6 to our financial statements included with this report.

      There are no material pending legal proceedings, other than routine litigation incidental to our business, to which we are a party, or of which any of our properties is the subject.

      No matters were submitted to a vote of security holders during the fourth quarter of 2003.

PART II

Market Information

      There is no established public trading market for our shares of common stock.

Shareholders

      As of April 9, 2004, we had 9,724 shareholders of record.

Distributions

      We paid monthly distributions on our common stock from September 1, 2002 through December 1, 2002 at an annual rate of $0.70 per share (7.00% based on a $10.00 purchase price). On November 25, 2002, our board of directors approved an increase in the annual distribution to $0.725 per share (7.25% based on a $10.00 purchase price) effective January 1, 2003. On March 22, 2003, our board of directors approved an increase in the annual distribution to $0.75 per share (7.50% based on a $10.00 purchase price) effective June 1, 2003.

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      Our continued payment of distributions will depend primarily on our ability to generate positive cash flow from future operations. However, we cannot assure you that we will continue to pay distributions at the current rate or at all.

Equity Compensation Plan Information

      Our equity compensation plan information as of December 31, 2003 is as follows:

(1)	Each of the independent director and officer/employee stock option plans was approved at our annual shareholders’ meeting held on June 28, 2003.

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SELECTED FINANCIAL DATA

G REIT, INC.

(1)	The above selected financial data should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report.
(2)	Net income and distributions per share are based upon the weighted average number of common shares outstanding. Distributions by the company of our current and accumulated earnings and profits for federal income tax purposes are taxable to shareholders as ordinary income. Distributions in excess of these earnings and profits generally are treated as a non-taxable reduction of the shareholder’s basis in the shares to the extent thereof (a return of capital for tax purposes), and thereafter as taxable gain. These distributions in excess of earnings and profits will have the effect of deferring taxation of the distributions until the sale of the shareholder’s shares. For the years ended December 31, 2003 and December 31, 2002, approximately 41% and 71%, respectively, represented a return of capital for tax purposes. In order to maintain our qualification as a REIT, we must make annual distributions to shareholders of at least 90% of our REIT taxable income. REIT taxable income does not include net capital gains. Under certain circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet the REIT distribution requirements. Distributions are determined by our board of directors and are dependent on a number of factors, including the amount of funds available for distribution, our financial condition, any decision by the board of directors to reinvest funds rather than to distribute the funds, our capital expenditures, the annual distribution

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	required to maintain REIT status under the Code and other factors the board of directors may deem relevant.

(3)

One of our objectives is to provide cash distributions to our shareholders from cash generated by our operations. Cash generated from operations is not equivalent to our net operating income or loss as determined under accounting principles generally accepted in the United States, or GAAP. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a standard known as “Funds from Operations” or “FFO,” which it believes more accurately reflects the operating performance of a REIT such as our company.

We define FFO, a non-GAAP measure, consistent with the NAREIT’s definition, as net income available to common shareholders, plus depreciation and amortization of assets uniquely significant to the real estate industry, reduced by gains and increased by losses on (i) sales of investment property and (ii) extraordinary items.

We consider FFO to be an appropriate supplemental measure of a REIT’s operating performance as it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. The use of FFO is recommended by the REIT industry as a supplemental performance measure.

Presentation of this information is intended to assist the reader in comparing the operating performance of different REIT’s, although it should be noted that not all REITs calculate FFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of our performance.

      FFO is calculated as follows:

      The following discussion should be read in conjunction with Item 6: “Selected Financial Data” and the Company’s financial statements and notes appearing elsewhere in this Form 10-K.

Forward-Looking Statements

      Historical results and trends should not be taken as indicative of future operations. Management’s statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may differ materially from those included in the forward-looking statements. We intend those forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies

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Overview

      We were incorporated on December 18, 2001 under the laws of the Commonwealth of Virginia. We operate as a real estate investment trust for federal income tax purposes. As a REIT, we are generally not subject to income taxes. To maintain our REIT status, we are required to distribute annually as dividends at least 90% of our REIT taxable income, as defined by the Code to our shareholders, among other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income tax on our taxable income at regular corporate tax rates. As of December 31, 2003, we believe we were in compliance with all relevant REIT requirements.

      We were incorporated to acquire ownership interests in office, industrial and service real estate properties, a number of which will have a government-tenant orientation. We completed our first property acquisition in September 2002. As of December 31, 2003, we have purchased interests in 13 properties, including 11 consolidated office properties and two unconsolidated undivided tenant in common interests in office properties.

      We are externally advised by Triple Net Properties, LLC, our advisor, which is primarily responsible for managing the day-to-day operations and assets of our company. The advisory agreement between us and our advisor has a one year term, and is subject to successive renewals with the written consent of the parties including a majority of our independent directors. Our advisor is affiliated with our company in that the two entities have common officers and directors, some of whom also own an equity interest in our advisor.

Public Offering of Equity Securities/ Use of Proceeds

      Pursuant to a registration statement on Form S-11/A under the Securities Act of 1933, as amended, we offered for sale to the public on a “best efforts” basis a minimum of 100,000 and a maximum of 20,000,000 shares of our common stock at a price of $10 per share and up to 1,000,000 additional shares pursuant to a dividend reinvestment plan under which our shareholders may elect to have dividends reinvested in additional shares at $9.05 per share. The registration statement was declared effective by the SEC on July 22, 2002. As discussed in the registration statement, we plan to principally use the net offering proceeds from the sale of shares to acquire ownership interests in real estate properties with a government-tenant orientation. We intend to finance property acquisitions with a combination of net offering proceeds and debt secured by the acquired properties.

      As of December 31, 2003, we sold 17,339,249 shares of our common stock under our initial offering, issued an additional 251,540 shares to shareholders participating in our dividend reinvestment plan and repurchased 28,242 shares under our repurchase plan. As a result, 17,562,457 shares were outstanding at December 31, 2003, which generated aggregate gross proceeds of approximately $175,000,000.

      In connection with the offering, we incurred approximately $18,200,000 of costs related to the issuance and distribution of shares through December 31, 2003. Such amount includes a total of approximately $13,200,000 paid to the dealer manager of the offering, NNN Capital Corp., which is

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2003 Acquisitions

      On January 9, 2003, through our wholly-owned subsidiary, GREIT — Congress Center, LLC, we purchased a 30% undivided tenant in common interest in Congress Center, a 16-story Class A office building of approximately 524,730 square feet located in Chicago, Illinois. NNN Congress Center, LLC and WREIT — Congress Center, LLC, affiliates of our advisor, simultaneously purchased undivided tenant in common interests totaling approximately 70% ownership of the property. The property was purchased from an unaffiliated third party for a purchase price of $136,108,000. Our cash investment was approximately $14,341,000. Our company’s total investment consisted of our proportionate share of the purchase price of approximately $40,832,000 (consisting of approximately $12,047,000 in cash and $28,785,000 in debt), plus $2,294,000 for our proportionate share of closing costs, loan fees and reserves. Our liability for the debt is limited to the amount of our investment in the property. The seller of the property paid a sales commission to Realty of $2,000,000, or approximately 1.5% of the purchase price.

      On January 31, 2003, through our wholly-owned subsidiary, GREIT — Atrium Building, LLC, we purchased the Atrium Building, a six-story Class B office building with approximately 166,902 square feet located in Lincoln, Nebraska. The property was purchased from an unaffiliated third party for a purchase price of $4,532,000. The property is encumbered by two ground leases under parts of the office building which expire in 2054 and 2055, respectively, including renewal options. We funded the purchase price with $2,200,000 in borrowings under our credit facility with LaSalle. We are required to make interest only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. The seller of the property paid a sales commission to Realty of $132,000, or approximately 2.9% of the purchase price.

      On March 18, 2003, through our wholly-owned subsidiary, GREIT — Park Sahara, LLC, we purchased a 4.75% undivided tenant in common interest in Park Sahara, a five-building Class B office park containing a total of approximately 123,343 square feet located in Las Vegas, Nevada. The property was purchased from an unaffiliated third party for a total purchase price of $12,200,000. Our proportionate share of the total purchase price was approximately $579,500 including $180,500 in cash and $399,000 in debt. Our liability for the debt is limited to the amount of our investment in the property. The seller of the property paid a sales commission to Realty of $320,000, or approximately 2.6% of the purchase price.

      On April 25 2003, through our wholly-owned subsidiary, GREIT — Department of DCF, LLC, we purchased the Department of Children and Families Campus, or DCF, consisting of one one-story and two three-story Class B buildings with a total of approximately 124,037 square feet located on a 9.4 acre site in Plantation, Florida. The property was purchased from an unaffiliated third party for a purchase price of $11,580,000. The purchase was financed with $7,605,000 in borrowings under our credit facility with LaSalle. We are required to make interest only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. The seller of the property paid a sales commission to Realty of $300,000, or approximately 2.6% of the purchase price.

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      On May 2, 2003, through our wholly-owned subsidiary, GREIT — Gemini Plaza, LLC, we purchased Gemini Plaza, a six-story Class A office building with approximately 158,627 square feet on a 7.02 acre site located in Houston, Texas. The property was purchased from an unaffiliated third party for a purchase price of $15,000,000. The purchase was financed with $9,815,000 in borrowings under our credit facility with LaSalle. We are required to make interest only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. The seller of the property paid a sales commission to Realty of $325,000, or approximately 2.2% of the purchase price.

      On July 31, 2003, through our wholly-owned subsidiary, GREIT — Bay View, LP, we purchased an approximately 97.68% majority tenant in common interest in Bay View Plaza in Alameda, California. The property consists of a two-story Class A office building with approximately 60,434 square feet in the master-planned Harbor Bay Office Park. The property was purchased from an unaffiliated third party for a purchase price of $11,655,000 in cash. Our proportionate share of the total purchase price was approximately $11,329,000. The seller of the property paid a sales commission to Realty of $380,000, or approximately 3.0% of the purchase price.

      On August 11, 2003, through our wholly-owned subsidiary, GREIT — North Pointe, LP, we purchased North Pointe Corporate Center in Sacramento, California. North Pointe is a 130,805 square foot, four-story Class A office building on 5.6 acres built in 1988. The property was purchased from an unaffiliated third party for a purchase price of $24,205,000 in cash. The seller of the property paid a sales commission to Realty of $705,000, or approximately 2.9% of the purchase price.

      On October 10, 2003, through our wholly-owned subsidiary, GREIT — 824 Market Street, LLC, we purchased 824 Market Street in Wilmington, Delaware. 824 Market Street is a 200,020 square foot, ten-story, Class B+ multi-tenant office tower which occupies one city block in downtown Wilmington, Delaware. The property was purchased from an unaffiliated third party for a purchase price of $31,900,000 in cash. We paid an acquisition fee to Realty of $970,000, or approximately 3.0% of the purchase price

      On October 28, 2003, through our wholly-owned subsidiary, GREIT — Sutter Square, LP, we purchased Sutter Square Galleria in Sacramento, California. Sutter Square is a two-building, mixed-use property containing approximately 61,036 square feet located in midtown Sacramento. The property is subject to a ground lease expiring in 2030 with one ten-year option period thereafter. The property was purchased from an unaffiliated third party for a purchase price of $8,240,000. In connection with the purchase, we assumed the existing loan from GE Capital Loan Services in the amount of $4,024,126. The loan bears interest at a fixed rate of 6.89% per annum. We are required to make monthly principal and interest payments on a 30-year amortization schedule until the due date of November 1, 2008. The seller paid a sales commission to Realty of $240,000, or approximately 2.9% of the purchase price.

      On December 5, 2003, through our wholly-owned subsidiary, GREIT — One World Trade Center, LP, we purchased One World Trade Center in Long Beach, California. One World Trade Center is a 27-story, Class A multi-tenant office building with approximately 573,300 square feet, including a retail component of approximately 120,000 square feet. We purchased the property from an unaffiliated third party for a purchase price of $113,648,000. We funded the purchase price with a first mortgage loan from HSH NordBank in the amount of $77,000,000 with an interest rate of 1.90% per annum over 3 month

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      On December 30, 2003, through our wholly-owned subsidiary, GREIT — Centerpoint Corporate Park, LLC, we purchased Centerpoint Corporate Park in Kent, Washington. Centerpoint consists of a four-building portfolio totaling approximately 435,784 square feet which is part of an eight building, 735,000 square-foot Class A suburban master-planned corporate campus built on 40.29 acres in Kent, Washington, a suburb of Seattle. We purchased the property from an unaffiliated third party for a purchase price of $54,220,000. We financed the purchase with approximately $25,028,814 in borrowings under our credit facility with LaSalle Bank. We paid an acquisition fee to Realty of $1,626,600, or approximately 3.0% of the purchase price.

Critical Accounting Policies

      The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that our critical accounting policies are those that require significant judgments and estimates such as those related to revenue recognition, allowance for doubtful accounts, impairment of real estate assets, purchase price allocation, deferred assets and qualification as a REIT. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could vary from those estimates and those estimates could be different under different assumptions or conditions.

      Base rental income is recognized on a straight-line basis over the terms of the respective lease agreements. Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to rent receivable. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under lease agreements. We also maintain an allowance for deferred rent receivables arising from the straight-lining of rents. We determine the adequacy of this allowance by continually evaluating individual tenant receivables considering the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions.

      Our properties are stated at depreciated cost. We assess the impairment of a real estate asset when events or changes in circumstances indicate that the net book value may not be recoverable. Indicators management considers important which could trigger an impairment review include the following:

	•	significant negative industry or economic trend;
	•	a significant underperformance relative to historical or projected future operating results; and
	•	a significant change in the manner in which the asset is used.

      Property acquisitions have been accounted for in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” The fair value of the real estate acquired is allocated to the

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      The fair value of the tangible assets of an acquired property (which includes land, building and tenant improvements) is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements based on our determination of the relative fair values of these assets. Factors considered by us in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and insurance and other operating expenses during the expected lease-up periods based on current market demand. We also estimate costs to execute similar leases including leasing commissions, concessions, legal and other related costs.

      In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market and below-market lease values are amortized into rental income over the remaining non-cancelable terms of the respective leases.

      Costs incurred for debt financing and property leasing are capitalized as deferred assets. Deferred financing costs include amounts paid to lenders and others to obtain financing. Such costs are amortized over the term of the related loan. Amortization of deferred financing costs is included in interest expense in our statements of operations. Deferred leasing costs include leasing commissions that are amortized using the straight-line method over the term of the related lease. Unamortized financing and leasing costs are charged to expense in the event of debt prepayment or early termination of the lease.

      Since our taxable year ended December 31, 2002, we have been organized and operated, and intend to continue to operate, so as to qualify for taxation as a REIT under the Code. Our qualification and taxation as a REIT depends on our ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, numerous requirements established under highly technical and complex Code provisions subject to interpretation.

      If we failed to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. Moreover, unless entitled to relief under specific statutory provisions, we also would be disqualified as a REIT for four taxable years following the year during which qualification was lost.

      There are no off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have a current or future material effect on our financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Results of Operations

      Our operating results are primarily comprised of income derived from our portfolio of properties. Because of the significant property acquisitions throughout the years ended December 31, 2003 and 2002, the comparability of financial data from period to period is limited.

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      Rental income increased approximately $11,700,000 or 1,596% during the year ended December 31, 2003 as compared with the year ended December 31, 2002. Approximately $8,000,000 of this increase was attributable to the nine consolidated properties acquired during 2003, and approximately $3,700,000 was attributable to a full year’s ownership of the two properties acquired during 2002.

      Rental expenses increased approximately $4,500,000, or 2,222% during the year ended December 31, 2003 as compared with the year ended December 31, 2002. Approximately $3,000,000 of this increase was attributable to properties acquired during 2003, and approximately $1,500,000 was attributable to a full year’s ownership of the properties acquired during 2002.

      General and administrative expenses consist primarily of third party professional legal and accounting fees and the cost of computerized information services and related office expenses required to maintain our accounting and investor records. General and administrative expenses increased approximately $1,400,000, or 797%, as a result of a full year’s operation of our company in 2003.

      Interest expense increased approximately $2,400,000, or 965% during the year ended December 31, 2003 as compared with the year ended December 31, 2002, as a result of an increase in borrowings for property acquisitions.

      Depreciation expense and amortization of leasing commissions increased approximately $3,700,000, or 3,577% during the year ended December 31, 2003 as compared with the year ended December 31, 2002. Approximately $2,300,000 of this increase is attributable to the properties acquired during 2003, and approximately $1,400,000 of the increase was attributable to a full year’s ownership of the properties acquired during 2002.

      Interest income increased approximately $105,000, or 591% during the year ended December 31, 2003 as compared with the year ended December 31, 2002, as a result of earnings in 2003 on short-term investment of cash pending its investment in acquired properties.

      As a result of the above items, net income for the year ended December 31, 2003 was $77,965 compared with $25,650 for the year ended December 31, 2002.

Liquidity and Capital Resources

      Cash flows provided by operating activities increased by approximately $1,200,000 during the year ended December 31, 2003 as compared to the year ended December 31, 2002, as a result of the acquisition of nine consolidated properties in 2003 and the full year’s operation of the two consolidated properties acquired in 2002.

      Cash flows used in investing activities were approximately $283,000,000 in 2003, primarily for the acquisition of nine consolidated properties and interests in two unconsolidated properties during 2003.

      Cash flows provided by financing activities were approximately $292,000,000 in 2003. The proceeds from issuance of approximately 15,404,000 shares of common stock resulted in net proceeds of approximately $138,000,000, and net borrowings under our line of credit and notes payable were approximately $158,000,000. Distributions paid in 2003 were approximately $5,300,000.

      On July 22, 2002, our registration statement for our initial public offering of shares of our common stock was declared effective by the Securities and Exchange Commission. In the initial offering, we offered for the sale to the public on a “best efforts” basis a maximum of 20,000,000 shares of our common stock at a purchase price of $10.00 per share and up to 1,000,000 additional shares through our dividend reinvestment plan. As of December 31, 2003, we sold 17,339,249 shares of our common stock under our initial offering, issued an additional 251,540 shares to shareholders participating in our dividend

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      On January 23, 2004, our registration statement for our second offering of shares of our common stock was declared effective by the Securities and Exchange Commission. In the second offering, we are offering for sale to the public on a “best efforts” basis a maximum of 27,000,000 shares of our common stock at a purchase price of $10.00 per share and up to 1,500,000 additional shares through our dividend reinvestment plan. We commenced the sale of shares pursuant to our second offering on February 9, 2004. We intend to terminate the current offering on April 30, 2004.

      Management anticipates that 87.5% of the gross offering proceeds of both the initial and second offerings will be used to acquire real estate and the balance will be used to pay various fees and expenses.

      Our operating partnership has a secured line of credit with a group of banks led by LaSalle, which matures on January 30, 2006. At December 31, 2003, advances under this credit facility bear interest at LIBOR plus 3.9% and we are required to make interest only payments on a monthly basis. As of December 31, 2003, our borrowings under this credit facility totaled $81,533,000 and undrawn amounts under the credit facility totaled $33,467,000. On April 1, 2004, we amended our credit agreement to increase the line of credit to $350,000,000.

      As of December 31, 2003, we had approximately $15,500,000 in cash and cash equivalents.

      We intend to acquire additional properties and will seek to fund these acquisitions through utilization of the current cash balances and/or proceeds received from a combination of subsequent equity issuances, debt financings or asset dispositions. There may be a delay between a sale of shares of common stock and our purchase of properties, which may result in a delay in the benefits to shareholders of returns generated from property operations. During such a period, we may temporarily invest any unused proceeds from the offering in investments that could yield lower returns than investments in real estate.

      In order to qualify as a REIT for federal income tax purposes, we are required to make distributions to its shareholders of at least 90% of REIT taxable income. We expect to use our cash flow from operating activities for distributions to shareholders.

      The following table provides information with respect to the maturities and scheduled principal repayments of our secured debt and line of credit and scheduled interest payments of our fixed rate debt at December 31, 2003. It also provides information about the minimum commitments due in connection with our ground lease obligations at December 31, 2003. The table does not reflect available extension options.

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Subsequent Events

Acquisitions

      On January 20, 2004, through our wholly-owned subsidiary, GREIT — AmberOaks GP, LLC, we purchased AmberOaks Corporate Center in Austin, Texas from an unaffiliated third party for a purchase price of approximately $35,525,000. AmberOaks is a Class A five-building office portfolio with approximately 281,885 square feet that is part of an eight-building complex. An affiliate of the advisor purchased the remaining three buildings. The property is approximately 74% leased, with approximately 64% of the property leased to URS Corporation (aka Radian International). We financed the purchase price with approximately $14,700,000 in borrowings under a three-year secured revolving line of credit with LaSalle. We are required to make interest only payments until the due date at our option of (1) LaSalle’s prime rate plus 0.50% or (2) up to 3 months LIBOR plus 3.00%. The rate will be subject to a floor of 4.25%. We paid an acquisition fee to Realty of $908,900, or approximately 2.6% of the purchase price.

      On February 13, 2004, through our wholly owned subsidiary, GREIT — Public Ledger, LLC, we purchased the Public Ledger Building in Philadelphia, Pennsylvania from an unaffiliated third party for a purchase price of approximately $33,950,000. The Public Ledger Building is a 471,217 square foot 12-story multi-tenant Class B+ office building located in Philadelphia’s East Market Street submarket. The property is approximately 85% leased to multiple tenants. At the date of acquisition, the General Services Administration occupied approximately 27.5% of the property. We financed the purchase price with approximately $19,929,000 in borrowings under our credit facility arranged through LaSalle. We are required to make interest only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. We paid an acquisition fee to Realty of $965,000, or approximately 2.8% of the purchase price.

      On March 31, 2004, through our wholly owned subsidiary, GREIT — Madrona, LP, we purchased the Madrona Buildings in Torrance, California from an unaffiliated third party for a purchase price of approximately $45,900,000 in cash. We received a credit of approximately $2,500,000 from the seller at closing to cover the free rental periods and tenant improvements that two tenants have under their respective leases. The property is a four-building Class A office portfolio totaling approximately 211,407 square feet located in Torrance, California, a suburb of Los Angeles. The Madrona Buildings are approximately 84.7% leased, with approximately 41.2% leased by American Honda Motor Company, 25.3% by NavCom Technology, Inc. and 18.2% by Kaiser Permanente. We paid an acquisition fee to Realty of $1,350,000, or approximately 2.9% of the purchase price.

      On April 5, 2004, through our wholly owned subsidiary, GREIT — Brunswig Square, LP, we purchased Brunswig Square in Los Angeles, California from an unaffiliated third party for a purchase price of approximately $23,805,000 in cash. Brunswig Square is a mixed use office/ retail building totaling approximately 135,982 square feet, including a retail component of approximately 24,169 square feet, located in the Little Tokyo District of downtown Los Angeles. The property is approximately 92.9% leased, with approximately 25.6% leased by the City of Los Angeles — Department of Fire & Police Pensions, 22.5% leased by the City of Los Angeles — Employee Retirement Systems, 14.5% by the General Services Administration — Immigration and Naturalization Services and 9.6% by the General Services Administration — Office of Personnel Management. We paid Realty an acquisition fee of $716,400, or approximately 3.0% of the purchase price.

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      On April 8, 2004, through our wholly owned subsidiary, GREIT — North Belt Corporate, LP, we purchased North Belt Corporate Center in Houston, Texas from an unaffiliated third party for a purchase price of approximately $12,675,000 in cash. North Belt is a multi-tenant office building totaling approximately 155,764 square feet. The property is approximately 86.5% leased, with approximately 21.1% leased by the General Services Administration — U.S. Customs and Border Protection, 20.2% by Southwestern Energy Company and 10.2% to Bredero Price Company. We paid Realty an acquisition fee of $400,000, or approximately 3.0% of the purchase price.

Proposed Acquisitions

      Our advisor has entered into a contract on our behalf with an unaffiliated third-party seller for the acquisition of Hawthorne Plaza, a two-building Class A office complex totaling approximately 418,668 square feet located in the south financial district in San Francisco, California. The property is approximately 99.7% leased, with approximately 87.4% leased by the General Services Administration on behalf of the Environmental Protection Agency, Health Care Financing Administration (Centers for Medicare & Medicaid Services), Bureau of Citizenship and Immigration Services, U.S. Department of Agriculture and the U.S. Passport Agency. The purchase price for the property is approximately $97,000,000. We intend to finance the property with a mortgage loan from Fleet National Bank, Administrative Agent in the amount of approximately $62,750,000. We intend to pay Realty an acquisition fee of $2,900,000, or approximately 3.0% of the purchase price, for arranging the transaction. Closing of this acquisition is anticipated in April 2004. We have a deposit of $2,000,000 related to this potential acquisition. Under certain circumstances, the deposit may be nonrefundable.

      In addition, we are currently considering several potential property acquisitions. Our decision to acquire one or more of these properties will generally depend upon:

	•	our receipt of a satisfactory environmental survey and property appraisal for each property;
	•	no material adverse change occurring in the properties, the tenants or in the local economic conditions; and
	•	our receipt of sufficient financing, either through the net proceeds from this offering or satisfactory debt financing.

      There can be no assurance that any or all of the conditions will be satisfied.

Other Events

      For the period from January 1, 2004 through March 31, 2004, we sold approximately 10,067,127 shares of common stock, and issued an additional 167,173 shares under the DRIP, resulting in additional gross proceeds before offering costs and selling commissions of approximately $102,500,000. We intend to terminate our current offering on April 30, 2004.

      On April 1, 2004, our company and LaSalle amended the credit agreement to increase our line of credit to $350,000,000.

      Effective April 22, 2004, Diana M. Laing has resigned her position as our chief financial officer and our board of directors has appointed Richard Hutton as interim chief financial officer. Mr. Hutton has served as the chief investment officer of our advisor since August 2003, overseeing all financial operations of our advisor, and previously served as our interim chief financial officer. From April 1999 to August 2003, Mr. Hutton served as senior vice president — real estate acquisitions and vice president — property management for our advisor. In that position, Mr. Hutton oversaw the management of the real estate portfolios and property management of our advisor and its affiliates. Mr. Hutton holds a BA in psychology

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Impact of Accounting Principles

      On January 1, 2003, we adopted the provisions of SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). The most significant provisions of this statement relate to the rescission of Statement No. 4 “Reporting Gains and Losses from Extinguishment of Debt.” SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified. The adoption of this statement did not have a material effect on our results of operations or financial condition.

      On January 1, 2003, we adopted the provisions of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity”. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The adoption of this statement did not have a material effect on our results of operations or financial condition.

      On January 1, 2003, we adopted the initial recognition and measurement provisions of Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 significantly changes the current practice in the accounting for, and disclosure of, guarantees. Guarantees and indemnification agreements meeting the characteristics described in FIN 45 are required to be initially recorded as a liability at fair value. FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor having to make payment under the guarantee is remote. We adopted the disclosure provisions of FIN 45 as of December 31, 2002. The adoption of the provisions of this interpretation did not have a material effect on our results of operations or financial condition.

      In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity in which either: (1) the equity investors (if any) lack one or more characteristics deemed essential to a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. The provisions of this interpretation are applicable to VIEs formed after January 31, 2003. For VIEs formed prior to January 31, 2003, the provisions of this interpretation apply to the first fiscal year or interim period beginning after December 15, 2003. On February 1, 2003, we adopted the provisions of this interpretation, which did not have a material effect on our results of operations or financial condition.

      In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” The provisions of SFAS 149 are generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this statement did not have a material effect on our results of operations or financial condition.

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      In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material effect on our results of operations or financial condition.

Inflation

      We will be exposed to inflation risk as income from long-term leases is expected to be the primary source of our cash flows from operations. We expect that there will be provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per square foot allowance. However, due to the long-term nature of the leases, the leases may not re-set frequently enough to cover inflation.

      We are exposed to interest rate changes primarily as a result of our long-term debt used to maintain liquidity and fund capital expenditures and expansion of our real estate investment portfolio and operations. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve our objectives we borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates. We may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate our interest rate risk on a related financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes.

      Our interest rate risk is monitored using a variety of techniques. The table below presents, as of December 31, 2003, the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes.

      The fair estimated value of our debt approximates its December 31, 2003 carrying amount.

      The weighted average interest rate of our mortgage debt as of December 31, 2003 was approximately 4.82%. At December 31, 2003, our mortgage debt consisted of approximately $14,126,600 or 8% of the total debt at a fixed interest rate of 6.24% and approximately $164,796,217 or 92% of the total debt at a variable interest rate of 4.5%. An increase in the variable interest rate on certain mortgages payable constitutes a market risk. As of December 31, 2003, for example, a .25% increase in LIBOR would have increased our overall annual interest expense by approximately $412,000 or less than 6%.

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      The table below presents, as of December 31, 2002, the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes.

      The fair estimated value of the Company’s debt approximates its December 31, 2002 carrying amount.

      The weighted average interest rate of the Company’s mortgage debt as of December 31, 2002 was approximately 5.75%. At December 31, 2002, the Company’s mortgage debt consisted of approximately $10,160,000 or 60% of the total debt at a fixed interest rate of 5.92% and approximately $6,700,000 or 40% of the total debt at a variable interest rate of 5.50%. An increase in the variable interest rate on certain mortgages payable constitutes a market risk. As of December 31, 2002, for example a .25% increase in LIBOR would have increased the Company’s overall annual interest expense by approximately $16,750 or less than 3%.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders

      We have audited the accompanying consolidated balance sheet of G REIT, Inc. and subsidiaries (the “Company”), as of December 31, 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit.

      We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2003, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

/s/ DELOITTE & TOUCHE, LLP

Los Angeles, California

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders

      We have audited the accompanying consolidated balance sheet of G REIT, Inc. (the “Company”) as of December 31, 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for the year ended December 31, 2002 and the period from December 18, 2001 (inception) through December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of G REIT, Inc. as of December 31, 2002, and the consolidated results of its operations and its cash flows for the year ended December 31, 2002 and the period from December 18, 2001 through December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

	/s/ GRANT THORNTON LLP

Irvine, California

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G REIT, INC.

CONSOLIDATED BALANCE SHEETS